~~t I~~

emItem 1. Unaudited

~~Condensed~~

Consolidated Financial Statements

Castellum, Inc. and Subsidiaries

~~CASTELLUM, INC. AND SUBSIDIARIES~~

Consolidated Balance Sheets

(Unaudited)


	March 31, 2023		December 31, 2022
	(unaudited)
Assets

Current Assets:
Cash	$	2,270,987	$	4,640,896
Accounts receivable	8,246,053		5,193,562
Contract asset	184,325		257,434
Prepaid income taxes	329,036		351,116
Prepaid expenses and other current assets	393,568		222,995

Total current assets	11,423,969		10,666,003

Fixed assets, net	337,242		173,350

Non-Current Assets:
Deferred tax asset	—		—
Right of use asset - operating lease	—		35,524
Intangible assets, net	10,860,535		6,634,167
Goodwill	17,356,430		15,533,964

Total non-current assets	28,554,207		22,377,005

Total Assets	$	39,978,176	$	33,043,008

Liabilities and Stockholders' Equity

Liabilities
Current Liabilities
Accounts payable and accrued expenses	$	1,715,776	$	1,617,596
Accrued payroll and payroll related expenses	2,900,703		1,869,517

Due to seller	350,000		280,000
Obligation to issue common and preferred stock	86,560		—

Contingent earnout	794,000		812,000
Derivative liabilities	960,000		824,000
Revolving credit facility	625,025		300,025
Current portion of notes payable, net of discount	1,936,569		2,033,348
Current portion of lease liability - operating lease	17,608		22,054

~~CONDENSED CONSOLIDATED BALANCE SHEETS~~3

~~SEPTEMBER 30, 2022 (UNAUDITED) AND DECEMBER 31, 2021~~

Table of Contents



Total current liabilities	9,386,241		7,758,540

Non-Current Liabilities
Deferred Tax Liability	—		—
Lease liability - operating lease, net of current portion	—		12,632
Note payable - related party, net of current portion	400,000		400,000
Convertible promissory notes - related parties, net of discount, net of current portion	1,299,173		999,430
Notes payable, net of discount, net of current portion	6,002,514		6,340,490

Total non-current liabilities	7,701,687		7,752,552

Total Liabilities	17,087,928		15,511,092

Stockholders' Equity
Preferred stock, 50,000,000 shares authorized
Series A Preferred stock, par value $0.0001; 10,000,000 shares authorized; 5,875,000 issued and outstanding as of March 31, 2023 and December 31, 2022, respectively	588		588
Series B Preferred stock, par value $0.0001; 10,000,000 shares authorized; 0 and 0 issued and outstanding as of March 31, 2023 and December 31, 2022, respectively	—		—
Series C Preferred stock, par value $0.0001; 10,000,000 shares authorized; 770,000 and 770,000 issued and outstanding as of March 31, 2023 and December 31, 2022, respectively	77		77
Common stock, par value, $0.0001, 3,000,000,000 shares authorized, 47,247,687 and 41,699,363 issued and outstanding as of March 31, 2023 and December 31, 2022, respectively	4,725		4,170
Additional paid in capital	53,333,138		43,621,651
Accumulated deficit	(30,448,280)		(26,094,570)

Total stockholders' equity	22,890,248		17,531,916

Total Liabilities and Stockholders' Equity	$	39,978,176	$	33,043,008

SEPTEMBER 30,

DECEMBER 31,

2022

2021

(unaudited)

ASSETS

CURRENT ASSETS:

Cash

$
1,853,388

$
2,017,915

Accounts receivable

8,465,979

5,414,401

Contract asset

-

591,055

Prepaid expenses and other current assets

310,569

185,824

Total current assets

10,629,936

8,209,195

Fixed assets, net

190,942

145,792

NON-CURRENT ASSETS:

Deferred tax asset

-

610,033

Right of use asset - operating lease

65,503

132,690

Intangible assets, net

7,131,860

7,595,599

Goodwill

15,533,964

14,062,964

Total non-current assets

22,731,327

22,401,286

TOTAL ASSETS

$
33,552,205

$
30,756,273

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

CURRENT LIABILITIES

Accounts payable and accrued expenses

$
1,644,838

$
1,437,827

Accrued payroll and payroll related expenses

2,106,252

1,511,622

Contract liability

82,583

-

Due to seller

591,003

200,000

Obligation to issue common and preferred stock

125,000

25,000

Contingent consideration

-

275,000

Contingent earnout

1,121,000

257,000

Derivative liabilities

789,000

-

Revolving credit facility

300,025

-

Current portion of notes payable, net of discount

1,960,402

1,279,390

Current portion of lease liability - operating lease

47,617

111,999

Total current liabilities

8,767,720

5,097,838

NON-CURRENT LIABILITIES

Lease liability - operating lease, net of current portion

16,743

18,715

Note payable - related party, net of current portion

400,000

400,000

Convertible promissory notes - related parties, net of discount, net of current portion

696,826

2,805,184

Notes payable, net of discount, net of current portion

6,512,019

7,112,419

Total non-current liabilities

7,625,588

10,336,318

Total Liabilities

16,393,308

15,434,156

STOCKHOLDERS' EQUITY

Preferred stock, 50,000,000 shares authorized

Series A Preferred stock, par value $0.0001; 10,000,000 shares authorized;

5,875,000 issued and outstanding as of September 30, 2022 and December 31, 2021,
respectively

588

588

Series B Preferred stock, par value $0.0001; 10,000,000 shares authorized;

3,075,000 and 3,610,000 issued and outstanding as of September 30, 2022 and

December 31, 2021, respectively

307

361

Series C Preferred stock, par value $0.0001; 10,000,000 shares authorized;

770,000 and 620,000 issued and outstanding as of September 30, 2022 and

December 31, 2021, respectively

77

62

Common stock, par value, $0.0001, 3,000,000,000 shares authorized,

24,788,132 and 19,960,632 issued and outstanding as of September 30, 2022 and

December 31, 2021, respectively

2,479

1,996

Additional paid in capital

37,546,787

26,405,126

Accumulated deficit

(20,391,341
)

(11,086,016
)

Total stockholders' equity

17,158,897

15,322,117

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
33,552,205

$
30,756,273

See notes to ~~condensed~~ consolidated financial statements.

Table of Contents

Castellum, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)


	Three Months Ended March 31,
	2023		2022

Revenues	$	9,937,013	$	9,990,141
Cost of Revenues	5,899,231		5,855,641
Gross Profit	4,037,782		4,134,500

Operating Expenses
Indirect costs	2,210,879		1,729,195
Overhead	467,682		418,970
General and administrative expenses	6,046,530		2,842,140
Gain from change in fair value of contingent earnout	(18,000)		—

Total operating expenses	8,707,091		4,990,305

Loss From Operations Before Other Income (Expense)	(4,669,309)		(855,805)

Other Income (Expense)

Gain on disposal of fixed assets	(1,075)		—
Loss on induced conversion	(300,000)		—
Gain from change in fair value of derivative liability	251,625		—
Interest expense, net of interest income	(830,281)		(689,626)
Total other income (expense)	(879,731)		(689,626)

Loss From Operations Before Benefit For Income Taxes	(5,549,040)		(1,545,431)

Income Tax Benefit	1,225,649		149,628

Net Loss	(4,323,391)		(1,395,803)
Less: Preferred Stock Dividends	30,319		10,912
Net Loss To Common Shareholders	$	(4,353,710)	$	(1,406,715)

Net Loss Per Share - Basic And Diluted	$	(0.10)	$	(0.07)

Weighted Average Shares Outstanding - Basic And Diluted	43,065,128		19,970,438

See notes to consolidated financial statements.

~~STELLUM, INC. AND SUBSIDIARIES~~Table of Contents

Castellum, Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders' Equity

(Unaudited)


	Series A Preferred			Series B Preferred			Series C Preferred			Common Stock			Additional Paid-In Capital		Accumulated Deficit		Total
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Balance - December 31, 2021	5,875,000	$	588	3,610,000	$	361	620,000	$	62	19,960,632	$	1,996	$	26,405,126	$	(11,086,016)	$	15,322,117

Stock-based compensation - options	—	—		—	—		—	—		—	—		875,640		—		875,640
Stock-based compensation - warrants	—	—		—	—		—	—		—	—		—		—		—
Stock-based compensation - restricted shares	—	—		—	—		—	—		—	—		30,937		—		30,937
Shares issued in acquisition of MFSI	—	—		—	—		—	—		—	—		—		—		—
Cancellation of shares in acquisition of MFSI	—	—		—	—		—	—		—	—		—		—		—
Shares issued for service, net of amounts prepaid	—	—		—	—		—	—		7,500	1		6,187		—		6,188
Shares issued in exercise of stock options	—	—		—	—		—	—		15,000	2		11,998		—		12,000
Shares issued for cash in Series C Preferred
Subscription Agreement	—	—		—	—		150,000	15		15,000	2		149,983		—		150,000

Net loss for the period	—	—		—	—		—	—		—	—		—		(1,406,715)		(1,406,715)

Balance - March 31, 2022	5,875,000	588		3,610,000	361		770,000	77		19,998,132	2,001		27,479,871		(12,492,731)		14,990,167

Balance - December 31, 2022	5,875,000	588		—	—		770,000	77		41,699,363	4,170		43,621,651		(26,094,570)		17,531,916

Stock-based compensation - options	—	—		—	—		—	—		—	—		2,436,299		—		2,436,299
Stock-based compensation - warrants	—	—		—	—		—	—		—	—		1,076,969		—		1,076,969
Stock-based compensation - restricted stock and shares issued for services	—	—		—	—		—	—		125,504	12		149,987		—		149,999
Shares issued to acquire GTMR	—	—		—	—		—	—		4,866,570	487		5,304,075		—		5,304,562
Shares issued in induced conversion of Crom note	—	—		—	—		—	—		556,250	56		589,944		—		590,000
Loss on induced conversion	—	—		—	—		—	—		—	—		300,000		—		300,000
Extinguishment of debt discount - derivative liability	—	—		—	—		—	—		—	—		(171,128)		—		(171,128)
Extinguishment of debt discount - debt issuance costs	—	—		—	—		—	—		—	—		(8,034)		—		(8,034)
Extinguishment of derivative liability	—	—		—	—		—	—		—	—		33,375		—		33,375

Net loss for the period	—	—		—	—		—	—		—	—		—		(4,353,710)		(4,353,710)

~~CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)~~6

~~FOR THE~~

~~THREE~~

~~AND~~

~~NINE~~

~~MONTHS ENDED SEPTEMBER 30, 2022 AND 2021~~

Table of Contents



Balance - March 31, 2023	5,875,000	$	588	—	$	—	770,000	$	77	47,247,687	$	4,725	$	53,333,138	$	(30,448,280)	$	22,890,248

THREE MONTHS ENDED

NINE MONTHS ENDED

SEPTEMBER 30,

SEPTEMBER 30,

2022

2021

2022

2021

REVENUES

$
11,120,712

$
7,378,094

$
32,166,104

$
15,587,246

COST OF REVENUES

6,474,261

4,309,439

18,698,820

8,921,153

GROSS PROFIT

4,646,451

3,068,655

13,467,284

6,666,093

OPERATING EXPENSES

Indirect costs

2,130,513

738,239

7,458,319

1,512,370

Overhead

407,804

248,540

1,167,346

431,987

General and administrative expenses

3,297,319

6,682,034

9,633,064

10,389,922

Loss from change in fair value of contingent earnout

864,000

-

864,000

-

Total operating expenses

6,699,636

7,668,813

19,122,729

12,334,279

LOSS FROM OPERATIONS BEFORE OTHER INCOME (EXPENSE)

(2,053,185
)

(4,600,158
)

(5,655,445
)

(5,668,186
)

OTHER INCOME (EXPENSE)

Realized gain on investment

-

-

-

38,851

Gain on disposal of fixed assets

-

-

303

-

Change in fair value of derivative liability

76,000

-

(97,000
)

-

Interest expense, net of interest income

(978,314
)

(648,175
)

(2,579,915
)

(1,838,032
)
Total other income (expense)

(902,314
)

(648,175
)

(2,676,612
)

(1,799,181
)

LOSS FROM OPERATIONS BEFORE BENEFIT

FOR INCOME TAXES

(2,995,499
)

(5,248,333
)

(8,332,057
)

(7,467,367
)

INCOME TAX (EXPENSE) BENEFIT

(159,025
)

328,735

(902,820
)

890,995

NET LOSS

(3,114,524
)

(4,919,598
)

(9,234,877
)

(6,576,372
)
Less: Preferred Stock Dividends

29,911

3,320

70,447

3,320

NET LOSS TO COMMON SHAREHOLDERS

$
(3,144,435
)

$
(4,922,918
)

$
(9,305,324
)

$
(6,579,692
)

NET LOSS PER SHARE - BASIC AND DILUTED

$
(0.12
)

$
(0.26
)

$
(0.39
)

$
(0.38
)

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED

25,868,849

18,679,462

23,621,551

17,414,469

See notes to ~~condensed~~ consolidated financial statements.

Table of Contents

Castellum, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2023 and 2022

(Unaudited)


	2023		2022
Cash Flow From Operating Activities
Net loss	$	(4,323,391)	$	(1,395,803)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
Depreciation and amortization	510,568		490,836
Amortization of discounts, premium and deferred costs	561,851		475,629
Stock-based compensation	3,721,828		942,765
Deferred tax provision	(1,244,366)		(202,795)

Financing fee and bank charges for note payable and advances on revolving credit line	—		3,750
Lease cost	838		277

Change in fair value of contingent earnout	(18,000)		—
Change in fair value of derivative liability	(251,625)		—
Changes in assets and liabilities
Accounts receivable	(2,102,056)		317,951
Proceeds from factoring accounts receivable	411,975		—
Prepaid expenses and other current assets	132,996		33,035
Contract asset (liability)	73,108		(140,615)

Accounts payable and accrued expenses	98,409		(440,257)
Net cash (used in) provided by operating activities	(2,427,865)		84,773

Cash Flows From Investing Activities
Acquisition of business, cash paid to seller	(470,233)		—
Cash paid to seller from factoring	(411,975)		—
Cash received in acquisition of GTMR	475,000		—
Purchase of fixed assets	(20,526)		(67,613)
Net cash (used in) provided by investing activities	(427,734)		(67,613)

Cash Flows From Financing Activities
Proceeds from revolving credit line	325,000		—
Payment of debt issuance costs	(15,000)		—
Proceeds from issuance of preferred and common stock	—		125,000
Proceeds from notes payable	800,000		500,000
Preferred stock dividend	(30,319)		(10,912)
Proceeds from exercise of stock options	—		12,000
Conversion of note payable	—		—
Repayment of amounts due to seller	(280,000)		(40,000)
Loss on induced conversion	300,000		—
Repayment of note payable	(613,991)		(311,378)
Net cash provided by financing activities	485,690		274,710

Net (Decrease) Increase in Cash	(2,369,909)		291,870

~~STELLUM, INC. AND SUBSIDIARIES~~

Table of Contents

~~CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)~~


Cash - Beginning of Period	4,640,896		2,017,915

Cash - End of Period	$	2,270,987	$	2,309,785

Supplemental Disclosures
Cash paid for interest expense	$	(247,541)	$	(196,474)
Cash refunded from income taxes	$	9,900	$	—

Summary of Non-Cash Activities:

Debt discount on note payable applied to obligation to issue common stock	$	28,000	$	500,000
Derivative liability incurred for note payable	421,000		-
Extinguishment of debt discount - derivative liability	171,128		-
Extinguishment of debt discount - debt issuance costs	8,034		-
Extinguishment of derivative liability on Crom note	$	33,375	$	-

~~FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021~~

Additional

Series A Preferred

Series B Preferred

Series C Preferred

Common Stock

Paid-In

Subscription

Accumulated

Shares

Amount

Shares

Amount

Shares

Amount

Shares

Amount

Capital

Receivable

Deficit

Total

Balance - December 31, 2020

5,875,000

$
588

3,610,000

$
361

-

$
-

15,411,264

$
1,541

$
6,133,332

$
-

$
(3,527,296
)

$
2,608,526

Stock-based compensation - options

-

-

-

-

-

-

-

-

263,610

-

-

263,610

Stock-based compensation - warrants

-

-

-

-

-

-

-

-

188,186

-

-

188,186

Net loss for the period

-

-

-

-

-

-

-

-

-

-

(829,532
)

(829,532
)

Balance - March 31, 2021

5,875,000

588

3,610,000

361

-

-

15,411,264

1,541

6,585,128

-

(4,356,828
)

2,230,790

Shares issued in acquisition of MFSI

-

-

-

-

-

-

1,114,023

111

1,782,326

-

-

1,782,437

Cancellation of shares in acquisition of MFSI

-

-

-

-

-

-

(250,000
)

(25
)

(399,975
)

-

-

(400,000
)
Stock-based compensation - options

-

-

-

-

-

-

-

-

407,271

-

-

407,271

Net loss for the period

-

-

-

-

-

-

-

-

-

-

(827,242
)

(827,242
)

Balance - June 30, 2021

5,875,000

588

3,610,000

361

-

-

16,275,287

1,627

8,374,750

-

(5,184,070
)

3,193,256

Shares issued in acquisition of Merrison

-

-

-

-

-

-

500,000

50

1,699,950

-

-

1,700,000

Shares issued in acquisition of SSI, net of transaction costs

-

-

-

-

-

-

2,600,000

260

5,149,240

-

-

5,149,500

Shares issued for cash in Series C Preferred Subscription Agreements

-

-

-

-

520,000

52

52,000

5

519,943

(100,000
)

-

420,000

Stock-based compensation - options

-

-

-

-

-

-

-

-

1,600,217

-

-

1,600,217

Stock-based compensation - warrants

-

-

-

-

-

-

-

-

2,846,416

-

-

2,846,416

Net loss for the period

-

-

-

-

-

-

-

-

-

-

(4,922,918
)

(4,922,918
)

Balance - September 30, 2021

5,875,000

$
588

3,610,000

$
361

520,000

$
52

19,427,287

$
1,942

$
20,190,516

$
(100,000
)

$
(10,106,988
)

$
9,986,471

Balance - December 31, 2021

5,875,000

$
588

3,610,000

$
361

620,000

$
62

19,960,632

$
1,996

$
26,405,126

$
-

$
(11,086,016
)

$
15,322,117

Stock-based compensation - options

-

-

-

-

-

-

-

-

875,640

-

-

875,640

Stock-based compensation - warrants

-

-

-

-

-

-

-

-

-

-

-

-

Stock-based compensation - restricted shares

-

-

-

-

-

-

-

-

30,937

-

-

30,937

Shares issued in acquisition of MFSI

-

-

-

-

-

-

-

-

-

-

-

-

Cancellation of shares in acquisition of MFSI

-

-

-

-

-

-

-

-

-

-

-

-

Shares issued for service, net of amounts prepaid

-

-

-

-

-

-

7,500

1

6,187

-

-

6,188

Shares issued in exercise of stock options

-

-

-

-

-

-

15,000

2

11,998

-

-

12,000

Shares issued for cash in Series C Preferred

Subscription Agreement

-

-

-

-

150,000

15

15,000

2

149,983

-

-

150,000

Net loss for the period

-

-

-

-

-

-

-

-

-

-

(1,406,715
)

(1,406,715
)

Balance - March 31, 2022

5,875,000

588

3,610,000

361

770,000

77

19,998,132

2,001

27,479,871

-

(12,492,731
)

14,990,167

Shares issued for services, net of amounts prepaid

-

-

-

-

-

-

7,500

1

11,939

-

-

11,940

Shares issued for cash, including fair value adjustment

-

-

-

-

-

-

1,250,000

125

592,875

-

-

593,000

Shares issued for commitment fees

-

-

-

-

-

-

125,000

12

59,288

-

-

59,300

Shares issued to satisfy obligation to issue common stock

-

-

-

-

-

-

132,500

13

533,737

-

-

533,750

Shares issued to acquire LSG

-

-

-

-

-

-

600,000

60

2,279,940

-

-

2,280,000

Common shares issued in conversion of Series B Preferred Stock

-

-

(535,000
)

(54
)

-

-

2,675,000

267

(213
)

-

-

-

Stock-based compensation - options

-

-

-

-

-

-

-

-

1,117,335

-

-

1,117,335

Stock-based compensation - warrants

-

-

-

-

-

-

-

-

1,603,219

-

-

1,603,219

Stock-based compensation - restricted shares

-

-

-

-

-

-

-

-

30,938

-

-

30,938

Gain on extinguishment of related party convertible note

-

-

-

-

-

-

-

-

2,667,903

-

-

2,667,903

Net loss for the period

-

-

-

-

-

-

-

-

-

-

(4,754,175
)

(4,754,175
)

Balance - June 30, 2022

5,875,000

$
588

3,075,000

$
307

770,000

$
77

24,788,132

$
2,479

$
36,376,832

$
-

$
(17,246,906
)

$
19,133,377

Stock-based compensation - options

-

-

-

-

-

-

-

-

1,139,018

-

-

1,139,018

Stock-based compensation - warrants

-

-

-

-

-

-

-

-

-

-

-

-

Stock-based compensation - restricted shares

-

-

-

-

-

-

-

-

30,937

-

-

30,937

Gain on extinguishment of related party convertible note

-

-

-

-

-

-

-

-

-

-

-

-

Net loss for the period

-

-

-

-

-

-

-

-

-

-

(3,144,435
)

(3,144,435
)

Balance - September 30, 2022

5,875,000

$
588

3,075,000

$
307

770,000

$
77

24,788,132

$
2,479

$
37,546,787

$
-

$
(20,391,341 )

$
17,158,897

~~See notes to condensed consolidated financial statements.~~

~~STELLUM, INC. AND SUBSIDIARIES~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)~~

~~FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021~~

2022

2021

CASH FLOW FROM OPERATING ACTIVIITES

Net loss

$
(9,234,877
)

$
(6,576,372
)
Adjustments to reconcile net loss to net cash (used in)
provided by
operating activities

Depreciation and amortization

1,520,329

1,126,047

Amortization of discounts, premium and deferred costs

1,869,152

1,342,181

Stock-based compensation

4,906,152

5,305,700

Deferred tax provision

610,033

(1,025,852
)
Gain on disposal of fixed assets

(303
)

-

Financing fee and bank charges for note payable and advances on revolving credit line

3,775

-

Realized gain on investment

-

(38,851
)
Lease cost

833

476

Legal fees paid out of proceeds from a note payable

30,000

-

Change in fair value of contingent earnout

864,000

-

Change in fair value of derivative liability

97,000

-

Changes in assets and liabilities

Accounts receivable

(2,637,969
)

144,601

Prepaid expenses and other current assets

(58,051
)

(2,014
)
Contract asset (liability)

673,638

(569,610
)
Payment of transaction costs in acquisition of SSI

-

(50,500
)
Accounts payable and accrued expenses

801,641

511,806

Net cash (used in)
provided by
operating activities

(554,647
)

167,612

CASH FLOWS FROM INVESTING ACTIVITES

Cash received in acquisition of MFSI

-

93,240

Cash received in acquisition of Merrison, net of amounts paid

-

183,588

Cash received in acquisition of SSI, net of amounts paid

-

198,935

Cash paid in acquisition of LSG

(250,000
)

-

Sale of investment

-

365,572

Purchase of fixed assets

(92,436
)

(5,346
)
Net cash (used in) provided by investing activities

(342,436
)

835,989

CASH FLOWS FROM FINANCING ACTIVITES

Proceeds from revolving credit line

300,000

-

Proceeds from issuance of preferred and common stock

625,000

420,000

Proceeds from note
s
payable

1,470,000

-

Preferred stock dividend

(70,449
)

(3,320
)
Proceeds from exercise of stock options

12,000

-

Repayment of convertible note payable - related parties

(500,000
)

(70,000
)
Repayment of amounts due to seller

(160,000
)

-

Repayment of line of credit, net

-

(3,460
)
Repayment of note payable

(943,995
)

(104,244
)
Net cash provided by financing activities

732,556

238,976

NET (DECREASE)
INCREASE
IN CASH

(164,527
)

1,242,577

CASH - BEGINNING OF PERIOD

2,017,915

2,412,382

CASH - END OF PERIOD

$
1,853,388

$
3,654,959

SUPPLEMENTAL DISCLOSURES

Cash paid for interest expense

$
559,234

$
474,414

Cash paid for income taxes

$
118,885

$
16,400

SUMMARY OF NON-CASH ACTIVITIES:

Debt discount on note payable applied to obligation to issue common stock

$
500,000

$
-

Adjustment to contingent consideration and customer relationships

$
275,000

$
-

Gain on extinguishment of convertible note payable - related party applied to APIC

$
2,667,903

$
-

Common shares issued for obligation to issue common stock

$
533,750

$
-

Derivative liability recognized as discount of note payable

$
692,000

$
-

Deferred issuance costs recognized for note payable

$
59,300

$
-

Fair value adjustment recognized on issuance of common stock in Securities Purchase Agreement

$
93,000

$
-

Common shares issued in conversion of Series B Preferred shares

$
5,350

$
-

Cancellation of shares offsetting acquisition of MFSI

$
-

$
400,000

For the non-cash activities related to the Company's acquisitions and debt transaction see Note 3, ~~"Acquisitions."~~

"Acquisitions" and Note 7 "Notes Payable".

See notes to ~~condensed~~ consolidated financial statements.

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~~CASTELLUM, INC. AND SUBSIDIARIES~~

Castellum, Inc. and Subsidiaries

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

Notes to Consolidated Financial Statements (Unaudited)

~~SEPTEMBER 30,~~March 31, 2023 and 2022 ~~AND 2021~~

~~NOTE~~Note 1: ~~NATURE OF OPERATIONS~~Nature of Operations

Castellum, Inc. (the “Company”) is focused on acquiring and growing technology companies in the areas of information technology, electronic warfare, information warfare and cybersecurity with businesses in the governmental and commercial markets. Services include intelligence analysis, software development, software engineering, program management, strategic planning, information assurance and cybersecurity and policy along with analysis support. These services, which largely focus on securing data and establishing related policies, are applicable to customers in the federal government, financial services, healthcare and other users of large data applications. The services can be delivered to legacy, customer owned networks or customers who rely upon cloud-based infrastructures. The Company has worked with multiple business brokers and contacts within

its

business network to identify potential acquisitions.

~~ince~~Since November 2019, the Company has made the following acquisitions that specialize in the areas noted above:

~~Corvus Consulting, LLC (“Corvus”),~~

•Corvus Consulting, LLC (“Corvus”),

~~Mainnerve Federal Services, Inc. dba MFSI Government Group (“MFSI),~~

•Mainnerve Federal Services, Inc. dba MFSI Government Group (“MFSI),

~~Merrison Technologies, LLC (“Merrison”),~~

•Merrison Technologies, LLC (“Merrison”),

~~Specialty Systems, Inc. (“SSI”),~~

•Specialty Systems, Inc. (“SSI”),

~~the business assets of Pax River from The Albers Group (“Pax River”), and~~

•the business assets of Pax River from The Albers Group (“Pax River”), and

~~Lexington Solutions Group, LLC (“LSG”).~~

•Lexington Solutions Group, LLC (“LSG”).

•Global Technology and Management Resources, Inc. ("GTMR")

With the exception of Pax River, all of these acquisitions were considered business combinations under Topic 805

Business Combinations

of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). See Note 3, “Acquisitions” for greater details on the acquisitions of the Company since January 1, ~~2021.~~2022.

On July 19, 2021, the Company filed a Certificate of Amendment with the State of Nevada to change the par value of all common and preferred stock to be $0.0001. All changes to the par value dollar amount for these classes of stock and adjustment to additional paid in capital have been made retroactively.

~~On April 7,~~October 17, 2022, the Company ~~filed~~completed a ~~Certificate~~$3,000,000 public offering, a 1-for-20 Reverse Stock Split of ~~Amendment for~~

its

~~Series A Preferred Stock~~ common shares, and an uplisting to ~~(a) provide for an annualized dividend of $0.0125~~the NYSE American exchange. All share and per share

figures related to ~~be paid monthly; (b) amend~~ the ~~conversion ratio for each share of Series A Preferred Stock~~

~~to convert~~

~~into 2 shares of~~ common stock ~~instead of 20 shares of common stock; and (c) providing for the Company to~~ have ~~the option to repurchase the Series A Preferred Stock at any time at a price of $1 per share.~~

been retroactively adjusted in accordance with SEC Staff Accounting Bulletin (“SAB”) Topic 4C.

The events related to COVID-19, the disease caused by the novel coronavirus (SARS-CoV-2) and its variants, have had significant health, economic, and market impacts and may have short-term and long-term adverse effects on our business that we cannot predict as the global pandemic continues to evolve. The extent and effectiveness of responses by governments and other organizations also cannot be predicted. Our ability to access the capital markets and maintain existing operations has been little affected during the COVID-19 pandemic. Going forward any possible adverse effects on the business are uncertain given any possible limitations on available financing and how we conduct business with our customers and vendors.

~~NOTE~~Note 2: ~~SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~Summary of Significant Accounting Policies

Basis of Presentation ~~and Principles of Consolidation~~

The ~~interim condensed~~accompanying consolidated financial statements, including the notes, include the accounts of the Company and its wholly-owned subsidiaries and the accompanying notes included in this Quarterly Report are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of the condensed consolidated financial statements have been ~~included. Such adjustments are of a normal, recurring nature.~~

~~The unaudited interim condensed consolidated financial statements, and the accompanying notes, are~~ prepared in accordance with U.S. generally accepted accounting principles in("U.S. GAAP") and the ~~United States (“GAAP”).~~

~~The condensed consolidated financial statements include~~rules and regulations of the ~~accounts of Castellum, Inc.~~U.S. Securities and ~~its subsidiaries, collectively referred to as “the Company”~~Exchange Commission ("SEC"). All ~~significant~~ intercompany ~~accounts~~balances and transactions have been eliminated in consolidation. ~~The Company owns~~

~~100%~~Basis of Presentation for Interim Periods

Certain information and footnote disclosures normally included for the ~~equity interests of each~~

~~of its~~

subsidiaries. The excess of the consideration paid over the net assets acquired in these business combinations was first attributed to identified intangible assets with the remainder being applied to goodwill. All goodwill other than that acquired in the acquisition of LSG is not deductible for tax purposes. The LSG-related goodwill is tax deductible.

On October 13, 2022, the Company completed a $3,000,000 public offering, a 1:20 reverse stock split of its common shares, and an uplisting to the NYSE American exchange. All share and per share figures related to the common stock, have been retroactively adjustedannual financial statements prepared in accordance with ~~SEC Staff Accounting Bulletin (SAB) Topic 4C.~~

~~Business Segments~~

~~Operating segments~~U.S. GAAP have been condensed or omitted for the interim periods presented. We believe that the unaudited interim financial statements include all adjustments (which are ~~defined as components of an enterprise about which separate~~normal and recurring in nature) necessary to present fairly our financial ~~information is available that is evaluated regularly by~~position and the ~~chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM, the Chief Executive Officer, reviews consolidated~~ results of operations and cash flows for the periods presented.

The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for the year or future periods. The financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2022 included in our Annual Report on Form 10-K for the year then ended. We have continued to ~~make decisions. The Company maintains one operating and reportable segment, which is~~follow the ~~delivery of products and services~~accounting policies set forth in ~~the areas of information technology, electronic warfare, information warfare~~

,those financial statements.

~~and cybersecurity in the governmental and commercial markets~~

Use of Estimates

The preparation of

~~condensed~~

consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of

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revenues and expenses during the reporting period. These estimates include, but are not limited to, management’s estimate of provisions required for uncollectible accounts receivable, the acquired value of the intangible assets, impaired value of intangible assets, liabilities to accrue, cost incurred in the satisfaction of performance obligations, fair value for consideration elements of business combinations, permanent and temporary differences related to income taxes and determination of the fair value of stock awards. Actual results could differ from those estimates.

Revenue Recognition

The Company accounts for revenue in accordance with ASC Topic 606,

Revenue from Contracts with Customers.

The Company accounts for a contract with a customer that is within the scope of this Topic only when the five steps of revenue recognition under ASC 606 are met.

The five core principles will be evaluated for each service provided by the Company and is further supported by applicable guidance in ASC 606 to support the Company’s recognition of revenue.

Revenue is derived primarily from services provided to the Federal government. The Company enters into agreements with customers that create enforceable rights and obligations and for which it is probable that the Company will collect the consideration to which it will be entitled as services and solutions are transferred to the customer. The Company also evaluates whether two or more agreements should be accounted for as one single contract.

When determining the total transaction price, the Company identifies both fixed and variable consideration elements within the contract. The Company estimates variable consideration as the most likely amount to which the Company expects to be entitled limited to the extent that it is probable that a significant reversal will not occur in a subsequent period.

At contract inception, the Company determines whether the goods or services to be provided are to be accounted for as a single performance obligation or as multiple performance obligations. For most contracts, the customers require the Company to perform several tasks in providing an integrated output and, hence, each of these contracts are deemed as having only one performance obligation. When contracts are separated into multiple performance obligations, the Company allocates the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised services underlying each performance obligation.

This evaluation requires professional judgment, and it may impact the timing and pattern of revenue recognition. If multiple performance obligations are identified, the Company generally uses the cost plus a margin approach to determine the relative standalone selling price of each performance obligation. The Company does not assess whether a contract contains a significant financing component if the Company expects, at contract inception, that the period between when payment by the client and the transfer of promised services to the client occur will be less than one year.

The Company currently generates its revenue from three different types of contractual arrangements: cost plus fixed fee (“CPFF”), firm-fixed-price contracts (“FFP”) and time-and-materials (“T&M”) contracts. The Company generally recognizes revenue over time as control is transferred to the customer, based on the extent of progress towards satisfaction of the performance obligation. The selection of the method used to measure progress requires judgment and is dependent on the contract type and the nature of the goods or services to be provided.

For CPFF contracts, the Company uses input progress measures to derive revenue based on hours worked on contract performance as follows: direct costs plus

Defense Contract Audit Agency

(“

~~DCAA~~

” (“DCAA”)

approved provisional burdens plus fee. The provisional indirect rates are adjusted and billed at actual at year end. Revenue from FFP contracts is generally recognized ratably over the contract term, using a time-based measure of progress, even if billing is based on other metrics or milestones, including specific deliverables. For T&M contracts, the Company uses input progress measures to estimate revenue earned based on hours worked on contract performance at negotiated billing rates, plus direct costs and indirect cost burdens associated with materials and the direct expenses incurred in performance of the contract.

These arrangements generally qualify for the “right-to-invoice” practical expedient where revenue is recognized in proportion to billable consideration. FFP Level-Of-Effort contracts are substantially similar to T&M contracts except that the Company is required to deliver a specified level of effort over a stated period. For these contracts, the Company estimates revenue earned using contract hours worked at negotiated bill rates as the Company delivers the contractually required workforce.

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Revenue generated by Contract Support Service contracts is recognized over time as services are provided, based on the transfer of control. Revenue generated by FFP contracts is recognized over time as performance obligations are satisfied. Most contracts do not contain variable consideration and contract modifications are generally minimal. For these reasons, there is not a significant impact of electing these transition practical expedients.

Revenue generated from contracts with Federal, state, and local governments ~~from these contracts~~ is recorded over time, rather than at a point in time. Under the Contract Support Services contracts, the Company performs software design work as it is assigned by the customer, and bills the customer, generally semi-monthly, on either a CPFF or T&M basis, as labor hours are expended. Certain other government contracts for software development have specific deliverables and are structured as FFP contracts, which are generally billed as the performance obligations under the contract are met. Revenue recognition under FFP contracts require judgment to allocate the transaction price to the performance obligations. Contracts may have terms up to five years.

Contract accounting requires judgment relative to assessing risks and estimating contract revenue and costs and assumptions for schedule and technical issues. Due to the size and nature of contracts, estimates of revenue and costs are subject to a number of variables. For contract change orders, claims or similar items, judgment is required for estimating the amounts, assessing the potential for realization and determining whether realization is probable. Estimates of total contract revenue and costs are continuously monitored during the term of the contract and are subject to revision as the contract progresses. From time to time, facts develop that require revisions of revenue recognized or cost estimates. To the extent that a revised estimate affects the current or an earlier period, the cumulative effect of the revision is recognized in the period in which the facts requiring the revision become known.

The Company accounts for contract costs in accordance with ASC Topic 340-40,

Contracts with Customers

. The Company recognizes the cost of sales of a contract as expense when incurred or at the time a performance obligation is satisfied. The Company recognizes an asset from the costs to fulfill a contract only if the costs relate directly to a contract, the costs generate or enhance resources that will be used in satisfying a performance obligation in the future and the costs are expected to be recovered. The incremental costs of obtaining a contract are capitalized unless the costs would have been incurred regardless of whether the contract was obtained.

The following table disaggregates the Company’s revenue by contract type for the ~~nine~~three months ended ~~September 30:~~

March 31:


	2022		2021			2023		2022
Revenue:					Revenue:
Time and material	$	17,924,100	$	10,860,224	Time and material	$	5,723,610	$	4,884,186
Firm fixed price		3,607,597		2,820,041	Firm fixed price	943,875		1,774,092
Cost plus fixed fee		10,634,407		1,837,869	Cost plus fixed fee	3,269,528		3,331,863
Other		-		69,112

Total	$	32,166,104	$	15,587,246	Total	$	9,937,013	$	9,990,141

~~Derivative Financial Instruments~~

Derivatives are recorded on the consolidated balance sheet at fair value. The conversion features of certain of the convertible instruments are embedded derivatives and are separately valued and accounted for on the consolidated balance sheet with changes in fair value recognized during the period of change as a separate component of other income/expense. Valuations derived from various models are subject to ongoing internal and external verification and review. The model used incorporates market-sourced inputs such as interest rates and stock price volatilities. Selection of these inputs involves management’s judgment and may impact net income (loss).

~~With the issuance of the July 2017 FASB ASU 2017-11,~~

~~“Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815),”~~

~~which addresses the complexity of accounting for certain financial instruments.~~

~~Under current GAAP, an equity-linked financial instrument that otherwise is not required to be classified as a liability under the guidance Topic 480 is evaluated under the guidance in Topic 815, “~~

~~Derivatives and Hedging~~

,” to determine whether it meets the definition of a derivative. If it meets that definition, the instrument (or embedded feature) is evaluated to determine whether it is indexed to an entity’s own stock as part of the analysis of whether it qualifies for a scope exception from derivative accounting.

Generally, for warrants and conversion options embedded in financial instruments that are deemed to have a debt host (assuming the underlying shares are readily convertible to cash or the contract provides for net settlement such that the embedded conversion option meets the definition of a derivative). This results in a reporting entity being required to classify the freestanding financial instrument or the bifurcated conversion option as a liability, which the entity must measure at fair value initially and at each subsequent reporting date.

~~The amendments in this Update revise the guidance for instruments with embedded features in Subtopic 815-40, “~~

~~Derivatives and Hedging—Contracts in Entity’s Own Equity~~

~~,” which is considered in determining whether an equity-linked financial instrument qualifies for a scope exception from derivative accounting.~~

~~Accounting for~~

~~Income Taxes~~

Income taxes are accounted for under the asset and liability method. We estimate our income taxes in each of the jurisdictions where the Company operates. This process involves estimating our current tax expense or benefit together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When assessing the realizability of deferred tax assets, we consider if it is more likely than not that some or all of the deferred tax assets will not be realized. In making this assessment, we consider the availability of loss carryforwards, projected reversals of deferred tax liabilities, projected future taxable income, and ongoing prudent and feasible tax planning strategies.

We are subject to income taxes in the federal and state tax jurisdictions based upon our business operations in those jurisdictions. Significant judgment is required in evaluating uncertain tax positions. We record uncertain tax positions in accordance with ASC 740-10 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position, and (2) with respect to those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority. Management evaluates its tax positions on a quarterly basis.

The Company files income tax returns in the US Federal tax jurisdiction and various state tax jurisdictions. The federal and state income tax returns of the Company are subject to examination by the Internal Revenue Service (“IRS”) and state taxing authorities, generally for three years after they were filed.

~~Share-Based Compensation~~

~~The Company follows ASC 718~~

~~Compensation – Stock Compensation~~

~~and has adopted ASU 2017-09~~

~~Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting~~

. The Company calculates compensation expense for all awards granted, but not yet vested, based on the grant-date fair values. The Company recognizes these compensation costs, on a pro rata basis over the requisite service period of each vesting tranche of each award for service-based grants, and as the criteria is achieved for performance-based grants.

~~The Company adopted ASU 2016-09~~

~~Improvements to Employee Share-Based Payment Accounting~~

~~. Cash paid when shares are directly withheld for tax withholding purposes is classified as a financing activity in the statement of cash flows.~~

~~Fair Value of Financial Instruments~~

~~ASC 825~~

~~Financial Instruments~~

requires the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company’s financial instruments: The carrying amount of cash, accounts receivable, prepaid and other current assets, accounts payable and accrued liabilities, approximate fair value because of the short-term maturity of those instruments. The fair value of debt reflects the price at which the debt instrument would transact between market participants, in an orderly transaction at the measurement date. The fair value of the equity consideration from business combinations is measured using the price of our common stock at the measurement date, along with applying an appropriate discount for lack of marketability. For contingent liabilities from business combinations, the fair value is measured on the acquisition date using an option pricing model. The Company does not utilize derivative instruments for hedging purposes.

~~Earnings (Loss) Per Share of Common Stock~~

~~Basic net income (loss) per common share is computed using the weighted average number of common shares outstanding~~

, as well as a warrant to purchase 1,080,717 shares of common stock for a total aggregate exercise price of $1 granted in connection with the $5,600,000 note payable maturing September 30, 2024, as the cash consideration for the holder/grantee to receive common shares was determined to be nonsubstantive

. Diluted earnings per share (“EPS”) include additional dilution from common stock equivalents, such as convertible notes, preferred stock, stock issuable pursuant to the exercise of stock options and all other warrants. Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for periods presented, so only the basic weighted average number of common shares are used in the computations. The Company subtracts dividends on preferred stock when calculating earnings (loss) per share.

Recent Accounting Pronouncements

The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows, or disclosures.

There have been no recently issued accounting pronouncements as of March 31, 2023 that would materially impact the company.

~~NOTE~~Note 3: ~~ACQUISITIONS~~Acquisitions

The Company has completed the following acquisitions to achieve its business purposes as discussed in Note 1. As the acquisitions made by the Company in ~~2021~~2022 and ~~2022~~2023 were of the common stock or membership interests of the companies, certain assets in some of the acquisitions (intangible assets and goodwill) are not considered deductible for tax purposes.

GTMR

~~MFSI~~

~~The~~On March 22, 2023, the Company entered into ~~a definitive~~an agreement and plan of merger ~~agreement~~ with ~~MFSI, effective as of January 1, 2021. This acquisition closed on February 11, 2021.~~GTMR. This acquisition was accounted for as a business combination whereby ~~MFSI~~GTMR became a 100% owned subsidiary of the Company. The

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Company acquired GTMR to expand our capabilities, increase market share, gain access to new contracts, and achieve cost efficiencies through synergies and economies of scale.

The following represents the preliminary assets and liabilities acquired in this acquisition:


Cash	$	475,000
Accounts receivable other receivables	1,380,203
Income tax receivable	155,449
Prepaid expenses	116,892
Other asset	17,182
Furniture and equipment	163,301

Customer relationships	2,426,000

Tradenames	517,000
Backlog	1,774,000
Goodwill	1,822,466
Deferred tax liability	(1,244,368)
Lease liability – operating lease	(17,608)

Accounts payable and accrued expenses	$	(1,030,957)
Net assets acquired	$	6,554,560

Cash

$
93,240

Accounts receivable

33,540

Unbilled receivable

45,316

Other assets

329,509

Right of use asset – operating lease

14,862

Customer relationships

348,000

Non-compete agreement

4,000

Goodwill

685,072

Deferred tax liability

(97,419
)
Line of credit

(12,249
)
Lease liability – operating lease

(13,862
)
Accounts payable and accrued expenses

(47,572
)
Net assets acquired

$
1,382,437

The consideration paid for ~~the acquisition of MFSI~~GTMR was as follows:

~~Common stock~~

~~1,382,437~~

	12
Cash		$	470,233
Due to Seller		350,000
Other consideration		17,791
Cash from factoring		411,975
Stock		$	5,304,561
Total consideration paid		$	6,554,560

The ~~MFSI~~GTMR acquisition has been accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the total acquisition consideration price was allocated to the assets acquired and liabilities assumed based on their preliminary estimated fair values. The fair value measurements utilize estimates based on key assumptions of the ~~MFSI~~GTMR acquisition, and historical and current market data. The excess of the purchase price over the total of the estimated fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed is recognized as goodwill. ~~In order to~~To determine the fair values of tangible and intangible assets acquired and liabilities assumed for ~~MFSI,~~GTMR, we have engaged a third-party independent valuation specialist. On the date of the acquisition, the Company simultaneously factored $411,975 of the accounts receivable from GTMR to finance the acquisition.

The Company had ~~estimated~~received a preliminary valuation from its specialist and recorded the ~~preliminary purchase price allocations~~value of the assets and liabilities acquired based on historical inputs and data as of ~~January 1, 2021.~~March 22, 2023. The allocation of the purchase price is based on the best information available. The Company ~~had a valuation prepared by an independent consultant. Upon the finalization~~paid $185,896 in transaction costs of ~~the valuation of MFSI, the Company reclassified $352,000 from goodwill into other intangible assets. There were no transactions costs that were material to this transaction.~~GTMR.

During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date. The ~~Company had reclassified a portion of~~measurement period for the ~~goodwill upon the finalization of an independent valuation report during the year ended December 31, 2021.~~

GTMR acquisition is currently open and may remain open until March 22, 2024.

LSG

~~Merrison~~13

~~The Company entered into a definitive merger agreement with Merrison, effective as~~Table of August 5, 2021. This acquisition was accounted for as a business combination whereby Merrison became a 100% owned subsidiary of the Company. The following represents the assets and liabilities acquired in this acquisition:Contents

Cash

$
183,588

Accounts receivable and unbilled receivables

391,049

Customer relationships

322,000

Non-compete agreements

7,000

Trademarks

164,000

Backlog

115,000

Goodwill

780,730

Deferred tax liability

(243,730
)
Accounts payable and accrued expenses

(102,354
)
Net assets acquired

$
1,617,283

~~The consideration paid for the acquisition of Merrison was as follows:~~

Common stock

$
1,595,000

Cash

22,283

$
1,617,283

The Merrison acquisition has been accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the total acquisition consideration price was allocated to the assets acquired and liabilities assumed based on their preliminary estimated fair values. The fair value measurements utilize estimates based on key assumptions of the Merrison acquisition, and historical and current market data.

The excess of the purchase price over the total of the estimated fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed is recognized as goodwill. In order to determine the fair values of tangible and intangible assets acquired and liabilities assumed for Merrison, we have engaged a third-party independent valuation specialist. The Company had estimated the preliminary purchase price allocations based on historical inputs and data as of August 5, 2021. The preliminary allocation of the purchase price is based on the best information available and is pending, amongst other things: (i) the finalization of the valuations and useful lives for the intangible assets acquired; (ii) finalization of the valuation of accounts payable and accrued expenses; and (iii) finalization of the fair value of non-cash consideration. Upon finalization of the valuation, the Company allocated $608,000 from goodwill to other intangible assets. There was a $105,000 adjustment in total purchase consideration upon finalization of the valuations that was applied to goodwill. There were no transaction costs that were material to this transaction.

During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date. The Company had reclassified a portion of the goodwill upon the finalization of an independent valuation report during the year ended December 31, 2021. There have been no additional adjustments in the nine months ended September 30, 2022.

~~SSI~~

The Company entered into a definitive merger agreement with SSI, effective as of August 12, 2021. This acquisition was accounted for as a business combination whereby SSI became a 100% owned subsidiary of the Company. The following represents the assets and liabilities acquired in this acquisition:

Cash

$
998,935

Accounts receivable and unbilled receivables

2,222,004

Prepaid expenses

147,600

Other asset

6,750

Furniture and equipment

148,931

Right of use asset – operating lease

169,063

Customer relationships

3,102,000

Non-compete agreements

65,000

Trademarks

367,000

Backlog

50,000

Goodwill

8,461,150

Deferred tax liability

(880,150
)
Lease liability – operating lease

(167,333
)
Contract liability

(226,591
)
Accounts payable and accrued expenses

(1,134,509
)
Net assets acquired

$
13,329,850

~~Total consideration~~

~~for the acquisition of SSI was as follows:~~

Common stock

$
7,872,850

Seller note

400,000

Cash

800,000

Contingent earnout

257,000

Lender financing

4,000,000

$
13,329,850

The SSI acquisition has been accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the total acquisition consideration price was allocated to the assets acquired and liabilities assumed based on their preliminary estimated fair values. The fair value measurements utilize estimates based on key assumptions of the SSI acquisition, and historical and current market data. The excess of the purchase price over the total of the estimated fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed is recognized as goodwill. In order to determine the fair values of tangible and intangible assets acquired and liabilities assumed for SSI, we have engaged a third-party independent valuation specialist.

The Company had estimated the preliminary purchase price allocations based on historical inputs and data as of August 12, 2021. The preliminary allocation of the purchase price is based on the best information available and is pending, amongst other things: (i) the finalization of the valuations and useful lives for the intangible assets acquired; (ii) finalization of the valuation of accounts payable and accrued expenses; and (iii) finalization of the fair value of non-cash consideration as well as any earnout to be paid out in cash if achieved by the Company per the merger agreement. Upon finalization of the valuation, the Company allocated $3,584,000 from goodwill to other intangible assets. The Company paid $50,500 in transaction costs of SSI. There was a $2,608,661 adjustment in total purchase consideration upon finalization of the valuations that was applied to goodwill.

During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date. The Company had reclassified a portion of the goodwill upon the finalization of an independent valuation report during the year ended December 31, 2021. There have been no additional adjustments in the nine months ended September 30, 2022.

~~Pax River~~

The Company entered into an acquisition agreement with The Albers Group, LLC, on October 22, 2021 which closed November 16, 2021 for certain assets represented by the Pax River business. This acquisition was accounted for as an asset purchase by the Company. The following represents the assets acquired in this acquisition:

Customer relationships (contracts) (a)

$
2,400,000

Net assets acquired

$
2,400,000

~~The consideration paid for the acquisition of The Albers Group assets was as follows:~~

Common stock

$
1,925,000

Contingent consideration represented by obligation to issue shares (a)

275,000

Cash (included in amounts due to seller as of December 31, 2021) (b)

200,000

$
2,400,000

~~(a)~~

It was determined that on March 31, 2022, that the requirements under section 1.5(b) of the acquisition agreement had not been achieved, and as a result the contingent consideration to issue the additional

~~68,750~~

~~common shares valued at $275,000 would not be issued. The Company adjusted the customer relationships by the $275,000 down to $2,125,000.~~

~~(b)~~

~~As of September 30, 2022, $160,000 was paid to the seller and the balance owed as of September 30, 2022 is $40,000.~~

~~Lexington Solutions Group~~

~~(“LSG”)~~

On April 15, 2022, the Company entered into Amendment No. 1 to Business Acquisition Agreement (“LSG Business Acquisition Agreement”) with LSG to acquire the assets of LSG. The Company acquired LSG to expand our capabilities, increase market share, gain access to new contracts, and achieve cost efficiencies through synergies and economies of scale. This LSG Business Acquisition Agreement superseded the Business Acquisition Agreement originally entered into on February 11, 2022. Under the terms of the LSG Business Acquisition Agreement, the Company acquired assets and assumed liabilities of LSG for consideration as follows: (a) 625,000 shares of common stock (600,000 shares paid at closing (issued on May 4, 2022) and 25,000 shares to be held and due within three business days of payment of the second tranche of cash described below); and (b) cash payments as follows: $250,000 due at closing (“initial cash payment”); $250,000 plus or minus any applicable post-closing adjustments paid on the date that is six months after the closing date (“second tranche”)

(paid in October 2022);

and $280,000 that iswas due no later than ~~December 31, 2022.~~10 months after the closing date of the acquisition (this amount was paid in January 2023).

The following represents the assets and liabilities acquired in this acquisition:


Receivable from seller	$	413,609
Due from employee/travel advance	5,000
Miscellaneous license	2,394
Customer relationships	785,000
Non-compete agreements	10,000
Backlog	489,000
Goodwill	1,471,000
Net assets acquired	$	3,176,003

Receivable from Seller

$
413,609

Due from Employee/Travel Advance

5,000

Miscellaneous license

2,394

Customer relationships

785,000

Non-compete agreements

10,000

Backlog

489,000

Goodwill

1,471,000

Net assets acquired

$
3,176,003

The consideration paid for the acquisition of LSG was as follows:

Common stock (600,000 shares issued May 4, 2022)

$
2,280,000

Holdback shares (25,000 shares due six months after the closing date) (in obligation to issue common stock)

95,000

Cash

250,000

Due to seller (cash)

551,003

$
3,176,003

	15
Common stock (600,000 shares issued May. 4, 2022)		$	2,280,000
Holdback shares (25,000 shares due six months after the closing date)		95,000
Cash		250,000
Due to seller (cash)		551,003
		$	3,176,003

The LSG acquisition has been accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the total acquisition consideration price was allocated to the assets acquired and liabilities assumed based on their preliminary estimated fair values. The fair value measurements utilize estimates based on key assumptions of the LSG acquisition, and historical and current market data. The excess of the purchase price over the total of the estimated fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed is recognized as goodwill. To determine the fair values of tangible and intangible assets acquired and liabilities assumed for LSG, we ~~have~~ engaged a third-party independent valuation specialist.

The Company had received a valuation from

its

specialist and recorded the value of the assets and liabilities acquired based on historical inputs and data as of April 15, 2022. The allocation of the purchase price is based on the best information available. The Company paid $44,752 in transaction costs of LSG.

During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date. There have been no adjustments in the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023 and we do not intend to include any additional adjustments through the remainder of the measurement period.

For all acquisitions disclosed, there were no transaction costs that were not recognized as an expense.

Table of Contents

The following table shows unaudited pro-forma results for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ as if the acquisitions of ~~Merrison, SSI,~~LSG and ~~LSG~~GTMR had occurred on January 1, ~~2021.~~2022. These unaudited pro forma results of operations are based on the historical financial statements of each of the companies.


For the three months ended March 31, 2023
Revenues	$	12,583,985
Net loss	$	(6,532,634)
Net loss per share - basic	$	(0.16)
For the three months ended March 31, 2022
Revenues	$	13,932,618
Net loss	$	(961,653)
Net loss per share - basic	$	(0.05)

For the nine months ended September 30, 2022

Revenues

$
33,685,580

Net loss

$
(7,843,711
)
Net loss per share - basic

$
(0.33
)

For the nine months ended September 30, 2021

Revenues

$
20,333,508

Net loss

$
(127,660
)
Net loss per share - basic

$
(0.00
)

~~NOTE~~Note 4: ~~FIXED ASSETS~~Fixed Assets

Fixed assets consisted of the following as of ~~September 30, 2022~~March 31, 2023 (unaudited) and December 31, ~~2021:~~

2022:


	March 31, 2023		December 31, 2022
Equipment	$	210,572	$	141,732
Furniture	40,267		32,574
Software	62,671		-
Leasehold improvements	120,830		83,266
Total fixed assets	434,340		257,572
Accumulated depreciation	(97,098)		(84,222)
Fixed assets, net	$	337,242	$	173,350

September 30, 2022
(unaudited)

December 31, 2021

Equipment

$
96,986

$
60,148

Furniture

32,574

32,574

Software

44,746

-

Leasehold improvements

83,266

75,265

Total fixed assets

257,572

167,987

Accumulated depreciation

(66,630
)

(22,195
)
Fixed assets, net

$
190,942

$
145,792

Depreciation expense for the ~~nine~~three months ended ~~September 30,~~March 31, 2023, and 2022 was $19,936 and ~~2021 was $47,589 and $7,329,~~$13,484, respectively.

~~NOTE~~Note 5: ~~INTANGIBLE ASSETS AND GOODWILL~~Intangible Assets and Goodwill

Intangible assets consisted of the following as of ~~September 30, 2022 (unaudited)~~March 31, 2023 and December 31, ~~2021:~~

2022:


		March 31, 2023		December 31, 2022
Customer relationships	4.5– 15 years	$	11,961,000	$	9,535,000
Tradename	4.5 years	783,000		266,000
Trademark	10-15 years	533,864		533,864
Backlog	2-5 years	3,210,000		1,436,000
Non-compete agreement	3-5 years	684,000		684,000
		17,171,864		12,454,864
Accumulated amortization		(6,311,329)		(5,820,697)
Intangible assets, net		$	10,860,535	$	6,634,167

September 30, 2022
(unaudited)

December 31,
2021

Customer relationships

4.5– 15 years

$
9,535,000

$
9,025,000

Trade name

4.5 years

266,000

266,000

Trademark

10-15 years

533,863

533,863

Backlog

2-5 years

1,436,000

947,000

Non-compete agreement

3-5 years

684,000

674,000

12,454,863

11,445,863

Accumulated amortization

(5,323,003
)

(3,850,264
)
Intangible assets, net

$
7,131,860

$
7,595,599

The intangible assets with the exception of the trademarks were recorded as part of the acquisitions of Corvus, MFSI, Merrison, SSI, LSG, and ~~LSG.~~GTMR. Amortization expense for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ was ~~$1,472,740~~$490,631 and $1,123,590, respectively, and the intangible assets are being amortized based on the estimated future lives as noted above. On March 31, 2022, $275,000 of customer relationships was adjusted for the contingent consideration that is no longer required to be paid for the acquisition related to The Albers Group.

Table of Contents

Future amortization of the intangible assets for the next five years as of ~~September 30~~March 31 are as follows:


2023	$	1,889,671
2024	2,074,686
2025	1,453,000
2026	1,242,863
2027	1,034,302
Thereafter	3,166,013
Total	$	10,860,535

September 30, 2023

$
1,969,588

September 30, 2024

1,653,245

September 30, 2025

985,482

September 30, 2026

721,751

September 30, 2027

526,950

Thereafter

1,274,844

Total

$
7,131,860

The activity of goodwill for the ~~nine~~three months ended ~~September 30, 2022 (unaudited)~~March 31, 2023 and year ended December 31, ~~2021,~~2022, is as follows:

2022

2021

Balance – beginning of period

$
14,062,964

$
4,136,011

Additions

1,471,000

9,926,953

Disposals

-

-

Impairment

-

-

$
15,533,964

$
14,062,964


	Corvus	SSI	MFSI	Total
December 31, 2022	6,387,741	8,461,150	685,073	15,533,964
Goodwill acquired through acquisitions	—	1,822,466	—	1,822,466
March 31, 2023	6,387,741	10,283,616	685,073	17,356,430

When the Company acquires a controlling financial interest through a business combination, the Company uses the acquisition method of accounting to allocate the purchase consideration to the assets acquired and liabilities assumed, which are recorded at fair value. Any excess of purchase consideration over the net fair value of the net assets acquired is recognized as goodwill. The additions of goodwill in the respective periods relate to the acquisitions made by the Company. The Company has not disposed of any entities, nor has the Company recognized impairment on the goodwill in these periods.

~~NOTE~~Note 6: ~~CONVERTIBLE PROMISSORY NOTES~~Convertible Promissory Notes – ~~RELATED PARTIES~~Related Parties

The Company entered into convertible promissory notes – related parties as follows as of ~~September 30, 2022 (unaudited)~~March 31, 2023 and December 31, ~~2021:~~

2022:


	March 31, 2023		December 31, 2022
Convertible note payable with a trust related to one of the Company’s directors, convertible at $0.26 per share, at 5% interest (amended April 4, 2022)	3,209,617		3,209,617

Less: BCF Discount	(1,910,444)		(2,210,187)
	$	1,299,173	$	999,430

September
30, 2022
(unaudited)

December
31, 2021

Convertible note payable with a trust related to one of the Company’s directors, convertible at $0.26 per share, at 5% interest (extinguished on April 4, 2022 for new note) (a)

$
-

4,209,617

Convertible note payable with a trust related to one of the Company’s directors, convertible at $0.26 per share, at 5% interest (amended April 4, 2022)

3,709,617

-

Total Convertible Notes Payable – Related Parties

$
3,709,617

$
4,209,617

Add: Premiums recorded on convertible note due to fair value adjustment at date of acquisition of Corvus

-

2,569

Less: BCF Discount

(3,012,791
)

(1,407,002
)

$
696,826

$
2,805,184

Interest expense which includes amortization of discount ~~and premium~~ for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 was $340,120 and ~~2021~~$417,219, respectively. There was ~~$1,205,123 and $1,218,979, respectively. Accrued~~no accrued interest on the ~~notes~~note payable at ~~September 30, 2022 is $110,749.~~March 31, 2023. The amount of the BCF discount recorded was evaluated for characteristics of liability or equity and was determined to be equity under ASC 470 and ASC 480. The Company recognized this as additional paid in capital, and the discount is being amortized over the life of the note.

~~(a)~~

On February 1, 2021, the two promissory notes with The Buckhout Charitable Remainder Trust (Laurie Buckhout – Trustee), were combined into one new note in the principal balance of $4,279,617, that has a new maturity date of February 1, 2024. The interest rate remains at 5% per annum, and the note now includes monthly principal payments of $10,000. The conversion terms have remained at $0.26 per share. It was determined that under ASC 470, the debt amendment was considered a modification. Then again on August 12, 2021, the convertible note was amended to remove the principal payments and extend the debt further to September 30, 2024. It was determined that under ASC 470, the debt amendment was considered an extinguishment. The result of the extinguishment netted a gain of $2,667,903 that was recorded as additional paid in capital as the transaction was with a related party.

On April 4, 2022, the Company entered into a letter agreement with The Buckhout Charitable Remainder Trust (Laurie Buckhout – Trustee) whereby the Company made a partial repayment of $500,000 (“First Payment”) to reduce the note from $4,209,617 to $3,709,617.

~~The~~

~~Company~~

~~originally intended~~

~~to make a second payment (“Second Payment”) of $2,709,617 at the time of an anticipated secondary offering,~~

~~initially~~

~~expected to occur on or about August 1, 2022, subject to extensions through October 31, 2022.~~

~~However, given the timing of our secondary offering, the Second Payment did not occur during the third quarter of 2022 and the Company negotiated an extension to October 31,~~

~~2022.~~

The Company shall accrue interest commencing March 1, 2022, however, no payment of interest is due through October 31, 2022. The First Payment of $500,000 was paid from proceeds from Crom Cortana Fund, LLC (“Crom”) as part of a unit agreement under the Securities Purchase Agreement (“SPA”) entered into with Crom on April 4, 2022.

~~Refer to subsequent events in Note 17 under Part 1, Item 1, Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional payment details.~~

The Company entered into an Amended and Restated Convertible Promissory Note (issued on April 4, 2022) (“Amendment #2 – BCT”) which summarizes the terms of the letter agreement. As the amendment resulted in an accounting extinguishment, the remaining note balance along with all unamortized discounts and premiums associated with the note were extinguished with the resulting gain being reflected in additional paid in capital as this is a related party transaction. The Company recorded the Amendment #2 – BCT and the discount on April 4, 2022, and amortizing the discount through the life of the note based on the effective interest method.

The entire convertible promissory note – related parties balance is reflected in long-term ~~liabilities~~liabilities.

Table of Contents

~~NOTE~~Note 7: ~~NOTES PAYABLE~~Notes Payable

The Company entered into notes payable as follows as of ~~September 30, 2022 (unaudited)~~March 31, 2023 and December 31, ~~2021:~~

2022:


	March 31, 2023		December 31, 2022
Note payable at 7% originally due November 2023, maturing September 30, 2024	$	5,600,000	$	5,600,000
Note payable at 10% interest dated February 28, 2022 and matures the earlier of (i) September 30, 2024 or (ii) the acceleration of the obligations as contemplated under the promissory note including the successful completion of an equity offering of at least $15,000,000 (a)	400,000		400,000
Convertible note payable, convertible at $1.60 per share, at 7%, maturing April 4, 2023 (b)	—		890,000
Convertible note payable, convertible at $1.20 per share, at 10%, maturing February 13, 2024 (b)	840,000		—
Term note payable, at prime plus 3% interest, applied on a deferred basis (7.75% at March 31, 2023 and 6.25% at December 31, 2022) maturing August 11, 2024	2,010,245		2,324,236

Total Notes Payable	8,850,245		9,214,236
Less: Debt Discount	(911,162)		(840,398)
	$	7,939,083	$	8,373,838

(a)On February 28, 2022, the Company was obligated to issue 125,000 shares of common stock as further consideration for making this loan to the Company. The shares were issued in April 2022.

(b)On February 13, 2023, the Company entered into a series of transactions with Crom Cortana Fund LLC (“Crom”), the primary purpose of which is related to the GTMR acquisition entered into on March 22, 2023. In connection therewith, the Company and Crom entered into an agreement to pay off the amount owed to Crom under the terms of the convertible promissory note in the original principal amount of $1,050,000 due April 4, 2023 ("Prior Crom Note"). In consideration of a $300,000 cash payment and 556,250 shares of common stock representing conversion of the remaining principal balance of the Company’s obligations under the Prior Crom Note are deemed satisfied reducing the balance to zero; we induced conversion of the debt, which effectively extinguished the debt. Simultaneously therewith, the parties entered into the Securities Purchase Agreement (the “2023 SPA”) pursuant to which Crom purchased (a) a convertible promissory note in the principal amount of $840,000 (the “2023 Note Payable”), which matures February 13, 2024 and bears interest at a per annum rate equal to 10% to be paid monthly, and (b) a warrant pursuant to which Crom has the right to purchase up to 700,000 shares of the Company’s common stock (the “2023 Warrant”) at an exercise price of $1.38 which expire 60 months from the date of issuance. The proceeds of the 2023 Note Payable were used primarily to fund the GTMR acquisition, as well as fund the aforementioned debt repayment.

September
30, 2022
(unaudited)

December
31, 2021

Note payable at 7% originally due November 2023, now maturing September 30, 2024 (a)

$
5,600,000

$
5,600,000

Note payable at 10% interest dated February 28, 2022
and matures the earlier of (i) September 30, 2024 or (ii) the acceleration of the obligations as contemplated under the promissory note including the successful completion of an equity offering of at least $15,000,000 (b)

500,000

-

Convertible note payable, convertible at $1.60 per share, at 7%, maturing April 4, 2023 (c)

1,050,000

-

Term note payable
, at prime plus 3% interest
, applied on a deferred basis
(7.75% at September 30, 2022 and 6.25% at December 31, 2021) maturing August 11, 2024

2,644,280

3,588,374

0

Total Notes Payable

9,794,380

9,188,374

Less: Debt Discount

(1,321,959
)

(796,565
)

$
8,472,421

$
8,391,809

~~(a)~~

~~on August 12, 2021, the note payable was amended to extend the debt to September 30, 2024. It was determined that under ASC 470, the debt amendment was considered a modification.~~

~~(b)~~

~~on February 28, 2022, the Company was obligated to issue 125,000 shares of common stock as further consideration for making this loan to the Company. The shares were issued in April 2022.~~

~~(c)~~

~~on April 4, 2022, the Company entered into~~

~~a Securities Purchase Agreement (“SPA”)~~

~~with Crom. The SPA includes (a) a Convertible~~

~~Promissory~~

Note dated April 4, 2022 in the amount of $1,050,000 at 7% interest per annum. This note matures April 4, 2023 (one-year) and is convertible at a conversion price of $1.60 per share; (b) the issuance of 656,250 warrants that mature April 4, 2027, with an exercise price of $1.84 per share; and (c) the issuance of 1,250,000 common shares at $0.40 per share ($500,000), the proceeds of which were paid to The Buckhout Charitable Remainder Trust for the First Payment. In addition, Crom was issued 125,000 common shares as further inducement to enter into the SPA. The Company analyzed the debt instrument with Crom, under ASC 815-10, and determined that the conversion option should be separated from the host debt instrument (i.e., bifurcated) and classified as a derivative liability, along with the value of the warrants as a derivative liability at the inception date of April 4, 2022. The fair value of the derivative liabilities at inception were reflected as a discount on the note, along with an original issue discount of $50,000, and the discount of $93,000 on the 1,250,000 shares of common stock issued to Crom that had a fair value of $593,000 which exceeded the $500,000 paid by Crom that will be amortized over the life of the note (one year). The derivative liability is marked to market each reporting period, and the Company recognized a loss on the change in fair value of the derivative liabilities of $173,000 from April 4, 2022 to September 30, 2022.

Interest expense which includes amortization of discount for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 was $485,000 and ~~2021 was $1,325,885 and $608,706,~~$268,576, respectively. Accrued interest on the notes payable as of ~~September 30, 2022~~March 31, 2023 is ~~$27,525.~~

$16,388.

Each note discussed above will reach maturity during 2024. Future principal payments will be $1,046,796 and $7,803,449 in 2023 and 2024, respectively.

~~The note payable repayment schedule, net of discounts for the next three years as of September 30 is as follows:~~

September 30, 2023

$
1,960,121

September 30, 2024

6,512,300

Total

$
8,472,421

Table of Contents

~~NOTE~~Note 8: ~~NOTE PAYABLE~~Note Payable – ~~RELATED PARTY~~Related Party

The Company entered into a note payable with a related party in August 2021 with balances as of ~~September 30, 2022~~March 31, 2023 (unaudited) and December 31, ~~2021,~~2022, as follows:


	March 31, 2023 (unaudited)		December 31, 2022
Note payable at 5% due December 31, 2024, in connection with the acquisition of SSI	$	400,000	$	400,000

September 30,
2022
(unaudited)

December 31,
2021

Note payable at 5% due December 31, 2024, in connection with the acquisition of SSI

$
400,000

$
400,000

Interest expense for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 was $4,928 and ~~2021 was $14,959 and $2,685,~~$4,928, respectively. The entire note payable – related party balance is reflected in ~~long-term~~noncurrent liabilities.

~~NOTE~~Note 9: ~~REVOLVING CREDIT FACILITY~~Revolving Credit Facility

On April 4, 2022, the Company secured a $950,000

revolving credit facility

with Live Oak Bank

(“Revolving Credit Facility”)

. The

Revolving Credit Facility

matures on March 28, 2029, and draws on

are charged interest at the rate of

prime plus

2.75% per annum. Interest is payable monthly. On April 12, 2022, the Company was advanced $300,025 under

the Revolving Credit ~~Facility~~

.Facility. The Company incurred $19,351 in interest in the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, of which $11,971 is accrued for as of ~~September 30, 2022.~~

March 31, 2023.

~~NOTE~~Note 10: ~~DUE TO SELLER~~

Due to Seller

~~connection with~~

the acquisition of ~~assets in The Albers Group, LLC transaction,~~LSG, the Company iswas obligated to pay ~~$200,000. This~~$3,176,003, which included cash of $780,000 and a working capital adjustment of $21,003. Of this amount, ~~will be~~$521,003 was paid ~~over a ten-month period which commenced February~~by December 31, 2022. The ~~$200,000 is non-interest bearing and is reflected as a current liability~~remaining $280,000 of this balance was paid on ~~the Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 under “Due to~~

~~eller~~

”

~~As of September 30, 2022 (unaudited) and December 31, 2021, the balance due for this obligation was $40,000 and $200,000, respectively.~~

January 23, 2023.

~~As stated in Note 3,~~

~~in connection with~~

In the acquisition of

~~LSG,~~ GTMR, the Company iswas obligated to pay ~~$551,003.~~$1,250,000 which included $350,000 held back to satisfy any net working capital deficiencies. This ~~amount will~~balance is scheduled to be paid ~~in two tranches over a ten (10) month period, with the first tranche of $271,003 paid~~ six ~~(6)~~ months ~~after~~following the closing date and ~~the second tranche of $280,000 paid ten (10) months after the closing date. The payment of $271,003 consists of a $250,000 payment plus a $21,003 closing adjustment. The $551,003~~ is ~~non-interest bearing and is reflected as a~~currently recorded in current ~~liability~~liabilities on the ~~Condensed Consolidated Balance Sheets~~Company's consolidated balance sheets as of ~~September 30, 2022. As of September 30, 2022 (unaudited), the balance due for this obligation was $551,003~~

,March 31, 2023.

~~and $271,003 was paid in October 2022.~~

~~NOTE~~Note 11: ~~STOCKHOLDERS’ EQUITY (DEFICIT)~~Stockholders’ Equity

On ~~July 19, 2021,~~October 13, 2022, the Company ~~filed~~effected a ~~Certificate~~1-for-20 reverse split ("Reverse Stock Split") of ~~Amendment with~~our authorized and outstanding shares of common stock. As a result of the ~~State of Nevada to change the par value of~~Reverse Stock Split, all authorized and outstanding common stock and ~~preferred stock to all be $0.0001. All changes~~per share amounts in this Quarterly Report on Form 10-Q, including but not limited to, the ~~par value dollar amount for these classes of stock~~consolidated financial statements and ~~adjustment to additional paid in capital~~footnotes included herein, have been ~~made retroactively.~~adjusted to reflect the Reverse Stock Split for all periods presented.

Preferred Stock

The Company has 50,000,000 shares of preferred stock authorized. The Company has designated a Series A Preferred Stock, Series B Preferred Stock, and ~~as of July 16, 2021~~

~~designated~~ a Series C Preferred Stock.

Series A Preferred Stock

The Company has designated 10,000,000 shares of Series A Preferred Stock, par value of $0.0001. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company has 5,875,000 shares of Series A Preferred Stock issued and ~~outstanding, respectively. The 5,875,000 shares were issued to former officers of the Company in settlement of debt.~~outstanding.

~~On April 7, 2022, the Company amended the Certificate of Designation for~~

~~its~~

~~Series A Preferred Stock to (a) provide for an annualized dividend of $0.0125 per share~~

~~to be paid monthly; (b) amend the conversion ratio for each share of Series A Preferred~~

~~Stock to convert~~

~~into 2 shares of common stock~~

~~instead of~~

~~20 shares of common stock; and (c)~~

~~provide~~

~~for the Company to have the option to repurchase the Series A Preferred Stock at any time at a price of $1 per share.~~

~~In connection with~~

~~the Amendment to the Certificate of Designation, the former officers entered into a letter agreement dated April 4, 2022 with Crom and the Company for Crom to purchase 1,750,000 shares of Common Stock~~

~~from the former officers~~

~~for $455,000,~~

~~the proceeds of which were~~

~~paid direct~~

~~to the former officers. The letter agreement also provided for the former officers to sell certain amounts of the common stock they own through the date of the~~

~~public~~

~~offering.~~

For the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, the Company recognized ~~$36,719~~$18,269 in Series A dividends, all of which

~~$30,569~~ has

been paid as of ~~September 30, 2022.~~

March 31, 2023.

Series B Preferred Stock

The Company has designated 10,000,000 shares of Series B Preferred Stock, par value of $0.0001. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company has ~~3,075,000 and 3,610,000~~0 shares of Series B Preferred Stock issued and ~~outstanding, respectively. The 3,610,000 shares were issued to directors of the Company and a third party in June 2019. Each share of Series B Preferred Stock converts into 5~~

~~shares of common stock and has 10,000 votes per preferred share.~~

~~In the nine months ended September 30, 2022, there were 535,000 shares of Series B Preferred Stock converted into 2,675,000 common shares.~~

outstanding.

Table of Contents

Series C Preferred Stock

The Company has designated 10,000,000 shares of Series C Preferred Stock, par value of ~~$0.0001 (effective July 19, 2021).~~

~~In the nine months ended September 30,~~$0.0001. As of March 31, 2023 and December 31, 2022, the Company ~~raised $150,000 for 150,000~~has 770,000 shares of Series C Preferred Stock ~~along with 15,000 common shares. In~~issued and outstanding.

For the ~~year~~three months ended ~~December~~March 31, ~~2021,~~2023, the Company ~~raised $620,000 for 620,000 shares of~~recognized $12,050 in Series C ~~Preferred Stock along with 62,000 common shares.~~

~~Each share~~dividends, all of ~~the Series C Preferred Stock is convertible into 0.625~~

~~common shares, and the Series C Preferred Stock pays a $.06 dividend per~~

~~Series C Preferred share~~

~~. The dividend commenced accruing when the Series C Preferred Shares were fully designated and issued.~~

~~For the nine months ended September 30, 2022, the Company~~which has ~~preferred stock dividends recognized of $33,825 of~~

~~which all have~~ been paid

as of ~~September 30, 2022.~~March 31, 2023.

The holders of the Series C Preferred Stock under their subscription agreements were issued 0.1 of a share of common stock for each share of preferred stock which they purchased. As a result, the Company issued

~~77,000 common shares for the 770,000 Series C Preferred shares purchased.~~

Common Stock

The Company has 3,000,000,000 shares of common stock, par value $0.0001 authorized. The Company has ~~24,788,132~~47,247,687 and ~~19,960,632~~41,699,363 shares issued and outstanding as of ~~September 30, 2022 (unaudited)~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

Shares issued during the three months ended March 31, 2023 were as follows:

•The Company issued ~~the following common~~125,504 shares for services;

•4,866,570 shares issued in the ~~nine~~acquisition of GTMR;

•556,250 shares issued to extinguish the Prior Crom Note.

During the three months ended ~~September 30, 2022:~~

~~The~~March 31, 2023, the Company issued ~~15,000 shares of common stock in accordance with the Series C Preferred Stock subscription agreements.~~

~~The Company issued 15,000 shares of common stock in the exercise of stock options.~~

~~The Company issued 7,500~~314,600 restricted shares of common stock, that vest ratably over ~~twelve months~~a period of one year, to ~~an advisory board member.~~

~~The Company issued 2,675,000~~its Board of Directors for their service. Any unvested restricted shares of common stock ~~in conversion~~are forfeited upon termination. As of ~~535,000 Series B Preferred shares.~~

~~The Company issued 125,000~~March 31, 2023, there were 125,504 total restricted shares of common stock ~~to Crom for entering into~~that have vested and 189,096 that will vest during the remainder of 2023.

~~SPA. The~~Warrants

Company expensed this as a financing fee and include the amount in interest expense in the condensed consolidated statements of operations for the nine months ended September 30, 2022; and 125,000 shares of common stock for entering into the Eisiminger note.

~~The Company issued 1,250,000 shares of common stock to Crom for $500,000 cash.~~

~~The Company issued 600,000 shares of common stock as described in Note 3, “Acquisitions” to the selling shareholder of LSG.~~

~~The Company issued 15,000 shares of common stock for services~~

~~to vendors~~

~~The Company issued the following common shares in the year ended December 31, 2021:~~

The Company issued 1,114,023 common shares in the acquisition of MFSI which were issued April 29, 2021 and June 15, 2021. In addition, upon the issuance of these shares the Company has cancelled 250,000 shares on May 12, 2021 that were previously issued to MFSI and returned those shares to treasury, with a reduction to equity of $400,000.

On August 6, 2021, the Company issued 500,000 shares in the acquisition of Merrison, and on August 25, 2021, the Company issued 2,600,000 shares in the acquisition of SSI. The Company issued 32,095 additional shares in October 2021 for payment of the working capital surplus delivered to the Company in the SSI acquisition.

~~In September through December 2021, the Company issued 62,000 shares of common stock in accordance with the Series C Preferred Stock subscription agreements.~~

~~In November 2021, the Company issued 481,250 shares of common stock in the SSI acquisition of certain assets of The Albers Group LLC.~~

~~In December 2021, 10,000 shares of common stock were issued in the exercise of stock options for $8,000.~~

~~Warrants~~

The following represents a summary of warrants for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and the year ended December 31, ~~2021:~~

2022:


	Three Months Ended March 31, 2023				Year Ended December 31, 2022
	Number		Weighted Average Exercise Price		Number		Weighted Average Exercise Price
Beginning balance	5,678,836		$	1.84	3,161,568		$	1.60
Granted	1,765,862		1.17		2,517,268		2.22



Ending balance	7,444,698		$	1.68	5,678,836		$	1.84

Warrants exercisable	7,444,698				5,678,836
Intrinsic value of warrants	$	1,242,174			$	1,374,303
Weighted Average Remaining Contractual Life (Years)	6.15				5.48

Nine Months Ended
September 30, 2022

Year Ended
December 31, 2021

Number

Weighted
Average
Exercise
Price

Number

Weighted
Average
Exercise
Price

Beginning balance

3,161,568

$
1.60

1,090,717

$
0.00

Granted

1,017,268

2.60

2,070,851

2.40

Exercised Cashless

-

-

-

-

Forfeited

-

-

-

-

Expired

-

-

-

-

Ending balance

4,178,836

$
1.79

3,161,568

$
1.60

Warrants exercisable

4,178,836

3,161,568

Intrinsic value of warrants

$
10,468,925

$
5,706,473

Weighted Average Remaining Contractual Life (Years)

5.26

During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, the Company granted ~~361,017~~1,065,862 warrants to two of its officers at ~~$3.80~~$1.04 per share that expire ~~May 2, 2029 valued at $1,603,219 as well as 656,250 warrants with a~~

~~n exercise~~

price of $1.84 that expire April 4, 2027 to Crom as part of the SPA with them dated April 4, 2022, and during the nine months ended September 30, 2021, the Company granted 130,000 warrants to two of its officers at $1.60 per share that expire January 20, 2028 valued at $188,186.on March 22, 2030. The warrants were issued as part of a bonus achieved under the respective employment agreements for two of the officers of the Company. ~~On August 20, 2021, the~~The Company also granted

~~320,000 (~~

~~160,000~~

~~each)~~

700,000 warrants to ~~two~~Crom, as part of ~~its officers~~the debt transaction discussed in Note 7, at ~~$3.40~~$1.38 per share that expire ~~August 20, 2028 valued at~~

~~$775,792 (~~

~~$387,896 each~~

)

~~, and~~ on ~~August 20, 2021, the Company granted to the same two officers~~

February 13, 2028.

~~1,450,850 (~~

~~725,425~~

~~each)~~

~~warrants at $2.00 per share that expire August 20, 2028 valued at~~

~~$2,070,624 (~~

~~$1,035,312 each). These were warrants granted pursuant to~~

~~the terms of~~

~~their employment agreements as a bonus for the acquisition of both Merrison and SSI.~~

All of the warrants have been fully expensed through ~~September 30, 2022.~~

March 31, 2023.

Table of Contents

Options

The Company on November 9, 2021, approved the Stock Incentive Plan, that authorizes the Company to grant up to 2,500,000 shares. Prior to this date, the granting of options was not done in accordance with a stock option plan.

As of ~~September, 30, 2022 no~~March, 31, 2023 812,500 stock options have been granted under the Stock Incentive Plan.

The following represents a summary of options for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and the year ended December 31, ~~2021:~~

2022:

Nine Months Ended
September 30, 2022

Year Ended
December 31, 2021

Number

Weighted
Average
Exercise
Price

Number

Weighted
Average
Exercise
Price

Beginning balance

4,594,688

$
2.094

1,856,250

$
0.80

Granted

2,535,000

3.60

4,087,500

2.40

Exercised

(15,000
)

(0.80
)

(10,000
)

(0.80
)
Forfeited

(289,688
)

(0.60
)

(1,339,062
)

(0.60
)
Expired

-

-

-

-

Ending balance

6,825,000

$
0.1368

4,594,688

$
2.094

Vested options

1,610,506

1,410,938

Nonvested options

5,214,494

3,183,750

Intrinsic value of options

$
12,876,650

$
6,140,313

Weighted Average Remaining Contractual Life (Years)

6.14

6.21


	Number	Weighted Average Exercise Price		Weighted-Average Remaining Contractual Term (in Years)	Weighted Average Fair Value
Outstanding, December 31, 2022	6,425,000	$	2.69	5.63	$	4.26
Granted	812,500	1.62		6.84	1.10
Outstanding. March 31, 2023	7,237,500	$	2.57	5.55	$	3.91

As of March 31, 2023
Vested and exercisable	3,178,870	$	2.24	5.21	$	3.20

~~Stock based compensation expense for the nine months ended September 30, 2022 and 2021 was $3,131,993 and $2,271,097, respectively, which is comprised of $2,733,718~~

nd $929,384 in service-based grants and $398,275 and $1,341,713 in performance-based grants, for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, there remains unrecognized stock-based compensation expense related to these grants of $15,647,325 comprising of $11,894,583 in service-based grants and $3,752,742 in performance-based grants, respectively.

The ~~vesting~~fair value of ~~these grants run through December 2026.~~

~~The Company uses~~each option/warrant is estimated using the Black-Scholes ~~method for valuing the expense related to the grants. See below for the criteria used for each of the respective periods.~~

~~For the Nine~~

~~Months Ended September 30, 2022~~

In January 2022, the Company granted a total of 725,000 stock options to four individuals as follows: (a) 50,000 service based options vest over 12 months at a strike price of $3.40 per share for a period of 7 years (expire December 31, 2028); (b) 25,000 service based options vest immediately at a strike price of $3.40 per share for a period of 7 years (expire December 31, 2028); (c) 150,000 options (75,000 service based options that vest over

~~four years~~

; and 75,000 performance based options that vest upon the successful implementation of an ERP) at a strike price of $3.40 per share for a period of 7 years (expire December 31, 2028); and (d) 500,000 options (250,000 service based options that vest over 42 months; and 250,000 performance based options that vest upon Corvus achieving an annualized run rate of $18,000,000 and net income of 7%) at a strike price of $3.40 per share for a period of 7 years (expire December 31, 2028).

~~On February 15, 2022, 15,000 stock options were exercised for $12,000.~~

In April 2022, the Company granted a total of 1,810,000 stock options to two individuals as follows: (a) 10,000 stock options at a strike price of $3.40 for a period of 7 years (expire March 31, 2029) to a consultant that vested upon the completion of the services he provided in completion of the year end audit; and (b) 1,800,000 stock options to our Chief Financial Officer at a strike price of $3.80 for a period of 7 years (expire April 24, 2029).

~~For the Nine Months Ended September 30, 2021~~

In January 2021, the Company granted 150,000 stock options to advisors (125,000) and an employee (25,000), that are service-based options that vest over a one-year period. The options have a strike price of $1.60 per share and expire seven years from the grant date (December 31, 2027).

In February 2021, the Company granted an advisor 50,000 stock options that are service-based options that vest immediately. The options have a strike price of $1.00 per share and expire seven years from the grant date (February 20, 2028).

In March 2021, the Company granted an advisor 50,000 stock options that are service-based options that vest over a one-year period. The options have a strike price of $1.80 per share and expire seven years from the grant date (March 11, 2028).

~~In April 2021, the Company granted an advisor 150,000 stock options that are that are~~ ~~half~~ ~~time-based~~ ~~and~~ ~~half~~ ~~performance-based~~ ~~options at a strike price of $1.80 per share. These options expire in seven years on March 31, 2028.~~

~~In July 2021, the Company granted the Chief Growth Officer 1,500,000 stock options that are~~ ~~half~~ ~~time based and~~ ~~half~~ ~~performance-based options at a strike price of $1.60 per share under his~~

~~mployment~~

greement. These options expire in seven years on June 30, 2028. The breakout of the 1,500,000 stock options are as follows: 750,000 are considered time based grants over a vesting period of four years; and 750,000 are performance based grants as follows: (a) 250,000 upon the closing of an acquisition in the Navy division of a company with annualized revenue of $12 million or greater; (b) 250,000 upon the Navy division achieving $25 million in revenue and $2.5 million in EBITDA in any 12 month period; and (c) 250,000 upon the overall Company achieving $100 million in revenue run rate based on quarterly performance (i.e. $25 million in any calendar quarter).

~~In August 2021, the Company granted 12,500 options at a~~

~~exercise~~

~~price of $3.40 per share to a consultant of MFSI for services performed. These options vested immediately, and mature August 31, 2028.~~

~~In September 2021, the Company granted to the former owner of Merrison, 150,000 stock options (effective August 6, 2021) that are~~ ~~half~~ ~~time based and~~

h~~alf~~

~~performance-based options at~~

~~an exercise~~

~~price of $3.40 per share under his~~

~~mployment~~

greement. These options expire in seven years on August 6, 2028. The breakout of the options are as follows: 75,000 are considered time-based grants over a three-year period, and 75,000 are performance-based grants as follows: (a) 25,000 upon the Company growing revenue and EBITDA at 15% per year; (b) 25,000 by maintaining net margin of at least 15%; and (c) 25,000 if he fills any open employee requisition within 45 calendar days of open position.

~~In September 2021, the Company granted 900,000~~ ~~stockoptions~~ ~~(effective August 12, 2021) to three key employees of SSI that are~~ ~~half~~ ~~time~~

~~based and~~ ~~half~~ ~~performance~~

~~based. The time-based options vest over 48 months, and each of the three employees has specific criteria based on their positions. These options expire August 10, 2028.~~

valuation model. Changes to these inputs could produce a significantly higher or lower fair value measurement. The ~~fair value of each option/warrant is estimated using the Black-Scholes valuation model. The~~ following assumptions were used for the periods as follows:

~~Nine~~

Three Months
Ended

~~September 30,~~March 31,
~~2022~~

2023

Year
Ended

December 31,
~~2021~~

2022

Expected term

7 years

Expected volatility

116 – 162%

114 – ~~126~~

~~135 – 177~~

157%

Expected dividend yield

—

Risk-free interest rate

3.53 – 3.89%

~~2.00 – 2.85~~

~~0.10~~

2.00% - 4.18%

~~NOTE~~Note 12:

Fair Value

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP sets forth a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels are as follows:

Level 1 – defined as observable inputs, such as quoted market prices in active markets.

Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable.

Level 3 – defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.

Table of Contents

Our financial assets and liabilities subject to the three-level fair value hierarchy consist principally of cash and cash equivalents, accounts receivable, accounts payable, contingent consideration and derivative liabilities. The estimated fair value of cash and cash equivalents, accounts receivable, and accounts payable approximates their carrying value.

The Company issued common stock, a convertible note, and warrants in a SPA with Crom (“Derivative ~~Instruments”~~Liabilities”). in 2022. During the three months ended March 31, 2023, the Company terminated this note through an induced conversion and extinguished the conversion option liability associated with the Prior Crom Note. As part of this transaction, the Company entered into another note with Crom and issued common stock, a convertible note, and warrants in this SPA. The Company evaluated the conversion option in the convertible note and the warrants to determine proper accounting treatment and determined them to be Derivative ~~Instruments.~~Liabilities. The Derivative ~~Instruments~~Liabilities identified have been accounted for utilizing ASC 815

“Derivatives and Hedging.”

The Company has incurred a liability for the estimated fair value of Derivative ~~Instruments.~~Liabilities. The estimated fair value of the Derivative ~~Instruments~~Liabilities has been calculated using a binomial pricing model with key input variables by an independent third party, as of the date of issuance, with changes in fair value recorded as gains or losses on revaluation in other income (expense).

The contingent earnout included in total consideration for the SSI acquisition, included in current liabilities on the ~~Condensed~~ Consolidated Balance Sheets, is measured at fair value on a recurring basis using the present value approach, which incorporates factors such as revenue growth and forecasted adjusted EBITDA to estimate expected value. Changes in fair value of the contingent earnout are recorded as gains or losses on revaluation in other income (expense) on the ~~Condensed~~ Consolidated Statements of Operations.

The Company determined that the significant inputs used to value the ~~derivative liabilities~~Derivative Liabilities and the contingent earnout fall within Level 3 of the fair value hierarchy. As a result, the Company has determined that the valuation of its ~~derivative liabilities~~Derivative Liabilities and contingent earnout are classified in Level 3 of the fair value hierarchy as shown in the table below:


	Fair Value Measurements at March 31, 2023
	Level 1		Level 2		Level 3		Total
Crom Derivative Liabilities	$	—	$	—	$	421,000	$	421,000
Prior Crom Note warrant liability	$	—	$	—	$	539,000	$	539,000
Contingent earnout	$	—	$	—	$	794,000	$	794,000
Total	$	—	$	—	$	1,754,000	$	1,754,000


	Fair Value Measurements at December 31, 2022
	Level 1		Level 2		Level 3		Total
Crom Derivative Liabilities	$	-	$	-	$	824,000	$	824,000
Contingent earnout	$	-	$	-	$	812,000	$	812,000
Total	$	-	$	-	$	1,636,000	$	1,636,000

Fair Value Measurements at September 30, 2022

Level 1

Level 2

Level 3

Total

Crom Derivative Liabilities

$
-

$
-

$
789,000

$
789,000

Contingent Earnout

$
-

$
-

$
1,121,000

$
1,121,000

Total

$
-

$
-

$
1,910,000

$
1,910,000

Fair Value Measurements at December 31, 2021

Level 1

Level 2

Level 3

Total

Crom Derivative Liabilities

$
-

$
-

$
-

$
-

Contingent Earnout

$
-

$
-

$
257,000

$
257,000

Total

$
-

$
-

$
257,000

$
257,000

The Company’s derivative liabilities as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 associated with the Derivative ~~Instruments~~Liabilities are as follows.


	March 31, 2023		December 31, 2022		Inception
Fair value of conversion option of Prior Crom note	$	—	$	191,000	$	314,000
Fair value of 656,250 warrants on April 4, 2022	539,000		633,000		378,000
Fair value of conversion option of Crom Cortana Fund LLC convertible note	162,000		—		162,000
Fair value of 700,000 warrants on February 13, 2023	259,000		—		259,000
	$	960,000	$	824,000

September 30,
2022
(unaudited)

December 31,
2021

Inception

Fair value of conversion option of Crom Cortana Fund LLC convertible note

$
(345,000
)

$
-

$
(314,000
)
Fair value of 656,250 warrants on April 4, 2022

(444,000
)

-

(378,000
)

$
(789,000
)

$
-

(692,000
)

Table of Contents

~~During the nine months ended September 30, 2022 and 2021, the Company recognized changes in the fair value of the derivative liabilities of $(97,000) and $0, respectively~~

~~Activity related to the derivative liabilities for the nine months ended September 30, 2022 is as follows:~~

Beginning balance as of December 31, 2021

$
-

Issuances of convertible note/warrants – derivative liabilities

(692,000
)
Warrants exchanged for common stock

-

Change in fair value of warrant derivative liabilities

(97,000
)
Ending balance as of September 30, 2022

$
(789,000
)

Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each Derivative Instrument is estimated using a binomial valuation model. The following assumptions were used for the periods as follows:


	3/31/2023
Expected term – conversion option	1 year
Expected term - warrants	5 years
Stock price as of measurement date	$	1.12
Equity volatility - unadjusted	131.90		%
Volatility haircut	5.00		%
Selected volatility – post haircut	124.20		%
Senior unsecured synthetic credit rating	CCC+
OAS differential between CCC+ and B- bonds	1047bps
Risk-free interest rate	4.90		%

September
30,
2022

Inception –
April 4, 2022

Expected term – conversion option

0.51 years

1 year

Expected term - warrants

4.51 years

5 years

Stock price as of Measurement Date

$
4.30

$
3.80

Equity volatility - unadjusted

284.80
%

278.80
%
Volatility haircut

5.00
%

5.00
%
Selected volatility – post haircut

115.0
%

112.60
%
Senior unsecured synthetic credit rating

CCC
+

CCC
+

B- market yield

7.90
%

4.50
%
OAS differential between CCC+ and B- bonds

458

bps

383
bps

Risk adjusted rate

12.50
%

8.30
%
Risk-free interest rate

3.90
%

1.70
%

Note 13: Concentrations

~~NOTE 13: CONCENTRATIONS~~

Concentration of Credit Risk.

The Company’s customer base is concentrated with a relatively small number of customers. The Company does not

generally

require collateral or other security to support accounts receivable. To reduce credit risk, the Company performs ongoing credit evaluations on its customers’ financial condition. The Company establishes allowances for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends, and other information.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the Company had

three

customers representing ~~57%~~60% and ~~53%~~70% of revenue earned, respectively. Any customer that represents 10% or greater of total revenue represents a risk. The Company also has four ~~and three~~ customers that represent ~~72%~~38% and ~~69%~~60% of the total accounts receivable as of ~~September 30, 2022 (unaudited)~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

Note 14: Commitments

~~NOTE 14: RELATED-PARTY TRANSACTIONS~~

~~In June 2021, the Company raised $220,000 for 220,000 shares~~As part of the ~~to be designated Series C Preferred Stock along with 22,000 common shares from the newly hired Chief Growth Officer~~acquisition of ~~the Company.~~

~~In January 2021, August 2021, November 2021 and April 2022, the Company granted warrants to two of~~

~~its~~

~~officers pursuant to the employment agreements with these officers as a bonus for closing the MFSI, Merrison, SSI, Pax River (~~

~~assets purchased from~~

~~The Albers Group, LLC) and LSG transactions.~~

~~NOTE 15: COMMITMENTS~~

~~The Company since April 2020 has entered in a series of~~

~~mployment~~

~~greements with management and key employees. The employment agreements are generally for terms ranging from~~ ~~three~~ ~~to four years and stipulate the compensation which include base pay and bonuses, as well as non-cash compensation (warrants or stock options) that are to be issued to the employee. The~~

~~mployment~~

~~greements run through June 30, 2025.~~

On April 1, 2020, the Company entered into Employment Agreements with both Mark Fuller and Jay Wright. The agreements have a term of three years. Pursuant to the agreements, each Employee has a base salary of $240,000 per year and may be increased to $25,000 per month upon reaching an annualized revenue run rate of $25,000,000 or greater, $30,000 per month upon reaching an annualized revenue of $50,000,000 or greater, or $40,000 per month upon reaching an annualized revenue run rate of $75,000,000 or greater.

The Company shall pay to the two officers a cash bonus equal to the lesser of (i) one percent (1%) of the trailing twelve months revenues of each company acquired during the term of the employment agreement, or (ii) four percent (4%) of the trailing twelve month earnings before interest, tax, depreciation, and amortization (“EBITDA”) of each business acquired during the term of the employment agreement, provided that, for a bonus to be due, such acquisition must be accretive to the Company on both a revenue per share and EBITDA per share basis. Additionally, the Company shall issue 1 warrant to each Employee for each $1 of revenue acquired in any such acquisition with a 7-year term and a strike price equal to the price used in such acquisition or if no stock is used, the 30-day moving average closing price of the Company’s stock.

An additional bonus of $50,000 and 500,000 warrants with a $2.00 strike price shall be paid to each Employee upon the Company commencing trading on either tier of Nasdaq or the NYSE, and an additional bonus of $125,000 and 1,250,000 warrants with a $2.40 strike price shall be paid to each Employee upon the Company joining the Russell 3000 and/or Russell 2000 stock index(ices).

On July 1, 2021, the Company entered into an Employment Agreement with its Chief Growth Officer for a period of four years, expiring June 30, 2025. Pursuant to the agreements, the Employee has a base salary of $250,000 per year and may be increased to $25,000 per month upon the Navy division reaching an annualized revenue run rate of $25,000,000 or greater, $30,000 per month upon the Navy division reaching an annualized revenue of $60,000,000 or greater, or $40,000 per month upon the Navy division reaching an annualized revenue run rate of $100,000,000 or greater.

The Chief Growth Officer is entitled to a bonus at the discretion of the Board of Directors annually. In addition, the Chief Growth Officer was granted 1,500,000 stock options, which 750,000 are considered time based grants over a vesting period of four years; and 750,000 are performance based grants as follows: (a) 250,000 upon the closing of an acquisition in the Navy division of a company with annualized revenue of $12 million or greater; (b) 250,000 upon the Navy division achieving $25 million in revenue and $2.5 million in EBITDA in any 12 month period; and (c) 250,000 upon the overall Company achieving $100 million in revenue run rate based on quarterly performance (i.e. $25 million in any calendar quarter).

On August 5, 2021, the Company and the former executive of Merrison entered into an Employment Agreement for a period of three years through August 5, 2024. Under the Employment Agreement, the executive shall be paid a base salary of $220,000 annually and receive 150,000 stock options. In addition, the executive will be provided a bonus of $80,000 payable annually on August 31 each year, starting August 31, 2022, if and only if Merrison maintains an annualized net income of $500,000 for the one-year period ending on the applicable August 31.

~~On August 12, 2021, the Company entered into several Employment Agreements for~~ ~~three-year~~ periods with the two executives of SSI as well as three management personnel. These agreements all contain base salaries and bonus criteria. In addition, the three key management personnel received 300,000 stock options each, of which one of those three retired December 31, 2021

~~On April 25, 2022,~~GTMR, the Company entered into an employment agreement with ~~David Bell, its~~the GTMR Chief

~~Financial~~

Executive Officer ~~(“CFO”~~(the "Executive")~~. The~~ on March 22, 2023 for a three year term. During the term of the employment agreement, ~~has a term of three years and five days and automatically renews for successive one-year periods unless terminated by~~ the Company ~~or Mr. Bell, with ninety (90) days advance notice of its intent not to renew. The agreement provides for~~shall pay the Executive an annual base salary of ~~$275,000~~$200,000 (the ~~“Bell Base~~“Base Salary”). The Bell Base Salary will increase as follows: (i) $25,000 per month upon the Company achieving an annualized revenue run rate of $50,000,000 or greater; (ii) $35,000 per month upon the Company achieving an annualized revenue run rate of $75,000,000 or greater; (iii) $40,000 per month upon the Company reaching an annualized revenue run rate of $150,000,000 or greater and EBITDA margin of no less than 7%; and (iv) $45,000 per month upon the Company reaching an annualized revenue run rate of $300,000,000 or greater and adjusted EBITDA margin of no less than 8%. The Bell Base Salary shall be payable to the Executive during the term in ~~regular~~substantially equal installments in accordance with the Company’s ~~general~~customary payroll practices.

~~Additionally, Mr. Bell~~ The Executive, as of the date of the acquisition, was awarded an incentive stock option to purchase 300,000 shares of the the Company’s Common Stock (the “Options”). The Executive is also eligible to receive an annual bonus (the “Annual Bonus”) in fiscal year 2023 which, provided GTMR obtains a net profit above $1,000,000 (the “Threshold”), shall be ~~eligible~~awarded in an amount equal to ~~earn~~$0.25 for every $1 above the Threshold up to a ~~performance bonus (the “Bell Performance Bonus”) at~~net profit of $2,000,000. The Annual Bonus amount payable to the discretion of the Board of the Company with target bonuses that are the following percentages of Bell Base Salary based on certain performance criteria set forth in the employment agreement: (i) 50% of Bell Base Salary of less than $35,000 per month; (ii) 60% of Bell Base Salary of $35,000 to less than $40,000 per month; and (iii) 100% of Bell Base Salary of $40,000 or more per month. The performance criteria include (a) ensure on time filing of all periodic filings (Form 10Q and Form 10K) and event driven filings (Form 13(d), Section 16 filings (forms 3 and 4) and Form 8K); (b) ensure on time filings and payment of all federal, state and local tax obligations; and (c) prepare an annual consolidated draft budget based on subsidiary budgets by October 31 each year. Mr. Bell is entitled to earn an additional bonus of (i) $50,000 and 500,000 warrants to purchase the Company’s common stock with an exercise price of $2.00 upon the Company’s common stock trading on any tier of the Nasdaq or the New York Stock Exchange

(which occurred on October 13, 2022), and (ii) $100,000 and 750,000 warrants to purchase the Company’s common stock with an exercise price of $0.12 upon the Company joining the Russell 3000 and/or Russell 2000 stock index(ices). The Board of the Company may pay an additional bonus (separate from any target) in its sole discretion.

~~As an additional incentive~~Executive for entering into the employment agreement, Mr. Bell was granted 1,800,000 stock options to purchase the Company’s common stock at an exercise price of $3.80 per share. The price amount is subject to adjustment in the event of a forward or reverse stock split, stock dividend or other similar mechanism. The stock options vest ratably over the first 36 months of employment with the Company. In the event of a change in control of the Company, unvested optionsfiscal year 2023 shall not vest unless (i) Mr. Bell is not given a commensurate position in the resulting organization, or (ii) the change in control transaction results in a price to stockholders of at least $.40 per share. The agreement entitles Mr. Bell to receive various employee benefits generally made available to other officers and senior executives of the Companyexceed $250,000.

Note 15: Income Taxes

~~NOTE 16:~~

~~INCOME TAXES~~

The Company's quarterly provision for income taxes is measured using an estimated annual effective tax rate adjusted for discrete items that occur within the quarter. ~~For the~~

~~three months ended September 30, 2022, the effective tax rate~~The provision for income taxes was ~~(10.5)~~

~~compared to 6.3%~~a benefit of $1,225,649 and $149,628 for the three months ended ~~September 30, 2021.~~March 31, 2023 and 2022, respectively. The ~~decrease~~effective income tax rate was 22.1% and 9.7% for the three months ended March 31, 2023 and 2022, respectively. The increase in the effective tax rate was primarily due to the ~~establishment~~release of a valuation allowance against the Company's net deferred tax assets. ~~For the nine months ended September 30, 2022, the effective~~The Company recognized a discrete tax ~~rate was (12.7)~~

~~compared to 11.9%~~benefit of $1,244,368 for the ~~nine months ended September 30, 2021. The decrease in~~release of the ~~effective tax rate was primarily~~valuation allowance due to the ~~establishment~~increase in deferred tax liabilities that related to the GTMR acquisition in the period ended March 31, 2023.

As of March 31, 2023, the Company had a valuation allowance ~~against the Company's net deferred tax assets.~~

~~A full valuation allowance was established in the second quarter~~ of ~~2022 due~~

$1,458,722 primarily related to the ~~uncertainty of the utilization of~~Company’s deferred tax assets that are more likely than not will not be realized.

Note 16: Factoring of Accounts Receivable

Table of Contents

On January 24, 2023, GTMR (acquired by the Company on March 22, 2023 and discussed in ~~future periods. In evaluating~~Note 3) entered into a factoring agreement (the “Factoring Agreement”) with Republic Capital Access LLC (“RCA”) wherein the ~~Company’s ability~~GTMR agreed to ~~realize~~sell certain of its accounts receivable, up to a limit of $1,000,000 without recourse.

During the ~~deferred tax assets, management considered all available positive~~three months ended March 31, 2023, total receivables sold under the Factoring Agreement was $484,677. Without recourse indicates that the Company assigns and ~~negative evidence, including cumulative historic earnings, reversal of temporary difference, projected taxable income~~transfers its rights, title, and ~~tax planning strategies. The Company’s negative evidence, largely related~~interest in and to the ~~Company's historical net losses, currently outweighs its positive evidence of future taxable income therefore it is more-likely-than-not~~accounts receivable to RCA, meaning that the Company will not ~~realize a significant~~be liable to repay all or any portion of ~~our deferred tax assets. The~~the advance amount if any portion of the ~~deferred tax asset~~accounts receivable is not paid by the Company’s customer(s). Information on accounts receivable identified for factoring are provided and verified by RCA prior to ~~be realized in~~being accepted for factoring. Pursuant to the ~~future could however be adjusted if objective negative evidence~~

Factoring Agreement, the Company will receive an initial payment of 90% or 85% on prime contracts or subcontracts, respectively. The remaining balance of the receivable is

paid upon receipt of payment by RCA, less RCA factoring fees.

~~no longer present.~~

The Company pays factoring fees associated with the sale of receivables based on the dollar value of the receivables sold. Factoring fees paid under this arrangement were $0 for the three months ended March 31, 2023.

Note 17: Subsequent Events

As disclosed previously, on January 18, 2023, the Company had signed a non-binding letter of intent to acquire an East Coast based government contractor. Subsequent to March 31, 2023, the Company determined that it is not currently pursuing this acquisition.

Table of Contents

~~NOTE 17:~~

~~SUBSEQUENT EVENTS~~

The Company evaluated subsequent events after September 30, 2022 through the date of the issuance of these financial statements and has determined there have been no subsequent events for which disclosure is required other than as discussed below:

~~On October 13, 2022, the Company effectuated the Reverse Stock Split and commenced trading of its common stock on the NYSE American LLC.~~

On October 17, 2022, the Company closed on its public offering of 1,500,000 shares of common stock consisting of 1,350,000 shares sold by the Company and 150,000 shares sold by certain selling stockholders, at a public offering price of $2.00 per share. In connection therewith, the Company issu

~~ed 1,231 shares of~~

~~common stock to stockholders with fractional shares resulting from the reverse stock split.~~

~~On October 17, 2022 the Company issued a total of 15,375,000 Common Stock in connection with the conversion of all its Series B preferred stock outstanding in connection with its public offering.~~

~~In October 2022,~~

~~he Company made an advanced principal payment of $500,000 to The Buckhout Charitable Remainder Trust.~~

~~In October 2022~~

~~the Company made a payment of $250,000 pursuant to the terms of the LSG Business Acquisition Agreement.~~

~~In November 2022,~~

~~he Company made an advanced principal payment of $100,000 on the Eisiminger note.~~

~~On November 7, 2022, the Company announced the signing of a non-binding letter of intent to acquire an East-Coast-based government contractor.~~

I~~tem~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations is provided to enhance the understanding of, and should be read together with, our ~~unaudited condensed consolidated~~ financial statements and related notes included in our Annual Report on Form 10-K for fiscal year 2022 filed with the ~~notes to those statements that appear~~Securities and Exchange Commission on March 17, 2023 and elsewhere in this Quarterly Report on Form ~~10-Q.~~

10-Q, as applicable.

Business Overview

Castellum, Inc. is focused on acquiring and growing technology companies in the areas of IT, electronic warfare, information warfare, information operations and cybersecurity with businesses in the governmental and commercial markets. ~~Services~~Our services include intelligence analysis, software development, software engineering, program management, strategic and mission planning, information assurance, cybersecurity and policy support, and data analytics. These services are applicable to customers in the Federal government, financial services, healthcare, and other users of large data applications. They can be delivered to on-premise enclaves or customers who rely upon cloud-based infrastructures. The Company has worked with multiple business brokers and contacts within its business network to identify potential acquisitions. Due to our success in completing six acquisitions over the previous three years and given our executive officers and key management member’s networks of contacts in the IT, telecom, cybersecurity, and defense sectors, we believe that we are well positioned to continue to execute our business strategy given a pipeline of identified and prequalified acquisition targets. Because of our executive officers and key management member’s prior experience growing businesses organically, we believe that we are well positioned to grow our existing business via internal growth as well. The Company has developed a qualified business opportunity pipeline of over $400 million.

Our primary customers are agencies and departments of the U.S. ~~Federal, state~~Government ("USG"), and ~~local governments. Our~~our expertise and technology support national security missions and government modernization for intelligence, defense, and federal civilian customers. The demand for our expertise and technology, in large measure, is created by the increasingly complex network, systems, and information environments in which governments and businesses operate, the global geo-political conditions impacting national security, and by the need to stay current with emerging technology while increasing productivity, enhancing security, and ultimately, improving performance.

We provide expertise and technology to enterprise and mission customers in support of national security missions and government modernization/transformation. Due to the nature of the work being executed for the USG the budgets continue to grow in support of the national security imperatives that are bipartisan. The majority of contracted work is operational in nature and is funded on an on-going basis.

Company leadership and our Board are well aware of the challenge our military will face in the future, from peer and near peer competitors, and that innovation will be necessary to maintain our military as the world’s premier defense force with overwhelming offensive force should that be necessary. To address military needs, our plan is to develop business teams that can undertake the larger system developments and provide superior technology services. Smaller business teams will also be created to evolve new technology and processes which will enable and improve our military effectiveness with these teams having the ability to provide advanced capabilities quickly and affordably. Our objective is to become a trusted partner in assisting our military to maintain superiority when compared to other forces. As innovation and new military processes are evolved and proven, solutions will be offered to avail these enhancements government wide. These will assist in introducing new levels of government service while reducing cost to the taxpayer.

~~To achieve Castellum’s objectives, the following solutions are offered:~~

~~Enterprise~~

– We provide capabilities that enable the internal operations of a government agency. This includes digital solutions, such as business systems, agency-unique applications, investigative solutions, and enterprise IT. For example, Castellum customizes, implements, and maintains commercial-off-the-shelf (“COTS”) and customer enterprise resource planning (“ERP”) systems. This includes, financial, human capital, and supply chain management systems. Castellum also designs, integrates, deploys, and sustains enterprise-wide IT systems in a variety of models.

~~Mission~~

– Castellum provides capabilities that enable the execution of a government agency’s primary function, or “mission”. For example, we support strategic and tactical mission customers with capabilities in areas such as command and control, communications, intelligence collection and analysis, signal intelligence (“SIGINT”), electronic warfare (“EW”), and cyber operations. Castellum develops tools and offerings in an open, software-defined architecture with multi-domain and multi-mission capabilities.

~~Expertise~~

– Castellum provides expertise to both enterprise and mission customers. For enterprise customers, we deliver talent with the specific technical and functional knowledge to support internal agency operations. And for mission customers, we deliver talent with technical and domain knowledge to support the execution of an agency’s mission. We also deliver actionable intelligence through multi-source collection, aggregation, and analysis.

~~Technology~~

– Castellum delivers technology to both enterprise and mission customers. For enterprise customers, technology includes developing and implementing digital solutions (business systems, agency-unique applications) and end-to-end enterprise IT systems. We continually advance infrastructure through migration to the cloud network modernization, active cyber defense, and the application of data operations and analytics. For mission customers, technology includes developing and deploying multi-domain offerings for signals intelligence, resilient communications, fee space optical communications, electronic warfare, and cyber operations. Castellum invests ahead of customer needs with research and development to generate unique intellectual property and differentiated technology addressing critical national security mission needs.

Recent Developments

On ~~October 17, 2022,~~March 23, 2023, the Company closed on its ~~public offering~~acquisition of ~~1,500,000~~Global Technologies Management Resources, Inc. ("GTMR"). Subject to the terms and conditions of the Agreement and Plan of Merger (the "Agreement"), all of the capital stock of GTMR outstanding immediately prior to the effective time was converted into (a) 4,866,570 shares of the Company’s common stock, ~~consisting of 1,350,000 shares sold by the Company~~par value $0.0001 per share and 150,000 shares sold by certain selling stockholders, at a public offering price of $2.00 per share. The Company’s registration statement on Form S-1 relating to the offering was declared effective by the U.S. Securities and Exchange Commission on October 12, 2022.

(b) $1,250,000 in cash (the “Closing Cash Consideration”).

Budgetary Environment

We carefully follow U.S. Federal budget, legislative and contracting trends and activities and evolve our strategies to take these into consideration. On August 2, 2019, the Bipartisan Budget Act of 2019 (“BBA 2019”) was signed into law. BBA 2019 called for defense spending, including Overseas Contingency Operations (“OCO”) funds, of $738,000,000,000 in government fiscal year (“GFY”) 2020 and $740,500,000,000 in GFY 2021. Both represent increases from GFY 2019 levels of $716,000,000,000. On January 1, 2021, the $740,000,000,000 National Defense Authorization Act (“NDAA”) for GFY 2021 became law. On March ~~11,~~15, 2022, ~~Congress passed and~~the President ~~Biden~~ signed ~~into law an omnibus spending bill which included $782,000,000,000 for national defense. This represents a 3.9% increase over~~ the ~~administration’s request for~~Consolidated Appropriations Act, 2022, ~~and a 5.6% increase over the 2021 appropriations. This bill provided for the continuity of~~providing annual funding for the ~~existing contracts on~~Department of Defense ("DoD") and other government departments and agencies. The appropriation provided $798 billion in discretionary spending for national defense, which includes the ~~Company is doing work while also authorizing~~DoD, Department of Energy ("DoE") nuclear weapons-related activities, and the ~~USG to award new contracts. We believe this latter opportunity will be key to generating organic growth for the Company.~~

~~While we view the budget environment as stable and believe there is bipartisan support for continued investment in the areas of defense and~~ national security ~~as evidenced by~~activities of the ~~recent approval~~Coast Guard, Federal Bureau of ~~military assistance~~Investigation, and others. Additionally, the legislation included supplemental funding to support Ukraine and the replacement of weapon systems from U.S. stockpiles, it is uncertain whether GFY 2023 will see similar increased levels of spending or a passing of a defense related appropriations bill. During those periods of time when appropriations bills have not been passed and signed into law, government agencies operate under a continuing resolution (“CR”)

~~. Depending on their scope, duration, and~~foreign military financing for Ukraine other factors, CRs can negatively impact our business due to delays in new program starts, delays in contract award decisions, and other factors. The Company’s most recent experience with CRs is that organic growth is impacted but, the Company continues to grow as the cybersecurity related operations (to include information warfare, electronic warfare, information operations, and related areas) are core to what has become a bipartisan National Security focus. However, there is the risk that when a CR expires, unless appropriations bills have been passed by Congress and signed by the then President, or a new CR is passed and signed into law, the government must cease operations, or shutdown, except in certain emergency situations or when the law authorizes continued activity. During Covid our work was deemed a key component of National Security and continued unabated which would suggest that lacking a CR we are likely toEastern European allies. Our programs continue to ~~operate largely unaffected but such an assumption may prove to~~ be ~~incorrect. We continuously review our operations in an attempt to identify programs potentially at risk from CRs so that we can consider appropriate contingency plans.~~

well supported and funded through the fiscal year 2023 budget process.

Basis of presentation

We have presented results of operations, including the related discussion and analysis, for the following periods:

·•the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

~~the three months ended September 30, 2022 compared to the three months ended September 30, 2021.~~

~~the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.~~

Key Components of Revenue and Expenses

Revenues

~~We account for revenue in accordance with ASC Topic 606,~~

~~Revenue from Contracts with Customers~~

. Our revenues are primarily derived from services provided to the U.S. Federal, state, and local governments. We enter into agreements with customers to create enforceable rights and obligations and for which it is probable that we will collect the consideration to which it will be entitled as services and solutions are transferred to the customer. We also evaluate whether two or more agreements should be accounted for as one single contract.

When determining the total transaction price, we identify both fixed and variable consideration elements within the contract. We estimate variable consideration as the most likely amount to which we expect to be entitled limited to the extent that it is probable that a significant reversal will not occur in a subsequent period.

At contract inception, we determine whether the goods and services to be provided are to be accounted for as a single performance obligation or as multiple performance obligations. For most contracts, the customers require us to perform several tasks in providing an integrated output, and accordingly, each of these contracts are deemed as having only one performance obligation. When contracts are separated into multiple performance obligations, we allocate the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised services underlying each performance obligation.

This evaluation requires us to exercise professional judgment, and it may impact the timing and pattern of revenue recognition. If multiple performance obligations are identified, we generally use the cost plus a margin approach to determine the relative standalone selling price of each performance obligation. We do not assess whether a contract contains a significant financing component if we expect, at contract inception, that the period between when payment by the client and the transfer of promised services to the client will be less than one year.

We currently generate our revenue from three different types of contractual arrangements: ~~CPFF, FFP~~Cost Plus Fixed Fee (“CPFF”), Fixed Firm Price (“FFP”) and Time and Materials (“T&M&M”) contracts. We generally recognize revenue over time as control is transferred to the customer, based on the extent of progress towards satisfaction of the performance obligation. The selection of the method used to measure progress requires judgment and is dependent on the contract type and the nature of the goods or services to be provided.

For CPFF contracts, we use input progress measures to derive revenue based on hours worked on contract performance as follows: direct costs plus ~~DCAA-approved~~Defense Contract Audit Agency (“DCAA”)-approved provisional burdens plus fee. The provisional indirect rates are adjusted and billed at actual at year end. Revenue from FFP contracts is generally recognized ratably over the contract term, using a time-based measure of progress, even if billing is based on other metrics or milestones, including specific deliverables. For T&M contracts, we use input progress measures to estimate revenue earned based on hours worked on contract performance at negotiated billing rates, plus direct costs and indirect cost burdens associated with materials and the direct expenses incurred in performance of the contract.

These arrangements generally qualify for the “right-to-invoice” practical expedient where revenue is recognized in proportion to billable consideration. FFP Level-Of-Effort contracts are substantially similar to T&M contracts except that we are required to deliver a specified level of effort over a stated period. For these contracts, we estimate revenue earned using contract hours worked at negotiated bill rates as we deliver the contractually required workforce.

Revenue generated by contract support service contracts is recognized over time as services are provided, based on the transfer of control. Revenue generated by FFP contracts is recognized over time as performance obligations are satisfied. Most contracts do not contain variable consideration and contract modifications are generally minimal. For these reasons, there is not a significant impact of electing these transition practical expedients.

Revenue generated from contracts with U.S. Federal, state, and local governments from these contracts is recorded over time, rather than at a point in time. Under the contract support services contracts, we perform software design work as it is assigned by the customer, and bill the customer, generally semi-monthly, on either a CPFF or T&M basis, as labor hours are expended. Certain other government contracts for software development have specific deliverables and are structured as FFP contracts, which are generally billed as the performance obligations under the contract are met. Revenue recognition under FFP contracts require judgment to allocate the transaction price to the performance obligations. Contracts may have terms up to five years.

Contract accounting requires judgment relative to assessing risks and estimating contract revenue and costs and assumptions for schedule and technical issues. Due to the size and nature of contracts, estimates of revenue and costs are subject to a number of variables. For contract change orders, claims or similar items, judgment is required for estimating the amounts, assessing the potential for realization, and determining whether realization is probable. Estimates of total contract revenue and costs are continuously monitored during the term of the contract and are subject to revision as the contract progresses. From time to time, facts develop that require revisions of revenue recognized or cost estimates. To the extent that a revised estimate affects the current or an earlier period, the cumulative effect of the revision is recognized in the period in which the facts requiring the revision become known.

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Cost of Revenues

Cost of Revenues include direct costs incurred to provide goods and services related to contracts, specifically labor, contracted labor, materials, and other direct costs, which includes rent, insurance, and software licenses. Cost of Revenues related to contracts is recognized as expense when incurred or at the time a performance obligation is satisfied.

Gross Profit and Gross Profit Margin

Our gross profit comprises our revenues less our cost of revenues. Gross profit margin is our gross profit divided by our revenues.

Operating Expenses

Our operating expenses include indirect costs, overhead, and general and administrative expenses.

•Indirect costs consist of expenses generally associated with bonuses and fringe benefits, including employee health and medical insurance, 401k matching contributions, and payroll taxes.

~~Indirect costs consist of expenses generally associated with bonuses and fringe benefits, including employee health and medical insurance, 401k matching contributions, and payroll taxes.~~

•Overhead consists of expenses associated with the support of operations or production, including labor for management of contracts, operations, training, supplies, and certain facilities to perform customer work.

Overhead consists of expenses associated with the support of operations or production, including labor for management of contracts, operations, training, supplies, and certain facilities to perform customer work.

•General and administrative expenses consist primarily of corporate and administrative labor expenses, administrative bonuses, legal expenses, IT expenses, and insurance expenses.

~~General and administrative expenses consist primarily of corporate and administrative labor expenses, administrative bonuses, legal expenses, IT expenses, and insurance expenses.~~

~~Change in Fair Value of Derivative Liabilities~~25

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~~The issuance of the July 2017 FASB ASU 2017-11,~~

~~“Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815),”~~

~~addresses the complexity of accounting for certain financial instruments.~~

~~Derivatives and Hedging~~

Generally, for warrants and conversion options embedded in financial instruments that are deemed to have a debt host (assuming the underlying shares are readily convertible to cash or the contract provides for net settlement such that the embedded conversion option meets the definition of a derivative), this results in a reporting entity being required to classify the freestanding financial instrument or the bifurcated conversion option as a liability, which the entity must measure at fair value initially and at each subsequent reporting date.

~~The amendments in this Update revise the guidance for instruments with embedded features in Subtopic 815-40, “~~

~~Derivatives and Hedging—Contracts in Entity’s Own Equity~~

~~,” which is considered in determining whether an equity-linked financial instrument qualifies for a scope exception from derivative accounting.~~

~~Interest Expense, Net of Interest Income~~

Interest expense consists of interest paid to service our convertible promissory notes which include the Amended BCR Trust Note, the Term Loan Promissory Note payable to Live Oak Banking Company, two promissory notes payable to Robert Eisiminger, the note payable to Emil Kaunitz, and the note payable to Crom

~~net of interest earned.~~

~~Income Tax (Provision) Benefit~~

Income taxes are accounted for under the asset and liability method. The current charge for income tax expense is calculated in accordance with the relevant tax regulations applicable to the entity. 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 for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Differences between statutory tax rates and effective tax rates relate to permanent tax differences.

~~We follow ASC 740-10~~

~~Accounting for Uncertainty in Income Taxes~~

~~. This requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. Management evaluates their tax positions on a quarterly basis.~~

Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax reporting purposes, net operating loss carryforwards, and other tax credits measured by applying currently enacted tax laws. When necessary, a valuation allowance is provided to reduce deferred tax assets to an amount that is more likely than not to be realized.

Results of operations

The period to period comparisons of our results of operations have been prepared using the historical periods included in our unaudited consolidated financial statements. The following discussion should be read in conjunction with the unaudited ~~condensed~~ consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

Three Months Ended ~~September 30, 2022~~March 31, 2023 Compared to Three Months Ended ~~September 30, 2021~~

March 31, 2022


	Three Months Ended March 31,				Change
	2023		2022		Amount		%
Revenues	$	9,937,013	$	9,990,141	$	(53,128)	(1)	%
Cost of revenues	5,899,231		5,855,641		43,590		1	%
Gross Profit	4,037,782		4,134,500		(96,718)		(2)	%
Operating expenses:
Indirect costs	2,210,879		1,729,195		481,684		28	%
Overhead	467,682		418,970		48,712		12	%
General and administrative expenses	6,046,530		2,842,140		3,204,390		113	%
Gain from change in fair value of contingent earnout	(18,000)		—		(18,000)		—	%
Total operating expenses	8,707,091		4,990,305		3,716,786		74	%
Loss from operations:	(4,669,309)		(855,805)		(3,813,504)		446	%

Other expense, net	(879,731)		(689,626)		(190,105)		28	%

Loss before income taxes and preferred stock dividends	(5,549,040)		(1,545,431)		(4,003,609)		259	%

Income tax benefit (expense)	1,225,649		149,628		1,076,021		719	%
Preferred stock dividend	30,319		10,912		19,407		178	%
Net loss	$	(4,353,710)	$	(1,406,715)	$	(2,946,995)	209	%

THREE MONTHS ENDED

SEPTEMBER 30,

Change

2022

2021

Amount

%

Revenues

$
11,120,712

$
7,378,094

$
3,742,618

51
%
Cost of revenues

6,474,261

4,309,439

2,164,822

50
%
Gross Profit

4,646,451

3,068,655

1,577,796

51
%
Operating expenses:

Indirect costs

2,130,513

738,239

1,392,274

189
%
Overhead

407,804

248,540

159,264

64
%
General and administrative expenses

3,297,319

6,682,034

(
3,384,715
)

(51
)%
Loss from change in fair value of contingent earnout

864,000

-

864,000

100
%
Total operating expenses

6,699,636

7,668,813

(
969,177
)

(13
)%
Income (loss) from operations:

(2,
053,185
)

(4,600,158
)

2,546,973

(55
)%

Other income (expense)

(
902,314
)

(648,175
)

(
254,139
)

39
%

Income (loss) before income taxes and preferred stock dividends

(
2,955,499
)

(5,248,333
)

2,
292,834

(44
)%

Income tax benefit (expense)

(159,025)

328,735

(487,760
)

(148
)%
Preferred stock dividend

29,911

3,320

26,591

801
%
Net loss

$
(3,144,435
)

$
(4,922,918
)

$
1,778,483

-36
%

Revenue

Total revenue was ~~$11,120,712~~$9,937,013 for the three months ended ~~September 30, 2022~~March 31, 2023 as compared to total revenue of ~~$7,378,094~~$9,990,141 for the three months ended ~~September 30, 2021.~~March 31, 2022. The ~~increase~~decrease of, ~~$3,742,618,~~$(53,128) or ~~51%~~(1)%, was driven primarily by

~~contributions from~~ a decrease in head count on continuing contracts in Q1 and the ~~acquisitions~~completion of ~~SSI and Merrison during the third quarter of 2021 as well as~~programs in 2022, offset by contributions from LSG ~~during~~in the ~~second~~first quarter of ~~2022.~~2023 and nine days of activity from GTMR in Q1.

Cost of revenues

Total cost of revenues was ~~$6,474,261~~$5,899,231 for the three months ended ~~September 30, 2022~~March 31, 2023 as compared to total cost of revenues of ~~$4,309,439~~$5,855,641 for the three months ended ~~September 30, 2021.~~March 31, 2022. The increase of ~~$2,164,822,~~$43,590, or ~~50%~~1%,

~~was driven primarily by~~ is in line with the ~~increased level of effort on contracts proportionate to the growth of revenues~~minimal change in revenue noted above due to the ~~acquisition activity noted above.~~acquisitions offset by the completion of programs in 2022 and higher costs of certain projects.

Gross Profit

Total gross profit was ~~$4,646,451~~$4,037,782 for the three months ended ~~September 30, 2022~~March 31, 2023 as compared to total gross profit of ~~$3,068,655~~$4,134,500 for the three months ended ~~September 30, 2021.~~March 31, 2022. The ~~increase~~decrease of ~~$1,577,796,~~$(96,718), or ~~51%~~(2)%,

was driven primarily by the ~~growth in revenues~~lower margins of certain projects due to ~~contributions from SSI, Merrison~~higher labor costs and ~~LSG offset by costs of revenues as noted above.~~

increased competition amongst contractors.

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Operating expenses

Total operating expenses were $

~~699~~

~~636~~

$8,707,091 for the three months ended ~~September 30, 2022~~March 31, 2023 as compared to total operating expense of ~~$7,668,813~~$4,990,305 for the three months ended ~~September 30, 2021.~~March 31, 2022. The ~~decrease~~increase of $

~~969,177~~

,$3,716,786, or

% 74%, was primarily driven ~~by a decrease in general and administrative expenses which was partially offset~~ by an increase in indirect costs ~~overhead~~

,due to the additional LSG labor from the acquisition and ~~loss from change in fair value of contingent earnout~~

~~. The decrease~~an increase in general and administrative expenses ~~was primarily~~("G&A") due to ~~a decrease in acquisition fees from the prior period as well as less~~ stock based compensation in ~~2022~~2023 paid to executives, ~~due~~expenses related to ~~less acquisition activity in 2022 than 2021, while the increase in indirect costs was driven by non-recurring accounting~~warrants issued to two officers, and additional legal and auditing fees related to ~~our public offering and listing on~~ the ~~NYSE American.~~GTMR acquisition.

Other income (expense)

Total other income (expense) was $(

~~902,314~~

)$(879,731) for the three months ended ~~September 30, 2022~~March 31, 2023 as compared to total other income (expense) of ~~$(648,175)~~$(689,626) for the three months ended ~~September 30, 2021.~~March 31, 2022. The increase of $(

~~254,139~~

)$(190,105) or 3

%28%, was primarily driven by the loss on the debt extinguishment related to Crom and an increase in interest expense due to rising interest rates on variable rate debt and interest on convertible ~~notes entered into during 2022.~~

notes.

Income tax (expense) benefit

~~Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021~~

NINE MONTHS ENDED

SEPTEMBER 30,

Change

2022

2021

Amount

%

Revenues

$
32,166,104

$
15,587,246

$
16,578,858

106
%
Cost of revenues

$
18,698,820

8,921,153

9,777,667

110
%
Gross Profit

$
13,467,284

6,666,093

6,801,191

102
%
Operating expenses:

Indirect costs

7,458,319

1,512,370

5,945,949

393
%
Overhead

1,167,346

431,987

735,359

170
%
General and administrative expenses

9,
633,064

10,389,922

(
756
,
858
)

(
7
)%
Loss from change in fair value of contingent earnout

864,000

-

864,000

100
%
Total operating expenses

19,122,729

12,334,279

6,788,450

55
%
Income (loss) from operations:

(
5,655,445
)

(5,668,186
)

12,741

0
%

Other income (expense)

(2,
676
,612
)

(1,799,181
)

(
877,431
)

49
%

Income (loss) before income taxes and preferred stock dividends

(8,
332,057
)

(7,467,367
)

(
864,690
)

(
1
2
)%

Income tax benefit (expense)

(
902,820
)

890,995

(1,
793,815
)

(
201
)%
Preferred stock dividend

70,447

3,320

67,127

2022
%
Net loss

$
(9,
305,324
)

$
(6,579,692
)

$
(2,
725,632
)

41
%

~~Revenue~~

~~Total revenue~~Income tax (expense) benefit was ~~$32,166,104~~$1,225,649 for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 as compared to ~~total revenue of $15,587,246~~$149,628 for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. The increase of ~~$16,578,858~~$1,076,021 or ~~106%, was driven primarily by~~

~~contributions from the acquisitions of SSI and Merrison during the third quarter of 2021 as well as contributions from LSG during the second quarter of 2022~~

~~Cost of revenues~~

Total cost of revenues was $18,698,820 for the nine months ended September 30, 2022 as compared to total cost of revenues of $8,921,153 for the nine months ended September 30, 2021. The increase of $9,777,667, or 110%,

~~was driven primarily by the increased level of effort on contracts proportionate to the growth of revenues due to the acquisition activity noted above.~~

~~Gross Profit~~

Total gross profit was $13,467,284 for the nine months ended September 30, 2022 as compared to total gross profit of $6,666,093 for the nine months ended September 30, 2021. The increase of $6,801,191, or 102%,

~~was driven primarily by the growth in revenues due to contributions from SSI, Merrison and LSG offset by costs of revenues as noted above.~~

~~Operating expenses~~

~~Total operating expenses were $~~

~~19,122,729~~

~~for the nine months ended September 30, 2022 as compared to total operating expense of $12,334,279 for the nine months ended September 30, 2021. The increase of $6,~~

~~788~~

~~450~~

~~or 55%, was driven by an increase in~~

~~loss from change in fair value of contingent earnout, an increase in~~

indirect costs partially offset by a decrease in general and administrative expenses. The increase in indirect costs was due to stock based compensation related to acquisition activity while the decrease in general and administrative expenses719% was primarily ~~due to a decrease in acquisition fees from the prior period as well as less stock based compensation in 2022 paid to executives due to less acquisition activity in 2022 than 2021.~~

~~Other income (expense)~~

~~Total other income (expense) was $(~~

~~2,676,612~~

~~) for the nine months ended September 30, 2022 as compared to total other income (expense) of $(1,799,181) for the nine months ended September 30, 2021. The increase of $(~~

~~877,431~~

~~) or~~

~~%, was driven~~driven by an increase in ~~interest expense~~the effective tax rate due to ~~rising interest rates on variable rate debt and interest on convertible notes entered into during 2022.~~the release of a valuation allowance against the Company's net deferred tax assets. The Company recognized a discrete tax benefit of $1,244,368 for the release of the valuation allowance due to the increase in deferred tax liabilities that related to the GTMR acquisition in the period ended March 31, 2023.

Contract backlog

We define backlog to include the following three components:

•Funded Backlog - Funded backlog represents the revenue value of orders for services under existing contracts for which funding is appropriated or otherwise authorized less revenue previously recognized on these contracts.

•Unfunded Backlog - Unfunded backlog represents the revenue value of orders (including optional orders) for services under existing contracts for which funding has not been appropriated or otherwise authorized.

•Priced Options - Priced contract options represent 100% of the revenue value of all future contract option periods under existing contracts that may be exercised at our clients’ option and for which funding has not been appropriated or otherwise authorized.

Our backlog does not include contracts that have been awarded but are currently under protest and also does not include any task orders under IDIQ contracts, except to the extent that task orders have been awarded to us under those contracts.

Contract Backlog

~~Funded Backlog~~

- Funded backlog represents the revenue value of orders for services under existing contracts for which funding is appropriated or otherwise authorized less revenue previously recognized on these contracts.

~~Unfunded Backlog~~

~~- Unfunded backlog represents the revenue value of orders (including optional orders) for services under existing contracts for which funding has not been appropriated or otherwise authorized.~~

~~Priced Options -~~

Priced contract options represent 100% of the revenue value of all future contract option periods under existing contracts that may be exercised at our clients’ option and for which funding has not been appropriated or otherwise authorized.

~~Contract Backlog~~

~~Funded~~	$	~~15,687,679~~
~~Unfunded~~ Funded		$	23,567,806	~~10,372,982~~
~~Priced Options~~ Unfunded		23,976,539			~~62,093,312~~
Priced Options		121,026,239
Total Backlog		$	$ 168,570,584	~~88,153,973~~

Total backlog

Our total backlog consists of remaining performance obligations, certain orders under contracts for which the original period of performance has expired, and unexercised option periods, and other unexercised optional orders. As of ~~September 30, 2022,~~March 31, 2023 the Company had ~~$88~~$169 million of remaining performance obligations. We expect to recognize approximately ~~forty~~

~~five~~

~~percent (45%)~~34% of the remaining performance obligations over the next 12 months, and approximately ~~seventy~~

~~two~~

~~percent (72%)~~55% over the next 24 months. The remainder is expected to be recognized thereafter. As with all government contracts there is no guarantee the customer will have future funding or exercise their contract option in the out-years. ~~Other budget risks are discussed in the Budget Environment.~~ Our backlog includes orders under contracts that, in some cases, extend for several years. Congress generally appropriates funds for our clients on a yearly basis, even though their contracts with us may call for performance that is expected to take a number of years to complete. As a result,

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contracts typically are only partially funded at any point during their term and all or some of the work to be performed under the contracts may remain unfunded unless and until the U.S. Congress makes subsequent appropriations and the procuring agency allocates funding to the contract.

We cannot predict with any certainty the portion of our backlog that we expect to recognize as revenue in any future period and we cannot guarantee that we will recognize any revenue from our backlog. The primary risks that could affect our ability to recognize such revenue on a timely basis or at all are: program schedule changes, contract modifications, and our ability to assimilate and deploy new consulting staff against funded backlog; cost-cutting initiatives and other efforts to reduce United States Government (“USG”)

spending, which could reduce or delay funding for orders for services; and delayed funding of our contracts due to delays in the completion of the USG's budgeting process and the use of ~~CRs~~continuing resolutions by the USG to fund its operations. The amount of our funded backlog is also subject to change, due to, among other factors: changes in congressional appropriations that reflect changes in USG policies or priorities resulting from various military, political, economic, or international developments; changes in the use of USG contracting vehicles, and the provisions therein used to procure our services and adjustments to the scope of services, or cancellation of contracts by the USG at any time. In our recent experience, none of the following additional risks have had a material negative effect on our ability to realize revenue from our funded backlog: the unilateral right of the USG to cancel multi-year contracts and related orders or to terminate existing contracts for convenience or default; in the case of unfunded backlog, the potential that funding will not be made available; and, in the case of priced options, the risk that our clients will not exercise their options.

In addition, contract backlog includes orders under contracts for which the period of performance has expired, and we may not recognize revenue on the funded backlog that includes such orders due to, among other reasons, the tardy submission of invoices by our subcontractors and the expiration of the relevant appropriated funding in accordance with a predetermined expiration date such as the end of the USG's fiscal year.

We expect to recognize revenue from a substantial portion of funded backlog within the next 24 months. However, given the uncertainties discussed above, ~~as well as the risks described in Budget Environment,~~ we can give no assurance that we will be able to convert our backlog into revenue in any particular period, if at all.

Liquidity and capital resources

Sources

We have historically sourced our liquidity requirements with cash flows from operations, borrowings under our current credit facilities, and in October, 2022, with an equity issuance through the listing of our common stock on the NYSE American LLC. As of ~~September 30, 2022,~~March 31, 2023, we had ~~$1,853,388~~$2,270,987 of cash ~~and cash equivalents~~ on hand and unused borrowing capacity of ~~$649,975~~$324,975 from our revolving line of credit.

We believe our existing cash and cash equivalents provided by our ongoing operations together with funds available under our credit facilities will be sufficient to meet our working capital, capital expenditures and cash needs for the next 12 months and beyond.

Uses

Our material cash requirements from known contractual and other obligations primarily relate to payments on our credit facilities. For information related to these cash requirements, refer to Note 6, Note 7, Note 8, and Note 9 ~~under Part 1, Item 1, Unaudited Condensed Consolidated Financial Statements of~~in this ~~Quarterly Report~~quarterly report on Form 10-Q.

Shares of our common stock included in our public float as of ~~November~~May 10, ~~2022~~2023 was

~~14,061,706~~

14,670,666 which excludes restricted shares and those held by officers, directors, and affiliates.

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Cash flows

The following tables present a summary of cash flows from operating, investing, and financing activities for the following comparative periods.

~~Nine~~Three Months Ended ~~September 30, 2022~~March 31, 2023 Compared to ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2022


	Three Months Ended March 31,				Change
	2023		2022		Amount		%
Net cash provided (used) by operating activities	$	(2,427,865)	$	84,773	$	(2,512,638)	NM
Net cash provided (used) by investing activities	(427,734)		(67,613)		$	(360,121)	533	%
Net cash provided (used) by financing activities	485,690		274,710		$	210,980	77	%
Change in cash	$	(2,330,737)	$	291,870	$	(2,622,607)	NM
NM - not meaningful

Nine Months Ended September 30,

Change

2022

2021

Amount

%

Net cash provided (used) by operating activities

$
(554,647
)

$
167,612

$
(722,259
)

-431
%
Net cash provided (used) by investing activities

(342,436
)

835,989

$
(1,178,425
)

-141
%
Net cash provided (used) by financing activities

732,556

238,976

$
493,580

207
%
Change in cash

$
(164,527
)

$
1,242,577

$
(1,407,104
)

-113
%

Operating activities

Net cash ~~provided~~ (used) by operating activities decreased to ~~$(554,647)~~$(2,427,865), for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, from ~~$167,612~~$84,773 for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. This decrease in net cash ~~provided~~ (used) by operating activities was primarily driven by an increase in accounts receivable (due to timing of collections), offset by noncash adjustments related to stock based compensation and warrants issued for the GTMR acquisition during the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023.

Investing activities

Net cash ~~provided~~ (used) by investing activities ~~decreased~~increased to ~~$(342,436)~~$(427,734), for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, from ~~$835,989,~~$(67,613), for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. The ~~decrease~~increase in net cash ~~provided~~ (used) by investing activities was primarily due to the additional cash paid in the acquisition of ~~LSG~~GTMR during ~~2022 and the cash received from the acquisition of MFSI, Merrison, and SSI in 2021.~~2023.

Financing activities

Net cash provided ~~(used)~~ by ~~investing~~financing activities increased to ~~$732,556,~~$485,690, for three months ended March 31, 2023, from $274,710, for the ~~nine~~three months ended ~~September 30, 2022, from $238,976, for the nine months ended September 30, 2021.~~March 31, 2022. The increase in net cash provided ~~(used)~~ by financing activities was primarily due to the proceeds from ~~issuance of preferred stock~~the new note entered into with Crom and ~~common stock as well as the~~ proceeds from ~~notes payable obtained in 2022, partially~~the revolving line of credit offset by athe $300,000 repayment on ~~notes payable.~~the Prior Crom Note.

Critical ~~accounting estimates~~

Accounting Policies and Estimates

~~Besides estimates that meet the “critical” accounting estimate criteria, we make many other~~A summary of our critical accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenue, and expenses as well as disclosures of contingent assets and liabilities. Estimates are based on experience and other information available prior to the issuance of the financial statements. Materially different results can occur as circumstances change and additional information becomes known, including for estimates that we do not deem “critical.”

~~Revenue Recognition~~

~~The Company accounts for revenue in accordance with ASC Topic 606,~~

~~Revenue from Contracts with Customers~~

~~. (Topic 606). Topic 606 requires entities to recognize revenues when control of the promised goods or services~~ is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The principles in the standard are applied in five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

Our revenue recognition policies are consistent with this five-step framework. Understanding the complex terms of agreements and determining the appropriate time, amount, and method to recognize revenue for each transaction requires judgment. These significant judgments include: (1) determining what point in time or what measure of progress depicts the transfer of control to the customer; (2) estimating contract revenue and costs and assumptions for schedule and technical issues; (3) selecting the appropriate method to measure progress; and (4) estimating how and when contingencies, or other forms of variable consideration, will impact the timing and amount of recognition of revenue. The timing and revenue recognition in a period could vary if different judgments were made.

~~Goodwill and Intangible Assets~~

~~We account for goodwill and intangible assets in accordance with ASC 350,~~

~~Intangibles-Goodwill and Other~~

(ASC 350). ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. Significant management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows.

Our acquisitions require the application of purchase accounting, which results in tangible and identifiable intangible assets and liabilities of the acquired entity being recorded at fair value. The difference between the purchase price and the fair value of net assets acquired is recorded as goodwill. We are responsible for determining the valuation of assets and liabilities and for the allocation of purchase price to assets acquired and liabilities assumed.

Assumptions must be made in determining fair values, particularly where observable market values do not exist. Assumptions may include discount rates, growth rates, cost of capital, tax rates, and remaining useful lives. These assumptions can have a significant impact on the value of identifiable assets and accordingly can impact the value of goodwill recorded. Different assumptions could result in different values being attributed to assets and liabilities. Since these values impact the amount of annual depreciation and amortization expense, different assumptions could also impact our statement of operations and could impact the results of future asset impairment reviews. Due to the many variables inherent in the estimation of a business’s fair value and the relative size of our goodwill, if different assumptions and estimates were used, it could have an adverse effect on our impairment analysis.

~~Income Taxes and Uncertain Tax Positions~~

Income taxes and uncertain tax positions are accounted for in accordance with ASC 740, Income Taxes (ASC 740). 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 for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Differences between statutory tax rates and effective tax rates relate to permanent tax differences.

Management determines recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. This approach to estimate the potential outcome of any uncertain tax issue is subject to its assessment of relevant risks, facts, and circumstances existing at that time. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax reporting purposes, net operating loss carryforwards, and other tax credits measured by applying currently enacted tax laws. When necessary, a valuation allowance is provided to reduce deferred tax assets to an amount that is more likely than not to be realized.

~~Share-Based Compensation~~

~~We account for share-based compensation in accordance with ASC 718~~

~~Compensation – Stock Compensation~~

. We calculate compensation expense for all awards granted, but not yet vested, based on the grant-date fair values. The Company recognizes these compensation costs, on a pro rata basis over the requisite service period of each vesting tranche of each award for service-based grants, and as the criteria is achieved for performance-based grants.

In determining the grant date fair value of share-based awards, we must estimate the expected volatility, forfeitures, and performance attributes. Since share-based compensation expense can be material to our financial condition, different assumptions and estimates could have a material adverse effect on our financial statements.

~~Principles of consolidation~~

~~Refer to Note 2 of the notes to our unaudited condensed consolidated financial statements~~ included in Part 1,II, Item 17 “Management’s Discussion and Analysis of ~~this Quarterly~~Financial Condition and Results of Operations” of our Annual Report on Form ~~10-Q.~~

10-K for the year-ended December 31, 2022. There have been no material changes to the critical accounting estimates disclosed in our Annual Report on Form 10-K for the year-ended December 31, 2022.

Principles of Consolidation

Refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year-ended December 31, 2022. There have been no material changes to our principles of consolidation disclosed in our Annual Report on Form 10-K for the year-ended December 31, 2022.

Recently ~~issued accounting standards~~

~~In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805):~~Issued Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The purpose of ASU 2021-08 is to improve the accounting for acquired revenue contracts with customers in a business combination to address recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. The guidance is effective for annual periods beginning after December 15, 2022 on a prospective basis. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.Standards

Management believes that there have not been any recently issued, but not effective, accounting standards which, if currently adopted, would have a material effect on the Company’s financial statements.

ITable of Contents~~tem~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. These risks include the following:

Interest rate and market risk

The Company maintains a revolving promissory note and a term loan note with Live Oak Bank, referred to as the “Live Oak Revolving Note” and the “Live Oak Term Loan Note”, respectively. The Live Oak Revolving Note is a variable rate instrument with a per annum interest rate equal to the prime rate as quoted in the Wall Street Journal (the “Prime Rate”), plus ~~two percentage points (2%)~~2.75%. Additionally, the Live Oak Term Loan Note has a per annum interest rate equal to the Prime Rate, plus three percentage points (3%). Rising interest rates are likely to increase our interest expense in the future. ~~Specifically, each one percent (1%) increase in interest rates results in approximately $30,000 per year of additional interest expense.~~ Such additional cost would need to be funded out of existing cash or additional financing. Future increase in interest rates are not expected to materially impact our Company’s liquidity. The Company has no other debt obligations tied to the Prime Rate, ~~SOFR,~~Secured Overnight Financing Rate, or ~~LIBOR.~~London Interbank Offered Rate.

Effects of inflation

U.S. inflation is at a 40-year high. Because costs rise faster than revenues during the early phase of inflation, we may ~~find that we~~ need to give higher than normal raises to employees, start new employees at higher ~~wage~~wages and/or ~~benefit rates,~~have increased cost of employee benefits, but not be able to ~~price~~pass the higher costs through to the government due to competition and government pressures. Therefore, we may be adversely affected (i) with lower gross profit margins; (ii) by losing contracts which are lowest price technically acceptable ~~(LPTA)~~ where another bidder underbids the real rates and then has difficulty staffing the project; and (iii) by having difficulty maintaining our staff at current salaries. Given the long-term nature of the Company’s contracts, we may be unable to take sufficient action to mitigate inflationary pressures.

Sustained inflation also can cause the Federal Reserve Board and its Open Market Committee (“Fed”) to raise the target for the federal funds rate which normally translates into an increase in most banks’ ~~“prime” rate.~~Prime Rate. Because our notes with Live Oak ~~Term Loan Note and Live Oak Revolving Note~~Banking Company are both variable interest rate instruments tied to the prime rate, actions by the ~~Federal Reserve~~Fed to increase the federal funds rate will increase our cost of debt and our interest expense thereby reducing our pre-tax income and net income.

~~During~~ Our borrowing costs have recently increased and are expected to increase with future Fed interest rate increases, although the year ended December 31, 2021, nineteen percent (19%) of our revenue was generated under cost-reimbursable contacts which automatically adjust revenue to cover costs that are affected by inflation and sixty-two percent (62%) of our revenue was generated under T&M contracts, where labor rates for many of our services provided are often fixed for several years. Under certain T&M contracts containing

~~indefinite delivery/indefinite quantity (“~~

~~IDIQ~~

”)

~~procurement arrangements, we adjust labor rates annually as permitted. The remaining portion of our business is fixed-price contracts which may span multiple years. We generally~~impacts have been ~~able~~and are expected to ~~price~~continue to be immaterial. Our contracts with U.S. Federal, state, and local government customers do not permit us to pass along our ~~T&M contracts and fixed-price contracts in a manner that accommodates the rates of inflation experienced in recent years.~~increased financing costs. The increases to our borrowing costs have not impacted (and are not expected to impact) our ability to make timely payments.

I~~tem~~Item 4. Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), to allow timely decisions regarding required disclosure.

~~During the audit process related to the year ended December 31, 2021, management, in connection with our independent auditors, identified a material weakness in our controls related to the review~~

~~over complex accounting transactions.~~

~~We continue to execute steps to remediate this material weakness and are committed to maintaining a strong internal control environment.~~

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our ~~Chief Executive Officer~~CEO and ~~Chief Financial Officer~~CFO carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~September 30, 2022.~~March 31, 2023. Based upon their evaluation, our ~~Chief Executive Officer~~CEO and ~~Chief Financial Officer~~CFO concluded that our disclosure controls and procedures (as defined in Rules 13a- 15 (e) and 15d-15 (e) under the Exchange Act) were effective as of ~~September 30, 2022.~~March 31, 2023.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended ~~September 30, 2022~~March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PTable of Contents~~art II~~

Part II

I~~tem~~Item 1. Legal Proceedings

As a commercial enterprise and employer, the Company and our subsidiaries are subject to threatened litigation and other legal actions in the ordinary course of business, including employee-related matters, inquiries, and administrative proceedings regarding our employment practices or other matters. Neither our Company nor any of our subsidiaries is a party to any legal proceeding that, individually or in the aggregate, we believe to be uncovered by insurance or otherwise material to our Company as a whole.

I~~tem~~Item 1A. Risk Factors

~~A description of~~We removed the ~~risks and uncertainties associated with~~following risk factor from those disclosed under "Item 1A. Risk Factors" included in our ~~business is set forth below. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly~~Annual Report on Form 10-Q, including our condensed consolidated financial statements and related notes included in Part I, Item 1, and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part I, Item 2. The occurrence of any of the events or developments described below could materially and adversely affect our business, financial condition, results of operations, and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently believe are not material may also impair our business, financial condition, results of operations, and growth prospects.

~~Risks Related to our Business, Industry and Operations~~

We lack a long-term operating history on which to evaluate our consolidated business and determine if we will be able to execute our business plan, and we can give no assurance that our operations will result in sustained profitability.

We are focused on acquiring and growing technology companies in the areas of information technology (“IT), electronic warfare, information warfare, and cybersecurity with businesses in the governmental and commercial markets. Since November 2019 we have executed our business plan and completed six acquisitions. As a result, we have a limited operating history on a consolidated basis upon which you may evaluate our business and prospects. Our business operations are subject to numerous risks, uncertainties, expenses, and difficulties associated with early-stage enterprises. You should consider an investment in our Company in light of these risks, uncertainties, expenses, and difficulties. Such risks include:

~~limited operating history at our current scale;~~

~~our ability to raise capital to develop our business and fund our operations;~~

~~our ability to anticipate and adapt to developing markets;~~

~~acceptance by our customers;~~

~~limited marketing experience;~~

~~competition from competitors with substantially greater financial resources and assets; and~~

~~the ability to identify, attract, and retain qualified personnel.~~

~~Because we are subject to these risks, and the other risks outlined below, you may have a difficult time evaluating our business and your investment in our Company.~~

~~We have historically suffered net losses, and we may not be able to sustain profitability.~~

We had an accumulated deficit of $20,124,324 as of September 30, 2022 and while we expect our profitability to improve, we expect to continue to generate a net loss in the year ending December 31, 2022. As a result, we are incurring net losses, and it is possible that we may not be able to achieve the revenue levels necessary to achieve and sustain net profitability. If we fail to generate sufficient revenues to operate profitably on a consistent basis, or if we are unable to fund our continuing losses, you could lose all or part of your investment.

We rely upon a few, select key employees who are instrumental to our ability to conduct and grow our business. In the event any of those key employees would no longer be affiliated with the Company, and we did not replace them with equally capable replacements, it may have a material detrimental impact on our ability to successfully operate our business.

Our future success will depend in large part on our ability to attract, retain, and motivate high-quality management, operations, and other personnel who are in high demand, are often subject to competing employment offers, and are attractive recruiting targets10-K for our competitors. The loss of qualified executives and key employees, or our inability to attract, retain, and motivate high-quality executives and employees required for the planned expansion of our business, may harm our operating results and impair our ability to grow.

��

We depend on the continued services of our key personnel, including Mark C. Fuller, our Chief Executive Officer (“CEO”), David T. Bell, our Chief Financial Officer (“CFO”), Glen R. Ives, our Chief Operating Officer (“COO”), and Jay O. Wright, our Vice Chair and General Counsel. Our work with each of these key personnel is subject to changes and/or termination, and our inability to effectively retain the services of our key management personnel, could materially and adversely affect our operating results and future prospects.

~~Certain key members of our management team lack public company experience in their positions and our executive management team has limited time working together.~~

Although our executive management team is highly experienced not all of the members of the team have experience working in the positions they are currently serving our Company. While our CEO, Mark C. Fuller has over thirty years of executive experience and has run private companies and held various roles in public companies, he has not previously been the CEO of a public company. While our COO, Glen R. Ives has previously been the chief operating officer of a private company, he has not previously held that role in a public company. While our CFO, David T. Bell has over twenty-eight years of accounting experience, including advising many public companies, he has not previously served as the CFO of a public company. The management team, while experienced, also has limited experience working together as a team. The inability of any member of our management team to operate effectively in their position, or for the management team to effectively work together, could materially and adversely affect our operating results and future prospects.

~~We may have difficulty raising additional capital, which could deprive us of necessary resources.~~

We expect to continue to devote significant capital resources to fund our acquisition strategy. In order to support the initiatives envisioned in our business plan, we will need to raise additional funds through the sale of public or private debt or equity financing or other arrangements. Our ability to raise additional financing depends on many factors beyond our control, including the state of capital markets and the market price of our common stock. Sufficient additional financing may not be available to us or may be available only on terms that would result in further dilution to the current owners of our common stock. If we are unable to raise additional capital to implement our business plan it could have a material adverse effect on our financial condition, business prospects and operations, and the value of an investment in our Company.

~~You may experience dilution or subordinate stockholder rights, preferences, and privileges as a result of our financing efforts.~~

Any future equity financing may involve substantial dilution to our then existing stockholders. Any future debt financing could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. There can be no assurance that such additional capital will be available, on a timely basis, or on terms acceptable to us. If we are unsuccessful in raising additional capital or the terms of raising such capital are unacceptable, then we may have to modify our business plan and/or curtail our planned activities and other operations.

Additionally, we have certain potential dilutive instruments, of which the conversion of these instruments could result in dilution to stockholders: As of November 10, 2022 the maximum potential dilution is

~~25,967,267~~

shares and includes Series A preferred stock convertible into approximately 587,500 shares of common stock, Series C preferred stock convertible into 481,250 shares of common stock, convertible promissory notes convertible into

~~13,000,931~~

~~shares of common stock, options granted convertible into~~

~~6,875,000~~

~~shares of common stock, and warrants granted convertible into~~

~~5,022,586~~

~~shares of common stock.~~

~~Failure to effectively manage our expected growth could place strains on our managerial, operational, and financial resources and could adversely affect our business and operating results.~~

Our expected growth could place a strain on our managerial, operational, and financial resources. Further, if our subsidiaries’ businesses grow, then we will be required to manage multiple relationships. Any further growth by us or our subsidiaries, or any increase in the number of our strategic relationships, will increase the strain on our managerial, operational, and financial resources. This strain may inhibit our ability to achieve the rapid execution necessary to implement our business plan and could have a material adverse effect on our financial condition, business prospects and operations, and the value of an investment in our Company.

We generate substantially all of our revenue from contracts with the United States Federal, state, and local governments which are subject to a number of challenges and risks that may adversely impact our business, prospects, financial condition, and operating results.

Sales to United States (“U.S.”), Federal, state, and local governmental agencies have in the past accounted for, and may in the future account for, substantially all of our revenue. Sales to such government entities are subject to the following risks:

selling to governmental agencies can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that such efforts will generate a sale. Our existing contracts typically expire after some period of time and must be “re-competed.” There is no guarantee that we will win such re-compete efforts;

government certification requirements applicable to our products may change and in doing so restrict our ability to sell into the U.S. Federal government (“USG”) sector until we have attained the revised certification;

government demand and payment for our products and services may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products and services;

~~governments can generally terminate our contracts “for convenience” meaning we could lose part or all of our revenue on short notice;~~

governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our platform, which would adversely impact our revenue and results of operations, or institute fines or civil or criminal liability if the audit uncovers improper or illegal activities; and

~~when we are a subcontractor, we have less control over the execution and success of the contract with the government.~~

If we were suspended or debarred from contracting with the USG, if our reputation or relationship with government agencies was impaired, or if the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our business, prospects, financial condition, and operating results would be materially and adversely affected.

~~We operate in an industry that is highly regulated and unexpected changes in laws could have a significant adverse impact on our business.~~

As a contractor to the USG, as well as state and local governments, we are heavily regulated in most fields in which we operate. We deal with numerous USG agencies and entities, and when working with these and other entities, we must comply with and are affected by unique laws and regulations relating to the formation, administration, and performance of government contracts. Some significant law and regulations that affect us include the following:

~~We face intense competition and could fail to gain market share from our competitors, which could adversely affect our business, financial condition, and results of operations.~~

The market for our products and services is intensely competitive and characterized by rapid changes in technology, customer requirements, industry standards, and frequent new product introductions and improvements. We anticipate continued challenges from current competitors, which in many cases are more established and enjoy greater resources than us, as well as by new entrants into the industry. If we are unable to anticipate or effectively react to these competitive challenges, our competitive position could weaken, and we could experience a decline in our growth rate or revenue that could adversely affect our business and results of operations.

In addition, some of our larger competitors have substantially broader product and service offerings and may be able to leverage their relationships with distribution partners and customers based on other products or services, or incorporate functionality into existing products to gain business in a manner that discourages users from purchasing our products, subscriptions and services, including by selling at zero or negative margins, product bundling, or offering closed technology platforms. Potential customers may also prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features. As a result, even if the features of our platform or the quality of our services are superior, customers may not purchase our products or services. In addition, new innovative start-up companies, and larger companies that are making significant investments in research and development, may invent similar or superior products and technologies that compete with our platform. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their resources. If we are unable to compete successfully, or if competing successfully requires us to take costly actions in response to the actions of our competitors, our business, financial condition, and results of operations could be adversely affected.

~~Systems failures may disrupt our business and have an adverse effect on our operating results.~~

Any systems failures, including network, software, or hardware failures, whether caused by us, a third-party service provider, unauthorized intruders and hackers, computer viruses, natural disasters, power shortages or terrorist attacks, could cause loss of data or interruptions or delays in our business or that of our customers. Like other companies, we have experienced cyber security threats to our data and systems, our Company sensitive information, and our IT infrastructure, including attempted malware and computer virus attacks, unauthorized access, systems failures, and temporary disruptions. Prior attempted cyber-attacks directed at us have not had a material adverse impact on our business and financial results, and we believe that our continuing commitment toward threat detection and mitigation processes and procedures will reduce such impact in the future. Due to the evolving nature of these security threats, however, the impact of any future incident cannot be predicted. In addition, the failure or disruption of our mail, communications, or utilities could cause us to interrupt or suspend our operations or otherwise harm our business. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, our actual results could differ materially and adversely from those anticipated.

The systems and networks that we maintain for our customers, although highly redundant in their design, could also fail. If a system or network we maintain were to fail or experience service interruptions, we might experience loss of revenue or face claims for damages or contract termination. Our errors and omissions liability insurance may be inadequate to compensate us for all the damages that we might incur and, as a result, our actual results could differ materially and adversely from those anticipated.

~~Customer systems failures could damage our reputation and adversely affect our operating results.~~

Many of the systems that we develop, integrate, maintain, otherwise support or use involve managing and protecting intelligence, national security, and other sensitive government information. While we have programs designed to protect such information and comply with all relevant privacy and security requirements, the threats that our clients face have grown more frequent and sophisticated. A security breach or system failure in a system that we develop, integrate, maintain or otherwise support could result in a loss of revenue, remediation costs, claims for damages or contract termination and our errors and omissions liability insurance may be inadequate to compensate us from all the damages that we might incur. Any such event could also cause serious damage to our reputation and prevent us from having access to or being eligible further work on such sensitive systems for USG customers.

In addition, to provide services to our customers, we often depend upon or use customer systems that are supported by the customer or third parties. Any security breach or system failure in such systems could result in an interruption of our customer’s operations, significant delays under a contract, and material adverse effect on our results of operations.

Given these risks, Castellum is adopting mitigation measures in the form of implementing CMMC which is a framework of various cybersecurity standards and best practices that is a requirement for government contractors working with the DoD. This framework includes evaluation and certification by third parties. This is the same program that is being adopted by others with whom we work providing further information assurance. Additionally, all systems we have deployed and are employing meet the CMMC system requirements; key data is backed-up; system administration is being centralized as part of the integration of acquired companies and multi-factor authentication is being deployed throughout the Company.

~~Our failure to adequately protect our confidential information and proprietary rights may harm our competitive position.~~

Our success depends, in part, upon our ability to protect our proprietary information. Although our employees are subject to confidentiality obligations, this protection may be inadequate to deter misappropriation of our proprietary information. In addition, we may be unable to detect unauthorized use of our proprietary information in order to take appropriate steps to enforce our rights. If we are unable to prevent third parties from infringing or misappropriating our proprietary information, our competitive position could be harmed, and our actual results could differ materially and adversely from those anticipated.

~~Our quarterly revenue and operating results could be volatile due to the unpredictability of the USG’s budgeting process and policy priorities.~~

Our quarterly revenue and operating results may fluctuate significantly and unpredictably in the future. If the USG does not adopt, or delays adoption of, a budget for each fiscal year beginning on October 1, or fails to pass a CR, federal agencies may be forced to suspend our contracts and delay the award of new and follow-on contracts and orders due to a lack of funding. Further, the rate at which the USG procures technology may be negatively affected following changes in presidential administrations and senior government officials or by “divided government” where one political party controls the White House and another party controls Congress. Therefore, period-to-period comparisons of our operating results may not be a good indication of our future performance. Our quarterly operating results may not meet the expectations of securities analysts or investors, which in turn may have an adverse effect on the market price of our common stock.

~~We may lose money or generate less than anticipated profits if we do not accurately estimate the cost of an engagement which is conducted on a fixed-price basis.~~

~~We generated 19 percent of our total revenue in~~ the year ended December 31, 2021, and 21 percent of our total revenue in the year ended December 31, 2020, from firm fixed-price contracts (“FFP”). FFP contracts require us to price our contracts by predicting our expenditures in advance. In addition, some of our engagements obligate us to provide ongoing maintenance and other supporting or ancillary services on a fixed-price basis or with limitations on our ability to increase prices. Many of our engagements are also on a time-and-material (T&M) basis. While these types of contracts are generally subject to less uncertainty than FFP contracts, to the extent that our actual labor costs are higher than the contract rates, our actual results could differ materially and adversely from those anticipated.

2022:

When making proposals for engagements on a FFP basis, we rely on our estimates of costs and timing for completing the projects. These estimates reflect our best judgment regarding our capability to complete the task efficiently. Any increased or unexpected costs or unanticipated delays in connection with the performance of FFP contracts, including delays caused by factors outside of our control, could make these contracts less profitable or unprofitable. If we encounter such problems in the future, our actual results could differ materially and adversely from those anticipated.

~~Our earnings and margins may vary based on the mix of our contracts and programs.~~

At September 30, 2022, our backlog included cost reimbursable, T&M, and FFP contracts. Cost reimbursable and T&M contracts generally have lower profit margins than FFP contracts. Our earnings and margins may therefore vary materially and adversely depending on the relative mix of contract types, the costs incurred in their performance, the achievement of other performance objectives and the state of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined.

The effects of health epidemics, pandemics and similar outbreaks may have material adverse effects on our business, financial position, results of operations, and/or cash flows.

We face various risks related to health epidemics, pandemics, and similar outbreaks, including the global outbreak of COVID-19. The COVID-19 pandemic and the mitigation efforts to control its spread have adversely impacted the U.S and global economies, leading to disruptions and volatility in global capital markets. ~~While we have taken steps to mitigate the impact of the COVID-19 pandemic on our employees and our business, the~~The continued spread of COVID-19 may have a material adverse effect on our business, financial position, results of operations, and/or cash flows as the result of significant portions of our workforce being unable to work due to illness, quarantines, government actions, facility closures or other restrictions; the inability for us to fully perform on our contracts; delays or limits to the ability of the USG or other customers to make timely payments; incurrence of increased costs which may not be recoverable; adverse impacts on our access to capital; or other unpredictable events. We continue to monitor the effect of COVID-19 on our business, but we cannot predict the full impact of Covid-19 as the extent of the impact will depend on the duration and spread of the pandemic and the actions taken by ~~Federal,~~federal, state, local, and foreign governments to prevent the spread of COVID-19.

~~U.S. Inflation is at a forty-year high which may adversely impact our business.~~

~~U.S. inflation is at a 40-year high. Because costs rise faster than revenues during~~Aside from the early phase of inflation, we may find that we need to give higher than normal raises to employees, start new employees at higher wage and/or increased cost of employee benefits, but not be able to pass the higher costs through to the government due to competition and government pressures. Therefore, we may be adversely affected (i) with lower gross profit margins; (ii) by losing contracts which are lowest price technically acceptable (“LPTA”) where another bidder underbids the real rates and then has difficulty staffing the project; and (iii) by having difficulty maintaining our staff at current salaries. Given the long-term nature of the Company’s contracts, it is unable to take any action to mitigate inflationary pressures.

~~Inflation may cause the Fed to increase interest rates thereby increasing our interest expense.~~

Sustained inflation also can cause the Federal Reserve Board and its Open Market Committee (“Fed”) to raise the target for the federal funds rate which normally translates into an increase in most banks’ “prime” rate. Because our notes with the Live Oak Banking Company are both variable interest rate instruments tied to the prime rate, actions by the Fed to increase the federal funds rate will increase our cost of debt and our interest expense thereby reducing our pre-tax income and net income. Our borrowing costs have recently increased and are expected to increase with future Fed interest rate increases, although the impactschange mentioned above, there have been and are expected to continue to be immaterial. Our contracts with U.S. Federal, state, and local government customers do not permit us to pass along our increased financing costs. The increases to our borrowing costs have not impacted (and are not expected to impact) our ability to make timely payments.

~~Risks Related to our Acquisitions~~

~~We may have difficulty identifying and executing acquisitions on favorable terms and therefore may grow more slowly than we historically have grown.~~

As part of our business strategy, we may acquire or make investments in complementary companies’ services, products, or technologies. Through acquisitions, we have expanded our base of U.S. Federal, state, and local governments customers, increased the range of solutions we offer to our customers and deepened our penetration of existing markets and customers. We may encounter difficulty identifying new acquisitions and executing suitable acquisitions due to lack of financing. To the extent that management is involved in identifying acquisition opportunities or integrating new acquisitions into our business, our management may be diverted from operating our core business. Without acquisitions, we may not grow as rapidly as we historically have grown, which could cause our actual results to differ materially and adversely from those anticipated. We may encounterno other ~~risks in executing our acquisition strategy, including:~~

	·	~~increased competition for acquisitions may increase the costs for our acquisitions;~~
	·	~~unreasonable expectations of companies related to their perceived versus actual value;~~

	·	~~our failure to discover~~ material liabilities during the due diligence process, including the failure of prior owners of any acquired businesses or their employees to comply with applicable laws or regulations, such as the FAR and health, safety, and environmental laws, or their failure to fulfill their contractual obligations to the USG or other customers;
	·	our acquisitions may not ultimately strengthen our competitive position or allow us to achieve our goals, and any acquisitions we complete could be viewed negatively by our customers, analysts, and investors;
	·	~~acquisition financing may not be available on reasonable terms or at all;~~
	·	~~failure to properly integrate our acquisitions with our existing business thereby preventing the realization of potential synergies with the acquired business; and~~

~~debt incurred in making acquisitions may reduce our financial flexibility to pursue other opportunities or invest in internal growth.~~

~~Each of these types of risks could cause our actual results to differ materially and adversely from those anticipated.~~

~~We may have difficulty integrating the operations of any companies we acquire, which could cause actual results to differ materially and adversely from what we anticipated.~~

The success of our acquisition strategy will depend on our ability to continue to successfully integrate any businesses we may acquire in the future. The integration of these businesses into our operations may result in unforeseen operating difficulties, absorb significant management attention, and require significant financial resources that would otherwise be available for the ongoing development of our business. These integration difficulties include the integration of personnel with disparate business backgrounds, the transition of new information systems, coordination of geographically dispersed organizations, loss of key employees of acquired companies, and reconciliation of different corporate cultures. For these or other reasons, we may be unable to retain key customers of acquired companies. Moreover, any acquired business may fail to generate the revenue or net income we expected or produce the efficiencies or cost-savings we anticipated. Any of these outcomes could cause our actual results to differ materially and adversely from those anticipated.

We have substantial investments in recorded goodwill as a result of prior acquisitions and change in future business conditions could cause these investments to become impaired, requiring substantial write-downs that would reduce our operating income.

Goodwill accounts for $15,533,964 of our recorded total assets as of September 30, 2022. We evaluate the recoverability of recorded goodwill amounts annually or when evidence of potential impairment exists. The annual impairment test is based on several factors requiring judgment. Principally, a decrease in expected reporting unit cash flows or changes in market conditions may indicate potential impairment of recorded goodwill. If there is an impairment, we would be required to write down the recorded amount of goodwill, which would be reflected as a charge against operating income and would reduce the value of our total assets and our total equity on our balance sheet.

~~Risks Related to our Indebtedness~~

~~Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.~~

We have substantial indebtedness. We have approximately $9,869,272 of debt as of September 30, 2022, the majority of which matures in calendar year 2024. Should our business fail to generate cash flow from operations sufficient to service our debt and make necessary capital expenditures we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining equity capital on terms that may be onerous or highly dilutive. Such a “fire sale” would materially and adversely affect the value of our common stock.

~~Risks Related to our Common Stock and Preferred Stock~~

~~Future sales or potential sales of our common stock in the public market could cause our share price to decline.~~

If the existing holders of our common stock, particularly our directors, officers, and other 5% stockholders, sell a large number of shares, they could adversely affect the market price for our common stock. Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline.

~~Because we will not pay dividends on our common stock in the foreseeable future, stockholders will only benefit from owning common stock if it appreciates.~~

We have never paid cash dividends on our common stock, and we do not intend to do so in the foreseeable future. We intend to retain any future earnings to finance our growth. Accordingly, any potential investor who anticipates the need for current dividends from his investment should not purchase our common stock.

~~Our share price has been, and will likely continue to be, volatile, and you may be unable to resell your shares at or above the price at which you acquired them.~~

The trading price of our common stock has been, and is likely to continue to be, highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. The market price for our securities may be influenced by many factors that are beyond our control, including, but not limited to:

~~whether our results of operations meet the expectations of securities analysts or investors;~~

~~departures of key personnel;~~

~~actual or anticipated changes in the expectations or securities analysts;~~

~~litigation involving us, our industry, or both;~~

~~regulatory developments in the U.S., foreign countries or both;~~

~~price and volume fluctuations in the overall stock market from time to time;~~

~~fluctuations in the trading volume of our shares or the size of the public float;~~

~~variations in our revenue and operating expenses;~~

~~market conditions in our industry and the economy as a whole;~~

~~actual or expected changes in our growth rates or our competitors’ growth rates;~~

~~developments or disputes concerning intellectual and proprietary rights;~~

~~developments in the financial markets and worldwide or regional economies;~~

~~variations in our financial results or those of companies that are perceived to be similar to us;~~

~~announcements by the government relating to regulations that govern our industry;~~

~~sales of our common stock or other securities by us or in the open market;~~

~~changes in the market valuations of other comparable companies;~~

~~general economic, industry, and market conditions;~~

~~major catastrophic events; and~~

~~the other factors described in this “Risk Factors” section.~~

In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations, or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have a material adverse effect on our business, results of operations, and financial condition.

Shares of our common stock that have not been registered under federal securities laws are subject to resale restrictions imposed by Rule 144, including those set forth in Rule 144(i) which apply to a former “shell company.”

Prior to the Bayberry Acquisition, the Company was once an entity with no or nominal operations and no or nominal non-cash assets (otherwise known as a “shell company”). Pursuant to Rule 144 promulgated under the Securities Act, sales of the securities of a former shell company, such as us, under Rule 144 are not permitted (i) until at least 12 months have elapsed from the date on which we have first filed current “Form 10 information,” reflecting our status as a non-shell company, with the SEC (the September 2, 2022 filing of the Company’s registration statement on Form S-1 fulfilled this requirement); and (ii) unless at the time of a proposed sale, we are subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As of October 12, 2022, we are subject to the reporting rules under the Exchange Act and expect to remain subject to the reporting requirements under the Exchange Act. Sales may not be made under Rule 144 unless we are in compliance with the requirements of Rule 144. Further, it will be more difficult for us to raise funding to support our operations through the sale of debt or equity securities unless we agree to register such securities under the Securities Act which could cause us to expend significant time and cash resources.

Additionally, our previous status as a shell company could also limit our use of our securities to pay for any acquisitions we may seek to pursue in the future. The lack of liquidity of our securities as a result of the inability to sell under Rule 144 for a longer period of time than a non-former shell company could cause the market price of our securities to decline or make it difficult to establish a trading market in our shares.

~~Our failure to meet the continued listing requirements of the NYSE American could result in a delisting of our common stock and subject us to the penny stock rules.~~

Our common stock was approved for listing on the NYSE American and began trading there on October 13, 2022; however, if we subsequently fail to meet any of NYSE American’s continued listing requirements, our common stock may be delisted. In addition, our Board may determine that the cost of maintaining our listing on a national securities exchange outweighs the benefits of such listing. A delisting of our common stock from the NYSE American may materially impair our stockholders’ ability to buy and sell our common stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our common stock. The delisting of our common stock could significantly impair our ability to raise capital and the value of your investment. The delisting of our common stock would also subject us to the rules adopted by the SEC that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and as a result, stockholders may have difficulty selling their shares.

~~Sales of a substantial number of shares of our common stock may adversely affect the market price of our common stock and the issuance of additional shares will dilute all other stockholders.~~

~~Sales of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock. There are 41,~~

~~539~~

~~342~~

shares of our common stock outstanding as of November 10, 2022. Thus, we will have the ability to issue substantial amounts of common stock in the future, which would dilute the percentage ownership held by the investors who purchase shares of our common stock in this offering.

In connection with the public offering of our common stock, we and our officers, directors and certain stockholders have agreed, subject to customary exceptions, not to, without the prior written consent of EF Hutton, division of Benchmark Investments, LLC, the representative of the underwriters of the public offering, during the period ending twelve months from the date of the public offering in the case of the Company and 180 days from the date of the public offering in the case of our directors, officers, and stockholders who beneficially own more than 5% of our common stock directly or indirectly, offer to sell, pledge or otherwise transfer or dispose of any of shares of our common stock, enter into any swap or other derivatives transaction that transfers to another any of the economic benefits or risks of ownership of shares of our common stock, make any demand for or exercise any right or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any shares of common stock or securities convertible into or exercisable or exchangeable for common stock or any other securities of the Company or publicly disclose the intention to do any of the foregoing. After the holding periods have expired, the directors and officers and other beneficial stockholders may elect to sell a substantial number of shares of common stock in the public market which could adversely affect the market price of our common stock.

~~The holders of our Series A preferred stock and Series C preferred stock receive cash dividends.~~

The holders of our Series A preferred stock and Series C preferred stock receive cash dividends and have a seniority in liquidation preference to the holders of our common stock. To date, we have not paid any dividends on our common stock and do not anticipate paying any dividends in the foreseeable future.

We are an “emerging growth company” and will be able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We may take advantage of these reporting exemptions until we are no longer an “emerging growth Company.” We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1,235,000,000 or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of the public offering; (iii) the date on which we have issued more than $1,000,000,000 in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

~~The financial and operational projections that we may make from time to time are subject to inherent risks.~~

The forward-looking statements that we provide herein, or our management team may provide from time to time reflect numerous assumptions made by management, including assumptions with respect to our specific as well as general business, regulatory, economic, market, and financial conditions and other matters, all of which are difficult to predict and many which are beyond our control. Accordingly, there is a risk that the assumptions made in preparing the projections, or the projections themselves, will prove inaccurate. There may be differences between actual and projected results, and actual results may be materially different from those contained in the projections. The inclusion of these forward-looking statements in this Form 10Q should not be regarded as an indication that we, our management, or its

~~representatives considered or consider the projections to be a guaranteed prediction of future events, and the projections should not be relied upon as such.~~

~~Unanticipated~~ changes in our tax provisions or exposure to additional income tax liabilities could affect our financial condition and profitability and we may take tax positions that the Internal Revenue Service or other tax authorities may contest.

We are subject to income taxes in the United States. Significant judgments and estimates are required to be made in determining our provision for income taxes. Changes in estimates of projected future operating results, loss of deductibility of items, recapture of prior deductions, limitations on our ability to utilize tax net operating losses in the future, or changes in assumptions regarding our ability to generate future taxable income could result in significant increases to our tax expense and liabilities that could adversely affect our financial condition and profitability.

We have in the past and may in the future take tax positions that the Internal Revenue Service (IRS) or other tax authorities may contest. We are required by an IRS regulation to disclose particular tax positions to the IRS as part of our tax returns for that year and future years. If the IRS or other tax authorities successfully contests a tax position that we take, we may be required to pay additional taxes, interest or fines that may adversely affect our results of operations and financial position.

~~Anti-takeover provisions~~risk factors from those disclosed under "Item 1A. Risk Factors" included in our ~~charter documents and Nevada law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.~~

We are a Nevada corporation and the anti-takeover provisions of the Nevada Revised Statutes may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. An interested stockholder is a person who, together with the affiliates and associates, beneficially owns (or within the prior two years, did beneficially own) ten percent or more of the Company’s capital stock entitled to vote. In addition, our amended and restated articles of incorporation, as amended (the “Amended and Restated Articles of Incorporation”) and amended and restated bylaws (the “Amended and Restated Bylaws”) may discourage, delay, or prevent a change in our management or control over us that stockholders may consider favorable. Our Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws (i) authorize the issuance of “blank check” preferred stock that could be issued by our Board to thwart a takeover attempt; (ii) provide that vacanciesAnnual Report on our Board, including newly created directorships, may be filled by a majority vote of directors then in office, (iii) provide that the Board shall have the sole power to adopt, amend, or repeal the Amended and Restated Bylaws, and (iv) requires a stockholder to provide advance written notice of a stockholder proposal.

Our Amended and Restated Articles of Incorporation and Amended and Restated Bylaws contain an exclusive forum provision, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees, or agents.

Our Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws provide that, to the fullest extent permitted by law, and unless the Company consents in writing to the selection of an alternative forum, the Eighth Judicial District Court of Clark County, Nevada, shall, to the fullest extent permitted by law, be the sole and exclusive forum for state law claims with respect to: (a) any derivative action or proceeding brought in the name or right of the Company or on its behalf, (b) any action asserting a claim for breach of any fiduciary duty owed by any director, officer, employee, or agent of the Company to the Company or the Company’s stockholders, (c) any action arising or asserting a claim arising pursuant to any provision of Nevada Revised Statutes Chapters 78 or 92A or any provision of the Amended and Restated Articles of Incorporation or the Amended and Restated Bylaws, or (d) any action asserting a claim governed by the internal affairs doctrine, including, without limitation, any action to interpret, apply, enforce, or determine the validity of the Amended and Restated Articles of Incorporation or the Amended and Restated Bylaws. Pursuant to Article IX of the Amended and Restated Articles of Incorporation and pursuant to Article XIII of the Amended and Restated Bylaws, andForm 10-K for the avoidance of doubt, this exclusive forum provision shall not be applicable to any action brought under the Securities Act of 1933, as amended (the “Securities Act”), or the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and that unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act or the Exchange Act. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder, and Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suites brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Company shall be deemed to have notice of and consented to the provisions of Article IX of our Amended and Restated Articles of Incorporation and Article XIII of our Amended and Restated Bylaws. There exists uncertainty, however, as to whether such forum selection provisions of our Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws would be enforced by a court.year ended December 31, 2022.

The choice of forum provision in our Amended and Restated Articles of Incorporation and Amended and Restated Bylaws may limit our stockholders’ ability to bring a claim in a judicial forum that they find favorable for disputes with us or our directors, officers, employees, or agents, which may discourage such lawsuits against us and our directors, officers, employees, and agents even though an action, if successful, might benefit our stockholders. The applicable courts may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments or results may be more favorable to us than to our stockholders. With respect to the provision making the Eighth Judicial District Court of Clark County, Nevada the sole and exclusive forum for certain types of actions, stockholders who do bring a claim in the Eighth Judicial District Court of Clark County, Nevada could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Nevada. Finally, if a court were to find this provision of our Amended and Restated Articles of Incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, could have a material adverse effect on us.

~~Our management collectively owns a substantial amount of our common stock.~~

Collectively, our officers and directors own or exercise voting and investment control of approximately 61.7% of our outstanding common stock and control 60.6% of the voting power of the Company. As a result, unless required by a stock exchange rule, investors may be prevented from affecting matters involving our Company, including:

~~the composition of our Board of Directors and, through it, any determination with respect to our business direction and policies, including the appointment and removal of officers;~~

~~any determination with respect to mergers or other business combinations;~~

~~our acquisition or disposition of assets; and~~

~~our corporate financing activities.~~

Furthermore, this concentration of voting power could have the effect of delaying, deterring, or preventing a change of control or other business combination that might otherwise be beneficial to our stockholders. This significant concentration of share ownership may also adversely affect the trading price of our common stock because investors may perceive disadvantages in owning stock in a Company that is controlled by a small number of stockholders.

Although our Company does not intend to utilize the controlled company exemptions to the NYSE American corporate governance listing standards, if we are eligible to utilize the controlled company exemptions in the future, we may choose to do so. In such instance we would be exempted from, among other things, the requirements to have a board with a majority of independent members and the requirement that we have a nominating and governance committee and compensation committee that are composed entirely of independent directors and have written charters addressing the respective committee’s purpose and responsibilities. Our Company’s reliance on such exemption would likely result in a reduction in transparency to shareholders on various governance matters which could negatively impact their investment decisions.

We have identified a material weakness in our internal controls over financial reporting. If we fail to establish and maintain an effective system of internal control or disclosure controls and procedures are not effective, we may not be able to report our financial results accurately and timely or to prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our common stock.

Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), requires that we maintain internal control over financial reporting that meets applicable standards. We may err in the design or operation of our controls, and all internal control systems, no matter how well designed and operated, can provide only reasonable assurance that the objectives of the control system are met. Because there are inherent limitations in all control systems, there can be no assurance that all control issues have been or will be detected. If we are unable, or are perceived as unable, to produce reliable financial reports due to internal control deficiencies, investors could lose confidence in our reported financial information and operating results, which could result in a negative market reaction and a decrease in our stock price.

We have identified a material weakness in our internal controls related to the accounting and review over complex accounting transactions. In April 2022 the Company hired David T. Bell as its CFO. As CFO, Mr. Bell will leverage his 28 years of public accounting experience, including his extensive knowledge of complex accounting issues and internal controls, to help the Company design and implement effective controls over complex accounting. Those controls will include his review of all significant complex accounting transactions. There can be no assurances that weakness in our internal controls will not occur in the future. If we identify new material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting (if and when required), we may be late with the filing of our periodic reports, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected. As a result of such failures, we could also become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, and become subject to litigation from investors and stockholders, which could harm our reputation, financial condition or divert financial and management resources from our core business and would have a material adverse effect on our business, financial condition, and results of operations.

I ~~tem~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)Recent Sales of Unregistered Securities.

On March 21, 2023, the Company issued 62,500 shares of common stock to its five independent board members as compensation for services rendered during the fourth quarter of 2022, valued at $75,000, and 252,100 shares of common stock for services rendered (and to be rendered) during the current fiscal year, valued at $300,000, which vest monthly through December 31, 2023.

~~(a)~~

~~Recent Sales of Unregistered Securities.~~

As consideration for, and in connection with the merger agreement with Global Technology and Management Resources, Inc. ("GTMR"), on March 31, 2023 the Company issued 4,866,570 shares of common stock to the seven former shareholders of GTMR, which we valued at $5,304,562.

The issuances described in this subsection were made in reliance on the private placement exemption pursuant to Section 4(a)(2) of the Securities Act because the issuances did not involve a public offering.

~~There were no sales~~(b)Use of ~~unregistered securities in~~Proceeds from the ~~three months ended September 30, 2022.~~Public Offering.

~~(b)~~

~~Use of Proceeds from the Public Offering.~~

On October 12, 2022, the registration statement on Form S-1 ~~(Registration~~(File No. 333-267249) for our initial public offering (“Public Offering”) of our common stock was declared effective by the ~~SEC.~~Securities and Exchange Commission (the “SEC”). On October 17, 2022, we closed our Public Offering and 1,500,000 shares of our common stock were issued and sold at a public offering price of $2.00 per share. The ~~underwriters have 45 days following the closing to exercise their option to purchase up to an additional 225,000 shares of common stock. The~~ shares of common stock sold consisted of 1,350,000 shares offered by us and 150,000 shares offered by an existing stockholder, for an aggregate ~~price~~proceeds of $3,000,000. We received $2,700,000 in offering proceeds before deducting underwriting discounts and offering expenses. We did not receive any proceeds from the sale of shares of our common stock by the selling stockholder.

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The underwriters of our Public Offering were EF Hutton, division of Benchmark Investments, LLC and Joseph Gunnar & Co. LLC. We paid the underwriters of our Public Offering underwriting discounts and commissions ~~totaling $189,000~~ and incurred offering costs totaling approximately ~~$621,000 in offering costs.~~$700,000. Thus, our net offering proceeds, after deducting underwriting discounts and commissions and offering expenses, were approximately ~~$1,890,000.~~$2,000,000. Other than the proceeds payable directly to the selling stockholder, no payments were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities, or any affiliates, other than payments in the ordinary course of business to officers for payments made in connection with their employment agreements.

There has been no material change in the planned use of proceeds from our Public Offering as described in our final prospectus dated October 12, 2022 and filed with the SEC on October 14, 2022 pursuant to Rule 424(b)(4).

of the Securities Act. As of the date of this Quarterly Report on Form 10-Q, we cannot predict with certainty all of the particular uses for the net proceeds, or the amounts that we will actually spend on the uses set forth in the prospectus.

I ~~tem~~Item 3. Defaults Upon Senior Securities

None.

I ~~tem~~Item 4. Mine Safety Disclosures

Not applicable.

I ~~tem~~Item 5. Other Information

None.

~~(a)~~

On August 30, 2022 the Registrant filed an Amended and Restated Articles of Incorporation (the “Restated Articles of Incorporation”) with the Secretary of State of Nevada. In connection with the Public Offering, the Company’s Board of Directors and stockholders approved the Restated Articles of Incorporation on July 27, 2022. The Restated Articles of Incorporation are attached hereto as Exhibit 3.1 and is incorporated herein by reference.

~~(b)~~

~~On and effective September 27, 2022 the Registrant’s Board of Directors adopted the Amended and Restated Bylaws of the Registrant (the “Restated Bylaws”), as follows:~~

Set forth procedures with respect to stockholder nominations of directors and submissions of stockholder proposals at meetings of stockholders which requires a stockholder to provide advance written notice of a proposal to nominate a person for election to the Registrant’s Board of Directors; and

~~Specify additional types of information and representations that a nominating stockholder or its proposed director nominee must provide to the Registrant in connection with a director nomination.~~

The foregoing summary of the Restated Bylaws does not purport to be complete and is qualified in its entirety to the full text of the Restated Bylaws, a copy of which is attached as Exhibit 3.2 and incorporated herein by reference.

I ~~tem~~Item 6. Exhibits

The documents listed in this Exhibit Index of this Quarterly Report on Form 10-Q are incorporated by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).


			Incorporated by Reference
Exhibit Number	Exhibit Title	Form	File Number	Exhibit	Filing Date

2.1	Stock Purchase Agreement dated May 6, 2019, by and among BioNovelus, Inc., Bayberry Acquisition Corp., and all of the stockholders of the company	S-1	333-267249	2.1	September 2, 2022

2.2	First Amendment to Stock Purchase Agreement dated June 2, 2019 by and among BioNovelus, Inc., Bayberry Acquisition Corp., and all the stockholders of the company	S-1	333-267249	2.2	September 2, 2022

2.3	Second Amendment to Stock Purchase Agreement dated June 8, 2019, by and among BioNovelus, Inc., Bayberry Acquisition Corp., and all the stockholders of the company	S-1	333-267249	2.3	September 2, 2022

2.4	Securities Purchase Agreement dated November 21, 2019, by and among BioNovelus, Inc., Corvus Consulting, LLC, and the Buckhout Charitable Remainder Trust	S-1	333-267249	2.4	September 2, 2022

2.5	Agreement and Plan of Merger dated August 12, 2021, by and among Castellum, Inc., KC Holdings Company, Inc., and Specialty Systems, Inc., and the Stockholders Named Herein	S-1	333-267249	2.5	September 2, 2022

Incorporated by Reference
Exhibit Number

Exhibit Title

Form

File Number

Exhibit

Filing Date

2.1

Stock Purchase Agreement dated May 6, 2019, by and among BioNovelus, Inc., Bayberry Acquisition Corp., and all of the stockholders of the company

S-1

333-267249

2.1

September 2, 2022

2.2

First Amendment to Stock Purchase Agreement dated June 2, 2019 by and among BioNovelus, Inc., Bayberry Acquisition Corp., and all the stockholders of the company

S-1

333-267249

2.2

September 2, 2022

2.3

Second Amendment to Stock Purchase Agreement dated June 8, 2019, by and among BioNovelus, Inc., Bayberry Acquisition Corp., and all the stockholders of the company

S-1

333-267249

2.3

September 2, 2022

2.4

Securities Purchase Agreement dated November 21, 2019, by and among BioNovelus, Inc., Corvus Consulting, LLC, and the Buckhout Charitable Remainder Trust

S-1

333-267249

2.4

September 2, 2022

2.5

Agreement and Plan of Merger dated August 12, 2021, by and among Castellum, Inc., KC Holdings Company, Inc., and Specialty Systems, Inc., and the Stockholders Named Herein

S-1

333-267249

2.5

September 2, 2022

3.1

Amended and Restated Articles of Incorporation of Registrant

S-1

333-267249

3.1

September 2, 2022

3.2

Amended and Restated Bylaws of Registrant

S-1/A

333-267249

3.2

October 4, 2022

3.3

Certificate of Amendment to the Amended and Restated Articles of Registrant

8-K

001-41526

3.1

October 18, 2022

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2.6	Agreement and Plan of Merger dated as of March 22, 2023 by and among Castellum, Inc., GTMR Merger Sub., Inc., Global Technology and Management Resources, Inc. ("GTMR"), the stockholders of GTMR, and James Morton, as the representative of the Stockholders.	8-K	001-41526	2.1	March 28, 2023
3.1	Amended and Restated Articles of Incorporation of Registrant	S-1	333-267249	3.1	September 2, 2022

3.2	Amended and Restated Bylaws of Registrant	S-1/A	333-267249	3.2	October 4, 2022

3.3	Certificate of Amendment to the Amended and Restated Articles of Inco rporation of Registrant	8-K	001-41526	3.1	October 18, 2022
4.1	Form of Warrant to Purchase Common Stock	S-1	333-267249	4.1	September 2, 2022

4.2	Amended Convertible Promissory Note Re-Issued as of February 1, 2021, by Corvus Consulting, LLC and Registrant to the Buckhout Charitable Remainder Trust	S-1	333-267249	4.2	September 2, 2022

4.3	Convertible Promissory Note Issued as of April 4, 2022 by Registrant to Crom Cortana Fund LLC	S-1	333-267249	4.3	September 2, 2022

4.4	Common Stock Purchase Warrant dated April 4, 2022, by and between Registrant and Crom Cortana Fund LLC	S-1	333-267249	4.4	September 2, 2022
4.5	Common Stock Purchase Warrant dated February 13, 2023 by and between Registrant and Crom Cortana Fund LLC	8-K	001-41526	4.1	February 16, 2023

4.6	Convertible Promissory Note dated February 13, 2023 by and between Registrant and Crom Cortana Fund LLC	8-K	001-41526	10.1	February 16, 2023

10.1	Secured Promissory Note Issued on August 10, 2021 by Corvus Consulting, LLC and BioNovelus, Inc. to Robert Eisiminger	S-1	333-267249	10.1	September 2, 2022

10.2	Term Loan Promissory Note Issued on August 11, 2021 by and between Registrant, Specialty Systems, Inc., Corvus Consulting, LLC, Mainnerve Federal Services, Inc., Merrison Technologies, LLC, and Live Oak Banking Company	S-1	333-267249	10.2	September 2, 2022

10.3	Term Loan and Security Agreement dated August 11, 2021, by and between Registrant, Specialty Systems, Inc., Corvus Consulting, LLC, Mainnerve Federal Services, Inc., Merrison Technologies, LLC and Live Oak Banking Company	S-1	333-267249	10.3	September 2, 2022

10.4	Promissory Note Issued on August 12, 2021 by Corvus Consulting, LLC and Registrant to Emil Kaunitz	S-1	333-267249	10.4	September 2, 2022

10.5	Promissory Note Issued on February 28, 2022 by Corvus Consulting, LLC and Registrant to Robert Eisiminger	S-1	333-267249	10.5	September 2, 2022

Table of Contents

10.6

Revolving Line of Credit Promissory Note Issued on March 28, 2022 by Registrant, Specialty Systems, Inc., Corvus Consulting, LLC, Mainnerve Federal Services, Inc., Merrison Technologies, LLC to Live Oak Banking Company

Loan and Security Agreement dated March 28, 2022, by and between Registrant, Specialty Systems, Inc., Corvus Consulting, LLC, Mainnerve Federal Services, Inc., Merrison Technologies, LLC and Live Oak Banking Company

Business Acquisition Agreement dated February 11, 2022, by and between Registrant and Lexington Solutions Group, LLC

Registrant’s Stock Incentive Plan

Form of Stock Option Agreement

Employment Agreement dated April 1, 2020, by and between Registrant and Mark Fuller

Employment Agreement dated April 1, 2020, by and between Registrant and Jay Wright

Employment Agreement dated April 1, 2020, by and between Registrant and Glen Ives

Employment Agreement dated April 25, 2022, by and between Registrant and David T. Bell

Employment Agreement dated as of November 21, 2019 between Corvus Consulting, LLC and Laurie Buckhout

Lease Agreement dated January 11, 2018, between LTD Realty investment, IV, LP, and Specialty Systems, Inc.

Form of Director Agreement

10.1 8 ++

Labor Hour Subcontract Agreement between Corvus Consulting, LLC and CACI, Inc. - Federal

10.1 9 ++

Modification dated April 8, 2022 to Purchase Order No. P000096970 between Corvus Consulting, LLC and CACI, Inc.- Federal

Contract No. N00178-14D-7931 effective February 14, 2019 between Specialty Systems, Inc. and NAVAIR Aircraft Division Lakehurst

10.2 1 ++

Modification No. 1 of Contract effective November 2, 2021 between Specialty Systems, Inc. and NAVAIR Aircraft Division Lakehurst

10.2 2 ++

Time and Material Subcontract Number PO-0018098 between Perpsecta Engineering, Inc. and Corvus Consulting, LLC

4.1

Form of Warrant to Purchase Common Stock

S-1

333-267249

4.1

September 2, 2022

4.2

Amended Convertible Promissory Note Re-Issued as of February 1, 2021, by Corvus Consulting, LLC and Registrant to the Buckhout Charitable Remainder Trust

S-1

333-267249

4.2

September 2, 2022

4.3

Convertible Promissory Note Issued as of April 4, 2022 by Registrant to Crom Cortana Fund LLC

S-1

333-267249

4.3

September 2, 2022

4.4

Common Stock Purchase Warrant dated April 4, 2022, by and between Registrant and Crom Cortana Fund LLC

S-1

333-267249

4.4

September 2, 2022

10.1

Secured Promissory Note Issued on August 10, 2021 by Corvus Consulting, LLC and BioNovelus, Inc. to Robert Eisiminger

S-1

333-267249

10.1

September 2, 2022

10.2

Term Loan Promissory Note Issued on August 11, 2021 by and between Registrant, Specialty Systems, Inc., Corvus Consulting, LLC, Mainnerve Federal Services, Inc., Merrison Technologies, LLC, and Live Oak Banking Company

S-1

333-267249

10.2

September 2, 2022

10.3

Term Loan and Security Agreement dated August 11, 2021, by and between Registrant, Specialty Systems, Inc., Corvus Consulting, LLC, Mainnerve Federal Services, Inc., Merrison Technologies, LLC and Live Oak Banking Company

S-1

333-267249

10.3

September 2, 2022

10.4

Promissory Note Issued on August 12, 2021 by Corvus Consulting, LLC and Registrant to Emil Kaunitz

S-1

333-267249

10.4

September 2, 2022

10.5

Promissory Note Issued on February 28, 2022 by Corvus Consulting, LLC and Registrant to Robert Eisiminger

S-1

333-267249

10.5

September 2, 2022

10.6

Revolving Line of Credit Promissory Note Issued on March 28, 2022 by Registrant, Specialty Systems, Inc., Corvus Consulting, LLC, Mainnerve Federal Services, Inc., Merrison Technologies, LLC to Live Oak Banking Company

S-1

333-267249

10.6

September 2, 2022

10.7

Loan and Security Agreement dated March 28, 2022, by and between Registrant, Specialty Systems, Inc., Corvus Consulting, LLC, Mainnerve Federal Services, Inc., Merrison Technologies, LLC and Live Oak Banking Company

S-1

333-267249

10.7

September 2, 2022

10.8

Business Acquisition Agreement dated February 11, 2022, by and between Registrant and Lexington Solutions Group, LLC

S-1

333-267249

10.8

September 2, 2022

10.9+

Registrant’s Stock Incentive Plan

S-1

333-267249

10.9

September 2, 2022

10.10+

Form of Stock Option Agreement

S-1

333-267249

10.10

September 2, 2022

10.11+

Employment Agreement dated April 1, 2020, by and between Registrant and Mark Fuller

S-1

333-267249

10.11

September 2, 2022

10.12+

Employment Agreement dated April 1, 2020, by and between Registrant and Jay Wright

S-1

333-267249

10.12

September 2, 2022

10.13+

Employment Agreement dated April 1, 2020, by and between Registrant and Glen Ives

S-1

333-267249

10.13

September 2, 2022

10.14+

Employment Agreement dated April 25, 2022, by and between Registrant and David T. Bell

S-1

333-267249

10.14

September 2, 2022

10.15

Lease Agreement dated January 11, 2018, between LTD Realty investment, IV, LP, and Specialty Systems, Inc.

S-1

333-267249

10.15

September 2, 2022

10.16

Form of Director Agreement

S-1

333-267249

10.16

September 2, 2022

10.17++

Labor Hour Subcontract Agreement between Corvus Consulting, LLC and CACI, Inc. - Federal

S-1

333-267249

10.17

September 2, 2022

10.18++

Modification dated April 8, 2022 to Purchase Order No. P000096970 between Corvus Consulting, LLC and CACI, Inc.- Federal

S-1

333-267249

10.18

September 2, 2022

10.19++

Contract No. N00178-14D-7931 effective February 14, 2019 between Specialty Systems, Inc. and NAVAIR Aircraft Division Lakehurst

S-1

333-267249

10.19

September 2, 2022

31.1*

Certification of Principal Executive Officer pursuant to Exchange Act Rules 13(a)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.2*						Certification of Principal Financial Officer pursuant to Exchange Act Rules 13(a)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


32.1**						Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


32.2**						Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

			~~104~~
104						The cover page from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, has been formatted in Inline XBRL and contained in Exhibits 101

_______________________

* Filed herewith.

** The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the SEC and not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Exchange Act whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

Management contract or compensatory plan.

++ Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because such information is (i) not material and (ii) the type of information the Company treats as confidential. The Company will furnish supplementally an unredacted copy of such exhibit to the Securities and Exchange Commission or its staff upon its request.

S ~~ignatures~~

Table of Contents

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

~~Date: November 14, 2022~~	~~CASTELLUM, INC.~~
Date: May 15, 2023		CASTELLUM, INC.

		/s/ Mark C. Fuller
		Mark C. Fuller
		Chief Executive Officer (Principal Executive Officer)

		/s/ David T. Bell
		David T. Bell
		Chief Financial Officer (Principal Financial Officer)

~~NEVADA~~	~~27-4079982~~
NEVADA		27-4079982
(STATE OF INCORPORATION)		(I.R.S Employer I.D.)


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	CTM	NYSE American LLC

~~Class~~
Class			Outstanding as of ~~November~~ May 10, ~~, 2022~~ 2023
Common Stock, par value $0.0001 per share			~~41,539,342~~ 47,331,674

x
x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

¨
o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


PART I			43
Item 1. Unaudited ~~Condensed~~ Consolidated Financial Statements			43
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2824
Item 3. Quantitative and Qualitative Disclosures About Market Risk			3930
Item 4. Controls and Procedures			3930
PART II			4031
Item 1. Legal Proceedings			4031
Item 1A. Risk Factors			4031
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			5731
Item 3. Defaults Upon Senior Securities			5732
Item 4. Mine Safety Disclosures			5732
Item 5. Other Information			5732
Item 6. Exhibits			5832
Signatures			6236

	·	Our business could be adversely affected by changes in spending levels or budgetary priorities of the United States Federal, state, and local governments or by the imposition by the United States government of sequestration in the absence of an approved budget or continuing resolution;
	·	~~We face intense competition and could fail to gain market share from our competitors, which could adversely affect our business, financial condition, and results of operations;~~

	SEPTEMBER 30,			DECEMBER 31,
	2022			2021
	(unaudited)
ASSETS

CURRENT ASSETS:
Cash	$	1,853,388		$	2,017,915
Accounts receivable		8,465,979			5,414,401
Contract asset		-			591,055
Prepaid expenses and other current assets		310,569			185,824

Total current assets		10,629,936			8,209,195

Fixed assets, net		190,942			145,792

NON-CURRENT ASSETS:
Deferred tax asset		-			610,033
Right of use asset - operating lease		65,503			132,690
Intangible assets, net		7,131,860			7,595,599
Goodwill		15,533,964			14,062,964

Total non-current assets		22,731,327			22,401,286

TOTAL ASSETS	$	33,552,205		$	30,756,273

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	1,644,838		$	1,437,827
Accrued payroll and payroll related expenses		2,106,252			1,511,622
Contract liability		82,583			-
Due to seller		591,003			200,000
Obligation to issue common and preferred stock		125,000			25,000
Contingent consideration		-			275,000
Contingent earnout		1,121,000			257,000
Derivative liabilities		789,000			-
Revolving credit facility		300,025			-
Current portion of notes payable, net of discount		1,960,402			1,279,390
Current portion of lease liability - operating lease		47,617			111,999

Total current liabilities		8,767,720			5,097,838

NON-CURRENT LIABILITIES
Lease liability - operating lease, net of current portion		16,743			18,715
Note payable - related party, net of current portion		400,000			400,000
Convertible promissory notes - related parties, net of discount, net of current portion		696,826			2,805,184
Notes payable, net of discount, net of current portion		6,512,019			7,112,419

Total non-current liabilities		7,625,588			10,336,318

Total Liabilities		16,393,308			15,434,156

STOCKHOLDERS' EQUITY
Preferred stock, 50,000,000 shares authorized
Series A Preferred stock, par value $0.0001; 10,000,000 shares authorized;
5,875,000 issued and outstanding as of September 30, 2022 and December 31, 2021, respectively		588			588
Series B Preferred stock, par value $0.0001; 10,000,000 shares authorized;
3,075,000 and 3,610,000 issued and outstanding as of September 30, 2022 and
December 31, 2021, respectively		307			361
Series C Preferred stock, par value $0.0001; 10,000,000 shares authorized;
770,000 and 620,000 issued and outstanding as of September 30, 2022 and
December 31, 2021, respectively		77			62
Common stock, par value, $0.0001, 3,000,000,000 shares authorized,
24,788,132 and 19,960,632 issued and outstanding as of September 30, 2022 and
December 31, 2021, respectively		2,479			1,996
Additional paid in capital		37,546,787			26,405,126
Accumulated deficit		(20,391,341	)		(11,086,016	)

Total stockholders' equity		17,158,897			15,322,117

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	33,552,205		$	30,756,273

	THREE MONTHS ENDED						NINE MONTHS ENDED
	SEPTEMBER 30,						SEPTEMBER 30,
	2022			2021			2022			2021

REVENUES	$	11,120,712		$	7,378,094		$	32,166,104		$	15,587,246
COST OF REVENUES		6,474,261			4,309,439			18,698,820			8,921,153
GROSS PROFIT		4,646,451			3,068,655			13,467,284			6,666,093

OPERATING EXPENSES
Indirect costs		2,130,513			738,239			7,458,319			1,512,370
Overhead		407,804			248,540			1,167,346			431,987
General and administrative expenses		3,297,319			6,682,034			9,633,064			10,389,922
Loss from change in fair value of contingent earnout		864,000			-			864,000			-

Total operating expenses		6,699,636			7,668,813			19,122,729			12,334,279

LOSS FROM OPERATIONS BEFORE OTHER INCOME (EXPENSE)		(2,053,185	)		(4,600,158	)		(5,655,445	)		(5,668,186	)

OTHER INCOME (EXPENSE)
Realized gain on investment		-			-			-			38,851
Gain on disposal of fixed assets		-			-			303			-
Change in fair value of derivative liability		76,000			-			(97,000	)		-
Interest expense, net of interest income		(978,314	)		(648,175	)		(2,579,915	)		(1,838,032	)
Total other income (expense)		(902,314	)		(648,175	)		(2,676,612	)		(1,799,181	)

LOSS FROM OPERATIONS BEFORE BENEFIT
FOR INCOME TAXES		(2,995,499	)		(5,248,333	)		(8,332,057	)		(7,467,367	)

INCOME TAX (EXPENSE) BENEFIT		(159,025	)		328,735			(902,820	)		890,995

NET LOSS		(3,114,524	)		(4,919,598	)		(9,234,877	)		(6,576,372	)
Less: Preferred Stock Dividends		29,911			3,320			70,447			3,320
NET LOSS TO COMMON SHAREHOLDERS	$	(3,144,435	)	$	(4,922,918	)	$	(9,305,324	)	$	(6,579,692	)

NET LOSS PER SHARE - BASIC AND DILUTED	$	(0.12	)	$	(0.26	)	$	(0.39	)	$	(0.38	)

WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED		25,868,849			18,679,462			23,621,551			17,414,469

																					Additional
	Series A Preferred				Series B Preferred						Series C Preferred				Common Stock						Paid-In			Subscription			Accumulated
	Shares		Amount		Shares			Amount			Shares		Amount		Shares			Amount			Capital			Receivable			Deficit			Total
Balance - December 31, 2020		5,875,000	$	588		3,610,000		$	361			-	$	-		15,411,264		$	1,541		$	6,133,332		$	-		$	(3,527,296	)	$	2,608,526

Stock-based compensation - options		-		-		-			-			-		-		-			-			263,610			-			-			263,610
Stock-based compensation - warrants		-		-		-			-			-		-		-			-			188,186			-			-			188,186

Net loss for the period		-		-		-			-			-		-		-			-			-			-			(829,532	)		(829,532	)

Balance - March 31, 2021		5,875,000		588		3,610,000			361			-		-		15,411,264			1,541			6,585,128			-			(4,356,828	)		2,230,790

Shares issued in acquisition of MFSI		-		-		-			-			-		-		1,114,023			111			1,782,326			-			-			1,782,437
Cancellation of shares in acquisition of MFSI		-		-		-			-			-		-		(250,000	)		(25	)		(399,975	)		-			-			(400,000	)
Stock-based compensation - options		-		-		-			-			-		-		-			-			407,271			-			-			407,271

Net loss for the period		-		-		-			-			-		-		-			-			-			-			(827,242	)		(827,242	)

Balance - June 30, 2021		5,875,000		588		3,610,000			361			-		-		16,275,287			1,627			8,374,750			-			(5,184,070	)		3,193,256

Shares issued in acquisition of Merrison		-		-		-			-			-		-		500,000			50			1,699,950			-			-			1,700,000
Shares issued in acquisition of SSI, net of transaction costs		-		-		-			-			-		-		2,600,000			260			5,149,240			-			-			5,149,500
Shares issued for cash in Series C Preferred Subscription Agreements		-		-		-			-			520,000		52		52,000			5			519,943			(100,000	)		-			420,000
Stock-based compensation - options		-		-		-			-			-		-		-			-			1,600,217			-			-			1,600,217
Stock-based compensation - warrants		-		-		-			-			-		-		-			-			2,846,416			-			-			2,846,416

Net loss for the period		-		-		-			-			-		-		-			-			-			-			(4,922,918	)		(4,922,918	)

Balance - September 30, 2021		5,875,000	$	588		3,610,000		$	361			520,000	$	52		19,427,287		$	1,942		$	20,190,516		$	(100,000	)	$	(10,106,988	)	$	9,986,471

Balance - December 31, 2021		5,875,000	$	588		3,610,000		$	361			620,000	$	62		19,960,632		$	1,996		$	26,405,126		$	-		$	(11,086,016	)	$	15,322,117

Stock-based compensation - options		-		-		-			-			-		-		-			-			875,640			-			-			875,640
Stock-based compensation - warrants		-		-		-			-			-		-		-			-			-			-			-			-
Stock-based compensation - restricted shares		-		-		-			-			-		-		-			-			30,937			-			-			30,937
Shares issued in acquisition of MFSI		-		-		-			-			-		-		-			-			-			-			-			-
Cancellation of shares in acquisition of MFSI		-		-		-			-			-		-		-			-			-			-			-			-
Shares issued for service, net of amounts prepaid		-		-		-			-			-		-		7,500			1			6,187			-			-			6,188
Shares issued in exercise of stock options		-		-		-			-			-		-		15,000			2			11,998			-			-			12,000
Shares issued for cash in Series C Preferred
Subscription Agreement		-		-		-			-			150,000		15		15,000			2			149,983			-			-			150,000

Net loss for the period		-		-		-			-			-		-		-			-			-			-			(1,406,715	)		(1,406,715	)

Balance - March 31, 2022		5,875,000		588		3,610,000			361			770,000		77		19,998,132			2,001			27,479,871			-			(12,492,731	)		14,990,167

Shares issued for services, net of amounts prepaid		-		-		-			-			-		-		7,500			1			11,939			-			-			11,940
Shares issued for cash, including fair value adjustment		-		-		-			-			-		-		1,250,000			125			592,875			-			-			593,000
Shares issued for commitment fees		-		-		-			-			-		-		125,000			12			59,288			-			-			59,300
Shares issued to satisfy obligation to issue common stock		-		-		-			-			-		-		132,500			13			533,737			-			-			533,750
Shares issued to acquire LSG		-		-		-			-			-		-		600,000			60			2,279,940			-			-			2,280,000
Common shares issued in conversion of Series B Preferred Stock		-		-		(535,000	)		(54	)		-		-		2,675,000			267			(213	)		-			-			-
Stock-based compensation - options		-		-		-			-			-		-		-			-			1,117,335			-			-			1,117,335
Stock-based compensation - warrants		-		-		-			-			-		-		-			-			1,603,219			-			-			1,603,219
Stock-based compensation - restricted shares		-		-		-			-			-		-		-			-			30,938			-			-			30,938
Gain on extinguishment of related party convertible note		-		-		-			-			-		-		-			-			2,667,903			-			-			2,667,903

Net loss for the period		-		-		-			-			-		-		-			-			-			-			(4,754,175	)		(4,754,175	)

Balance - June 30, 2022		5,875,000	$	588		3,075,000		$	307			770,000	$	77		24,788,132		$	2,479		$	36,376,832		$	-		$	(17,246,906	)	$	19,133,377

Stock-based compensation - options		-		-		-			-			-		-		-			-			1,139,018			-			-			1,139,018
Stock-based compensation - warrants		-		-		-			-			-		-		-			-			-			-			-			-
Stock-based compensation - restricted shares		-		-		-			-			-		-		-			-			30,937			-			-			30,937
Gain on extinguishment of related party convertible note		-		-		-			-			-		-		-			-			-			-			-			-

Net loss for the period		-		-		-			-			-		-		-			-			-			-			(3,144,435	)		(3,144,435	)

Balance - September 30, 2022		5,875,000	$	588		3,075,000		$	307			770,000	$	77		24,788,132		$	2,479		$	37,546,787		$	-		$	(20,391,341	)	$	17,158,897

	2022			2021
CASH FLOW FROM OPERATING ACTIVIITES
Net loss	$	(9,234,877	)	$	(6,576,372	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
Depreciation and amortization		1,520,329			1,126,047
Amortization of discounts, premium and deferred costs		1,869,152			1,342,181
Stock-based compensation		4,906,152			5,305,700
Deferred tax provision		610,033			(1,025,852	)
Gain on disposal of fixed assets		(303	)		-
Financing fee and bank charges for note payable and advances on revolving credit line		3,775			-
Realized gain on investment		-			(38,851	)
Lease cost		833			476
Legal fees paid out of proceeds from a note payable		30,000			-
Change in fair value of contingent earnout		864,000			-
Change in fair value of derivative liability		97,000			-
Changes in assets and liabilities
Accounts receivable		(2,637,969	)		144,601
Prepaid expenses and other current assets		(58,051	)		(2,014	)
Contract asset (liability)		673,638			(569,610	)
Payment of transaction costs in acquisition of SSI		-			(50,500	)
Accounts payable and accrued expenses		801,641			511,806
Net cash (used in) provided by operating activities		(554,647	)		167,612

CASH FLOWS FROM INVESTING ACTIVITES
Cash received in acquisition of MFSI		-			93,240
Cash received in acquisition of Merrison, net of amounts paid		-			183,588
Cash received in acquisition of SSI, net of amounts paid		-			198,935
Cash paid in acquisition of LSG		(250,000	)		-
Sale of investment		-			365,572
Purchase of fixed assets		(92,436	)		(5,346	)
Net cash (used in) provided by investing activities		(342,436	)		835,989

CASH FLOWS FROM FINANCING ACTIVITES
Proceeds from revolving credit line		300,000			-
Proceeds from issuance of preferred and common stock		625,000			420,000
Proceeds from note s payable		1,470,000			-
Preferred stock dividend		(70,449	)		(3,320	)
Proceeds from exercise of stock options		12,000			-
Repayment of convertible note payable - related parties		(500,000	)		(70,000	)
Repayment of amounts due to seller		(160,000	)		-
Repayment of line of credit, net		-			(3,460	)
Repayment of note payable		(943,995	)		(104,244	)
Net cash provided by financing activities		732,556			238,976

NET (DECREASE) INCREASE IN CASH		(164,527	)		1,242,577

CASH - BEGINNING OF PERIOD		2,017,915			2,412,382

CASH - END OF PERIOD	$	1,853,388		$	3,654,959

SUPPLEMENTAL DISCLOSURES
Cash paid for interest expense	$	559,234		$	474,414
Cash paid for income taxes	$	118,885		$	16,400

SUMMARY OF NON-CASH ACTIVITIES:

Debt discount on note payable applied to obligation to issue common stock	$	500,000		$	-
Adjustment to contingent consideration and customer relationships	$	275,000		$	-
Gain on extinguishment of convertible note payable - related party applied to APIC	$	2,667,903		$	-
Common shares issued for obligation to issue common stock	$	533,750		$	-
Derivative liability recognized as discount of note payable	$	692,000		$	-
Deferred issuance costs recognized for note payable	$	59,300		$	-
Fair value adjustment recognized on issuance of common stock in Securities Purchase Agreement	$	93,000		$	-
Common shares issued in conversion of Series B Preferred shares	$	5,350		$	-
Cancellation of shares offsetting acquisition of MFSI	$	-		$	400,000

Cash	$	183,588
Accounts receivable and unbilled receivables		391,049
Customer relationships		322,000
Non-compete agreements		7,000
Trademarks		164,000
Backlog		115,000
Goodwill		780,730
Deferred tax liability		(243,730	)
Accounts payable and accrued expenses		(102,354	)
Net assets acquired	$	1,617,283

Cash	$	998,935
Accounts receivable and unbilled receivables		2,222,004
Prepaid expenses		147,600
Other asset		6,750
Furniture and equipment		148,931
Right of use asset – operating lease		169,063
Customer relationships		3,102,000
Non-compete agreements		65,000
Trademarks		367,000
Backlog		50,000
Goodwill		8,461,150
Deferred tax liability		(880,150	)
Lease liability – operating lease		(167,333	)
Contract liability		(226,591	)
Accounts payable and accrued expenses		(1,134,509	)
Net assets acquired	$	13,329,850

Common stock	$	7,872,850
Seller note		400,000
Cash		800,000
Contingent earnout		257,000
Lender financing		4,000,000
	$	13,329,850

Customer relationships (contracts) (a)		$	2,400,000
Net assets acquired		$	2,400,000

Common stock	$	1,925,000
Contingent consideration represented by obligation to issue shares (a)		275,000
Cash (included in amounts due to seller as of December 31, 2021) (b)		200,000
	$	2,400,000

For the nine months ended September 30, 2022
Revenues	$	33,685,580
Net loss	$	(7,843,711	)
Net loss per share - basic	$	(0.33	)

For the nine months ended September 30, 2021
Revenues	$	20,333,508
Net loss	$	(127,660	)
Net loss per share - basic	$	(0.00	)

	September 30, 2022 (unaudited)			December 31, 2021
Equipment	$	96,986		$	60,148
Furniture		32,574			32,574
Software		44,746			-
Leasehold improvements		83,266			75,265
Total fixed assets		257,572			167,987
Accumulated depreciation		(66,630	)		(22,195	)
Fixed assets, net	$	190,942		$	145,792

		September 30, 2022 (unaudited)			December 31, 2021
Customer relationships	4.5– 15 years	$	9,535,000		$	9,025,000
Trade name	4.5 years		266,000			266,000
Trademark	10-15 years		533,863			533,863
Backlog	2-5 years		1,436,000			947,000
Non-compete agreement	3-5 years		684,000			674,000
			12,454,863			11,445,863
Accumulated amortization			(5,323,003	)		(3,850,264	)
Intangible assets, net		$	7,131,860		$	7,595,599

September 30, 2023	$	1,969,588
September 30, 2024		1,653,245
September 30, 2025		985,482
September 30, 2026		721,751
September 30, 2027		526,950
Thereafter		1,274,844
Total	$	7,131,860

	2022		2021
Balance – beginning of period	$	14,062,964	$	4,136,011
Additions		1,471,000		9,926,953
Disposals		-		-
Impairment		-		-
	$	15,533,964	$	14,062,964

	September 30, 2022 (unaudited)			December 31, 2021
Convertible note payable with a trust related to one of the Company’s directors, convertible at $0.26 per share, at 5% interest (extinguished on April 4, 2022 for new note) (a)	$	-			4,209,617
Convertible note payable with a trust related to one of the Company’s directors, convertible at $0.26 per share, at 5% interest (amended April 4, 2022)		3,709,617			-

Total Convertible Notes Payable – Related Parties	$	3,709,617		$	4,209,617
Add: Premiums recorded on convertible note due to fair value adjustment at date of acquisition of Corvus		-			2,569
Less: BCF Discount		(3,012,791	)		(1,407,002	)
	$	696,826		$	2,805,184

September 30, 2023	$	1,960,121
September 30, 2024		6,512,300
Total	$	8,472,421

		September 30, 2022 (unaudited)				December 31, 2021
Note payable at 5% due December 31, 2024, in connection with the acquisition of SSI		$	400,000			$	400,000

	Nine Months Ended September 30, 2022				Year Ended December 31, 2021
	Number		Weighted Average Exercise Price		Number		Weighted Average Exercise Price
Beginning balance		3,161,568	$	1.60		1,090,717	$	0.00
Granted		1,017,268		2.60		2,070,851		2.40
Exercised Cashless		-		-		-		-
Forfeited		-		-		-		-
Expired		-		-		-		-
Ending balance		4,178,836	$	1.79		3,161,568	$	1.60

Warrants exercisable		4,178,836				3,161,568
Intrinsic value of warrants	$	10,468,925			$	5,706,473
Weighted Average Remaining Contractual Life (Years)		5.26

Beginning balance as of December 31, 2021	$	-
Issuances of convertible note/warrants – derivative liabilities		(692,000	)
Warrants exchanged for common stock		-
Change in fair value of warrant derivative liabilities		(97,000	)
Ending balance as of September 30, 2022	$	(789,000	)

	September 30, 2022			Inception – April 4, 2022
Expected term – conversion option		0.51 years			1 year
Expected term - warrants		4.51 years			5 years
Stock price as of Measurement Date	$	4.30		$	3.80
Equity volatility - unadjusted		284.80	%		278.80	%
Volatility haircut		5.00	%		5.00	%
Selected volatility – post haircut		115.0	%		112.60	%
Senior unsecured synthetic credit rating		CCC +			CCC +
B- market yield		7.90	%		4.50	%
OAS differential between CCC+ and B- bonds		458	bps		383	bps
Risk adjusted rate		12.50	%		8.30	%
Risk-free interest rate		3.90	%		1.70	%

	Nine Months Ended September 30,					Change
	2022			2021		Amount			%
Net cash provided (used) by operating activities	$	(554,647	)	$	167,612	$	(722,259	)		-431	%
Net cash provided (used) by investing activities		(342,436	)		835,989	$	(1,178,425	)		-141	%
Net cash provided (used) by financing activities		732,556			238,976	$	493,580			207	%
Change in cash	$	(164,527	)	$	1,242,577	$	(1,407,104	)		-113	%

	·	laws and regulations restricting the ability of a contractor to provide gifts or gratuities to employees of the USG, including The Foreign Corrupt Practices Act of 1977 (the “FCPA”) which prohibits U.S. citizens and entities from bribing foreign government officials to benefit their business interests;
	·	~~post-government employment laws and regulations, which restrict the ability of a contractor to recruit and hire current employees of the USG and deploy former employees of the USG;~~