Notes to the Financial Statements

For the years ended December 31, 2020 and 2019

NOTE 1. NATURE OF THE BUSINESS

Gray Matters, Inc. (the Company) was incorporated on October 3, 2013, in the state of Delaware and reincorporated on April 2, 2021, in the state of Nevada. The Company’s primary product is its blockchain software that is sold as an installed/on-premise license with a single U.S. government customer.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting: The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP).

Use of Estimates: The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include depreciable lives for property and equipment, recoverability of income taxes, accrued liabilities, and collectability of accounts receivables. Actual results could differ from those estimates.

Cash: Cash includes bank checking accounts in the United States which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk with respect to cash.

Accounts Receivable: The Company provides credit in the normal course of business to its customer. Accounts for which no payments have been received for several months are considered delinquent and customary collection efforts are begun. After all collection efforts are exhausted, the account will be written-off. An allowance for doubtful accounts is based on the Company’s past experience as well as a specific review of outstanding accounts. The Company has determined that no allowance for doubtful accounts is required at December 31, 2020 and 2019.

Property and Equipment: Property and equipment are stated at cost and primarily consist of computer hardware and software. The Company capitalizes all property and equipment purchases over $1,000 that have a useful life greater than one year. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which currently are all estimated at five years.

Revenue Recognition: The Company recognizes revenue under the provisions of Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers”. ASC 606 requires an entity to recognize revenue to depict the transfer of control of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.

Revenue is recognized when all of the following steps have been taken and criteria met for each contract:

GRAY MATTERS, INC.

Notes to the Financial Statements

For the years ended December 31, 2020 and 2019

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Nature of Products and Services

The Company generates revenue primarily from software sales and licensing. The Company currently sells through its direct relationship with its end customer. Software is installed and configured on the customer’s premises. Direct costs that are reimbursable by the customer under the contract are recognized on a gross basis under revenue as reimbursable expenses.

The Company’s only customer contract is a firm fixed price contract. The performance obligations are generally separated into separate tasks or deliverables within the contract. Within a single contract, revenue related to performance obligations may be recognized at a point in time or over time. During the years ended December 31, 2020 and 2019, the Company recognized point in time revenue of $26,634 and $27,399, respectively.  The sale of a software license is not a distinct performance obligation from the other development and maintenance services, and is recognized over time.  During December 31, 2020, the Company recognized $2,290,366 of revenue over time.

GRAY MATTERS, INC.

Notes to the Financial Statements

For the years ended December 31, 2020 and 2019

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Customer contracts may be modified to change the scope, price, specifications, other terms within the existing arrangement. Contract modifications are evaluated by management to determine whether the modification should be accounted for as part of the original performance obligation(s) or as a separate contract. If the modification adds distinct goods or services and increases the contract value proportionate to the stand-alone selling price of the additional goods or services, it will be accounted for as a separate contract. Generally, the Company's contract modifications include services which are distinct, and therefore are accounted for as separate from the original performance obligation(s).

Customer payment terms are generally 30 days. The Company does not have any significant financing components as payment is received within one year of the transfer of control to the customer. Sales or other taxes billed and collected from the customer are excluded from revenue.

Trade accounts receivable are recorded at the billable amount where the Company has the unconditional right to bill, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of accounts. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, the customer's expected ability to pay and collection history, when applicable, to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectible are charged against the allowance for doubtful accounts when identified. There were no such allowances recognized at December 31, 2020 and 2019. Accounts receivable at December 31, 2020 and 2019, do not include any unbilled amounts. Unbilled receivables occur when transfer of the performance obligation to the customer has occurred, and therefore revenue is recognized, in a period prior to invoicing for that performance obligation.

Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss carryforwards. A valuation allowance is provided when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible.

The Company recognizes a tax benefit if it is more-likely-than-not that a tax position taken or expected to be taken on a tax return will be sustained upon examination by taxing authorities based on the merits of the position. The tax benefit recognized in the financial statements is measured based on the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. As such, the difference between a tax position taken or expected to be taken in a tax return in future periods and the benefit recognized and measured pursuant to this guidance in the financial statements represents an unrecognized tax benefit.

The Company recognizes interest and penalties related to unrecognized tax benefits in operating expense. As of December 31, 2020 and 2019, there were no unrecognized tax benefits or penalties accrued related to unrecognized tax benefits, nor were any interest or penalties recognized during the years ended December 31, 2020 and 2019.

Recently Issued Accounting Pronouncements: In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments - Credit Losses” (Topic 326). ASU 2016-13 provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to accounts receivable. The new guidance will be effective for fiscal years beginning after December 15, 2022. Early adoption is allowed. The Company is currently assessing the impact of the new guidance.

GRAY MATTERS, INC.

Notes to the Financial Statements

For the years ended December 31, 2020 and 2019

Depreciation expense amounted to $3,493 and $1,144 for the years ended December 31, 2020 and 2019, respectively.

NOTE 4. NOTES PAYABLE

On November 1, 2019, the Company entered into a note agreement with a company affiliated with one of its contractors for $100,000. The loan had an interest rate of 18 percent per annum and monthly interest payments of $1,500 beginning in December 2019, with the outstanding principal due at maturity. The loan was repaid in full on August 6, 2020. Interest was $8,315 and $2,985 for the years ended December 31, 2020 and 2019, respectively.

On December 9, 2019, the Company entered into an agreement with an individual investor to provide “permanent” working capital funding to the Company of up to $600,000. Advances requested and paid under the agreement do not bear interest and are only payable by the Company to the investor upon a Company liquidity event, as defined in the agreement (generally, a change in control or initial public offering). The amount contingently payable upon a liquidity event is 220 percent of the total advances. The Company received advances under the agreement totaling $481,000 in 2020 and $119,000 in 2019. On December 8, 2021, the Company and investor executed a Payoff and Termination Agreement which was effectuated upon payment of a discounted amount in connection with the sale of the Company on December 10, 2021.

During 2020, the Company applied for and received a Targeted Economic Injury Disaster Loan (EIDL) Advance through the United States Small Business Administration in the amount of $5,000. The Targeted EIDL Advance is treated as a grant and was forgiven in full in the same year and is reported as other income.

GRAY MATTERS, INC.

Notes to the Financial Statements

For the years ended December 31, 2020 and 2019

The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 2020 and 2019, are as follows:

The income tax expense differs from the expected income tax expense computed by applying the U.S. federal corporate tax rate of 21% to the income (loss) before income taxes primarily as a result of non-deductible expenses, state income taxes and the change in the valuation allowance on the net deferred tax asset.

There was a full valuation allowance recorded against the net deferred tax asset at December 31, 2019, because the Company had incurred historical losses and future realization of the net deferred tax asset was not more-likely-than-not at that time.

As of December 31, 2020, the Company had no remaining federal and state net operating loss carryforwards after utilizing federal and state operating loss carryforwards of $141,496 and $142,496, respectively, that were outstanding at December 31, 2019.

The Company files income tax returns in the U.S. federal and the state of Maryland jurisdictions.

GRAY MATTERS, INC.

Notes to the Financial Statements

For the years ended December 31, 2020 and 2019

NOTE 6. RELATED PARTY TRANSACTIONS

During 2019, the shareholder paid certain operating expenses on behalf of the Company which are included in the Company’s statement of operations and paid certain income tax payables on behalf of the Company, all of which are reflected as shareholder equity contributions in the 2019 financial statements. In both 2020 and 2019, the Company paid certain personal expenses on behalf of the shareholder which are not included in the Company’s statements of operations and are reflected as dividends in the 2020 and 2019 financial statements. At December 31, 2020 and 2019, the Company owed amounts to the shareholder for Company expenses incurred which are reflected as due to shareholder in the balance sheets.

NOTE 7. REVENUE CONCENTRATION

For the years ended December 31, 2020 and 2019, 100% of the Company’s revenue was derived from one customer.

NOTE 8. SUBSEQUENT EVENTS

On December 10, 2021, the shareholder sold 100% of the Company’s common stock to WaveDancer, Inc., a Delaware publicly traded company.

The Company has evaluated subsequent events through January 28, 2022, the date which the financial statements were available to be issued. There are no other material events that have occurred subsequent to December 31, 2020 that would require adjustment to or disclosure in these financial statements.

11

Notes to the Unaudited Interim Financial Statements

For the nine months September 30, 2021

NOTE 1. NATURE OF THE BUSINESS

Gray Matters, Inc. (the Company) was incorporated on October 3, 2013, in the state of Delaware. The Company’s primary product is its blockchain software that is sold as an installed/on-premise license with a single U.S. government customer.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Condensed Consolidated Financial Statements

The accompanying unaudited financial statements (“financial statements”) have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or. In the opinion of management, the financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair and not misleading presentation of the results of the interim periods presented. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2020. The results of operations for any interim periods are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

There have been no changes in the Company’s significant accounting policies as of September 30, 2021, as compared to the significant accounting policies disclosed in Note 1, "Summary of Significant Accounting Policies" in the Company's audited financial statements for the year ended December 31, 2020.

Basis of Accounting: The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP).

Use of Estimates: The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include depreciable lives for property and equipment, recoverability of income taxes, accrued liabilities, and collectability of accounts receivables. Actual results could differ from those estimates.

Cash: Cash includes bank checking accounts in the United States which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk with respect to cash.

Property and Equipment: Property and equipment are stated at cost and primarily consist of computer hardware and software. The Company capitalizes all property and equipment purchases over $1,000 that have a useful life greater than one year. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which currently are all estimated at five years.

Revenue Recognition: The Company recognizes revenue under the provisions of Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers”. ASC 606 requires an entity to recognize revenue to depict the transfer of control of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.

Revenue is recognized when all of the following steps have been taken and criteria met for each contract:

Gray Matters, Inc.

Notes to the Unaudited Interim Financial Statements

For the nine months September 30, 2021

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Nature of Products and Services

The Company generates revenue primarily from software sales and licensing. The Company currently sells through its direct relationship with its end customer. Software is installed and configured on the customer’s premises. Direct costs that are reimbursable by the customer under the contract are recognized on a gross basis under revenue as reimbursable expenses.

The Company’s only customer contract is a firm fixed price contract. The performance obligations are generally separated into separate tasks or deliverables within the contract. Within a single contract, revenue related to performance obligations may be recognized at a point in time or over time. During the nine months ended September 30, 2021, the Company recognized point in time revenue of $19,819.  The sale of a software license is not a distinct performance obligation from the other development and maintenance services and is recognized over time.  During the nine months ended September 30, 2021, the Company recognized $698,823 of revenue over time.

Customer contracts may be modified to change the scope, price, specifications, other terms within the existing arrangement. Contract modifications are evaluated by management to determine whether the modification should be accounted for as part of the original performance obligation(s) or as a separate contract. If the modification adds distinct goods or services and increases the contract value proportionate to the stand-alone selling price of the additional goods or services, it will be accounted for as a separate contract. Generally, the Company's contract modifications include services which are distinct, and therefore are accounted for as separate from the original performance obligation(s).

Customer payment terms are generally 30 days. The Company does not have any significant financing components as payment is received within one year of the transfer of control to the customer. Sales or other taxes billed and collected from the customer are excluded from revenue.

Gray Matters, Inc.

Notes to the Unaudited Interim Financial Statements

For the nine months September 30, 2021

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Trade accounts receivable are recorded at the billable amount where the Company has the unconditional right to bill, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of accounts. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, the customer's expected ability to pay and collection history, when applicable, to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectible are charged against the allowance for doubtful accounts when identified. There were no such allowances recognized at September 30, 2021. Accounts receivable at September 30, 2021 do not include any unbilled amounts. Unbilled receivables occur when transfer of the performance obligation of the performance obligation to the customer has occurred, and therefore revenue is recognized, in a period prior to invoicing for that performance obligation.

Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss carryforwards. A valuation allowance is provided when it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible.

The Company recognizes interest and penalties related to unrecognized tax benefits in operating expense. As of September 30, 2021, there were no penalties accrued related to unrecognized tax benefits, nor were any interest or penalties recognized during the nine months ended September 30, 2021.

Recently Issued Accounting Pronouncements: In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments - Credit Losses” (Topic 326). ASU 2016-13 provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets and certain other instruments, including but not limited to accounts receivable. The new guidance will be effective for fiscal years beginning after December 15, 2022. Early adoption is allowed. The Company is currently assessing the impact of the new guidance.

Depreciation expense amounted to $2,620 for the nine months ended September 30, 2021.

NOTE 4. NOTES PAYABLE

On December 9, 2019, the Company entered into an agreement with an individual investor to provide “permanent” working capital funding to the Company of up to $600,000. Advances requested and paid under the agreement do not bear interest and are only payable by the Company to the investor upon a Company liquidity event, as defined in the agreement (generally, a change in control or initial public offering). The amount contingently payable upon a liquidity event is 220 percent of the total advances. The Company received advances under the agreement totaling $481,000 in 2020 and $119,000 in 2019. On December 8, 2021, the Company and investor executed a Payoff and Termination Agreement which was effectuated upon payment of a discounted amount in connection with the sale of the Company on December 10, 2021.

Gray Matters, Inc.

Notes to the Unaudited Interim Financial Statements

For the nine months September 30, 2021

NOTE 5. RELATED PARTY TRANSACTIONS

During the nine months ended September 30, 2021, the Company paid certain personal expenses on behalf of the shareholder which are not included in the Company’s statements of operations and are reflected as dividends in these interim financial statements. At December 31, 2020 and September 30, 2021, the Company owed amounts to the shareholder for Company expenses incurred which are reflected as due to shareholder in the balance sheets.

NOTE 6. REVENUE CONCENTRATION

For the nine months ended September 30, 2021, 100% of the Company’s revenue was derived from one customer.

NOTE 7. SUBSEQUENT EVENTS

On December 10, 2021, the shareholder sold 100% of the Company’s common stock to WaveDancer, Inc., a Delaware publicly traded company. The Company paid all of its outstanding debt simultaneous with the closing of the sale.

Note 1 – Basis of Presentation

The unaudited pro forma condensed combined financial statements are based on the Company’s and GMI’s historical consolidated financial statements as adjusted to give effect to the acquisition of GMI and the issuance of shares of WAVD common stock in a private placement that was necessary to finance the acquisition. The unaudited pro forma combined statements of operations for the nine months ended September 30, 2021 and the 12 months ended December 31, 2020 give effect to the GMI acquisition as if it had occurred on January 1, 2020. The unaudited pro forma combined balance sheet as of September 30, 2021 gives effect to the GMI acquisition as if it had occurred on September 30, 2021.

The unaudited pro forma combined statements of operations for the nine months ended September 30, 2021 and the 12 months ended December 31, 2020 separately show the effect of the Tellenger acquisition, which closed on April 7, 2021, as if it had occurred on January 1, 2020.

Note 2 – Description of Transaction

On December 10, 2021, WaveDancer, Inc. (“WAVD”) entered into a Stock Purchase Agreement among WAVD, Jeffrey P. Gerald, as Seller, and Gray Matters, Inc., a Delaware corporation (“GMI”), whereby WAVD purchased all the outstanding shares of GMI. Subject to positive or negative adjustments tied to GMI’s working capital at the closing as measured against a working capital target, the purchase price for the shares consists of (i) $1,500,000 in value of WAVD shares of common stock, (ii) $7,500,000 in cash consideration, (iii) deferred consideration of $1,500,000 payable 24 months after the closing of the transaction and (iv) earn-out consideration of up to $4,000,000 of which up to $2,000,000 is dependent upon GMI achieving gross revenue targets in 2022 and up to $2,000,000 is dependent upon GMI achieving gross profit targets in 2022.

The fair value of WAVD common stock is based on the volume weighted average price for the five days prior to the transaction closing date. Deferred consideration and the contingent consideration have been estimated based on their present value using an appropriate discount rate. Contingent consideration has been estimated using a probability weighted average of possible outcomes. The final estimate of contingent consideration will be recorded as a liability as of the acquisition date and the liability will be remeasured at fair value through net income at the end of each reporting period until the liability is settled.

Using the total consideration for the Acquisition, the Company has estimated the allocations to such assets and liabilities. The following table summarizes the preliminary allocation of the estimated purchase price as of the transaction’s closing date, December 10, 2021:

WaveDancer, Inc.

Unaudited Pro Forma Condensed Combined Financial Information

This preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma balance sheet and income statement. The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include (1) changes in fair values of property, plant and equipment, (2) changes in allocations to identifiable intangible assets such as trade names, technology and customer relationships as well as goodwill and (3) other changes to assets and liabilities. The pro-forma adjustments do not reflect the deferred tax liability that may need to be recorded in connection with recording intangible assets that will be subject to amortization for book purposes but not tax purposes. The offset to such an adjustment would be to increase goodwill.

Note 4—Pro forma adjustments for Gray Matters

The pro forma adjustments are based on preliminary estimates and assumptions that are subject to change.

Adjustments to the pro forma condensed combined balance sheet:

WaveDancer, Inc.

Unaudited Pro Forma Condensed Combined Financial Information

Adjustments to the pro forma condensed combined statement of operations and comprehensive income:

Note 5—Pro forma adjustments for Tellenger