What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2024-03-21 compared with 2023-03-17 · 271 added, 276 removed, 702 unchanged (44% of the section changed)

38 unchanged sentences

Accounts receivable 6,883,566 5,193,562

Contract asset 257,434 591,055

Contract assets 160,649 257,434

Prepaid income taxes 216,909 351,116

3 unchanged sentences

Noncurrent assets:

Deferred tax asset — 610,033

Right of use asset – operating lease 613,143 35,524

7 unchanged sentences

Accrued payroll and payroll related expenses 2,925,312 1,869,517

Current portion of lease liability – operating lease 185,263 22,054

Due to seller 350,000 280,000

Obligation to issue common and preferred stock 255,940 —

Contingent consideration — 275,000

Contingent earnout 380,000 812,000

1 unchanged sentence

Revolving credit facility 625,025 300,025

Current portion of convertible promissory notes – related parties, net of discount 238,212 —

Current portion of notes payable, net of discount 2,074,775 2,033,348

Current portion of lease liability – operating lease 22,054 111,999

Total current liabilities 7,977,092 7,758,540

Noncurrent liabilities:

Deferred tax liability 6,292 —

Lease liability – operating lease, net of current portion 435,204 12,632

Contingent earnout, net of current portion 340,000 —

Convertible promissory notes – related parties, net of current portion 2,000,000 999,430

Notes payable, net of current portion 6,000,000 6,340,490

Note payable – related party, net of current portion 400,000 400,000

Convertible promissory notes – related parties, net of discount, net of current portion 999,430 2,805,184

Notes payable, net of discount, net of current portion 6,340,490 7,112,419

Total noncurrent liabilities 9,181,496 7,752,552

5 unchanged sentences

5,875,000 issued and outstanding as of December 31, 2023 and 2022

Series B Preferred stock, par value $ 0.0001 ;

10,000,000 shares authorized;

0 and 3,610,000 issued and outstanding as of December 31, 2022 and 2021, respectively

Series C Preferred stock, par value $ 0.0001 ;

20 unchanged sentences

General and administrative 17,697,886 13,586,600 14,539,053

Loss from change in fair value of contingent earnout 555,000 — —

Goodwill impairment loss 6,919,094 — —

(Gain) loss from change in fair value of contingent earnout ( 92,000 ) 555,000 —

Total operating expenses 35,344,152 27,561,253 18,799,701

Loss from operations before other other income (expense) ( 9,963,936 ) ( 7,725,149 ) ( 1,468,149 )

Loss from operations before other income (expense) ( 16,668,825 ) ( 9,963,936 ) ( 7,725,149 )

Other income (expense):

Realized gain on investment — 38,851 —

Gain on disposal of fixed assets 303 — —

Change in fair value of derivative liability ( 132,000 ) — —

Loss on induced conversion ( 300,000 ) — —

Gain (loss) from change in fair value of derivative liability 1,054,025 ( 132,000 ) —

Other income, net 106,419 303 38,851

Interest expense, net of interest income ( 3,248,914 ) ( 3,992,809 ) ( 2,516,775 )

Total other income (expense) ( 4,124,506 ) ( 2,477,924 ) ( 2,295,906 )

Total other (expense) ( 2,388,470 ) ( 4,124,506 ) ( 2,477,924 )

Loss from operations before (expense) benefit for income taxes ( 19,057,295 ) ( 14,088,442 ) ( 10,203,073 )

Income tax (expense) benefit ( 819,596 ) 2,656,643 1,056,562

Income tax benefit (expense) 1,257,117 ( 819,596 ) 2,656,643

Net loss ( 17,800,178 ) ( 14,908,038 ) ( 7,546,430 )

13 unchanged sentences

Net loss $ ( 17,800,178 ) $ ( 14,908,038 ) $ ( 7,546,430 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

Depreciation and amortization 2,528,815 2,032,459 1,886,228

Amortization of discount and premium 2,553,317 1,806,848 1,695,067

Amortization of discounts, premiums and deferred cost 2,265,061 2,553,317 1,806,848

Stock-based compensation 7,495,759 8,796,641 6,919,524

1 unchanged sentence

Gain on sale of fixed assets — ( 303 ) —

Financing fees and bank charges 3,775 — —

Financing fee and bank charges for note payable and advances on revolving credit line — 3,775 —

Realized gain on investment — — ( 38,851 )

Goodwill impairment loss 6,919,094 — —

Lease cost 218,314 1,139 754

1 unchanged sentence

Change in fair value of contingent earnout ( 92,000 ) 555,000 —

Change in fair value of derivative liability 132,000 — —

Change in fair value of derivative liabilities ( 1,054,025 ) 132,000 —

Gain from timing difference on issuance of shares ( 107,491 ) — —

Changes in assets and liabilities

Accounts receivable ( 1,187,118 ) 634,448 ( 1,217,326 )

Proceeds from factoring accounts receivable 850,141 — —

Prepaid expenses and other current assets 75,614 ( 321,593 ) 8,119

Contract asset (liability) 96,785 333,621 ( 817,646 )

Payment of transaction costs in acquisition of SSI — ( 50,500 ) —

Payment of transaction costs in acquisition of business — — ( 50,500 )

Lease liability ( 185,261 ) — —

Accounts payable and accrued expenses ( 807,791 ) 537,664 594,715

Net cash provided by (used in) operating activities 990,163 ( 1,350,136 ) 1,006,091

Net cash (used in) provided by operating activities ( 2,264,447 ) 990,163 ( 1,350,136 )

Cash flows from investing activities:

Cash paid in acquisition of LSG ( 250,000 ) — —

Cash received in acquisition of MFSI — 93,240 —

Cash received in acquisition of Merrison, net of amounts paid — 161,305 —

Cash received in acquisition off SSI, net of amounts paid — 198,935 —

Acquisition of business, cash paid to seller ( 485,739 ) ( 250,000 ) —

Cash paid to seller from factoring ( 411,975 ) — —

Acquisition of business, cash received from seller 475,000 — 453,480

Sale of investment — — 365,572

Purchases of intangible assets — — ( 2,863 )

Purchases of fixed assets ( 18,271 ) ( 89,282 ) ( 10,218 )

2 unchanged sentences

Proceeds from revolving credit line 325,000 300,000 —

Proceeds from issuance of common stock — — 120,000

Payment of debt issuance costs ( 15,000 ) — —

Proceeds from issuance of preferred and common stock 126,000 625,000 645,000

5 unchanged sentences

Repayment of line of credit, net — — ( 12,249 )

Loss on induced conversion 300,000 — —

Repayment of amounts due to seller ( 280,000 ) ( 471,003 ) —

Repayment of notes payable ( 1,642,471 ) ( 1,364,137 ) ( 411,626 )

Net cash provided by financing activities 1,972,100 146,835 109,000

Net cash (used in) provided by financing activities ( 104,623 ) 1,972,100 146,835

Net (decrease) increase in cash ( 2,810,055 ) 2,622,981 ( 394,467 )

5 unchanged sentences

Summary of noncash activities:

Adjustment to contingent consideration and customer relationships $ 275,000 $ — $ —

Gain on extinguishment of convertible note payable - related party 2,667,903 — —

Debt discount recognized for obligation to issue common stock 500,000 — —

Extinguishment of debt discount - derivative liabilities $ 171,128 $ — $ —

Extinguishment of debt discount - debt issuance costs $ 8,034 $ — $ —

Debt discount on note payable $ 28,000 $ 500,000 $ —

Partial conversion of note payable $ — $ 160,000 $ —

Common shares issued for obligation to issue shares $ — $ 533,750 $ —

Derivative liability recognized as discount of note payable 692,000 — —

Derivative liabilities incurred for note payable $ 421,000 $ 692,000 $ —

Extinguishment of derivative liability $ 33,375 $ — $ —

Acquisition of business, common stock issued to seller $ 5,304,561 $ — $ —

Gain on extinguishment of convertible note payable - related party $ — $ 2,667,903 $ —

Adjustment to contingent consideration and customer relationships $ — $ 275,000 $ —

Fair value adjustment recognized on issuance of common stock in Securities Purchase Agreement $ — $ 93,000 $ —

1 unchanged sentence

Conversion of Series B preferred shares to common stock $ — $ 1,805 $ —

Conversion of purchase consideration payable to convertible note — — 579,617

Beneficial Conversion Feature ("BCF") discount on convertible note, net of tax — — 430,423

Conversion of convertible notes – related parties and accrued interest to common stock — — 63,800

Cancellation of shares offsetting acquisition of MFSI $ — $ 400,000 $ —

Cancellation of shares offsetting acquisition of business $ — $ — $ 400,000

See accompanying notes to consolidated financial statements.

8 unchanged sentences

Balances at 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

Shares issued for cash — — — — — — 116,731 12 119,988 — 120,000

Shares issued in conversion of notes payable and accrued interest — — — — — — 550,000 55 63,745 — 63,800

Stock-based compensation – options — — — — — — — — 3,113,261 — 3,113,261

BCF discount, net of tax — — — — — — — — 430,423 — 430,423

Net loss for the year — — — — — — — — — ( 2,707,493 ) ( 2,707,493 )

Balances at 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 — — — — — — — — 3,113,261 — 3,113,261

Stock-based compensation - warrants — — — — — — — — 3,806,263 — 3,806,263

16 unchanged sentences

Subscription agreement — — — — 150,000 15 15,000 2 149,983 — 150,000

Shares issued in acquisition of LSG — — — — — — 625,000 62 2,279,938 — 2,280,000

Gain on extinguishment of related party note — — — — — — 0 — 2,667,903 — 2,667,903

Debt discount recognized for obligation to issue common stock — — — — — — 0 — ( 100,000 ) — ( 100,000 )

6 unchanged sentences

Balances at 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 — — — — — — 0 5,923,200 — 5,923,200

Stock-based compensation - warrants — — — — — — 0 1,076,969 — 1,076,969

Stock-based compensation - shares issued for services and Restricted stock — — — — — — 462,244 45 423,614 — 423,659

Shares issued in acquisition of GTMR — — — — — — 4,866,570 487 5,304,075 — 5,304,562

Extinguishment of Crom Note — — — — — — 556,250 56 589,944 — 590,000

Loss on induced conversion — — — — — — 0 — 300,000 — 300,000

Extinguishment of debt discount related to derivative liability — — — — — — 0 ( 171,128 ) — ( 171,128 )

Extinguishment of debt discount related to debt issuance — — — — — — 0 ( 8,034 ) — ( 8,034 )

Extinguishment of derivative liability — — — — — — 0 33,375 — 33,375

Shares issued in private placement — — — — — — 63,000 6 125,994 — 126,000

Shares issued as commitment shares in Crom Transaction — — — — — — 25,000 3 10,997 — 11,000

Balance sheet reclassification adjustment (a) — — — — — — 0 ( 304,500 ) 30,000 ( 274,500 )

Net loss — — — — — — 0 — ( 17,918,330 ) ( 17,918,330 )

Balances at December 31, 2023 5,875,000 $ 588 — $ — 770,000 $ 77 47,672,427 $ 4,767 $ 56,926,157 $ ( 43,982,900 ) $ 12,948,689

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 all be $ 0.0001 .

2 unchanged sentences

As a result of the Reverse Stock Split, all authorized and outstanding common stock and per share amounts in this Annual Report on Form 10-K, including but not limited to, the consolidated financial statements and footnotes included herein, have been adjusted to reflect the Reverse Stock Split for all periods presented.

(a) In the second quarter of 2023, the Company made an immaterial balance sheet reclassification to reduce additional paid in capital by $ 304,500 and to increase the obligation to issue common shares account and the accumulated deficit account by $ 274,500 and $ 30,000 , respectively.

These immaterial amounts are also reflected in the Company's Consolidated Balance Sheets, Consolidated Statements of Cash Flows, and the Consolidated Statement of Changes in Stockholders' Equity.

See accompanying notes to consolidated financial statements.

4 unchanged sentences

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.

(the “Company”) is focused on building a large, successful technology company 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.

18 unchanged sentences

Merrison, is a government contractor with expertise in software engineering and IT in the classified arena.

Effective December 1, 2023, all operations, contracts and employees were merged into the Corvus entity and Merrison was dissolved with the Virginia Secretary of State.

Specialty Systems, Inc.

1 unchanged sentence

SSI is a New Jersey based government contractor that provides critical mission support to the Navy at Joint Base McGuire-Dix-Lakehurst in the areas of software engineering, cyber security, systems engineering, program support and network engineering.

The Company acquired the business assets that represented the Pax River from The Albers Group, LLC (“Pax River”) which closed on November 16, 2021 in an asset purchase for up to 550,000 shares of common stock and cash of $ 200,000 paid monthly over a 10-month period starting February 2022 upon the satisfaction of conditions in the acquisition agreement.

The Company acquired certain business assets from The Albers Group, LLC located in Pax River, Maryland (“Pax River”) which closed on November 16, 2021 in an asset purchase for up to 550,000 shares of common stock and cash of $ 200,000 paid monthly over a 10-month period starting February 2022 upon the satisfaction of conditions in the acquisition agreement.

The Company acquired Lexington Solutions Group, LLC (“LSG”), on April 15, 2022.

LSG is a government contractor with a wide range of national security, strategic communication, and management consulting services.

The Company acquired Global Technologies Management Resources, Inc.

(“GTMR”) on March 23, 2023.

GTMR is a government contractor based in Hollywood, Maryland near Naval Air Station Patuxent River.

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 all be $ 0.0001 .

2 unchanged sentences

All share and per share figures related to the common stock have been retroactively adjusted in accordance with SEC Staff Accounting Bulletin (“SAB”) Topic 4C.

The unprecedented events related to COVID-19, the disease caused by the novel coronavirus (SARS-CoV-2), 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 not been significantly 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.

Summary of Significant Accounting Policies

7 unchanged sentences

Castellum, Inc.

is a holding company that holds 100 % of Corvus, MFSI, Merrison, SSI, and LSG.

owns 100 % of Corvus, MFSI, Merrison (until dissolved as of December 1, 2023), and SSI.

The Company applies the guidance of Topic 805 Business Combinations of the Financial Accounting Standards Board Accounting Standards Codification (“ASC”).

1 unchanged sentence

Reclassification

The Company has reclassified certain amounts in the 2020 financial statements to comply with the 2021 and 2022 presentation.

These principally relate to classification of certain expenses and liabilities.

The reclassifications had no impact on total net loss or net cash flows for the years ended December 31, 2022 or 2021.

The Company has reclassified certain amounts in the 2022 financial statements to comply with the 2023 presentation.

These principally relate to classification of “Gain on Disposal of Fixed Assets” to “Other” on our consolidated statements of operations.

The reclassifications had no impact on total net loss or net cash flows for the years ended December 31, 2023 and 2022.

Business Segments

13 unchanged sentences

Fixed assets are stated at cost.

Depreciation on fixed assets is computed using the straight-line method over the estimated useful lives of the assets, which range from three to fifteen years for all classes of fixed assets.

Depreciation on fixed assets is computed using the straight-line method over the estimated useful lives of the assets, which range from three to 15 years for all classes of fixed assets.

ASC 360 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

6 unchanged sentences

These intangible assets are being amortized on either the straight-line basis over their estimated average useful lives (certain trademarks, tradenames, backlog and non-compete agreements) or are being amortized based on the present value of the future cash flows (customer relationships, certain tradenames, backlog, and non-compete agreements).

Amortization expense of the intangible assets runs through December 2035.

Amortization expense of the intangible assets runs through March 2038.

The Company assesses the impairment of identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

4 unchanged sentences

When the Company determines that the carrying value of intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, the Company records an impairment charge.

The Company measures any impairment based on undiscounted cash flows.

Significant management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows.

The Company measures any impairment based on fair value.

Si gnificant management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows.

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.

5 unchanged sentences

This change does not delay, accelerate, or avoid an impairment of goodwill.

In 2022, Management performed a qualitative analysis as of its annual measurement date, which included a quantitative market capitalization reconciliation.

During the fourth quarter of 2022, due to the Company being in a net loss position, Management performed additional qualitative analysis, including a market capitalization reconciliation, to evaluate the performance of its reporting units.

Management determined there were no indicators of impairment noted during the years ended December 31, 2022 and 2021.

During the third quarter of 2023, due to decline in stock price, Management determined that a triggering event occurred representing an indicator of goodwill impairment and requiring goodwill impairment testing for each of its reporting units as of September 30, 2023.

Management elected to bypass a qualitative assessment and performed a quantitative assessment, including a market capitalization reconciliation, to evaluate the performance of its reporting units.

The impairment assessment resulted in a non-cash goodwill impairment charge related to all three reporting units totaling $ 6,919,094 .

Given the date of this assessment, Management concluded it satisfied the Company’s annual assessment requirement.

Additionally, during the fourth quarter of 2023, Management considered whether there were any additional triggering events that would represent indicators of impairment and determined there were none.

Subsequent Events

Subsequent events were evaluated through March 15, 2023, the date the consolidated financial statements were issued .

Subsequent events were evaluated through March 21, 2024, the date the consolidated financial statements for the year ended December 31, 2023 were issued .

Revenue Recognition

61 unchanged sentences

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.

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).

5 unchanged sentences

Accounts Receivable and Concentration of Credit Risk

An allowance is based on management’s estimate of the overall collectability of accounts receivable, considering historical losses.

An allowance for credit losses is based on management’s estimate of the overall collectability of accounts receivable, considering historical losses.

Based on these same factors, individual accounts are charged off against the allowance when management determines those individual accounts are uncollectible.

4 unchanged sentences

Interest income is recorded when received.

As of December 31, 2022 and 2021, management did not consider an allowance necessary.

As of December 31, 2023 and 2022, management did not consider an allowance for credit losses is necessary.

The Company’s customer base is concentrated with a relatively small number of customers.

1 unchanged sentence

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.

The Company establishes allowances for credit losses based upon factors surrounding the credit risk of customers, historical trends and other information.

For the years ended December 31, 2023, 2022, and 2021, the Company had three customers represent 52 %, 62 %, and 61 % of revenue earned, respectively.

Any customer that represents 10% or greater of total revenue represents a risk.

The Company also has four customers that represent 60 % of the total accounts receivable as of December 31, 2022 and three customers that represented 78 % of the total accounts receivable as of December 31, 2021 and 2020.

The Company also has three customers that represent 54 % of the total accounts receivable as of December 31, 2023 and four customers that represented 60 % of the total accounts receivable as of December 31, 2022.

Accounting for Income Taxes

8 unchanged sentences

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.

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.

21 unchanged sentences

The Company subtracts dividends on preferred stock when calculating earnings (loss) per share.

Refer to N ote 16 , Subsequent Events.

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 December 31, 2022 that would materially impact the Company.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.

This update requires disaggregated information about a reporting entity’s effective tax rate reconciliations as well as information on income taxes paid.

This update is effective for annual periods beginning in our fiscal year ending December 31, 2025.

Early adoption is permitted.

We are currently evaluating the impact that this update will have on our financial statement disclosures.

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 2022 and 2021 (MFSI, Merrison, SSI, and LSG) 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.

Mainnerve Federal Services, Inc.

The Company entered into a definitive merger agreement with MFSI, effective as of January 1, 2021.

This acquisition closed on February 11, 2021.

This acquisition was accounted for as a business combination whereby MFSI became a 100 % owned subsidiary of the Company.

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

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 was as follows:

Common stock $ 1,382,437

The MFSI 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 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 MFSI, the Company engaged a third-party independent valuation specialist.

The Company had estimated the preliminary purchase price allocations based on historical inputs and data as of January 1, 2021.

The Company had a valuation prepared by an independent consultant.

Upon the finalization of the valuation of MFSI, the Company reclassified $ 352,000 from goodwill into other intangible assets.

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.

The Company entered into a definitive merger agreement with Merrison, effective as 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:

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

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, the Company 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.

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.

There were no additional adjustments made during the year ended December 31, 2022.

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:

On March 22, 2023, the Company entered into an agreement and plan of merger with GTMR.

This acquisition was accounted for as a business combination whereby GTMR became a 100 % owned subsidiary of the Company.

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.

As the acquisition was an equity acquisition of GTMR, certain assets of the acquisition (intangible assets and goodwill) are not considered deductible for tax purposes.

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

March 31, 2023 Adjustments December 31, 2023

Cash $ 475,000 $ — $ 475,000

Accounts receivable and unbilled receivables 2,222,004

Accounts receivable and other receivables 1,380,203 ( 9,384 ) 1,370,819

Income tax receivable 155,449 ( 127,992 ) 27,457

Prepaid expenses 116,892 ( 30,856 ) 86,036

Other asset 6,750

Other assets 17,182 — 17,182

Furniture and equipment 163,301 103,760 267,061

1 unchanged sentence

Customer relationships 2,426,000 — 2,426,000

Non-compete agreements 65,000

Trademarks 367,000

Right of use - finance lease — 17,456 17,456

Tradename 517,000 — 517,000

Backlog 1,774,000 — 1,774,000

2 unchanged sentences

Lease liability - operating lease ( 17,608 ) ( 603,799 ) ( 621,407 )

Contract liability ( 226,591 )

Lease liability - finance lease — ( 12,549 ) ( 12,549 )

Accounts payable and accrued expenses ( 1,030,957 ) 141,341 ( 889,616 )

Net assets acquired $ 6,554,560 $ 156,847 $ 6,711,407

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

The consideration paid for GTMR was as follows:

Cash $ 470,233

Due to Seller 350,000

Other consideration 17,791

Cash from factoring 411,975

Common stock 5,304,561

Seller note 400,000

Contingent earnout 257,000

Lender financing 4,000,000

The SSI acquisition has been accounted for under the acquisition method of accounting.

Accounts receivable note 156,847

Total consideration paid $ 6,711,407

The 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 SSI acquisition, and historical and current market data.

The fair value measurements utilize estimates based on key assumptions of the 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 determine the fair values of tangible and intangible assets acquired and liabilities assumed for SSI, the Company 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.

Upon finalization of the valuation, the Company allocated $ 3,584,000 from goodwill to other intangible assets.

The Company paid $ 50,500 of SSI’s transaction costs.

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, the Company reclassified a portion of the goodwill upon the finalization of an independent valuation report during the year ended December 31, 2021.

There were no additional adjustments made during the year ended December 31, 2022.

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) $ 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) 200,000

(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 .

To determine the fair values of tangible and intangible assets acquired and liabilities assumed for GTMR, we engaged a third-party independent valuation specialist.

Intangible assets, which are primarily comprised of customer relationships and backlog, were valued using the excess earnings discounted cash flow method.

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 received a preliminary valuation from its specialist and recorded the value of the assets and liabilities acquired based on historical inputs and data as of March 22, 2023.

The allocation of the purchase price is based on the best information available.

The Company paid $ 185,896 in transaction costs of GTMR, which was excluded from the purchase price and issued an accounts receivable note (“Accounts Receivable Note”) and held back $ 350,000 , the details for which have been discussed in amounts due to seller in Note 9 .

The measurement period for the GTMR acquisition is currently open and may remain open until March 22, 2024, but we do not anticipate any further adjustments.

During the measurement period, the Company recorded several adjustments to goodwill as a result of GTMR's adoption of ASC 842, tax adjustments, and an update to the fair value of acquired furniture and equipment.

These measurement period adjustments were subsequently identified as a result of the completion of third party accounting assistance.

The Company also recorded a measurement period adjustment to goodwill as a result of finalizing the transaction price.

The Company entered into an accounts receivable note payable due to the sellers four months after the closing date of the transaction, subject to the adjustment of any net working capital deficiencies.

This amount was determined to be $ 156,847 .

Lexington Solutions Group (“LSG”)

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$ 250,000 due at closing (“initial cash payment”);

$ 250,000 plus or minus any applicable post-closing adjustments (subsequently determined to be $ 21,003 ) which was paid within six months after the closing date (“second tranche”);

and $ 280,000 that is due no later than 10 months after the closing date of the acquisition (this amount was paid in January 2023;

refer to Note 16 of Item 8 in this Annual Report on Form 10-K).

$ 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 was due no later than 10 months after the closing date of the acquisition (paid in January 2023).

As the acquisition was of the assets of LSG, intangible assets and goodwill are considered deductible for tax purposes.

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

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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, the Company engaged a third-party independent valuation specialist.

determine the fair values of tangible and intangible assets acquired and liabilities assumed for LSG, the Company 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 LSG’s transaction costs.

The Company concluded that there were no measurement period adjustments during the year ended December 31, 2022.

LSG is accounted for under the Corvus reporting unit and its goodwill is presented accordingly in Note 5.

The Company paid $ 44,752 in transaction costs of LSG, which was excluded from the purchase price.

There have been no adjustments for the year ended December 31, 2023 and the measurement period was closed April 15, 2023.

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

The following table shows unaudited pro-forma results for the year ended December 31, 2022 and 2021, as if the acquisitions of Merrison, SSI, and LSG had occurred on January 1, 2021 (the Albers Group, LLC is not included below because it was an asset purchase).

The following table shows unaudited pro-forma results for the year ended December 31, 2023 and 2022, as if the acquisitions of GTMR and LSG had occurred on January 1, 2022.

These unaudited pro forma results of operations are based on the historical financial statements of each of the companies.

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Net loss per share - basic $ ( 0.53 )

Revenue attributable to the GTMR acquisition included in our consolidated statement of operations for the year ended December 31, 2023, was $ 7,779,478 .

Fixed assets consisted of the following as of December 31:

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Furniture 43,119 32,574

Automobile 43,928 —

Leasehold improvements 192,959 83,266

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December 31, 2022

Gross carrying value Accumulated Amortization Net carrying value

Customer relationships 4.5 – 15 years

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$ 12,454,864 $ ( 5,820,697 ) $ 6,634,167

The intangible assets, with the exception of the trademarks, were recorded as part of the acquisitions of Corvus, MFSI, Merrison, LSG, and SSI.

The intangible assets, with the exception of the trademarks, were recorded as part of the acquisitions of Corvus, MFSI, Merrison, LSG, SSI and GTMR.

Amortization expense for the years ended December 31, 2023, 2022, and 2021 was $ 2,380,303 , $ 1,970,433 , and $ 1,867,108 respectively, and the intangible assets are being amortized based on the estimated future lives as noted above.

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2025 1,453,000

2026 1,242,863

2027 1,034,302

Thereafter 2,622,421

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Goodwill acquired through acquisitions 1,471,000 — — — 1,471,000

Merrison subsumed into Corvus 780,730 — — ( 780,730 ) —

December 31, 2022 6,387,741 8,461,150 685,073 — 15,533,964

Goodwill acquired through acquisitions — 2,102,037 — — 2,102,037

Merrison subsumed into Corvus 780,730 — — ( 780,730 ) —

Impairment loss ( 4,429,000 ) ( 1,845,094 ) ( 645,000 ) — ( 6,919,094 )

December 31, 2023 $ 1,958,741 $ 8,718,093 $ 40,073 $ — $ 10,716,907

There were no indicators of impairment noted in the periods presented.

Convertible Promissory Notes – Related Parties

The Company entered into convertible promissory notes – related parties as follows as of December 31:

Convertible note payable with a trust related to one of the Company’s directors, convertible at $ 0.260 per share, at 5 % interest, (extinguished on April 4, 2022 for new note)

Convertible Promissory Notes – Related Party

The Company entered into convertible promissory notes – related party as follows as of December 31:

Convertible note payable with a trust related to one of the Company’s former directors, convertible at $ 0.260 per share, at 5 % interest, (extinguished on April 4, 2022 for new note)

$ 3,209,617 $ 3,209,617

Total Convertible Notes Payable – Related Parties $ 3,209,617 $ 4,209,617

Premium recorded on convertible note due to fair value adjustment at date of acquisition of Corvus — 2,569

BCF Discount ( 2,210,187 ) ( 1,407,002 )

Total Convertible Notes Payable – Related Party $ 3,209,617 $ 3,209,617

Debt discount ( 971,405 ) ( 2,210,187 )

$ 2,238,212 $ 999,430

Interest expense which includes amortization of discount and premium for the years ended December 31, 2023 and 2022 was $ 1,399,262 and $ 1,535,840 , respectively.

The amount of the debt discount recorded related to the warrants granted to the note holder was evaluated for characteristics of liability or equity and was determined to be equity under ASC 470 and ASC 480.

The amount of the debt discount recorded related to the conversion feature granted to the note holder 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.

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In October 2022, the Company made an advanced principal payment of $ 500,000 , further reducing the principal of the convertible promissory note to $ 3,209,617 .

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

On February 22, 2024, the Company entered into a new note payable with the Buckout Charitable Remainder Trust.

As a result, a majority of the balance is reflected in non-current liabilities.

Refer to subsequent events in Note 16 for more detail.

Notes Payable

The Company entered into notes payable as follows as of December 31:

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

Note payable at 7 % originally due November 2023, 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)

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

Note payable with bank, at prime plus 3 % interest ( 6.25 % at December 31, 2022) maturing August 11, 2024

400,000 400,000

Note payable at 12 % interest dated April 6, 2023 and matures the earlier of (i) September 30, 2024 or (ii) the acceleration of the obligations as contemplated under the promissory note (c)

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

Convertible note payable, convertible at $ 1.20 per share, at 10 %, maturing February 13, 2024 (d)

Term note payable, at prime plus 3 % interest, applied on a deferred basis ( 8.50 % at December 31, 2023 and 6.25 % at December 31, 2022) maturing August 11, 2024

981,764 2,324,236

Total Notes Payable 8,221,764 9,214,236

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The shares were issued in April 2022.

The SPA included (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 liabilities are marked to market each reporting period, and the Company recognized a loss on the change in fair value of the derivative liabilities of 132,000 from April 4, 2022 to December 31, 2022.

Furthermore, on February 13, 2023 the Company entered into a series of transactions with Crom to pay off the total amount currently owed under the terms of the convertible promissory note.

Refer to subsequent events in Note 16.

(c) On April 6, 2023, the Company entered into a promissory note with principal balance of $ 400,000 bearing interest at 12 % per annum.

This promissory note matures at the earlier of September 30, 2024 or at the acceleration of the obligations under the promissory note (together with those discussed in a and b above, “Eisiminger Notes”).

Interest is paid in monthly installments and the total principal is due upon maturity.

(d) 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 expires 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.

Interest expense, which includes amortization of discount, for the years ended December 31, 2023, 2022, and 2021 was $ 1,732,265 , $ 1,874,142 , and $ 859,744 respectively.

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 it are charged interest at the rate of prime plus 2.75 % per annum.

The Revolving Credit Facility matures on March 28, 2029, and draws on it 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.

Total principal payments on our notes payable for the next three years as of December 31, 2022 are as follows:

2023 $ 2,244,627

2024 6,969,609

The outstanding balance as of December 31, 2023 and December 31, 2022, under the Revolving Credit Facility was $ 625,025 and $ 300,025 , respectively.

On February 22, 2024, the Company extended the maturity date of the Eisiminger Notes.

As a result, the majority of the balance is reflected in non-current liabilities.

Refer to subsequent events in Note 16 for more detail.

Due to the subsequent events described under Note 16 , the total principal payments on our notes payable for the next three years are as follows:

Total $ 8,221,764

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$ 400,000 $ 400,000

Interest expense for the years ended December 31, 2022 and 2021 was $ 20,000 and $ 7,726 , respectively.

The entire note payable – related party balance is reflected in long-term liabilities.

Interest expense for both the years ended December 31, 2023 and 2022 was $ 20,000 .

Interest expense for the year ended December 31, 2021, was $ 7,726 .

On February 16, 2024, the Company extended the maturity date of this note.

As a result, the balance is reflected in non-current liabilities.

Refer to subsequent events in Note 16 for more detail.

Amount Due To Seller

In the acquisition of GTMR, the Company was obligated to pay $ 1,250,000 which included $ 350,000 held back to satisfy any net working capital deficiencies.

This balance was originally scheduled to be paid six months following the closing date, however, payment has been postponed and the unpaid balance of $ 350,000 will accrue interest at an annual rate of 5 % until it is paid in full in July of 2024.

The $ 350,000 is recorded in current liabilities on the Company's Consolidated Balance Sheets as of December 31, 2023.

In the acquisition of GTMR, the Company also issued an Accounts Receivable Note to the sellers of GTMR whereby the Company is obligated to pay the sellers a principal amount of $ 206,587 , adjusted for deficiencies in net working capital, for four months following the closing date of the acquisition.

The Company determined a net working capital deficiency of $ 49,740 resulting in an amount due to the sellers of $ 156,847 .

This amount was paid in full during the three months ended September 30, 2023.

In the acquisition of LSG, the Company was obligated to pay $ 3,176,003 , which included cash of $ 780,000 and a working capital adjustment of $ 21,003 .

Of this amount, $ 521,003 was paid by December 31, 2022.

The remaining $ 280,000 of this balance is recorded as a current liability under “Due to Seller” on the Consolidated Balance Sheet as of December 31, 2022.

In the acquisition of assets in The Albers Group, LLC transaction, the Company was obligated to pay $ 200,000 as part of the acquisition, post the effective date of October 22, 2021.

This amount was paid over a 10-month period commencing February 2022.

The $ 200,000 was non-interest bearing and was reflected as a current liability on the Consolidated Balance Sheet as of December 31, 2021 under “Due to seller”.

This amount has been paid in full as of December 31, 2022 and is no longer reflected on the consolidated balance sheets.

The remaining $ 280,000 of this balance was paid on January 23, 2023.

Stockholders’ Equity (Deficit)

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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 all 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.

Preferred Stock

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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, former officers of the Company (“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 officers for $ 445,000 , the proceeds of which were paid directly 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.

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As of December 31, 2023 and December 31, 2022, the Company had 0 and 3,610,000 shares of Series B Preferred Stock issued and outstanding, respectively.

The 3,610,000 shares were issued to directors of the Company in June 2019.

The 3,610,000 shares were issued to the shareholders, who are also directors of the Company, for the Bayberry acquisition in June 2019.

Series C Preferred Stock

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Weighted Average Remaining Contractual Life (Years) 4.70

On November 9.

the Company approved the Stock Incentive Plan that authorizes the Company to grant up to 2,500,000 shares of common stock.

Prior to this date, the granting of options was not done in accordance with a stock option plan.

As of December 31, 2023, the Company has granted 522,265 shares of common stock under the Stock Incentive Plan.

In addition, on November 9, 2021, the Company approved the 2021 Stock Incentive Plan (“Stock Incentive Plan”) that authorizes the Company to grant up to 2,500,000 shares of common stock.

Prior to this date, the granting of options was not done pursuant to the terms of a stock incentive plan.

The following represents a summary of options for the years ended December 31, 2023 and 2022:

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Expected volatility 161.61 % - 166.14 %

135.00 %– 177.00 %

Expected dividend yield — —

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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.

The Company evaluated the conversion option in the convertible note and the warrants (“Derivative Liabilities”) to determine proper accounting treatment and determined them to be Derivative Liabilities.

The Derivative 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 Liabilities.

The estimated fair value of the Derivative Liabilities has been calculated using 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 operating expenses on the Consolidated Statements of Operations.

The estimated fair value of cash and cash equivalents, accounts receivable, fixed interest debt and accounts payable approximates their carrying value.

On April 4, 2022, the Company issued common stock, a convertible note, and warrants in a securities purchase agreement (“SPA”), with Crom (“2022 Crom SPA”).

The Company had evaluated the conversion option liability in the convertible note and the warrants to determine proper accounting treatment and determined them to be derivative liabilities (“Derivative Liabilities”).

On February 13, 2023, the 2022 Crom SPA was terminated through an induced conversion thereby extinguishing the conversion option liability associated with the 2022 Crom note;

the warrants were not affected.

Concurrent with the termination of the 2022 Crom SPA, the Company issued common stock, a convertible note, and warrants in an SPA with Crom .

The Company evaluated the conversion option in this convertible note and these warrants to determine proper accounting treatment and determined them to be derivative liabilities (also “Derivative Liabilities”).

The Derivative Liabilities had and have been accounted for utilizing ASC 815 “Derivatives and Hedging.”

The Company recognized liabilities for the estimated fair values of the Derivative Liabilities.

The estimated fair values of these liabilities were 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 as of December 31, 2022, presented as part of current liabilities on the Consolidated Balance Sheets, was 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 were recorded as gains or losses on revaluation in operating expenses on the Consolidated Statements of Operations until the earnout amount was settled with the sellers of SSI.

On February 15, 2024, the Company agreed to the amount and timing of the earnout payout.

Please see Note 16 for subsequent events.

The Company determined that the significant inputs used to value the Derivative Liabilities and the contingent earnout fall within Level 3 of the fair value hierarchy.

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Derivative Liabilities $ — $ — $ 157,600 $ 157,600

Contingent earnout — — 812,000 812,000

Total $ — $ — $ 1,636,000 $ 1,636,000

Fair Value Measurements at December 31, 2022

Level 1 Level 2 Level 3 Total

Derivative Liabilities $ — $ — $ 824,000 $ 824,000

Contingent earnout $ — $ — $ 812,000 $ 812,000

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2023 2022 Inception

Fair value of conversion option of Crom Cortana Fund LLC convertible note $ 191,000 $ — $ 314,000

Fair value of conversion option in 2022 Crom convertible note $ — $ 191,000 $ 314,000

Fair Value of 656,250 warrants on April 4, 2022

$ 66,000 $ 633,000 $ 378,000

Fair value of conversion option in 2023 Crom convertible note $ 200 $ — $ 162,000

Fair value of 700,000 warrants on February 13, 2023

$ 91,400 $ — $ 259,000

$ 157,600 $ 824,000

During the year ended December 31, 2023, 2022, and 2021 the Company recognized changes in the fair value of the Derivative Liabilities of $ 666,400 , $ 824,000 , and $ 0 respectively.

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Issuance of Derivative Liabilities ( 421,000 )

Warrants exchanged for common stock —

Change in fair value of Derivative Liabilities 1,087,400

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The following assumptions were used for the periods as follows:

December 31, 2022 Inception - April 4, 2022

Expected term - conversion option 0.26 years 1 year

Expected term - warrants 4.26 years 5 years

Stock price as of measurement date $ 1.26 $ 3.80

Equity volatility - unadjusted 161.00 % 278.80 %

Volatility haircut 5.00 % 5.00 %

Selected volatility - post haircut 156.50 % 112.60 %

Senior unsecured synthetic credit rating CCC+ CCC+

B- market yield 6.30 % 4.50 %

OAS differential between CCC+ and B- bonds 387 bps

Risk adjusted rate 10.30 % 8.30 %

Risk-free interest rate 4.40 % 1.70 %

Stock Price $ 0.30 $ 1.26

Conversion option - convertible note 1.20 1.60

Strike price - warrants 1.38 - 1.84

Term 0.12 years - 4.10 years

0.26 years - 4.26 years

Volatility 98.00 % - 148.30 %

121.00 % - 156.50 %

Market yield - conversion option 17.40 % 10.30 %

Risk-free rate 3.90 % - 5.60 %

4.10 % - 4.40 %

Related-Party Transactions

In June 2021, the Company raised $ 220,000 for 220,000 shares of the to be designated Series C Preferred Stock along with 440,000 common shares from the newly hired Chief Growth Officer 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.

During 2023, the Company granted warrants to two of its officers pursuant to the employment agreements with these officers as a bonus for closing the GTMR Acquisition.

During 2022, the Company repaid $ 1,000,000 of note principal to a member of its Board of Directors in relation to payments on its related party note payable.

For details on this note payable refer to Note 6 .

Defined Contribution Plan

The Company maintains a 401(k) plan as a defined contribution retirement plan for all eligible employees.

The 401(k) plan provides for tax-deferred contributions of employees’ salaries, limited to a maximum annual amount as established by the IRS.

The plan enrolls employees immediately with no age or service requirement.

The 401(k) Plan employer match was $ 651,353 , $ 434,267 and $ 271,647 in the years ended December 31, 2022, 2021 and 2020, respectively.

The Company and its subsidiaries maintain 401(k) plans as a defined contribution retirement plan for all eligible employees.

Each 401(k) plan provides for tax-deferred contributions of employees’ salaries, limited to a maximum annual amount as established by the IRS.

The plans enroll employees immediately with no age or service requirement.

The aggregate 401(k) Plan employer match was $ 882,707 , $ 651,353 and $ 434,267 in the years ended December 31, 2023, 2022 and 2021, respectively.

The Company, since April 2020, has entered into a series of employment agreements with management and key employees.

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The agreements have a term of three years .

Pursuant to the agreements, each of the Two Officers have 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.

Pursuant to the agreements, each of the Two Officers have 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 (which occurred in 2021), $ 30,000 per month upon reaching an annualized revenue of $ 50,000,000 or greater (which occurred in March, 2023), 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 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 of the Two Officers 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 the the Two Officers upon the Company commencing trading on either the Nasdaq or the NYSE (which occurred on October 13, 2022), and an additional bonus of $ 125,000 and 1,250,000 warrants with a $ 2.40 strike price shall be paid to each of the Two Officers upon the Company joining the Russell 3000 and/or Russell 2000 stock index(ices).

Additionally, the Company shall issue 1 warrant to each of the Two Officers 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 the the Two Officers upon the Company commencing trading on either the Nasdaq or the NYSE American (which occurred on October 13, 2022), and an additional bonus of $ 125,000 and 1,250,000 warrants with a $ 2.40 strike price shall be paid to each of the Two Officers 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 Chief Growth Officer 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.

Pursuant to the agreements, the Chief Growth Officer 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 (which occurred in 2021), $ 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.

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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.

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 key management personnel.

These agreements all contain base salaries and bonus criteria.

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The CFO 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;

(i) $ 25,000 per month upon the Company achieving an annualized revenue run rate of $ 50,000,000 or greater (which occurred in March, 2023);

(ii) $ 35,000 per month upon the Company achieving an annualized revenue run rate of $ 75,000,000 or greater;

1 unchanged sentence

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 CFO Base Salary shall be payable in regular installments in accordance with the Company’s general payroll practices.

Additionally, the CFO shall be eligible to earn a performance bonus at the discretion of the Board of the Company with target bonuses that are the following percentages of CFO Base Salary based on certain performance criteria set forth in the employment agreement:

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The Board of the Company may pay an additional bonus (separate from any target) in its sole discretion.

As an additional incentive for entering into the employment agreement, the CFO 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 options shall not vest unless (i) the CFO 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 $ 8.00 per share.

The agreement entitles the CFO to receive various employee benefits generally made available to other officers and senior executives of the Company.

As an additional incentive for entering into the employment agreement, the CFO was granted 1,800,000 stock options to purchase the Company’s common stock at an exercise price of $ 3.80 per share which vest ratably over the first 36 months of employment with the Company.

On March 22, 2023, the Company entered into a three year employment agreement with an executive in connection with the GTMR Acquisition.

The agreement provides an annual base salary of $ 200,000 and bonus criteria.

As an additional incentive for entering into the employment agreement, the executive received 300,000 incentive stock options issued pursuant to the terms of the Stock Incentive Plan.

The following table summarizes the significant differences between the U.S.

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Other 0.50 % ( 1.70 ) % ( 0.04 ) %

Goodwill impairment ( 6.30 ) % — % — %

Change in valuation allowance ( 6.40 ) % ( 17.90 ) % — %

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Deferred tax assets:

Net operating losses $ — $ — $ 53,457

Deferred interest $ 698,231 $ — $ —

Lease liabilities 160,042 8,973 —

Accrued bonus/PTO/Vacation 148,776 95,673 73,390

Stock options/consultant stock 3,008,318 2,358,218 243,628

Section 195 costs 41,817 53,881 52,416

Accrued expenses 352,346 148,776 95,673

Stock compensation 3,530,993 3,008,318 2,358,218

Transaction costs 44,665 41,817 53,881

Other 160 149,153 2,407

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Debt discount ( 256,788 ) ( 741,579 ) ( 400,064 )

Section 481(a) adjustment ( 43,443 ) ( 151,310 ) ( 159,554 )

Cash to accrual method change ( 136,667 ) ( 43,443 ) ( 151,310 )

Total deferred tax liabilities ( 1,953,682 ) ( 1,742,250 ) ( 1,900,146 )

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A full valuation allowance was established in the second quarter of 2022 due to the uncertainty of the utilization of deferred tax assets in future periods.

In evaluating the Company’s ability to realize the deferred tax assets, management considered all available positive and negative evidence, including cumulative historic earnings, reversal of temporary differences, projected taxable income and tax planning strategies.

The Company’s negative evidence, largely related to the Company's historical pre-tax net losses, currently outweighs its positive evidence of future taxable income therefore it is more-likely-

than-not that the Company will not realize a significant portion of our deferred tax assets.

In evaluating the Company’s ability to realize the deferred tax assets, management considered

all available positive and negative evidence, including cumulative historic earnings, reversal of temporary differences, projected taxable income and tax planning strategies.

The Company’s negative evidence, largely related to the Company's historical pre-tax net losses, currently outweighs its positive evidence of future taxable income therefore it is more-likely-than-not that the Company will not realize a significant portion of our deferred tax assets.

The amount of the deferred tax asset to be realized in the future could however be adjusted if objective negative evidence is no longer present.

Section 382 of the Internal Revenue Code provides an annual limitation on the amount of federal NOLs and tax credits that may be used in the event of an ownership change.

The Company had a net operating loss carryforward totaling approximately $ 286,760 at December 31, 2020 that was used to offset 2021 taxable income.

The Company classifies accrued interest and penalties, if any, for unrecognized tax benefits as part of income tax expense.

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Subsequent Events

On January 18, 2023, the Company signed a non-binding letter of intent to acquire an East Coast based government contractor which focuses on cybersecurity, data analysis, and other IT services for federal civilian agencies.

On January 23, 2023, the Company made a final payment of $ 280,000 pursuant to the terms of the LSG Business Acquisition Agreement.

On February 13, 2023, the Company entered into a series of transactions with Crom Cortana Fund LLC (“Crom”), the primary purpose of which is to fund the pending acquisition related to a non-binding letter of intent signed on November 7, 2022.

In connection therewith, the Company and Crom entered into an agreement to pay off the amount currently owed to Crom under the terms of the convertible promissory note in the original principal amount of $ 1,050,000 due April 4, 2023 (the “2022 Note Payable”).

In consideration of a cash payment of $ 300,000 and 556,250 shares of common stock representing conversion of the remaining principal balance the Company’s obligations under the 2022 Note Payable are deemed satisfied reducing the balance to zero .

The proceeds of the 2023 Note Payable will be used primarily to fund a pending acquisition, as well as fund the debt repayment referred to in the foregoing paragraph.

As a result of these transactions, the current Crom note payable of $ 890,000 , reported in current liabilities on the consolidated balance sheets as of December 31, 2022, will be reported in noncurrent liabilities in 2023.

On January 25, 2024 the Company entered into a securities purchase agreement (the “SPA”) with an institutional investor, pursuant to which the Company agreed to sell and issue, in a registered direct offering, an aggregate of (i) 5,243,967 shares of the Company’s common stock, at a purchase price of $ 0.32 per share and accompanying warrant (the “Warrant”) and (ii) 3,193,534 pre-funded warrants (the “Pre-funded Warrant(s)”) to purchase up to an aggregate of 3,193,534 shares of common stock at a purchase price of $ 0.319 per Pre-funded Warrant and accompanying Warrant, for aggregate gross proceeds to the Company of approximately $ 2.7 million, before deducting the placement agent fees and estimated offering expenses payable by the Company (the “Registered Offering”).

Pursuant to the terms of the SPA, in a concurrent private placement (the “Private Placement” and together with the Registered Offering, the “Offering”), the Company also sold and issued to the Purchaser warrants (the “Warrants”) to purchase up to 8,437,501 shares of common stock.

The Warrants will become exercisable upon receipt of shareholder approval, expire five years from such approval, and have an exercise price of $ 0.35 per share.

The shares, the Pre-Funded Warrants, and the Pre-Funded Warrant Shares are being offered pursuant to a shelf registration statement on Form S-3 (File No.

333-275840), which was declared effective by the U.S.

Securities and Exchange Commission (the “SEC”) on December 12, 2023, and a related prospectus supplement dated January 25, 2024, related to the Registered Offering.

The Offering closed on January 29, 2024.

Pursuant to a placement agency agreement dated as of January 25, 2024 (the “Placement Agency Agreement”), the Company engaged Maxim Group LLC (“Maxim”) to act as the lead placement agent in connection with the Offering.

At closing, the Company paid Maxim (i) a cash fee equal to 7.0 % of the aggregate gross proceeds of the Offering and (ii) reimbursed Maxim for all reasonable and documented out-of-pocket expenses of $ 60,000 , which included the reasonable fees, costs, and disbursements of its legal counsel.

On February 13, 2024 the Company paid the outstanding principal and accrued interest owed on the 2023 Note Payable to Crom in the amount of $ 847,000 .

On February 16, 2024 the Company entered into a letter agreement to (i) extend the maturity date from December 31, 2024 to August 1, 2025 on the note payable dated August 12, 2021 in the principal amount of $ 400,000 that was issued in connection with the acquisition of SSI and (ii) require monthly principal payments of $ 50,000 per month for eight months commencing on the maturity date.

All other terms of the note payable remain unchanged.

On February 15, 2024 the Company entered into an agreement with the former shareholders of SSI concerning, among other things, the amount and timing of the earnout payment owed under the terms of the agreement and plan of merger dated August 12, 2021 between the Company, SSI, and the other parties named therein.

With respect to the earnout payment, the parties agreed to settle the amount for a total of $ 720,000 , with an initial payment of $ 180,000 to be made by the Company at signing of the agreement, plus monthly payments thereafter of $ 20,000 plus interest payable at 5 % per annum for 27 months.

As a result, $ 380,000 is reflected in current liabilities and $ 340,000 is reflected in non-current liabilities.

On February 22, 2024 the Company entered into a $ 4,000,000 revolving credit facility with Live Oak Banking Company that bears interest at prime plus 2 % interest which matures on February 22, 2025 (the “New Live Oak Revolver).

The New Live Oak Revolver replaces the $ 950,000 revolving credit facility dated April 4, 2022 with Live Oak Banking Company with a maturity date of March 28, 2029.

The Company rolled over approximately $ 625,000 of the principal balance outstanding on the prior revolving credit facility and made payments totaling $ 1,209,617 to the holders of two notes payable referred to in the next two paragraphs.

On February 22, 2024 the Company entered into an agreement to extend the maturity date from September 30, 2024 to August 31, 2026 on the note payable dated November 21, 2019 in the principal amount of $ 5,600,000 and the note payable dated February 28, 2022 in the principal amount $ 400,000 .

Additionally, the per annum interest rate on t he Eisiminger Notes was set at 7.5 % through February 1, 2025, after which it increases to 8.0 %.

All other terms of the notes payable remain unchanged.

The Company accessed funds available on the New Live Oak Revolver to pay the outstanding principal and interest in full on the note payable dated April 6, 2023 in the principal amount of $ 400,000 .

The Company accessed funds available on the New Live Oak Revolver to pay $ 809,617 owed to The Buckhout Charitable Remainder Trust under the terms of the amended convertible promissory note payable in the principal amount of $ 3,209,617 which matures on September 30, 2024.

Simultaneously therewith, the Company and The Buckhout Charitable Remainder Trust entered into a new note payable in the principal amount of $ 2,400,000 which matures on August 31, 2026, and accrues interest at a per annum rate of 5 % through January 1, 2025, 8 % per annum through January 1, 2026, and 12 % per annum thereafter.

The principal amount shall be amortized at the rate of $ 100,000 per month, commencing in September 2024.

The terms of the new note payable to The Buckhout Charitable Remainder Trust do not permit the principal amount to be converted into common stock.

On March 12, 2024, the Board of Directors approved the extension of the term of the Two Officers employment agreements until June 30, 2024.

The employment agreements are described in Note 14 Commitments.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosures

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data