ctm-20240930

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2024


o			TRANSITION 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)


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

1934 Old Gallows Road, Suite 350, Vienna, VA 22182

(703) 752-6157

(Address and telephone number of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:


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

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 November 11, 2024
Common Stock, par value $0.0001 per share			56,109,928

Table of Contents

CASTELLUM, INC.

FORM 10-Q

For the Quarter Ended September 30, 2024

INDEX


PART I			3
Item 1. Unaudited Consolidated Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3. Quantitative and Qualitative Disclosures About Market Risk			42
Item 4. Controls and Procedures			43
PART II			44
Item 1. Legal Proceedings			44
Item 1A. Risk Factors			44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3. Defaults Upon Senior Securities			46
Item 4. Mine Safety Disclosures			46
Item 5. Other Information			46
Item 6. Exhibits			47
Signatures			51

Table of Contents

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:

•our limited operating history, ongoing net income losses, and growth trajectory;

•our ability to attract and retain senior management and other employees with suitable experience leading a public company;

•our ability to raise additional capital on acceptable terms and to service our ongoing debt obligations;

•changes in political, economic, or regulatory conditions generally and in the markets in which we operate including the 2024 elections and their aftermath;

•our ongoing relationships with government entities, agencies, and teaming partners;

•overall levels of government spending on defense spending and spending on IT services, including potential imposition of sequestration in the absence of an approved budget or continuing resolution;

•our ability to win new contracts amidst increased levels of competition in contract bidding process;

•delays due to the appropriation process, change in the procurement process, and audits or cost adjustments to our contracts;

•our inability to receive full amounts authorized, or ongoing lack of funding, for contracts in our backlog;

Table of Contents

•potential systems failures, security breaches, or the inability of Company employees to obtain required clearances;

•our ability successfully to execute additional acquisitions and integrate those operations into our ongoing businesses; and

•the effect of ongoing financing efforts and volatility of our common stock share price.

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.

Table of Contents

Part I

Item 1. Unaudited Consolidated Financial Statements

Castellum, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)


	September 30, 2024		December 31, 2023
	(unaudited)
Assets

Current Assets:
Cash	$	2,742,961	$	1,830,841
Accounts receivable, net	5,611,060		6,883,566
Contract asset	5,783		160,649
Due from buyer	205,897		—
Income tax receivable	238,817		—
Prepaid income taxes	—		216,909
Prepaid expenses and other current assets	525,347		404,228
Total current assets	9,329,865		9,496,193

Fixed assets, net	193,546		310,170

Non-Current Assets:
Due from buyer, net of current portion	191,470		—
Right of use asset - operating lease	1,147,883		613,143
Investment in captive insurance entity	52,110		—
Intangible assets, net	7,252,948		8,970,864
Goodwill	10,676,834		10,716,907
Total non-current assets	19,514,791		20,611,084

Total Assets	$	28,844,656	$	30,107,277

Liabilities and Stockholders' Equity

Liabilities

Current Liabilities
Accounts payable and accrued expenses	$	1,004,207	$	784,965
Accrued payroll and payroll related expenses	3,598,833		2,925,312
Due to seller	240,000		350,000
Obligation to issue common and preferred stock	402,708		255,940
Contingent earnout	—		380,000

Table of Contents


Derivative liabilities	40,000		157,600
Revolving credit facility	1,514,818		625,025
Notes payable, related party	100,000		—
Current portion of convertible promissory notes - related parties, net of discount	—		238,212
Current portion of notes payable, net of discount	1,200,000		2,074,775
Current portion of lease liability - operating lease	301,136		185,263
Total current liabilities	8,401,702		7,977,092

Non-Current Liabilities
Deferred tax liability	—		6,292
Lease liability - operating lease, net of current portion	857,890		435,204
Due to Seller, net of current portion	160,000		—
Contingent earnout, net of current portion	—		340,000
Convertible promissory notes - related parties, net of discount, net of current portion	—		2,000,000
Notes payable, net of current portion	7,100,000		6,000,000
Notes payable, related party, net of current portion	300,000		400,000
Total non-current liabilities	8,417,890		9,181,496

Total Liabilities	$	16,819,592	$	17,158,588

Stockholders' Equity
Preferred stock, 50,000,000 shares authorized
Series A Preferred stock, par value $0.0001; 10,000,000 shares authorized; 5,875,000 issued and outstanding as of September 30, 2024 and December 31, 2023, respectively	588		588
Series C Preferred stock, par value $0.0001; 10,000,000 shares authorized; 770,000 and 770,000 issued and outstanding as of September 30, 2024 and December 31, 2023, respectively	77		77
Common stock, par value, $0.0001, 3,000,000,000 shares authorized, 56,109,928 and 47,672,427 issued and outstanding as of September 30, 2024 and December 31, 2023, respectively	5,611		4,767
Additional paid in capital	63,329,698		56,926,157
Accumulated deficit	(51,310,910)		(43,982,900)
Total stockholders' equity	12,025,064		12,948,689

Total Liabilities and Stockholders' Equity	$	28,844,656	$	30,107,277

See notes to unaudited consolidated financial statements.

Table of Contents

Castellum, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Revenues	$	11,608,691	$	11,741,164	$	34,466,131	$	34,153,979

Cost of Revenues	6,650,035		6,903,689		20,318,846		20,066,904

Gross Profit	4,958,656		4,837,475		14,147,285		14,087,075

Operating Expenses
Indirect costs	2,449,974		2,258,082		7,152,304		6,710,421
Overhead	495,482		493,706		1,464,363		1,498,325
General and administrative	3,396,297		3,739,975		11,155,142		14,030,818
Goodwill impairment loss	—		6,919,094		—		6,919,094
Gain from change in fair value of contingent earnout	—		—		—		65,000
Total operating expenses	6,341,753		13,410,857		19,771,809		29,223,658

Loss From Operations Before Other Income (Expense)	(1,383,097)		(8,573,382)		(5,624,524)		(15,136,583)

Other Income (Expense)
Loss on induced conversion	—		—		—		(300,000)
Loss on extinguishment of debt	—		—		(822,847)		—
Gain from change in fair value of derivative liability	15,000		241,700		117,400		1,086,325
Gain from sale of subsidiary	39,234		—		39,234		—
Other income, net	—		85,230		—		84,157
Interest expense, net of interest income	(208,709)		(843,148)		(950,905)		(2,484,263)


Total other income (expense)	(154,475)		(516,218)		(1,617,118)		(1,613,781)

Loss From Operations Before Benefit For Income Taxes	(1,537,572)		(9,089,600)		(7,241,642)		(16,750,364)

Income tax benefit (expense)	257,480		(102,584)		3,090		1,136,345

Net Loss	(1,280,092)		(9,192,184)		(7,238,552)		(15,614,019)
Less: preferred stock dividends	29,819		28,719		89,458		88,858
Net Loss To Common Shareholders	$	(1,309,911)	$	(9,220,903)	$	(7,328,010)	$	(15,702,877)

Net Loss Per Share - Basic And Diluted	$	(0.02)	$	(0.19)	$	(0.13)	$	(0.34)

Weighted Average Shares Outstanding - Basic And Diluted	57,190,645		48,527,472		54,845,606		46,673,959

Table of Contents

See notes to unaudited consolidated financial statements.

Table of Contents

Castellum, Inc. and Subsidiaries

Consolidated Statement of Changes in Stockholders' Equity

(Unaudited)


	Series A Preferred			Series B Preferred			Series C Preferred			Common Stock			Additional Paid-In Capital		Accumulated Deficit		Total
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Balance - December 31, 2022	5,875,000	$	588	—	$	—	770,000	$	77	41,699,363	$	4,170	$	43,621,651	$	(26,094,570)	$	17,531,916

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

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

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

Stock-based compensation - options	—	—		—	—		—	—		—	—		1,089,163		—		1,089,163
Stock-based compensation - restricted stock and shares issued for services	—	—		—	—		—	—		63,025	6		74,994		—		75,000
Shares issued in private placement	—	—		—	—		—	—		63,000	6		125,994		—		126,000

Table of Contents



Net loss for the period	—	—		—	—		—	—		—	—		—		(2,128,266)		(2,128,266)

Balance - June 30, 2023	5,875,000	588		—	—		770,000	77		47,373,712	4,737		54,623,289		(32,576,546)		22,052,145

Stock-based compensation - options	—	—		—	—		—	—		—	—		1,089,163		—		1,089,163
Stock-based compensation - shares issued to advisory board	—	—		—	—		—	—		48,000	5		17,275		—		17,280
Stock-based compensation - restricted shares	—	—		—	—		—	—		132,690	13		100,066		—		100,079
Shares issued to Crom Cortana in Crom Transaction	—	—		—	—		—	—		25,000	3		10,997		—		11,000
Balance sheet reclassification adjustment (Note 2)	—	—		—	—		—	—		—	—		(304,500)		30,000		(274,500)
Net loss for the period	—	—		—	—		—	—		—	—		—		(9,220,903)		(9,220,903)

Balance - September 30, 2023	5,875,000	$	588	—	$	—	770,000	$	77	47,579,402	$	4,758	$	55,536,290	$	(41,767,449)	$	13,774,264

Balance - December 31, 2023	5,875,000	$	588	—	$	—	770,000	$	77	47,672,427	$	4,767	$	56,926,161	$	(43,982,904)	$	12,948,689

Stock-based compensation - options	—	—		—	—		—	—		—	—		1,657,822		—		1,657,822

Shares issued to institutional investor	—	—		—	—		—	—		5,357,487	536		755,231		—		755,767
Private warrants issued to institutional investor	—	—		—	—		—	—		—	—		1,081,471		—		1,081,471
Pre-funded warrants issued to institutional investor	—	—		—	—		—	—		—	—		525,905		—		525,905




Net loss for the period	—	—		—	—		—	—		—	—		—		(4,141,541)		(4,141,541)

Balance - March 31, 2024	5,875,000	588		—	—		770,000	77		53,029,914	5,303		60,946,590		(48,124,445)		12,828,113

Table of Contents


Stock-based compensation - options	—	—		—	—		—	—		—	—		1,127,762		—		1,127,762



Net loss for the period	—	—		—	—		—	—		—	—		—		(1,876,554)		(1,876,554)

Balance - June 30 2024	5,875,000	588		—	—		770,000	77		53,029,914	5,303		62,074,352		(50,000,999)		12,079,321

Stock-based compensation - options	—	—		—	—		—	—		—	—		1,252,574		—		1,252,574
Shares issued to institutional investor	—	—		—	—		—	—		3,080,014	308		2,772		—		3,080
Net loss for the period	—	—		—	—		—	—		—	—		—		(1,309,911)		(1,309,911)

Balance - September 30, 2024	5,875,000	$	588	—	$	—	770,000	$	77	56,109,928	$	5,611	$	63,329,698	$	(51,310,910)	$	12,025,064

See notes to unaudited consolidated financial statements.

Table of Contents

Castellum, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2024 and 2023

(Unaudited)


	2024		2023
Cash Flow From Operating Activities
Net loss	$	(7,238,552)	$	(15,614,019)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	1,723,553		1,865,839
Amortization of discounts, premium and deferred costs	1,118,194		1,746,019
Stock-based compensation	4,184,930		6,112,184
Deferred tax provision	(6,290)		(1,486,460)
Goodwill impairment loss	—		6,919,094
Lease cost	214,672		128,403
Gain on sale of subsidiary	(39,234)		—
Gain from timing difference on issuance of shares	—		(85,231)
Change in fair value of contingent earnout	—		65,000
Change in fair value of derivative liability	(117,400)		(1,086,325)
Gain on lease termination	(9,225)		—
Changes in assets and liabilities, net of acquisition
Accounts receivable	932,912		(2,118,021)
Proceeds from factoring accounts receivable	—		850,141
Prepaid expenses and other current assets	(134,336)		335,262
Contract asset (liability)	154,865		(318,509)
Accounts payable and accrued expenses	932,076		(354,502)
Lease liability	(201,628)		(94,295)
Net cash provided by (used in) operating activities	1,514,537		(3,135,420)

Cash Flows From Investing Activities
Acquisition of business, cash paid to seller	—		(485,739)
Sale of subsidiary, cash received from buyer	109,523		—
Cash paid to seller from factoring	—		(411,975)
Cash received in acquisition of GTMR	—		475,000
Purchases of fixed assets	(3,317)		(20,526)
Investment in captive insurance entity	(54,534)		—
Net cash provided by (used in) in investing activities	51,672		(443,240)

Cash Flows From Financing Activities
Proceeds from revolving credit line	889,793		325,000
Payment of debt issuance costs	(19,266)		(15,000)
Proceeds from issuance of common stock, prefunded warrants and regular warrants, net of issuance costs	2,366,223		126,000
Proceeds from notes payable	—		1,200,000

Table of Contents


Preferred stock dividend	(89,458)		(88,858)


Repayment of amounts due to seller	(670,000)		(280,000)
Loss on induced conversion			300,000
Repayment of convertible note payable - related party	(809,617)		—
Repayment of note payable	(2,321,764)		(1,293,401)
Net cash provided by (used in) financing activities	(654,089)		273,741

Net increase (decrease ) in cash	912,120		(3,304,919)

Cash - Beginning of Period	1,830,841		4,640,896

Cash - End of Period	$	2,742,961	$	1,335,977

Supplemental Disclosures
Cash paid for interest expense	$	607,133	$	749,465
Cash refunded (paid) from income taxes	$	25,813	$	(4,751)

Summary of Non-Cash Activities:

Debt discount on note payable applied to obligation to issue common stock	$	—	$	28,000
Derivative liability incurred for note payable	$	—	$	421,000
Extinguishment of debt discount - derivative liability	$	—	$	171,128
Extinguishment of debt discount - debt issuance costs	$	—	$	8,034
Extinguishment of derivative liability on Crom note	$	—	$	33,375
Gain on lease termination	$	9,225	$	—
Derecognition of lease liability	$	396,388	$	—
Derecognition of right of use asset	$	387,164	$	—

For the non-cash activities related to the Company's debt transactions see Note 6, "Convertible Promissory Notes - Related Party" and Note 7, "Notes Payable".

See notes to unaudited consolidated financial statements.

Table of Contents

Castellum, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2024 and 2023

Note 1: Nature of Operations

Castellum, Inc. (the “Company”) is focused on building a large, successful technology company in the areas of cybersecurity, information technology, electronic warfare, information warfare, and information operations with businesses in the defense, federal, civilian, and commercial markets (the "Markets"). Services include intelligence analysis, software development, software engineering, program management, strategic and mission planning, information assurance, cybersecurity and policy support, data analytics, and model based systems engineering ("MBSE"). These services, which largely focus on securing data and establishing related policies, are applicable to customers in the United States ("U.S.") 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, “Acquisition and Disposition” for greater detail on the GTMR acquisition and the disposition of MFSI.

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, 2023 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.

Table of Contents

Business Segments

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) and in deciding how to allocate resources and in assessing performance. The Company’s CODM, the Chief Executive Officer, conducts a review of the consolidated results of operations to make decisions. The Company maintains one operating and reportable segment, which is the delivery of products and services in the Markets.

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 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 and goodwill, impaired value of intangible assets, self-insurance expense and accruals, 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 these estimates.

Revenue Recognition

The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606").

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

Table of Contents

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 a 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. FFP contracts require the use of an input method based on estimated costs to complete. 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 manpower.

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 of up to five years.

Contract accounting requires judgment relative to assessing risks and estimating contract revenue, as well as 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 340-40, Other Assets and Deferred Costs - Contracts with Customers. The Company recognizes the cost of sales of a contract as an 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

Table of Contents

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 three months ended September 30:


	2024		2023
Revenue:
Time and material	$	6,254,135	$	6,546,903
Firm fixed price	810,812		811,404
Cost plus fixed fee	4,543,744		4,382,857

Total	$	11,608,691	$	11,741,164

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


	2024		2023
Revenue:
Time and material	$	18,945,698	$	19,481,565
Firm fixed price	2,323,228		2,452,726
Cost plus fixed fee	13,197,205		12,219,688

Total	$	34,466,131	$	34,153,979

Accounting for Income Taxes

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

We are subject to income taxes in the Federal and state tax jurisdictions based upon our business operations in those jurisdictions. Significant judgment is required in evaluating uncertain tax positions. We record uncertain tax positions in accordance with ASC 740-10, Income Taxes - Overall, 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 up on ultimate settlement with the related tax authority. Management evaluates its tax positions on a quarterly basis.

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

Table of Contents

Recent Accounting Pronouncements

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.

Reclassification Adjustment

The Company identified an immaterial error in its annual and interim financial statements for the year ended December 31, 2022 and the first and second quarters of 2023, whereby additional paid in capital was overstated by $304,500 and the obligation to issue common shares account and the accumulated deficit account were understated by $274,500 and $30,000 respectively. These immaterial amounts have been adjusted and the corrected balances are reflected in the Company's Consolidated Balance Sheets, Consolidated Statements of Cash Flows, and the Consolidated Statement of Changes in Stockholders' Equity.

Note 3: Acquisition and Disposition

Since January 1, 2023, the Company has completed the following acquisition and disposition to achieve its business purposes as discussed in Note 1.

GTMR

On March 22, 2023, the Company entered into an agreement and plan of merger with GTMR (the "GTMR Acquisition"). The GTMR Acquisition was accounted for as a business combination whereby GTMR became a 100% owned subsidiary of the Company. The Company acquired GTMR to expand its capabilities, increase market share, gain access to new contracts, and achieve cost efficiencies through synergies and economies of scale.

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

Table of Contents



	March 31, 2023		Adjustments		March 22, 2024
Cash	$	475,000	$	—	$	475,000
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	17,182		—		17,182
Furniture and equipment	163,301		103,760		267,061
Right of use asset – operating lease	—		641,392		641,392
Customer relationships	2,426,000		—		2,426,000
Right of use asset - finance lease	—		17,456		17,456
Tradename	517,000		—		517,000
Backlog	1,774,000		—		1,774,000
Goodwill	1,822,466		279,571		2,102,037
Deferred tax liability	(1,244,368)		(242,093)		(1,486,461)
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 Seller	350,000
Other consideration	17,791
Cash from factoring	411,975
Common stock	5,304,561
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 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 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 GTMR Acquisition, the Company simultaneously factored $411,975 of the accounts receivable from GTMR to finance the GTMR Acquisition.

The Company paid $185,896 in transaction costs of GTMR, which was excluded from the purchase price, issued an accounts receivable note (the “Accounts Receivable Note”), and held back $350,000, the details of which have been discussed in amounts Due to Seller in Note 10, "Due to Seller and Contingent Earnout." As of September 30, 2024, the remaining balance under this note is $0.

Table of Contents

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 measurement period for the GTMR Acquisition closed as of March 22, 2024.

During the measurement period, the Company recorded several adjustments to goodwill as a result of GTMR's adoption of ASC 842, Leases, 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 evaluation.

The Company also recorded a measurement period adjustment to goodwill as a result of finalizing the transaction price. The Company entered into the Accounts Receivable Note 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.

The following table shows unaudited pro-forma results for the nine months ended September 30, 2023, as if the acquisition of GTMR had occurred on January 1, 2023. These unaudited pro forma results of operations are based on the historical financial statements of each of the companies.


For the nine months ended September 30, 2023
Revenues	$	36,521,201
Net loss	$	(15,523,013)
Net loss per share - basic	$	(0.32)

MFSI

On September 11, 2024, the Company entered into a stock purchase agreement with Lead-Risk Millenia, LLC (the "Buyer") for the sale of one of its subsidiaries, MFSI (the "MFSI Divestiture"). The stock purchase agreement, approved by the Board of Directors on September 13, 2024, was for the purchase and sale of 100% of the issued and outstanding stock of MFSI, which became effective on September 16, 2024. The stock purchase agreement requires an initial cash payment of $15,000. Additionally, the Company will receive future consideration equal to 6% of all revenue generated by MFSI until September 30, 2029, or until total payments reach $705,000, whichever comes first. As part of the MFSI Divestiture, the Company retained all of MFSI's cash deposits and accounts receivable in excess of $150,000.

Management estimated the present value of future consideration to be received, recognizing short and long term components of a receivable, which we will accrete over time and reassess periodically. An 8.5% discount rate was applied to calculate the present value of the receivable, totaling $296,009 ("Anticipated Receivable"). The Company recorded a gain of $39,234 from the MFSI Divestiture. The balance of the Anticipated Receivable, accounts receivable in excess of $150,000, and any payments made by the Company on behalf of the Buyer, are reflected in Due from Buyer on the Consolidated Balance Sheets.

After considering qualitative and quantitative aspects of MFSI and its sale relative to the Guidance of ASC 205-20, Presentation of Financial Statements - Discontinued Operations, Management concluded MFSI should not be reported or disclosed as a discontinued operation. Further, because MFSI represented less than 5% of the total revenue for the Company, and as such was immaterial to the Company's financial statements and pro forma financial statements are not required.

Table of Contents

Note 4: Fixed Assets

Fixed assets consisted of the following as of September 30, 2024 and December 31, 2023:


	September 30, 2024		December 31, 2023
Equipment and software	$	261,408	$	258,091
Furniture	43,119		43,119
Automobile	43,928		43,928
Leasehold improvements	192,959		192,959
Total fixed assets	541,414		538,097
Accumulated depreciation	(347,868)		(227,927)
Fixed assets, net	$	193,546	$	310,170

Depreciation expense for the three and nine months ended September 30, 2024, was $38,855 and $119,942, and depreciation expense for the three and nine months ended September 30, 2023, was $40,822 and $107,121, respectively.

Note 5: Intangible Assets and Goodwill

Intangible assets consisted of the following as of September 30, 2024 and December 31, 2023:


		September 30, 2024		December 31, 2023
Customer relationships	4.5– 15 years	$	11,613,000	$	11,961,000
Tradename	4.5 years	783,000		783,000
Trademark	10-15 years	533,863		533,864
Backlog	2-5 years	3,210,000		3,210,000
Non-compete agreement	3-5 years	680,000		684,000
		16,819,863		17,171,864
Accumulated amortization		(9,566,915)		(8,201,000)
Intangible assets, net		$	7,252,948	$	8,970,864

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 nine months ended September 30, 2024 was $517,669 and $1,603,611, respectively, and amortization expense for the three and nine months ended September 30, 2023 was $634,043 and $1,758,718, respectively. Upon the MFSI Divestiture as disclosed in Note 3, “Acquisition and Disposition” the intangible assets of MFSI were removed. The intangible assets are being amortized based on the estimated future lives as noted above.

Table of Contents

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


Remainder of the year ending December 31, 2024	$	221,501
Year ending 2025	1,422,149
Year ending 2026	1,218,182
Year ending 2027	1,014,558
Year ending 2028	528,784
Year ending 2029 and thereafter	2,847,774
Total	$	7,252,948

The activity of goodwill for the nine months ended September 30, 2024, is as follows:


	Corvus		SSI		MFSI		Total
December 31, 2023	$	1,958,741	$	8,718,093	$	40,073	$	10,716,907
Goodwill removed through dispositions	—		—		(40,073)		(40,073)

September 30, 2024	$	1,958,741	$	8,718,093	$	—	$	10,676,834

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. There were no additions of goodwill for the nine months ended September 30, 2024. Upon the MFSI Divestiture as disclosed in Note 3, “Acquisition and Disposition”, goodwill associated with MFSI was removed.

Note 6: Convertible Promissory Note - Related Party

We had the following promissory note as of September 30, 2024 and December 31, 2023:


	September 30, 2024		December 31, 2023
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, maturity date September 30, 2024)	—		3,209,617

Less: Beneficial conversion feature discount	—		(971,405)
	$	—	$	2,238,212

Interest expense which includes amortization of discount for the three and nine months ended September 30, 2024, was $0 and $245,438, respectively, and interest expense which includes amortization of discount for the three and nine months ended September 30, 2023 was $354,230 and $1,030,552, respectively. There was no accrued interest on the note payable as of September 30, 2024. The amount of the beneficial conversion feature ("BCF") discount recorded was evaluated for characteristics of liability or equity and was determined to be equity under ASC 470, Debt ("ASC 470") and ASC 480, Distinguishing Liabilities from Equity ("ASC 480"). The Company recognized this as additional paid in capital, and the discount was being amortized over the life of the note.

On February 22, 2024, the Company entered into an agreement to amend the related party convertible promissory note with the Buckhout Charitable Remainder Trust, resulting in the elimination of the BCF discount feature, change in the interest rate, extension of the term, and change in the payoff schedule. As part of this amendment, a partial payment of $809,617 was made on the date of the agreement, resulting in an outstanding balance of $2,400,000 as of that date. The change in terms of the note were evaluated for

Table of Contents

characteristics of modification or extinguishment, and it was determined that under ASC 470, the debt amendment was considered to be an extinguishment, thus the amended note is considered a new note. As of February 22, 2024, the remaining unamortized carrying value of the BCF was $761,783, which was treated as a loss on debt extinguishment on the income statement. Concurrent with this amendment, we determined that the trustee of the Buckhout Charitable Remainder Trust (who resigned as an officer of the Company) is no longer a related party to the Company. See Note 7, "Notes Payable" for more information about the terms of the new note.

Note 7: Notes Payable

Our notes payable consists of the following as of September 30, 2024 and December 31, 2023:


	September 30, 2024		December 31, 2023
Note payable at 7% originally due November 2023, maturing September 30, 2024 (a)	$	—	$	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)	—		400,000
Note payable at 7.5% dated February 22, 2024, maturing August 31, 2026 (c)	6,000,000		-
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 (d)	—		400,000
Convertible note payable, convertible at $1.60 per share, at 7%, maturing April 4, 2023 (e)	—		840,000
Promissory note payable (f)	2,300,000		—
Term note payable, at prime plus 3% interest, applied on a deferred basis (11.50% at September 30, 2024 and 6.25% at December 31, 2023) maturing August 11, 2024 (g)	—		981,764

Total Notes Payable	8,300,000		8,221,764
Less: Debt Discount	—		(146,989)
	$	8,300,000	$	8,074,775

(a)On August 12, 2021, the note payable was amended to extend the maturity date to September 30, 2024 (the "Eisiminger Note 1"). It was determined that under ASC 470, the debt amendment was considered a modification. 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 and the entire balance was fully amortized as of December 31, 2023. On February 22, 2024, the Company entered into an agreement to amend the Eisiminger Note 1, resulting in a change to the interest rate and an extension of the maturity date. The amended note was evaluated for characteristics of debt modification or extinguishment and it was determined that under ASC 470, the debt amendment was considered an extinguishment. As a result of the amendment, the Eisiminger Note 1 was combined with Eisiminger Note 2 as defined and described in (b) below, resulting in a new note, (the "2024 Eisiminger Note"). See (c) below.

Table of Contents

(b)On February 28, 2022, the Company was obligated to issue 125,000 shares of common stock as further consideration for making this loan to the Company (the "Eisiminger Note 2"). The shares were issued in April 2022. On February 22, 2024, the Company entered into an agreement to amend the Eisiminger Note 2 resulting in a change to the interest rate and an extension of the maturity date. The Eisiminger Note 2 was evaluated for characteristics of debt modification or extinguishment and it was determined that under ASC 470, the debt amendment was considered an extinguishment. Therefore, the remaining unamortized debt discount balance of $61,263 was recorded as a loss in the income statement. As a result of the amendment, the principal balances of the Eisiminger Note 2 was combined with the Eisminger Note 1 as described in (a) above, resulting in the 2024 Eisiminger Note. See (c) below.

(c)On February 22, 2024, as a result of amending the Eisiminger Note 1 and the Eisiminger Note 2, the Company entered into the 2024 Eisiminger Note, with a principal balance of $6,000,000, maturing on August 31, 2026, and bearing interest at 7.5% per annum until February 1, 2025, after which the interest rate will increase to 8% per annum.

(d)On April 6, 2023, the Company entered into a promissory note with a principal balance of $400,000 bearing interest at 12% per annum (the "Eisiminger Note 3"). On February 22, 2024, the Company paid the outstanding principal and accrued interest owed on the Eisiminger Note 3.

(e)On February 13, 2023, the Company entered into a series of transactions with Crom Cortana Fund LLC (“Crom”), the primary purpose of which was 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 thereunder, the Company’s obligations under the Prior Crom Note was 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 matured 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. On January 25, 2024, the Company paid the outstanding principal and accrued interest owed on the 2023 Note Payable to Crom.

(f)On February 22, 2024, the Company and the Buckhout Charitable Remainder Trust entered into a new note payable in the principal amount of $2,400,000 (the "Buckhout February 2024 Note") 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 will be amortized at the rate of $100,000 per month, commencing in September 2024 until the final payment is made in August 2026. The terms of the Buckhout February 2024 Note do not permit the principal amount to be converted into common stock. Refer to Note 6, "Convertible Promissory Notes - Related Party" for relevant information regarding the previous note with the Buckhout Charitable Remainder Trust.

(g)Refer to Note 16, "Subsequent Events" for information about early payoff of this note.

Interest expense which includes amortization of discount for the three and nine months ended September 30, 2024 was $181,474 and $565,440, respectively, and $486,079 and $1,444,540 for the three and nine months ended September 30, 2023, respectively. Accrued interest on the notes payable as of September 30, 2024 was $0.

Future principal payments are scheduled to be $652,678 (out of which $252,679 was paid in July 2024, refer to Note 16, "Subsequent Events" for additional information regarding the payoff) in 2024, $1,200,000 in 2025, with the remainder being paid off in 2026.

Table of Contents

Note 8: Note Payable – Related Party

The Company entered into a note payable with a related party in August 2021 with balances as of September 30, 2024 (unaudited) and December 31, 2023, as follows:


	September 30, 2024 (unaudited)		December 31, 2023
Note payable at 5%, amended to ultimately mature in March 31, 2026	$	400,000	$	400,000

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 and (ii) require subsequent monthly principal payments of $50,000 for eight months commencing on the maturity date, with the final payment by March 31, 2026. All other terms of the note payable remain unchanged. As a result, $100,000 is reflected in current liabilities and the remaining balance is reflected in non-current liabilities.

Interest expense for the three and nine months ended September 30, 2024, was $5,027 and $14,973, respectively, and $5,092 and $15,004 for the three and nine months ended September 30, 2023, respectively.

Note 9: Revolving Credit Facility

On April 4, 2022, the Company secured a $950,000 revolving credit facility with Live Oak Banking Company ("Live Oak Bank" and the “Revolving Credit Facility”). The Revolving Credit Facility was to mature 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. As of December 31, 2023, the Company had $625,025 outstanding on the Revolving Credit Facility.

On February 22, 2024 the Company entered into a $4,000,000 revolving credit facility with Live Oak Bank that bears interest at prime plus 2% interest and matures on February 22, 2025 (the “New Live Oak Revolver"). The New Live Oak Revolver replaces the Revolving Credit Facility. The Company rolled over the principal balance outstanding of approximately $625,000 on the Revolving Credit Facility and was advanced an additional amount of $904,793, the majority of which was used to make the partial payment on the convertible promissory note with the Buckhout Charitable Remainder Trust. See Note 6, "Convertible Promissory Notes - Related Party". As of September 30, 2024, the total amount outstanding on the New Live Oak Revolver was $1,529,818.

Effective August 15, 2024, the Company modified the terms of the New Live Oak Revolver with Live Oak Bank. Under the terms of the modified agreement, the Company is required to (i) establish a collateral account with a balance of not less than $250,000 until such time as the senior debt service covenant is replaced by a total debt service covenant of 1.15:1.00 at which time funds shall be released at lender's sole discretion, (ii) modified the frequency of the reporting of the borrowing base certificate from once a month to twice a month, and (iii) reduced the borrowing capacity from $4,000,000 to $2,000,000.

The Company incurred $109,512 in interest in the nine months ended September 30, 2024, none of which is accrued as of September 30, 2024.

Note 10: Due to Seller and Contingent Earnout

As part of the GTMR Acquisition, 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 had been postponed and the unpaid balance of $350,000

Table of Contents

accrued interest at an annual rate equal to the rate of interest announced publicly by Citibank N.A. in New York, plus 2% until it was paid in full in July of 2024.

As part of the acquisition of SSI (the "SSI Acquisition"), the Company was obligated to pay an earnout contingent on the results of operations of SSI through August 2023. On February 15, 2024, the Company entered into an agreement with the former shareholders of SSI concerning the amount and timing of the contingent earnout included in total consideration for the SSI Acquisition in August 12, 2021. The parties agreed to settle the amount for a total of $720,000, with an initial payment of $180,000 that was made by the Company at signing of the agreement, plus starting in March 2024, monthly payments of $20,000 plus interest payable at 5% per annum for 27 months. As a result, $240,000 is recorded as Due to Seller in current liabilities and $160,000 is reflected in non-current liabilities as of September 30, 2024. Prior to the February 15, 2024 agreement, this earnout was recorded as Contingent Earnout on the Consolidated Balance Sheets.

Note 11: Stockholders’ Equity

January 2024 Registered Offering

In a concurrent private placement, the Company agreed to issue to the same institutional investor, for each ordinary share and Pre-funded Warrant purchased in the offering, an additional ordinary share purchase warrant (“Regular Warrants”). The Regular Warrants have an exercise price of $0.35 and are exercisable to purchase an aggregate of 8,437,501 shares of common stock. The Regular Warrants are exercisable for five years.

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 September 30, 2024 and December 31, 2023, 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 nine months ended September 30, 2024, the Company recognized $54,808 in Series A dividends, all of which have been paid as of September 30, 2024.

Series B Preferred Stock

The Company has designated 10,000,000 shares of Series B Preferred Stock, par value of $0.0001. As of September 30, 2024 and December 31, 2023, the Company has 0 shares of Series B Preferred Stock issued and outstanding.

Table of Contents

Series C Preferred Stock

The Company has designated 10,000,000 shares of Series C Preferred Stock, par value of $0.0001. As of September 30, 2024 and December 31, 2023, 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 nine months ended September 30, 2024, the Company recognized $34,650 in Series C dividends, all of which have been paid as of September 30, 2024.

Common Stock

The Company has 3,000,000,000 shares of common stock, par value $0.0001 authorized. The Company has 56,109,928 and 47,672,427 shares issued and outstanding as of September 30, 2024, and December 31, 2023, respectively.

During the nine months ended September 30, 2024, 8,437,501 shares of common stock were issued, all in connection with the SPA. 3,193,534 of these related to the Pre-funded Warrants.

During the nine months ended September 30, 2024, the Company recorded an obligation to issue 515,464 restricted shares of common stock, that vest ratably over a period of one year, to its Board of Directors for their service on the Board from January 1, 2024, through June 30, 2024. The total expense booked to record this obligation was $146,768. The shares were not issued as of June 30, 2024. Once issued, 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 2024.

Table of Contents

Warrants

The following table represents a summary of warrants for the nine months ended September 30, 2024 and the year ended December 31, 2023:


	Nine Months Ended September 30, 2024				Year Ended December 31, 2023
	Number		Weighted Average Exercise Price		Number		Weighted Average Exercise Price
Beginning balance	7,444,698		$	1.68	5,678,836		$	1.84

Warrants	8,437,501		0.25		1,765,862		1.17
Pre-funded Warrants	3,193,534		0.09		—		—
Total Granted	11,631,035		0.34		1,765,862		1.17

Warrants	—		—		—		—
Pre-funded Warrants	(3,193,534)		0.32		—		—
Total Exercised	(3,193,534)		0.32		—		—



Ending balance	15,882,199		$	0.97	7,444,698		$	1.68

Warrants exercisable	15,882,199				7,444,698
Intrinsic value of warrants	$	185,421			$	327,214
Weighted Average Remaining Contractual Life (Years)	4.23				4.70

The Pre-funded Warrants that the Company sold related to the Registered Offering were immediately exercisable and do not have an expiration date. As noted above, the Company sold Pre-funded Warrants to purchase up to an aggregate of 3,193,534 shares of common stock at an offering price of $0.319 per Pre-funded Warrant, which are exercisable at a price of $0.001 per share. As of September 30, 2024, all Pre-funded Warrants have been exercised.

The Regular Warrants related to the Registered Offering became exercisable on March 20, 2024, upon effectiveness of shareholder approval which was obtained on February 12, 2024. The Regular Warrants expire on March 20, 2029, and have an exercise price of $0.35 per share.

The Regular Warrants and the Pre-funded Warrants do not require a cash settlement for the warrants. Based on the terms of the agreements, both the Regular Warrants and the Pre-funded warrants were freestanding, equity-linked instruments that represented separate units of account. The Company allocated the value of the net proceeds from the offering to the ordinary shares and Regular Warrants and Pre-funded warrants based on relative fair value. The value allocated to the Regular Warrants and Pre-funded warrants was recorded in Additional Paid-In Capital in the Consolidated Balance Sheets.

Options

The Company on November 9, 2021, approved the 2021 Stock Incentive Plan (the "Plan"), that authorized the Company to issue up to 2,500,000 shares of the Company's common stock in the form of restricted stock, stock options, and other stock awards as set forth in the Plan. On November 9, 2023 the Board of Directors approved

Table of Contents

an amendment to the Plan to increase the aggregate number of shares available for issuance from 2,500,000 to 6,000,000 (the "Amended Plan"), which was approved by the Company's shareholders at its annual meeting on May 29, 2024. As of September, 30, 2024, 4,032,500 stock options have been granted under the Amended Plan.

The following represents a summary of options for the Amended Plan and additional options granted outside of the Amended Plan, for the nine months ended September 30, 2024 and the year ended December 31, 2023:


	Number	Weighted Average Exercise Price		Weighted-Average Remaining Contractual Term (in Years)	Weighted Average Fair Value
Outstanding, December 31, 2023	8,243,437	$	2.41	4.98	$	3.58
Granted	150,000	0.35		6.92	0.31
Exercised	—	—		—	—
Forfeited	(65,938)	1.72		—	—
Outstanding. March 31, 2024	8,327,499	2.38		4.76	3.55
Granted	—	—		—	—
Exercised	—	—		—	—
Forfeited	(150,000)	0.35		—	—
Outstanding, June 30, 2024	8,177,499	2.42		4.47	3.61
Granted	1,900,000	—		—	—
Exercised	—	—		—	—
Forfeited	—	—		—	—
Outstanding, September 30, 2024	10,077,499	$	2.00	4.09	$	2.95

As of September 30, 2024
Vested and exercisable	6,003,993	$	2.30	4.05	$	2.91

During the nine months ended September 30, 2024, the Company recognized $4,184,930 of noncash stock based compensation related to the vesting of service-based stock options. No options were exercised during the nine months ended September 30, 2024.

The fair value of each option 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:


	Nine Months Ended September 30, 2024	Year Ended December 31, 2023
Expected term	7 years	7 years
Expected volatility	123.05% – 124.33%	161.61% – 166.14%
Expected dividend yield	—	—
Risk-free interest rate	3.89% – 4.45%	3.48% - 3.89%

Table of Contents

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.

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.

On April 4, 2022, the Company issued common stock, a convertible note, and warrants in a 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, the 2023 Note Payable, and warrants in the 2023 SPA with Crom. The Company evaluated the conversion option in the 2023 Note Payable 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.

On February 13, 2024, the Company paid the outstanding principal and accrued interest owed on the 2023 Note Payable to Crom, thereby extinguishing the conversion feature associated with this note; the warrants were not affected.

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

In connection with the MFSI Divestiture, as discussed in Note 3, "Acquisition and Disposition". Management estimated the present value of future consideration to be received, using a probability-weighted analysis to determine the amount of the receivable and applying a discount rate that captures the risks associated with the duration of the consideration. The Company determined that the significant inputs used to value the Anticipated Receivable fall within Level 3 of the fair value hierarchy.

Table of Contents

The following tables present the Company's financial instruments that are measured at fair value on a recurring basis:


	Fair Value Measurements at September 30, 2024
	Level 1		Level 2		Level 3		Total
Anticipated Receivable	$	-	$	-	$	296,009	$	296,009

Derivative Liabilities	$	—	$	—	$	40,000	$	40,000


	Fair Value Measurements at December 31, 2023
	Level 1		Level 2		Level 3		Total
Derivative Liabilities	$	-	$	-	$	157,600	$	157,600

The Company’s derivative liabilities as of September 30, 2024 and December 31, 2023 associated with the Derivative Liabilities are as follows.


	September 30, 2024		December 31, 2023		Inception

Fair value of 656,250 warrants issued on April 4, 2022	$	15,000	$	66,000	$	378,000
Fair value of conversion option of Crom convertible note	—		200		162,000
Fair value of 700,000 warrants issued on February 13, 2023	25,000		91,400		259,000
	$	40,000	$	157,600

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:


	September 30, 2024
Expected term - warrants	2.51 years - 3.40 years
Stock price as of measurement date	$	0.17
Volatility (observed)	115.40% - 117.20%
Incremental discount	5.0		%
Selected volatility – post haircut	89.8% - 98.5%
Risk-free interest rate	3.55% - 3.59%

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 allowance for credit losses based upon factors surrounding the credit risk of customers, historical trends, and other information.

For the nine months ended September 30, 2024, the Company had three customers representing 52% of revenue earned, and for the nine months ended September 30, 2023, the Company had three customers representing 52%

Table of Contents

of revenue earned. Any customer that represents 10% or greater of total revenue represents a risk. The Company also has three customers that represent 41% and three customers that represent 54% of the total accounts receivable as of September 30, 2024, and December 31, 2023, respectively.

Note 14: 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 16.70% and (1.10)% for the three months ended September 30, 2024, and 2023, respectively. The increase in the effective tax for the three months ended September 30, 2024, was primarily due to the decrease in permanent adjustments and decrease in profitability during the year as the Company maintains a full valuation allowance against it's deferred tax assets. The effective income tax rate was —% and 6.80% for the nine months ended September 30, 2024, and 2023, respectively. The decrease in the effective tax rate was primarily due to the partial release of the valuation allowance in 2023 due to the increase in deferred tax liabilities that related to the GTMR acquisition resulting in a $1.2 million net income tax benefit.

Note 15: Factoring of Accounts Receivable

On January 24, 2023, GTMR (acquired by the Company on March 22, 2023 and discussed in Note 3, "Acquisition and Disposition" 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 nine-months ended September 30, 2023, total receivables sold under the Factoring Agreement was $1,757,281. 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 received 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 $11,716 for the nine months ended September 30, 2023.

The Company did not factor any receivables under the Factoring Agreement for the three- and nine-months ended September 30, 2024. The Company terminated this agreement in February 2024.

Note 16: Subsequent Events

In connection with the MFSI Divestiture, on November 8, 2024, Live Oak Bank released MFSI from its obligations under the New Live Oak Revolver and related agreements, including as collateral under the security agreement.

Table of Contents

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 2023 filed with the Securities and Exchange Commission ("SEC") on March 21, 2024 and elsewhere in this Quarterly Report on Form 10-Q, as applicable.

Business Overview

Castellum, Inc. is focused on building a large, successful technology company in the areas of cybersecurity, information technology, electronic warfare, information warfare, and information operations with businesses in the defense, federal, civilian, and commercial markets. Our services include intelligence analysis, software development, software engineering, program management, strategic and mission planning, information assurance, cybersecurity and policy support, data analytics, and model based systems engineering ("MBSE"). Our primary customers are agencies and departments of the U.S. Government ("USG"), financial services, healthcare, and other users of large data applications. Our expertise and technology support national security missions and government modernization for intelligence, defense, and federal civilian customers.

Recent Developments

On February 22, 2024 the Company entered into a $4,000,000 revolving credit facility with Live Oak Banking Company ("Live Oak Bank") 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 Bank with a maturity date of March 28, 2029 (the "Prior Revolving Credit Facility"). The Company rolled over approximately $625,000 of the principal balance outstanding on the Prior Revolving Credit Facility and was advanced an additional amount of $904,793, the majority of which was used to make a partial payment of $809,617 on the Buckhout Remainder Charitable Trust convertible promissory note. See Note 6, "Convertible Promissory Notes - Related Party".

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 (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. The Pre-funded Warrants were sold at an offering price of $0.319 per Pre-funded Warrant and are exercisable at a price of $0.001 per share. In a concurrent private placement, the Company agreed to issue to the same institutional investor, for each ordinary share and Pre-funded Warrant purchased in the offering, an additional ordinary share purchase warrant (“Regular Warrants”). The Regular Warrants have an exercise price of $0.35 and are exercisable to purchase an aggregate of 8,437,501 shares of common stock, 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”).

On November 9, 2023 the Board of Directors approved an amendment to the Company's 2021 Stock Incentive Plan to increase the aggregate number of shares available for issuance from 2,500,000 to 6,000,000 (the "Amended Plan"), which was approved by the Company's shareholders at its annual meeting on May 29, 2024.

Table of Contents

Business Operations and Trends

We believe that the following trends and developments in the USG services industry and our markets may influence our future results of operations:

•budget deficits and the growing United States ("U.S.") national debt increasing pressure on the USG to reduce federal spending across all federal agencies together with associated uncertainty about the size and timing of those reductions;

•cost-cutting and efficiency initiatives, current and future budget restrictions, continued implementation of Congressionally mandated automatic spending cuts, and other efforts to reduce USG spending could cause clients to reduce or delay funding for orders for services or invest appropriated funds on a less consistent or rapid basis or not at all, particularly when considering long-term initiatives and in light of current uncertainty around Congressional efforts to craft a long-term agreement on the USG's ability to incur indebtedness in excess of its current limits, and generally in the current political environment, there is a risk that it will not issue task orders in sufficient volume to reach current contract ceilings, alter historical patterns of contract awards, including the typical increase in the award of task orders or completion of other contract actions by the USG in the period before the end of the USG's fiscal year on September 30, delay requests for new proposals and contract awards, rely on short-term extensions and funding of current contracts, or reduce staffing levels and hours of operation;

•government customers consolidation of smaller contract vehicles into larger contract vehicles could result in a lack of opportunity to re-compete for the existing business if the larger contract vehicle is not held by the Company;

•delays in the completion of USG’s budget processes for FY 2025, which has in the past and could in the future delay procurement of the products, services, and solutions we provide;

•changes in the relative mix of overall USG spending and areas of spending growth, with lower spending on homeland security, intelligence, defense-related programs as certain overseas operations end, and continued increased spending on cybersecurity, command, control, communications, computers, intelligence, surveillance, and reconnaissance, advanced analytics, technology integration, and healthcare, including as a result of the presidential and administration transition;

•consolidation of acquisition authority in areas directly related to the core business of the Company could limit limit access to new business and re-competing for existing business;

•increased inflationary pressure that could impact the cost of doing business and/or reduce customer buying power;

•risks related to a possible recession and volatility or instability of the global financial system, including bank failures and the resulting impact on counterparties and business conditions generally;

•legislative and regulatory changes, or shifts in regulatory priorities as a result of U.S. administration transitions, including limitations on the amount of allowable executive compensation permitted under flexibly priced contracts following implementation of interim rules adopted by federal agencies pursuant to the Bipartisan Budget Act of 2013, which substantially further reduce the amount of allowable executive compensation under these contracts and extend these limitations to a larger segment of our executives and our entire contract base;

•efforts by the USG to address organizational conflicts of interest and related issues and the impact of those efforts on us and our competitors;

•increased audit, review, and general scrutiny by USG agencies of government contractors' performance under USG contracts and compliance with the terms of those contracts and applicable laws;

Table of Contents

•the inability of the government to make timely awards on contracts for which the Company has submitted proposals could affect the rate of revenue growth;

•USG agencies awarding contracts on a technically acceptable/lowest cost basis, which could have a negative impact on our ability to win certain contracts;

•increased competition from other government contractors and market entrants seeking to take advantage of certain of the trends identified above, and an industry trend towards consolidation, which may result in the emergence of companies that are better able to compete against us;

•impact of pre-requisite certifications such as cyber maturity model certification, capability maturity model integration and international organization for standards on certain contract opportunities;

•restrictions by the USG on the ability of federal agencies to use lead system integrators, in response to cost, schedule, and performance problems with large defense acquisition programs where contractors were performing the lead system integrator role; and

•increasingly complex requirements and enforcement and reporting landscapes of the Department of Defense including cybersecurity, managing federal health care cost growth, competition, and focus on reforming existing government regulation of various sectors of the economy, such as financial regulation and healthcare.

In the course of conducting our business operations, we are exposed to a variety of risks. Any of the risk factors we described in Part II, Item 1A, of this Annual Report on Form 10-Q, and Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2023 filed on March 21, 2024 have affected or could materially adversely affect our business, prospects, operating results, and financial condition.

Budgetary Environment

On September 26, 2024, following passage by both chambers of Congress, the President signed a continuing resolution (“CR”) to extend government funding through December 20, 2024.

Basis of presentation

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

•the three months ended September 30, 2024 compared to the three months ended September 30, 2023;

•the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

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

Table of Contents

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.

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 an 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, 401(k) 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, information technology ("IT") expenses, and insurance expenses.

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.

Table of Contents

Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023


	Three Months Ended September 30,				Change
	2024		2023		Amount		%
Revenues	$	11,608,691	$	11,741,164	$	(132,473)	(1)	%
Cost of revenues	6,650,035		6,903,689		(253,654)		(4)	%
Gross Profit	4,958,656		4,837,475		121,181		3	%
Operating expenses:
Indirect costs	2,449,974		2,258,082		191,892		8	%
Overhead	495,482		493,706		1,776		—	%
General and administrative expenses	3,396,297		3,739,975		(343,678)		(9)	%

Change in fair value of contingent earnout	—		—		—		NM
Total operating expenses	6,341,753		13,410,857		(7,069,104)		(53)	%
Loss from operations:	(1,383,097)		(8,573,382)		7,190,285		(84)	%

Other (expense), net	(154,475)		(516,218)		361,743		(70)	%

Loss before income taxes and preferred stock dividends	(1,537,572)		(9,089,600)		7,552,028		(83)	%

Income tax benefit (expense)	257,480		(102,584)		360,064		(351)	%
Preferred stock dividend	29,819		28,719		1,100		4	%
Net loss	$	(1,309,911)	$	(9,220,903)	$	7,910,992	(86)	%

NM - Not Meaningful

Revenue

Total revenue was $11,608,691 for the three months ended September 30, 2024 as compared to total revenue of $11,741,164 for the three months ended September 30, 2023. The decrease of $(132,473) or (1)%, was driven primarily by lost positions on certain legacy contracts due to reduction in funding.

Cost of revenues

Total cost of revenues was $6,650,035 for the three months ended September 30, 2024 as compared to total cost of revenues of $6,903,689 for the three months ended September 30, 2023. The decrease of $(253,654), or (4)%, is in line with the change in revenue noted above and managing labor costs on certain projects.

Gross Profit

Total gross profit was $4,958,656 for the three months ended September 30, 2024 as compared to total gross profit of $4,837,475 for the three months ended September 30, 2023. The increase of $121,181, or 3%, was driven primarily by managing labor costs on certain projects.

Table of Contents

Operating expenses

Total operating expenses were $6,341,753 for the three months ended September 30, 2024 as compared to total operating expense of $13,410,857 for the three months ended September 30, 2023. The decrease of $7,069,104, or 53%, was primarily driven by the goodwill impairment loss of $6,919,094 recognized in Q3 2023.

Other income (expense)

Total other income (expense) was $(154,475) for the three months ended September 30, 2024 as compared to total other (expense) of $(516,218) for the three months ended September 30, 2023. The decrease in (expense) of $361,743 or 70%, was primarily driven by the decrease in the amortization on debt discount on our notes payable, and decrease in expense due to the reduction in the fair value of derivative liability.

Income tax (expense) benefit

Income tax benefit was $257,480 for the three months ended September 30, 2024, as compared to an expense $(102,584) for the three months ended September 30, 2023. The increase in expense of $360,064 or 351% was primarily related to the decrease in permanent adjustments and decreased profitability during the year as the Company maintains a full valuation allowance against its' deferred tax assets.

Table of Contents

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023


	Nine Months Ended September 30,				Change
	2024		2023		Amount		%
Revenues	$	34,466,131	$	34,153,979	$	312,152	1	%
Cost of revenues	20,318,846		20,066,904		251,942		1	%
Gross Profit	14,147,285		14,087,075		60,210		—	%
Operating expenses:
Indirect costs	7,152,304		6,710,421		441,883		7	%
Overhead	1,464,363		1,498,325		(33,962)		(2)	%
General and administrative expenses	11,155,142		14,030,818		(2,875,676)		(20)	%

Change in fair value of contingent earnout	—		65,000		(65,000)		NM
Total operating expenses	19,771,809		29,223,658		(9,451,849)		(32)	%
Loss from operations:	(5,624,524)		(15,136,583)		9,512,059		(63)	%

Other (expense), net	(1,617,118)		(1,613,781)		(3,337)		—	%

Loss before income taxes and preferred stock dividends	(7,241,642)		(16,750,364)		9,508,722		(57)	%

Income tax benefit (expense)	3,090		1,136,345		(1,133,255)		(100)	%
Preferred stock dividend	89,458		88,858		600		1	%
Net loss	$	(7,328,010)	$	(15,702,877)	$	8,374,867	(53)	%

NM - Not Meaningful

Revenue

Total revenue was $34,466,131 for the nine months ended September 30, 2024 as compared to total revenue of $34,153,979 for the nine months ended September 30, 2023. The increase of $312,152 or 1%, was driven primarily by organic contributions from the acquisition of Global Technology and Management Resources, Inc. ("GTMR" and the "GTMR Acquisition").

Cost of revenues

Total cost of revenues was $20,318,846 for the nine months ended September 30, 2024 as compared to total cost of revenues of $20,066,904 for the nine months ended September 30, 2023. The increase of $251,942, or 1%, is in line with the minimal change in revenue noted above due to the acquisition and higher costs of certain projects.

Gross Profit

Total gross profit was $14,147,285 for the nine months ended September 30, 2024 as compared to total gross profit of $14,087,075 for the nine months ended September 30, 2023. The increase of $60,210, or 0%, was driven primarily by the higher margins of certain projects due to managing costs on certain projects and organic contributions from the acquisition of GTMR.

Operating expenses

Table of Contents

Total operating expenses were $19,771,809 for the nine months ended September 30, 2024 as compared to total operating expense of $29,223,658 for the nine months ended September 30, 2023. The decrease of $(9,451,849), or (32)%, was primarily driven by the decrease in general and administrative expenses caused largely by noncash stock based compensation in 2023 paid to executives, the goodwill impairment loss, and expenses related to warrants issued to two officers in connection with the GTMR Acquisition.

Other expense

Total other expense was $(1,617,118) for the nine months ended September 30, 2024 as compared to total other expense of $(1,613,781) for the nine months ended September 30, 2023. The increase of $(3,337) or 0%, was primarily driven by a gain from the change in fair value of derivative liabilities, and interest expense net of income.

Income tax (expense) benefit

Income tax benefit was $3,090 for the nine months ended September 30, 2024, as compared to a benefit of $1,136,345 for the nine months ended September 30, 2023. The decrease in benefit of $(1,133,255) or (100)% was primarily related to the decrease in permanent adjustments and decreased profitability during the year as the Company maintains a full valuation allowance against its' deferred tax assets..

Contract backlog

We define backlog to include the following three components:

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

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

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

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

Contract Backlog


Funded	$	15,527,306
Unfunded	19,026,292
Priced Options	53,012,353
Total Scheduled Backlog	$	87,565,951

Total backlog

Our total scheduled backlog consists of remaining performance obligations, certain orders under contracts for which the original period of performance has expired, unexercised option periods, and other unexercised or optional orders. Excluding unscheduled options orders, as of September 30, 2024, the Company had $87,565,951 of funded, unfunded, and scheduled priced options. We expect to recognize approximately 38.0%

Table of Contents

of the remaining performance obligations over the next 12 months, and approximately 63.0% over the next 24 months. Including priced options that have been awarded but not yet scheduled of $28,474,144, our grand total backlog is $116,040,095. The remainder is expected to be recognized thereafter. As with all government contracts there is no guarantee the customer will have future funding or exercise their contract option in the out-years. Our backlog includes orders under contracts that in some cases extend for several years. Congress generally appropriates funds for our clients on a yearly basis, even though their contracts with us may call for performance that is expected to take a number of years to complete. As a result, contracts typically are only partially funded at any point during their term and all or some of the work to be performed under the contracts may remain unfunded unless and until the U.S. Congress makes subsequent appropriations and the procuring agency allocates funding to the contract.

We cannot predict with any certainty the portion of our backlog that we expect to recognize as revenue in any future period and we cannot guarantee that we will recognize any revenue from our backlog. The primary risks that could affect our ability to recognize such revenue on a timely basis or at all are: program schedule changes, contract modifications, and our ability to assimilate and deploy new consulting staff against funded backlog; cost-cutting initiatives and other efforts to reduce USG spending, which could reduce or delay funding for orders for services; and delayed funding of our contracts due to delays in the completion of the USG's budgeting process and the use of CR's by the USG to fund its operations. The amount of our funded backlog is also subject to change, due to, among other factors: changes in congressional appropriations that reflect changes in USG policies or priorities resulting from various military, political, economic, or international developments; changes in the use of USG contracting vehicles, and the provisions therein used to procure our services and adjustments to the scope of services, or cancellation of contracts by the USG at any time. In our recent experience, none of the following additional risks have had a material negative effect on our ability to realize revenue from our funded backlog: the unilateral right of the USG to cancel multi-year contracts and related orders or to terminate existing contracts for convenience or default; in the case of unfunded backlog, the potential that funding will not be made available; and, in the case of priced options, the risk that our clients will not exercise their options.

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

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

Liquidity and capital resources

Sources

We have historically sourced our liquidity requirements with cash flows from operations, borrowings under our current credit facilities, and in October, 2022, with an equity issuance through the listing of our common stock on the NYSE American LLC ("NYSE American"). In January and February of 2024, we undertook the following significant equity and debt transactions that enhance our liquidity and sources of funds:

•In January 2024, after filing a universal shelf registration statement on Form S-3 with the SEC in December of 2023 allowing us to issue additional equity (“Security Offering”), we raised net proceeds of approximately $2,200,000.

•In February 2024, we paid the outstanding principal and accrued interest owed on a note payable to Crom Cortana Fund LLC ("Crom") in the amount of $847,000.

•In February 2024, we agreed with Emil Kaunitz to extend the maturity date of a $400,000 note payable from December 31, 2024, to August 1, 2025, after which we will make monthly principal payments of $50,000 per month for eight months.

Table of Contents

•In February 2024, we entered into a new $4,000,000 revolving credit facility with Live Oak Bank which matures on February 22, 2025 (the “New Live Oak Revolver”). The New Live Oak Revolver replaces the $950,000 revolving credit facility noted above (“Old Live Oak Revolver”), and we rolled over the $625,025 outstanding principal balance outstanding on the Old Live Oak Revolver and drew an additional amount of $904,793. We also made payments of $1,209,617 to the holders of two notes payable noted below. On August 15, 2024, the Company modified the terms of the New Live Oak Revolver with Live Oak Bank under which the borrowing capacity is reduced from $4,000,000 to $2,000,000.

•In February 2024, we agreed with Robert Eisiminger to extend the maturity dates of two notes payable for $5,600,000 and $400,000 from September 30, 2024, to August 31, 2026. The change in the terms of the two notes resulted in the debt extinguishment of both the old notes and resulted in the establishment of one note totaling $6,000,000. We paid off a third note totaling $400,000.

•In February 2024, we agreed with the Buckhout Charitable Remainder Trust to pay down and amend a convertible promissory note payable totaling $3,209,617. We accessed the New Live Oak Revolver to pay down principal of $809,617. We simultaneously agreed to enter into a new note payable in the principal amount of $2,400,000 which matures on August 31, 2026, and may not be converted into common stock. Beginning in September 2024, we commenced making monthly principal payments of $100,000 for 24 months.

•In May 2024, the Company entered in to a program to self-insure some of our health risk up to a certain limit, with the use of a stop loss policy. In June 2024, we made an equity investment in a captive insurance company for $54,533. To mitigate risks, the Company created a reserve as of September 30, 2024, of $79,217 based on one month of claims data. Additionally, the Company has engaged with a third-party actuarial firm to assist in providing reports related to claims incurred but not reported. Losses will be accrued based on the Company's historical claims experience and reports provided by the actuaries.

•On July 8, 2024, we repaid the balance owed on the Old Live Oak Revolver of $252,678, that was due to mature on August 11, 2024. This payment retired the Old Live Oak Revolver.

As of September 30, 2024, we had $2,742,961 of cash on hand and unused borrowing capacity of $470,182 from our New Live Oak Revolver.

Uses

Our material cash requirements from known contractual and other obligations primarily relate to payments on our credit facilities. For information related to these cash requirements, refer to Note 6, "Convertible Promissory Notes - Related Party", Note 7, "Notes Payable", Note 8, "Note Payable - Related Party", Note 9, "Revolving Credit Facility", and Note 10, "Due to Seller and Contingent Earnout" in this Quarterly Report on Form 10-Q.

Shares of our common stock included in our public float as of November 11, 2024 was 29,827,540 which excludes 26,282,388 shares held by officers, directors, and affiliates.

Table of Contents

Cash flows

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

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023


	Nine Months Ended September 30, 2024				Change
	2024		2023		Amount		%
Net cash provided by (used in) operating activities	$	1,514,537	$	(3,135,420)	$	4,649,957	-148	%
Net cash provided by (used in) investing activities	51,672		(443,240)		$	494,912	-112	%
Net cash provided by (used in) financing activities	(654,089)		273,741		$	(927,830)	-339	%
Change in cash	$	912,120	$	(3,304,919)	$	4,217,039	-128	%

Operating activities

Net cash provided by operating activities was $1,514,537 for the nine months ended September 30, 2024, compared to $(3,135,420) for the nine months ended September 30, 2023. This increase in net cash provided by operating activities was primarily driven by a decrease in net loss, decrease in stock based compensation, and collections of accounts receivable, offset by an increase in accounts payable for the nine months ended September 30, 2024.

Investing activities

Net cash provided by investing activities was $51,672 for the nine months ended September 30, 2024, compared to $(443,240) for the nine months ended September 30, 2023. The increase in net cash provided by investing activities was primarily due to the sale of the subsidiary Mainnerve Federal Services, Inc. dba MFSI Government Group (“MFSI") during the nine months ended September 30, 2024, compared to investing activities related to the GTMR Acquisition for the nine months ended September 30, 2023.

Financing activities

Net cash used in financing activities was $(654,089), for the nine months ended September 30, 2024, compared to $273,741 provided by financing activities for the nine months ended September 30, 2023. The decrease in net cash used in financing activities was primarily due to payments on notes payable and payments to sellers from the GTMR Acquisition and the acquisition of Specialty Systems, Inc. ("SSI" and the "SSI Acquisition"), offset by the proceeds from the SPA and an additional draw on the line of credit.

Critical Accounting Policies and Estimates

A summary of our critical accounting estimates is included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year-ended December 31, 2023. There have been no material changes to the critical accounting estimates disclosed in our Annual Report on Form 10-K for the year-ended December 31, 2023, with the exception of the following.

We currently self-insure for certain losses relating to employee health-care claims. We use captive insurance as a risk-reduction strategy to minimize catastrophic losses. We record a self-insurance liability using an estimate

Table of Contents

of claims incurred but not yet reported or paid, up to our stop-loss policy, based on historical claims experience and actuarial methods. The assumptions made by management in estimating our self-insurance reserves include consideration of historical cost experience and judgments about the present and expected levels of cost per claim. As we obtain additional information and refine our methods regarding the assumptions and estimates we use to recognize liabilities incurred, we will adjust our reserves accordingly. As of September 30, 2024, our self-insurance reserve estimate is $79,217.

Principles of Consolidation

Refer to Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year-ended December 31, 2023. There have been no material changes to our principles of consolidation disclosed in our Annual Report on Form 10-K for the year-ended December 31, 2023.

Recently Issued Accounting Standards

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest rate and market risk

The Company maintains a revolving promissory note with Live Oak Bank, referred to as the “New Live Oak Revolver. The New Live Oak Revolver is a variable rate instrument with a per annum interest rate equal to the prime rate as quoted in the Wall Street Journal (the “Prime Rate”), plus two percentage points (2%). Rising interest rates would increase our interest expense in the future; lower rates would reduce our interest expense. Such additional cost would need to be funded out of existing cash or additional financing. Future increase in interest rates are not expected to materially impact our Company’s liquidity. The Company has no other debt obligations tied to the Prime Rate or the Secured Overnight Financing Rate.

Effects of inflation

U.S. inflation has begun to moderate after nearing a 40-year high in June 2022. Because costs rise faster than revenues during the early phase of inflation, we may need to give higher than normal raises to employees, start new employees at higher wages and/or have increased cost of employee benefits, but not be able to pass the higher costs through to the government due to competition and government pressures. Therefore, we may be adversely affected (i) with lower gross profit margins; (ii) by losing contracts which are lowest price technically acceptable where another bidder underbids the real rates and then has difficulty staffing the project; and (iii) by having difficulty maintaining our staff at current salaries. Given the long-term nature of the Company’s contracts, we may be unable to take sufficient action to mitigate inflationary pressures.

Sustained inflation also can cause the Federal Reserve Board and its Open Market Committee (“Fed”) to raise the target for the federal funds rate which normally translates into an increase in most banks’ Prime Rate. Because our note with Live Oak Banking Company is a variable interest rate instrument tied to the prime rate, actions by the Fed to increase the federal funds rate will increase our cost of debt and our interest expense thereby increasing our pre-tax loss and net loss. Similarly, a decrease in the federal funds rate will decrease our

Table of Contents

debt and out interest expense thereby decreasing our pre-tax loss and net loss. Our borrowing costs have recently increased and are expected to increase with future Fed interest rate increases, although the impacts have been and are expected to continue to be immaterial. Our contracts with U.S. Federal, state, and local government customers do not permit us to pass along our increased financing costs. The increases to our borrowing costs have not impacted (and are not expected to impact) our ability to make timely payments.

Item 4. Controls and Procedures

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

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our CEO and CFO carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2024. Based upon their evaluation, our CEO and CFO concluded that our disclosure controls and procedures (as defined in Rules 13a- 15 (e) and 15d-15 (e) under the Exchange Act) were effective as of September 30, 2024.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the nine months ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

Part II

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

In the course of conducting our business operations, we are exposed to a variety of risks. Any of the risk factors we described in Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2023 filed on March 21, 2024 have affected or could materially adversely affect our business, prospects, operating results, and financial condition. Certain statements in “Risk Factors” are forward-looking statements. See “Explanatory Note Regarding Forward-Looking Statements.”

We have added the following risk factor to those disclosed in Part I, Item 1A., Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2023:

Risks Related to our Business, Industry and Operations

Our self-insurance program may expose us to significant and unexpected costs and losses.

To help control our overall long-term costs associated with employee health benefits, we began maintaining our employee medical insurance benefits on a self-insured basis effective June 1, 2024. To limit our exposure, we have third party stop-loss insurance coverage which sets a limit on our liability for both individual and aggregate claim costs. We record a liability for our estimated cost of claims incurred but unpaid as of each balance sheets date. Our estimated liability is based on assumptions we believe to be reasonable under the current circumstances and will be adjusted as warranted based on changing circumstances. It is possible, however, that our actual liabilities may exceed our estimates of losses. We may also experience an unexpectedly large number of claims that result in costs or liabilities in excess of our projections, which could cause us to record additional expenses. Our self-insurance reserves could prove to be inadequate, resulting in liabilities in excess of our available insurance and self-insurance. If a successful claim is made against us and is not covered by our insurance or exceeds our policy limits, our business may be negatively and materially impacted. These fluctuations could have a material adverse effect on our business, operating results, and financial condition.

We have modified the following risk factors disclosed in Part I, Item 1A., Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2023:

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

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

Effective July 1, 2024, Glen R. Ives, the Company's former chief operating officer, was appointed as President and Chief Executive Officer ("CEO") after which, on September 1, 2024 Andrew Merriman was promoted to Chief Operating Officer ("COO"). We depend on the continued services of our key personnel, including our CEO; David T. Bell, our CFO; our COO; and Jay O. Wright, our Executive Vice-President of Strategy and General Counsel. Our work with each of these key personnel is subject to changes and/or termination, and our

Table of Contents

inability to effectively retain the services of our key management personnel, could materially and adversely affect our operating results and future prospects.

We have deleted the following risk factor from those disclosed in Part I, Item 1A., Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2023:

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

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)Recent Sales of Unregistered Securities.

The Company had no recent sales of unregistered securities.

(b)Use of Proceeds from the Public Offering.

On January 25, 2024 the Company entered into 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 (ii) 3,193,534 Pre-funded Warrants to purchase up to an aggregate of 3,193,534 shares of common stock. The Pre-funded Warrants were sold at an offering price of $0.319 per Pre-funded Warrant and are exercisable at a price of $0.001 per share.

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 agreed to issue to the same institutional investor, for each ordinary share and Pre-funded Warrant purchased in the Offering, an additional Regular Warrant. The Regular Warrants have an exercise price of $0.35 and are exercisable to purchase an aggregate of 8,437,501 shares of common stock, for aggregate gross proceeds to the Company of approximately $2.7 million in the Registered Offering.

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 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.

There has been no material change in the planned use of proceeds from our Registered Offering as described in our final prospectus dated January 25, 2024 and filed with the SEC on January 29, 2024 pursuant to Rule 424(b)(4) of the Securities Act. As of the date of this Quarterly Report on Form 10-Q, we cannot predict with

Table of Contents

certainty all of the particular uses for the net proceeds, or the amounts that we will actually spend on the uses set forth in the prospectus.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Table of Contents

Item 6. Exhibits

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


			Incorporated by Reference
Exhibit Number		Form	File Number	Exhibit	Filing Date

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

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

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

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

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

2.6	Agreement and Plan of Merger dated as of March 22, 2023 by and among Castellum, Inc., GTMR Merger Sub., Inc., Global Technology and Management Resources, Inc. (“GTMR”), the stockholders of GTMR, and James Morton, as the representative of the stockholders	8-K	001-41526	2.1	March 28, 2023

3.1	Amended and Restated Articles of Incorporation of Registrant	S-1	333-267249	3.1	September 2, 2022

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

3.3	Certificate of Amendment to the Amended and Restated Articles of Incorporation of Registrant	8-K	001-41526	3.1	October 18, 2022

3.4	Certificate of Amendment to the Amended and Restated Articles of Incorporation of Registrant	8-K	001-41526	3.1	April 6, 2023

4.1	Form of Warrant to Purchase Common Stock of Registrant	S-1	333-267249	4.1	September 2, 2022

Table of Contents

4.2

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

S-1

333-267249

4.4

September 2, 2022

4.3

Common Stock Purchase Warrant dated February 13, 2023 by and between Registrant and Crom Cortana Fund LLC

8-K

001-41526

4.1

February 16, 2023

10.1

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

S-1

333-267249

10.8

September 2, 2022

10.2+

Registrant’s Stock Incentive Plan

S-1

333-267249

10.9

September 2, 2022

10.3+

Form of Stock Option Agreement

S-1

333-267249

10.10

September 2, 2022

10.4+

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

S-1

333-267249

10.14

September 2, 2022

10.5+

Employment Agreement executed on March 22, 2023 by and between James Morton and Castellum, Inc.

8-K

001-41526

10.1

March 28, 2023

10.6+

Form of Restrictive Covenant Agreement, by and among ____, individually, in favor of and for the benefit of Global Technology and Management Resources, Inc. and Castellum, Inc.

8-K

001-41526

10.2

March 28, 2023

10.7+

Employment Agreement dated July 1, 2024 by and between the Registrant and Glen R. Ives

8-K

001-41526

10.1

July 3, 2024

10.8+

Employment Agreement dated July 1, 2024 by and between the Registrant an Jay O. Wright

8-K

001-41526

10.2

July 3, 2024

10.9

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

S-1

333-267249

10.15

September 2, 2022

10.10

Form of Director Agreement

S-1

333-267249

10.16

September 2, 2022

10.11++

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

S-1

333-267249

10.17

September 2, 2022

10.12++

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

S-1

333-267249

10.18

September 2, 2022

10.13++

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

S-1

333-267249

10.19

September 2, 2022

10.14++

Modification No. 1 of Contract No. N6833521C0843 effective November 2, 2021 between Specialty Systems, Inc. and NAVAIR Aircraft Division Lakehurst

S-1

333-267249

10.20

September 2, 2022

Table of Contents



10.15++	Time and Material Subcontract Number PO-0018098 dated June 3, 2019 between Perpsecta Engineering, Inc. and Corvus Consulting, LLC	S-1	333-267249	10.21	September 2, 2022

10.16++	Modification 13 to Time and Material Subcontract Number PO-0018098 dated May 31, 2022 between Perspecta Engineering, Inc. and Corvus Consulting, Inc.	S-1	333-267249	10.22	September 2, 2022

10.17	Loan and Security Agreement issued on February 22, 2024 by Registrant, Specialty Systems, Inc., Corvus Consulting, LLC, Mainnerve Federal Services, Inc., Global Technology and Management Resources, Inc., and Live Oak Banking Company	8-K	001-41526	10.2	February 22, 2024

10.18	Amended and Restated Subordination and Standby Agreement dated February 22, 2024 by and between Registrant, Live Oak Banking Company, and Emil Kaunitz	8-K	001-41526	10.3	February 22, 2024

10.19	Amended and Restated Subordination and Standby Agreement dated February 22, 2024 by and between Registrant, Live Oak Banking Company, and Robert Eisiminger	8-K	001-41526	10.4	February 22, 2024

10.20	Amended and Restated Subordination and Standby Agreement dated February 22, 2024 by and between Registrant, Live Oak Banking Company, and The Buckhout Charitable Remainder Trust	8-K	001-41526	10.5	February 22, 2024

10.21	Amended and Restated Subordination and Standby Agreement dated February 22, 2024 b and between Registrant, Live Oak Banking Company, Emil Kaunitz, and William Cabey	8-K	001-41526	10.6	February 22, 2024

10.22	Letter Agreement dated February 22, 2024 by and between Registrant and Robert Eisiminger	8-K	001-41526	10.7	February 22, 2024

10.23	Amended and Restated Convertible Promissory Note in the principal amount of $2,400,000 issued on February 22, 2024 by Registrant, Corvus Consulting, LLC, and The Buckhout Charitable Remainder Trust	8-K	001-41526	10.8	February 22, 2024

10.24	Letter Agreement dated February 22, 2024 by and between Registrant and Emil Kaunitz	8-K	001-41526	10.9	February 22, 2024

21.1*	L ist of Subsidiaries

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

Table of Contents

31.2*

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

32.1**

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

32.2**

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

101

The following financial information from Castellum, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2023 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, and (v) Notes to the Consolidated Financial Statements.

104

Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101)

_______________________

* Filed herewith.

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

+ Management contract or compensatory plan.

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

Table of Contents

Signatures

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


Date: November 13, 2024			CASTELLUM, INC.

			/s/ Glen R. Ives
			Glen R. Ives
			Chief Executive Officer (Principal Executive Officer)

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