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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
Or
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File Number: 001-41526
CASTELLUM, INC.
(Exact Name of Registrant as Specified in Charter)
NEVADA27-4079982
(STATE OF INCORPORATION)(I.R.S Employer I.D.)
3 Bethesda Metro Center, Suite 700, Bethesda, MD 20814
(301) 961-4895
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.0001 per shareCTM
NYSE American LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company x
 
Emerging growth company x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding as of August 11, 2023
Common Stock, par value $0.0001 per share47,524,762


Table of Contents
CASTELLUM, INC.
FORM 10-Q
For the Quarter Ended June 30, 2023
INDEX


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Explanatory Note Regarding Reverse Stock Split
On October 13, 2022, Castellum, Inc. (the “Company”, “our Company,” “we,” “our,” “us” and “Castellum”) effected a 1-for-20 reverse split of our authorized and outstanding shares of common stock (the “Reverse Stock Split,” “Offering,” “Uplisting”) by way of the filing on October 5, 2022 of an amendment to the Company’s amended and restated articles of incorporation to effect the Reverse Stock Split which was approved by Financial Industry Regulatory Authority on October 12, 2022 in connection with the closing of an underwritten public offering of our common stock and the commencement of the trading of our common stock on the New York Stock Exchange American LLC ("NYSE American"). As a result of the Reverse Stock Split, all authorized and outstanding common stock and per share amounts in this Quarterly Report on Form 10-Q, 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.
Explanatory Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the “Securities Act,” and Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act,” which statements involve substantial risk and uncertainties. These statements do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties and include statements regarding, among other things, our projected revenue growth and profitability, our growth strategies and opportunity, anticipated trends in our market and our anticipated needs for working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plans,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the negative of these words or other variations on these words or comparable terminology. In particular, these statements relate to future actions, prospective products and services, market acceptance, future performance or results of current and anticipated products and services, sales efforts, expenses, and the outcome of contingencies such as legal proceedings and financial results.
Examples of forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, our expectations regarding our business strategy, business prospects, operating results, operating expenses, working capital, liquidity, and capital expenditure requirements. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products and services, the cost, terms, and availability of components, pricing levels, the timing and cost of capital expenditures, competitive conditions, and general economic conditions. These statements are based on our management’s expectations, beliefs, and assumptions concerning future events affecting us, which in turn are based on currently available information. These assumptions could prove inaccurate. Although we believe that the estimates and projections reflected in the forward-looking statements are reasonable, our expectations may prove to be incorrect.
Important factors that could cause actual results to differ materially from the results and events anticipated or implied by such forward-looking statements include, but are not limited to:
changes in the market acceptance of our products and services;
overall levels of government spending, including defense spending and spending on IT services;
increased levels of competition;
changes in political, economic, or regulatory conditions generally and in the markets in which we operate;
adverse conditions in the industries in which our customers operate;
our ability to retain and attract senior management and other employees;
our ability to respond quickly and effectively to new technological developments;
our ability to protect our trade secrets or other proprietary rights, operate without infringing upon the proprietary rights of others and prevent others from infringing on the proprietary rights of the Company;
sequestration imposed by the United States government in the absence of an approved budget or continuing resolution;
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existing revenues related to small business contracts which are not replaced by other opportunities; and
failure by our company to win prime contracts or acquire companies with prime contract vehicles.
We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all of those risks, nor can we assess the impact of all of those risks on our business or the extent to which any factor may cause actual results to differ materially from those contained in any forward-looking statement. The forward-looking statements in this Quarterly Report on Form 10-Q are based on assumptions management believes are reasonable. However, due to the uncertainties associated with forward-looking statements, you should not place undue reliance on any forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and unless required by law, we expressly disclaim any obligation or undertaking to publicly update any of them in light of new information, future events, or otherwise.
In this Quarterly Report on Form 10-Q, unless the context otherwise requires, all references to the “Company,” “our Company,” “we,” “our,” “us” and “Castellum” refer to Castellum, Inc., a Nevada corporation, and its wholly owned subsidiaries.
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Part I
Item 1. Unaudited Consolidated Financial Statements
Castellum, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)

June 30,
2023
December 31,
2022
(unaudited)
Assets
Current Assets:
Cash$2,989,677 $4,640,896 
Accounts receivable6,607,784 5,193,562 
Contract asset635,691 257,434 
Prepaid income taxes371,412 351,116 
Prepaid expenses and other current assets324,553 222,995 
Total current assets10,929,117 10,666,003 
Fixed assets, net394,638 173,350 
Non-Current Assets:
Right of use asset - operating lease830,451 35,524 
Intangible assets, net10,226,492 6,634,167 
Goodwill17,393,908 15,533,964 
Total non-current assets28,845,489 22,377,005 
Total Assets$39,774,606 $33,043,008 
Liabilities and Stockholders' Equity
Liabilities
Current Liabilities
Accounts payable and accrued expenses$1,076,899 $1,617,596 
Accrued payroll and payroll related expenses3,041,351 1,869,517 
Due to seller506,847 280,000 
Obligation to issue common and preferred stock138,590  
Contingent earnout877,000 812,000 
Derivative liabilities367,000 824,000 
Revolving credit facility625,025 300,025 
Current portion of notes payable, net of discount1,979,622 2,033,348 
Current portion of lease liability - operating lease234,450 22,054 
 
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Total current liabilities8,846,784 7,758,540 
Non-Current Liabilities
Lease liability - operating lease, net of current portion571,277 12,632 
Note payable - related party, net of current portion400,000 400,000 
Convertible promissory notes - related parties, net of discount, net of current portion1,606,015 999,430 
Notes payable, net of discount, net of current portion6,298,385 6,340,490 
Total non-current liabilities8,875,677 7,752,552 
Total Liabilities17,722,461 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 June 30, 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 June 30, 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 June 30, 2023 and December 31, 2022, respectively
77 77 
Common stock, par value, $0.0001, 3,000,000,000 shares authorized, 47,373,712 and 41,699,363 issued and outstanding as of June 30, 2023 and December 31, 2022, respectively
4,737 4,170 
Additional paid in capital54,623,289 43,621,651 
Accumulated deficit(32,576,546)(26,094,570)
Total stockholders' equity22,052,145 17,531,916 
Total Liabilities and Stockholders' Equity$39,774,606 $33,043,008 
See notes to consolidated financial statements.
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Castellum, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
2023202220232022
Revenues$12,475,802 $11,055,251 $22,412,815 $21,045,392 
Cost of Revenues7,263,984 6,368,918 13,163,215 12,224,559 
Gross Profit5,211,818 4,686,333 9,249,600 8,820,833 
Operating Expenses   
Indirect costs2,241,460 3,598,611 4,452,339 5,327,806 
Overhead536,937 340,572 1,004,619 759,542 
General and administrative expenses4,244,312 3,493,605 10,290,842 6,335,745 
Change in fair value of contingent earnout83,000  65,000  
Total operating expenses7,105,709 7,432,788 15,812,800 12,423,093 
Loss From Operations Before Other Income (Expense)(1,893,891)(2,746,455)(6,563,200)(3,602,260)
Other Income (Expense)   
Gain (loss) on disposal of fixed assets2 303 (1,073)303 
Loss on induced conversion  (300,000) 
Gain (loss) from change in fair value of derivative liability593,000 (173,000)844,625 (173,000)
Interest expense, net of interest income(810,837)(911,975)(1,641,115)(1,601,601)
Total other income (expense)(217,835)(1,084,672)(1,097,563)(1,774,298)
Loss From Operations Before Benefit For Income Taxes(2,111,726)(3,831,127)(7,660,763)(5,376,558)
Income tax benefit (expense)13,280 (893,422)1,238,929 (743,794)
Net Loss(2,098,446)(4,724,549)(6,421,834)(6,120,352)
Less: preferred stock dividends29,820 29,626 60,139 40,538 
Net Loss To Common Shareholders$(2,128,266)$(4,754,175)$(6,481,973)$(6,160,890)
Net Loss Per Share - Basic And Diluted$(0.04)$(0.20)$(0.14)$(0.27)
Weighted Average Shares Outstanding - Basic And Diluted48,369,25023,891,70745,731,84222,479,278
See notes to consolidated financial statements.
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Castellum, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)

Series A PreferredSeries B Preferred Series C PreferredCommon Stock Additional
Paid-In
Capital
Accumulated
Deficit
Total
SharesAmountShares Amount SharesAmountShares Amount
Balance - December 31, 20215,875,000 $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, 20225,875,000 588 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 13 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 
Conversion of Series B Preferred to Common Shares— — (535,000)(54)— — 2,675,000 268 (214)—  
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)
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Balance - June 30, 20225,875,0005883,075,000307770,0007724,788,1322,48036,376,831-17,246,90619,133,377
Balance - December 31, 20225,875,000 588   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)
Balance - March 31, 20235,875,00058800770,0007747,247,6874,72553,333,138(30,448,280)22,890,248
Stock-based compensation - options1,089,1631,089,163 
Stock-based compensation - restricted stock and shares issued for services63,025674,99475,000 
Shares issued in private placement63,0006125,994126,000 
Net loss for the period(2,128,266)(2,128,266)
Balance - June 30, 20235,875,00058800770,0007747,373,7124,73754,623,289(32,576,546)22,052,145
See notes to consolidated financial statements.
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Castellum, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2023 and 2022
(Unaudited)
20232022
Cash Flow From Operating Activities
Net loss$(6,421,834)$(6,120,352)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization1,190,974 1,005,400 
Amortization of discounts, premium and deferred costs1,147,921 1,154,062 
Stock-based compensation4,938,021 3,736,197 
Deferred tax provision(1,089,677)610,033 
Gain on disposal of fixed assets (303)
Financing fee and bank charges for note payable and advances on revolving credit line 3,775 
Lease cost1,006 556 
Legal fees paid out of proceeds from a note payable 30,000 
Change in fair value of contingent earnout65,000  
Change in fair value of derivative liability(844,625)173,000 
Changes in assets and liabilities
Accounts receivable(473,170)(810,386)
Proceeds from factoring accounts receivable411,975  
Prepaid expenses and other current assets(12,564)(2,125)
Contract asset (liability)(378,258)(452,293)
Accounts payable and accrued expenses(399,820)(96,570)
Net cash used in operating activities(1,865,051)(769,006)
Cash Flows From Investing Activities
Acquisition of business, cash paid to seller(470,233)(250,000)
Cash paid to seller from factoring(411,975) 
Cash received in acquisition of GTMR475,000  
Purchases of fixed assets(20,526)(80,545)
Net cash (used in) provided by investing activities(427,734)(330,545)
Cash Flows From Financing Activities
Proceeds from revolving credit line325,000 300,000 
Payment of debt issuance costs(15,000) 
Proceeds from issuance of preferred and common stock126,000 625,000 
Proceeds from notes payable1,200,000 1,470,000 
Preferred stock dividend(60,139)(40,538)
Proceeds from exercise of stock options 12,000 
Repayment of amounts due to seller(280,000)(100,000)
Loss on induced conversion300,000  
Repayment of convertible note payable - related party (500,000)
Repayment of note payable(954,295)(627,074)
Net cash provided by financing activities641,566 1,139,388 
 
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Net (Decrease) Increase in Cash(1,651,219)39,837 
 
Cash - Beginning of Period4,640,896 2,017,915 
 
Cash - End of Period$2,989,677 $2,057,752 
 
Supplemental Disclosures
Cash paid for interest expense$(490,875)$(196,474)
Cash refunded (paid) from income taxes$4,751 $(102,185)
 
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 liability171,128 - 
Extinguishment of debt discount - debt issuance costs8,034 - 
Extinguishment of derivative liability on Crom note $33,375 $- 
For the non-cash activities related to the Company's acquisitions and debt transaction see Note 3, "Acquisitions" and Note 7, "Notes Payable".
See notes to consolidated financial statements.
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Castellum, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2023 and 2022
Note 1: Nature of Operations
Castellum, Inc. (the “Company”) is focused on acquiring and growing technology companies in the areas of cybersecurity, information technology, electronic warfare, and information warfare 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 works with multiple business brokers and contacts within its business network to identify potential acquisitions.
Since November 2019, the Company has made the following acquisitions that specialize in the areas noted above:
Corvus Consulting, LLC (“Corvus”),
Mainnerve Federal Services, Inc. dba MFSI Government Group (“MFSI"),
Merrison Technologies, LLC (“Merrison”),
Specialty Systems, Inc. (“SSI”),
the business assets of Pax River from The Albers Group (“Pax River”),
Lexington Solutions Group, LLC (“LSG”), and
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, 2022.
On October 13, 2022, the Company effected a $3,000,000 public offering, a 1-for-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 adjusted in accordance with SEC Staff Accounting Bulletin (“SAB”) Topic 4C.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements, including the notes, include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). All intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation for Interim Periods
Certain information and footnote disclosures normally included for the annual financial statements prepared in accordance with 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 normal and recurring in nature) necessary to present fairly our financial position and the 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 follow the accounting policies set forth in those financial statements.
Use of Estimates
The preparation of 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”) 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 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 requires 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 six months ended June 30:
20232022
Revenue:  
Time and material$12,934,662 $10,946,928 
Firm fixed price1,641,322 3,635,560 
Cost plus fixed fee7,836,831 6,462,904 
Total$22,412,815 $21,045,392 

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 June 30, 2023 that would materially impact the Company.
Note 3: 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 2022 and 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
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. 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:
March 31, 2023AdjustmentsJune 30, 2023
Cash$475,000 $ $475,000 
Accounts receivable other receivables1,380,203 (9,384)1,370,819 
Income tax receivable155,449 (127,992)27,457 
Prepaid expenses116,892 (30,856)86,036 
Other asset17,182  17,182 
Furniture and equipment163,301 103,760 267,061 
Right of use asset – operating lease 641,392 641,392 
Customer relationships2,426,000  2,426,000 
Right of use asset - finance lease 17,456 17,456 
Tradename517,000  517,000 
Backlog1,774,000  1,774,000 
Goodwill1,822,466 37,478 1,859,944 
Deferred tax liability(1,244,368) (1,244,368)
Lease liability – operating lease(17,608)(603,799)(621,407)
Lease liability – finance lease (12,549)(12,549)
Accounts payable and accrued expenses$(1,030,957)$141,341 $(889,616)
Net assets acquired$6,554,560 $156,847 $6,711,407 
The consideration paid for GTMR was as follows:
Cash$470,233 
Due to Seller350,000 
Other consideration17,791 
Cash from factoring411,975 
Common stock5,304,561 
Accounts receivable note156,847 
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 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. To determine the fair values of tangible and intangible assets acquired and liabilities assumed for 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 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.
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
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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 measurement period for the GTMR acquisition is currently open and may remain open until March 22, 2024.
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.
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 was due no later than 10 months after the closing date of the acquisition (paid in January 2023).
The following represents the assets and liabilities acquired in this acquisition:
Receivable from seller$413,609 
Due from employee/travel advance5,000 
Miscellaneous license2,394 
Customer relationships785,000 
Non-compete agreements10,000 
Backlog489,000 
Goodwill1,471,000 
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)
95,000 
Cash250,000 
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 engaged a third-party independent valuation specialist.
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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, which was excluded from the purchase price.
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 six months ended June 30, 2023 and the measurement period is closed as of June 30, 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 six months ended June 30, 2023 and 2022, as if the acquisitions of LSG and GTMR 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.
For the six months ended June 30, 2023
Revenues$25,379,875 
Net loss$(6,293,003)
Net loss per share - basic$(0.15)
For the six months ended June 30, 2022
Revenues$28,830,236 
Net loss$(5,379,080)
Net loss per share - basic$(0.24)
Note 4: Fixed Assets
Fixed assets consisted of the following as of June 30, 2023 and December 31, 2022:
June 30, 2023December 31, 2022
Equipment$230,092 $141,732 
Furniture43,119 32,574 
Software71,928 - 
Leasehold improvements192,962 83,266 
Total fixed assets538,101 257,572 
Accumulated depreciation (143,463)(84,222)
Fixed assets, net$394,638 $173,350 
Depreciation expense for the three and six months ended June 30, 2023 was $46,364 and $66,299 and depreciation expense for the three and six months ended June 30, 2022 was $6,150 and $13,484, respectively.
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Note 5: Intangible Assets and Goodwill
Intangible assets consisted of the following as of June 30, 2023 and December 31, 2022:
June 30,
2023
December 31,
2022
Customer relationships
4.515 years
$11,961,000 $9,535,000 
Tradename4.5 years783,000 266,000 
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(6,945,372)(5,820,697)
Intangible assets, net$10,226,492 $6,634,167 
The intangible assets with the exception of the trademarks were recorded as part of the acquisitions of Corvus, MFSI, Merrison, SSI, LSG, and GTMR. Amortization expense for the three and six months ended June 30, 2023 was $634,044 and $1,124,675, respectively, and amortization expense for the three and six months ended June 30, 2022 was $497,695 and $975,047, respectively, and the intangible assets are being amortized based on the estimated future lives as noted above.
Future amortization of the intangible assets for the next five years as of June 30 are as follows:
2023$1,255,628 
20242,074,686 
20251,453,000 
20261,242,863 
20271,034,302 
Thereafter3,166,013 
Total$10,226,492 
The activity of goodwill for the six months ended June 30, 2023, is as follows:
CorvusSSIMFSITotal
December 31, 20226,387,741 8,461,150 685,073 15,533,964 
Goodwill acquired through acquisitions 1,859,944  1,859,944 
June 30, 20236,387,741 10,321,094 685,073 17,393,908 
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.
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Note 6: Convertible Promissory Notes – Related Parties
The Company entered into convertible promissory notes – related parties as follows as of June 30, 2023 and December 31, 2022:
June 30,
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: Beneficial conversion feature discount(1,603,602)(2,210,187)
$1,606,015 $999,430 
Interest expense which includes amortization of discount for the three and six months ended June 30, 2023 was $336,202 and $676,322, respectively, and $382,998 and $800,217 for the three and six months ended June 30, 2022, respectively. There was no accrued interest on the note payable at June 30, 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.
The entire convertible promissory note – related parties balance is reflected in long-term liabilities.
Note 7: Notes Payable
The Company entered into notes payable as follows as of June 30, 2023 and December 31, 2022:
June 30, 2023December 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 
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 (b)
400,000 - 
Convertible note payable, convertible at $1.60 per share, at 7%, maturing April 4, 2023 (c)
 890,000 
Convertible note payable, convertible at $1.20 per share, at 10%, maturing February 13, 2024 (c)
840,000  
Term note payable, at prime plus 3% interest, applied on a deferred basis (7.75% at June 30, 2023 and 6.25% at December 31, 2022) maturing August 11, 2024
1,669,940 2,324,236 
Total Notes Payable 8,909,940 9,214,236 
Less: Debt Discount(631,933)(840,398)
$8,278,007 $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 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. Interest is paid in monthly installments and the total principal is due upon maturity.
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(c)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.
Interest expense which includes amortization of discount for the three and six months ended June 30, 2023 was $473,461 and $958,461, respectively, and $518,643 and $787,219 for the three and six months ended June 30, 2022, respectively. Accrued interest on the notes payable as of June 30, 2023 was $0.
Each note discussed above will reach maturity during 2024. Future principal payments are scheduled to be $706,943 and $8,202,997 in 2023 and 2024, respectively.
Note 8: Note Payable – Related Party
The Company entered into a note payable with a related party in August 2021 with balances as of June 30, 2023 (unaudited) and December 31, 2022, as follows:
June 30,
2023
(unaudited)
December 31,
2022
Note payable at 5% due December 31, 2024, in connection with the acquisition of SSI
$400,000 $400,000 
Interest expense for the three and six months ended June 30, 2023 was $4,984 and $9,912, respectively, and $4,990 and $9,918 for the three and six months ended June 30, 2022, respectively. The entire note payable – related party balance is reflected in noncurrent liabilities.
Note 9: 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 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 and on January 19, 2023, the Company was advanced an additional $325,000 under the Revolving Credit Facility. The Company currently has $625,025 outstanding on the Revolving Credit Facility. The Company incurred $26,442 in interest in the six months ended June 30, 2023, none of which is accrued as of June 30, 2023.
Note 10: 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 is scheduled to be paid six months following the closing date and is currently recorded in current liabilities on the Company's consolidated balance sheets as of June 30, 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.
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Note 11: Stockholders’ Equity
On October 13, 2022, the Company effected a 1-for-20 reverse split ("Reverse Stock Split") of our authorized and outstanding shares of common stock. As a result of the Reverse Stock Split, all authorized and outstanding common stock and per share amounts in this Quarterly Report on Form 10-Q, 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.
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 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 June 30, 2023 and December 31, 2022, the Company has 5,875,000 shares of Series A Preferred Stock issued and outstanding, which is convertible into 587,500 shares of the Company's common stock.
For the six months ended June 30, 2023, the Company recognized $36,538 in Series A dividends, all of which has been paid as of June 30, 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 June 30, 2023 and December 31, 2022, the Company has 0 shares of Series B Preferred Stock issued and outstanding.
Series C Preferred Stock
The Company has designated 10,000,000 shares of Series C Preferred Stock, par value of $0.0001. As of June 30, 2023 and December 31, 2022, the Company has 770,000 shares of Series C Preferred Stock issued and outstanding, which is convertible into 481,250 shares of the Company's common stock.
For the six months ended June 30, 2023, the Company recognized $23,600 in Series C dividends, all of which has been paid as of June 30, 2023.
Common Stock
The Company has 3,000,000,000 shares of common stock, par value $0.0001 authorized. The Company has 47,373,712 and 41,699,363 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively. Shares issued during the six months ended June 30, 2023 were as follows:
The Company issued 188,529 shares for services;
4,866,570 shares issued in the acquisition of GTMR;
556,250 shares issued to partially extinguish the Prior Crom Note;
63,000 shares issued to an existing shareholder in a private placement at $2.00 per share.
During the six months ended June 30, 2023, the Company issued 314,600 restricted shares of common stock, that vest ratably over a period of one year, to its Board of Directors for their service. Any unvested restricted shares of common stock are forfeited upon termination of the Board members position on the Board of Directors prior to the end of 2023. As of June 30, 2023, there were 188,529 total restricted shares of common stock that have vested and 126,071 that are expected to vest during the remainder of 2023.
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Warrants
The following represents a summary of warrants for the six months ended June 30, 2023 and the year ended December 31, 2022:
Six Months Ended
June 30, 2023
Year Ended
December 31, 2022
NumberWeighted
Average
Exercise
Price
NumberWeighted
Average
Exercise
Price
Beginning balance5,678,836$1.84 3,161,568$1.60 
Granted1,765,8621.17 2,517,2682.22 
Ending balance7,444,698$1.68 5,678,836$1.84 
Warrants exercisable 7,444,6985,678,836
Intrinsic value of warrants$545,358 $1,374,303 
Weighted Average Remaining Contractual Life (Years)5.205.48
No warrants were granted during the three months ended June 30, 2023. During the six months ended June 30, 2023, the Company granted 1,065,862 warrants to two of its officers at $1.04 per share that expire 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. The Company also granted 700,000 warrants to Crom, as part of the debt transaction discussed in Note 7, at $1.38 per share that expire on February 13, 2028.
All of the warrants have been fully expensed through June 30, 2023.
Options
The Company on November 9, 2021, approved the Stock Incentive Plan, that authorizes the Company to grant up to 2,500,000 shares and options. Prior to this date, the granting of options was not done in accordance with a stock option plan. As of June, 30, 2023, 862,500 stock options have been granted under the Stock Incentive Plan.
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The following represents a summary of options for the six months ended June 30, 2023 and the year ended December 31, 2022:
NumberWeighted
Average
Exercise
Price
Weighted-Average Remaining Contractual Term (in Years)Weighted
Average
Fair Value
Outstanding, December 31, 20226,425,000$2.69 5.63$4.26 
Granted812,5001.62 6.841.10 
Exercised
Forfeited
Outstanding. March 31, 20237,237,500$2.57 5.55$3.91 
Granted
Exercised
Forfeited
Outstanding, June 30, 20237,237,500 $2.57 5.30$3.91 
As of June 30, 2023
Vested and exercisable3,511,122$2.31 5.02$3.21 
During the six months ended June 30, 2023, the Company recognized $3,525,463 of noncash stock based compensation related to the vesting of service-based stock options. No options were exercised during the six months ended June 30, 2023.
The fair value of each option and warrant is estimated using the Black-Scholes valuation model. Changes to these inputs could produce a significantly higher or lower fair value measurement. The following assumptions were used for the periods as follows:
Three Months
Ended
June 30,
2023
Year
Ended
December 31, 2022
Expected term7 years7 years
Expected volatility
116162%
114157%
Expected dividend yield  
Risk-free interest rate
3.533.89%
2.00% - 4.18%
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. U.S. 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.
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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 securities purchase agreement with Crom (“Derivative Liabilities”) in 2022. During the three months ended March 31, 2023, the Company terminated the Prior Crom 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 the 2023 Note Payable with Crom and issued common stock, a convertible note, and warrants under the 2023 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 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 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 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 Consolidated Statements of Operations.
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. As a result, the Company has determined that the valuation of its 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 June 30, 2023
Level 1Level 2Level 3Total
Crom Derivative Liabilities$ $ $202,000 $202,000 
Prior Crom Note warrant liability$ $ $165,000 $165,000 
Contingent earnout$ $ $877,000 $877,000 
Total$ $ $1,244,000 $1,244,000 
Fair Value Measurements at December 31, 2022
Level 1Level 2Level 3Total
Crom Derivative Liabilities$- $- $824,000 $824,000 
Contingent earnout$- $- $812,000 $812,000 
Total$- $- $1,636,000 $1,636,000 
The Company’s derivative liabilities as of June 30, 2023 and December 31, 2022 associated with the Derivative Liabilities are as follows.
June 30, 2023December 31,
2022
Inception
Fair value of conversion option of Prior Crom note$ $191,000 $314,000 
Fair value of 656,250 warrants on April 4, 2022
165,000 633,000 378,000 
Fair value of conversion option of Crom Cortana Fund LLC convertible note29,000  162,000 
Fair value of 700,000 warrants on February 13, 2023
173,000  259,000 
$367,000 $824,000 
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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 period as follows:
June 30,
2023
Expected term – conversion option0.60 years
Expected term - warrants4.60 years
Stock price as of measurement date$0.50 
Equity volatility - unadjusted111.10 %
Volatility haircut5.00 %
Selected volatility – post haircut107.20 %
Senior unsecured synthetic credit ratingCCC+
OAS differential between CCC+ and B- bonds881 bps
Risk-free interest rate8.35 %
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 six months ended June 30, 2023 and 2022, the Company had two customers representing 44% and 38% of revenue earned, respectively. Any customer that represents 10% or greater of total revenue represents a risk. The Company also has three customers that represent 57% and 60% of the total accounts receivable as of June 30, 2023 and December 31, 2022, respectively.
Note 14: Commitments
As part of the acquisition of GTMR, the Company entered into an employment agreement with the GTMR Chief Executive Officer (the "Executive") on March 22, 2023 for a three year term. During the term of the employment agreement, the Company shall pay the Executive an annual base salary of $200,000 (the “Base Salary”). The Base Salary shall be payable to the Executive during the term in substantially equal installments in accordance with the Company’s customary payroll practices. 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 awarded in an amount equal to $0.25 for every $1 above the Threshold up to a net profit of $2,000,000. The Annual Bonus amount payable to the Executive for fiscal year 2023 shall not exceed $250,000.
Note 15: 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. The effective income tax rate was (0.7)% and (23.3)% for the three months ended June 30, 2023 and 2022, respectively, and 16.4% and (13.8)% for the six months ended June 30, 2023 and 2022, respectively. The decrease in the effective tax rate was primarily due to the establishment of a valuation allowance against the Company's net deferred tax assets in the three months ended June 30, 2022. The increase in the effective tax rate for the six months was primarily due to the release of the valuation allowance due to the increase in deferred tax liabilities that related to the GTMR acquisition in the first quarter of 2023.

Note 16: Factoring of Accounts Receivable

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

During the six months ended June 30, 2023, total receivables sold under the Factoring Agreement was $1,335,813. Without recourse indicates that the Company assigns and transfers its rights, title, and interest in and to the accounts receivable to RCA, meaning that the Company will not be liable to repay all or any portion of the advance amount if any portion of the 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 being accepted for factoring. Pursuant to the 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.

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 $8,257 for the six months ended June 30, 2023.
Note 17: Subsequent Events
Castellum, Inc. has performed an evaluation of subsequent events through the date the consolidated financial statements were issued. This evaluation did not result in any subsequent events that necessitated disclosure and/or adjustments.
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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 financial statements and related notes included in our Annual Report on Form 10-K for fiscal year 2022 filed with the Securities and Exchange Commission on March 17, 2023 and elsewhere in this Quarterly Report on Form 10-Q, as applicable.
Business Overview
Castellum, Inc. is focused on acquiring and growing technology companies in the areas of cybersecurity, IT, electronic warfare, information warfare, and information operations with businesses in the governmental and commercial markets. Our services include intelligence analysis, software development, software engineering, program management, strategic and mission planning, information assurance, cybersecurity and policy support, and data analytics. Our primary customers are agencies and departments of the U.S. Government ("USG"), and our expertise and technology support national security missions and government modernization for intelligence, defense, and federal civilian customers.
Recent Developments
On March 23, 2023, the Company closed on its acquisition of Global Technologies Management Resources, Inc. ("GTMR"). Subject to the terms and conditions of the Agreement and Plan of Merger, 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, par value $0.0001 per share and (b) $1,250,000 in cash.
Budgetary Environment

On August 2, 2023, the U.S. Senate passed their version of the National Defense Authorization Act ("NDAA") and have adjourned to return in September when lawmakers in the U.S House of Representatives and U.S. Senate will negotiate the final NDAA. Although the final NDAA is subject to further negotiations and is expected to have additional revisions, we do not believe that there will be revisions that have an impact on our existing contracts. We will continue to monitor the process closely as the NDAA progresses through the appropriations process.
Basis of presentation
We have presented results of operations, including the related discussion and analysis, for the following periods:
the three months ended June 30, 2023 compared to the three months ended June 30, 2022;
the six months ended June 30, 2023 compared to the six months ended June 30, 2022.
Key Components of Revenue and Expenses
Revenues
Our revenues are primarily derived from services provided to the U.S. Federal, state, and local governments. We currently generate our revenue from three different types of contractual arrangements: Cost Plus Fixed Fee (“CPFF”), Fixed Firm Price (“FFP”) and Time and Materials (“T&M”) contracts. For CPFF contracts, we use input progress measures to derive revenue based on hours worked on contract performance as follows: direct costs plus Defense Contract Audit Agency 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.

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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.
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.

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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 consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
Three Months Ended June 30,Change
20232022Amount%
Revenues$12,475,802 $11,055,251 $1,420,551 13 %
Cost of revenues7,263,984 6,368,918 895,066 14 %
Gross Profit5,211,818 4,686,333 525,485 11 %
Operating expenses:
Indirect costs2,241,460 3,598,611 (1,357,151)(38)%
Overhead536,937 340,572 196,365 58 %
General and administrative expenses4,244,312 3,493,605 750,707 21 %
Gain from change in fair value of contingent earnout83,000 — 83,000 — %
Total operating expenses7,105,709 7,432,788 (327,079)(4)%
Loss from operations:(1,893,891)(2,746,455)