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What changed in Castellum, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Castellum, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+196 added−209 removedSource: 10-K (2024-03-21) vs 10-K (2023-03-17)

Top changes in Castellum, Inc.'s 2023 10-K

196 paragraphs added · 209 removed · 151 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

37 edited+13 added−2 removed37 unchanged
Biggest changeWe generated $25,302,224 (60%), $15,381,979 (61%), and $10,419,729 (78%) of our total revenues from T&M contracts in the years ended December 31, 2022, 2021, and 2020, respectively. In the year ending December 31, 2022, the top three revenue-producing contracts, some of which consist of multiple task orders, accounted for forty-six percent (46%) of our revenue, or $19,223,528.
Biggest changeTypically, the prime contract will dictate the terms of the subcontracts including, among other things, the workshare percentages, mechanics of payment terms, and the process for operational management. We generated $25,631,786 (57%), $25,302,224 (61%), and $15,381,979 (78%) of our total revenues from T&M contracts in the years ended December 31, 2023, 2022, and 2021, respectively.
Some significant law and regulations that affect us include the following: • the Federal Acquisition Regulation (“FAR”) and agency regulations supplemental to FAR, which regulate the formation, administration, and performance of USG contract; • the False Claims Act, which imposes civil and criminal liability for violations, including substantial monetary penalties for, among other things, presenting false or fraudulent claims for payments or approval; • the False Statements Act, which imposes civil and criminal liability for making false statements to the USG; • the Truthful Cost or Pricing Data Statute (formerly known as the “Truth in Negotiations Act”), which requires certification and disclosure of cost and pricing data in connection with the negotiation of certain contracts, modifications, or task orders; • the Procurement Integrity Act, which regulates access to competitor bid and proposal information and certain internal government procurement sensitive information, and our ability to provide compensation to certain former government procurement officials; • laws and regulations restricting the ability of a contractor to provide gifts or gratuities to employees of the USG; • post-government employment laws and regulations, which restrict the ability of a contractor to recruit and hire current employees of the USG and deploy former employees of the USG; • laws, regulations, and executive orders restricting the handling, use, and dissemination of information classified for national security purposes or determined to be “controlled unclassified information” or “for official use only,” and the export of certain products, services, and technical data, including requirements regarding any applicable licensing of our employees involved in such work; • laws, regulations, and executive orders regulating the handling, use, and dissemination of personally identifiable information in the course of performing a USG contract; • international trade compliance laws, regulations, and executive orders that prohibit business with certain sanctioned entities and require authorization for certain exports or imports in order to protect national security and global stability; • laws, regulations, and executive orders governing organizational conflicts of interest that may restrict our ability to compete for certain USG contracts because of the work that we currently perform for the USG or may require that we take measures such as firewalling off certain employees or restricting their future work activities due to the current work that they perform under a USG contract; • laws, regulations, and executive orders that impose requirements on us to ensure compliance with requirements and protect the government from risks related to our supply chain most notably is compliance with Cybersecurity Maturity Model Certification (“CMMC”); • laws, regulations, and mandatory contract provisions providing protections to employees or subcontractors seeking to report alleged fraud, waste, and abuse related to a government contract; • the National Industrial Security Operating Manual and other laws and regulations concerning the maintenance of a facility security clearance and the safeguarding of classified materials; 7 Table of Contents • the Contractor Business Systems rule, with authorizes Department of Defense agencies to withhold a portion of our payments if we are determined to have a significant deficiency in our accounting, cost estimating, purchasing, earned value management, material management and accounting, and/or property management system; and • the Cost Accounting Standards and Cost Principles, which impose accounting and allowability requirement that govern our right to reimbursement under certain cost-based USG contracts and require consistency of accounting practices over time.
Some significant law and regulations that affect us include the following: • the Federal Acquisition Regulation (“FAR”) and agency regulations supplemental to FAR, which regulate the formation, administration, and performance of USG contracts; • the False Claims Act, which imposes civil and criminal liability for violations, including substantial monetary penalties for, among other things, presenting false or fraudulent claims for payments or approval; • the False Statements Act, which imposes civil and criminal liability for making false statements to the USG; • the Truthful Cost or Pricing Data Statute (formerly known as the “Truth in Negotiations Act”), which requires certification and disclosure of cost and pricing data in connection with the negotiation of certain contracts, modifications, or task orders; • the Procurement Integrity Act, which regulates access to competitor bid and proposal information and certain internal government procurement sensitive information, and our ability to provide compensation to certain former government procurement officials; • laws and regulations restricting the ability of a contractor to provide gifts or gratuities to employees of the USG; • post-government employment laws and regulations, which restrict the ability of a contractor to recruit and hire current employees of the USG and deploy former employees of the USG; • laws, regulations, and executive orders restricting the handling, use, and dissemination of information classified for national security purposes or determined to be “controlled unclassified information” or “for official use only,” and the export of certain products, services, and technical data, including requirements regarding any applicable licensing of our employees involved in such work; • laws, regulations, and executive orders regulating the handling, use, and dissemination of personally identifiable information in the course of performing a USG contract; • international trade compliance laws, regulations, and executive orders that prohibit business with certain sanctioned entities and require authorization for certain exports or imports in order to protect national security and global stability; • laws, regulations, and executive orders governing organizational conflicts of interest that may restrict our ability to compete for certain USG contracts because of the work that we currently perform for the USG or 7 Table of Contents may require that we take measures such as firewalling off certain employees or restricting their future work activities due to the current work that they perform under a USG contract; • laws, regulations, and executive orders that impose requirements on us to ensure compliance with requirements and protect the government from risks related to our supply chain, including compliance with Cybersecurity Maturity Model Certification (“CMMC”); • laws, regulations, and mandatory contract provisions providing protections to employees or subcontractors seeking to report alleged fraud, waste, and abuse related to a government contract; • the National Industrial Security Operating Manual and other laws and regulations concerning the maintenance of a facility security clearance and the safeguarding of classified materials; • the Contractor Business Systems rule, with authorizes Department of Defense agencies to withhold a portion of our payments if we are determined to have a significant deficiency in our accounting, cost estimating, purchasing, earned value management, material management and accounting, and/or property management system; and • the Cost Accounting Standards and Cost Principles, which impose accounting and allowability requirements that govern our right to reimbursement under certain cost-based USG contracts and require consistency of accounting practices over time.
Acquisition Strategy Castellum seeks acquisitions which fit one or more of the following criteria: (1) expands Castellum's capability in existing areas of expertise such as cybersecurity and electronic warfare; (2) broadens the scope of clients which Castellum serves such as adding a new service branch or new government agency; (3) increases the scale of Castellum's business in existing areas in order to generate better operating profit margins and reduce the Company's wrap rate; (4) increases the geographic footprint of Castellum in order to offer more capability to existing or new clients; (5) adds management talent to Castellum; (6) adds technological capability in new areas which Castellum believes are high growth potential; and (7) fills a need within Castellum to be able to serve current customers such as adding a prime contract vehicle or the capability to win new prime contract vehicles.
Acquisition Strategy Castellum seeks acquisitions which fit one or more of the following criteria: (1) expands Castellum's capability in existing areas of expertise such as cybersecurity and electronic warfare; (2) broadens the scope of clients which Castellum serves such as adding a new service branch or new government agency; (3) increases the scale of Castellum's business in existing areas in order to generate better operating profit margins and reduce the Company's wrap rate; (4) increases the geographic footprint of Castellum in order to offer more capability to existing or new clients; (5) adds management talent to Castellum; (6) adds technological capability in new areas which Castellum believes are high growth potential; and (7) fills a need 5 Table of Contents within Castellum to be able to serve current customers such as adding a prime contract vehicle or the capability to win new prime contract vehicles.
The Opportunity Pipeline represents the revenue opportunity for the Company from potential future contracts obtained through organic growth from qualified customers based on the expected base year contract value plus the value of all option periods. Our primary customers are agencies and departments of the USG.
The Opportunity Pipeline represents the revenue opportunity for the Company from potential future contracts obtained through organic growth from qualified customers based on the expected base year contract value plus the value of all option periods. Our primary customers are currently agencies and departments of the USG.
Some of our key initiatives include the following: • Continue our unwavering commitment to our customers while supporting the communities in which we work and live; • Continue to grow organic revenue across our large, addressable market; • Recruit and hire a world class workforce to execute on our growing backlog; and • Differentiate ourselves through our investment, including our strategic mergers and acquisitions allowing us to enhance our current capabilities and create new customer access points.
Some of our key initiatives include the following: • Continue our unwavering commitment to our customers while supporting the communities in which we work and live; • Grow organic revenue across our large, addressable market; • Recruit and hire a world class workforce to execute on our growing backlog; and • Differentiate ourselves through our investment, including our strategic mergers and acquisitions which allow us to enhance our current capabilities and create new customer access points.
We have previously supported international clients in Australia and other foreign countries and believe that future opportunities for providing our services internationally is growing given current record nominal levels of global spending on defense and the continued rising threat from cybersecurity breaches. Deep-Seated Government Relationships .
We currently support and have previously supported international clients in Australia and other foreign countries and believe that future opportunities for providing our services internationally is growing given current record nominal levels of global spending on defense and the continued rising threat from cybersecurity breaches. Deep-Seated Government Relationships .
We modernize enterprise and agency-unique applications, enterprise infrastructure, and business processes to enhance productivity and increase user satisfaction. We use data analytics and visualization to provide insights and outcomes that optimize our customer’s operations. • C4ISR, Cyber & Space – Castellum teams ensure information superiority by delivering multi-domain C4 technology and networks.
We modernize enterprise and agency-unique applications, enterprise infrastructure, and business processes to enhance productivity and increase user satisfaction. We use data analytics and visualization to provide insights and outcomes that optimize our customer’s operations. • C4ISR, Cyber & Space – Castellum helps ensure information superiority by delivering multi-domain C4 technology and networks.
On June 12, 2019, the Company acquired Bayberry Acquisition Corporation, a Nevada corporation (“Bayberry” and, as context requires, the “Bayberry Acquisition”). On February 23, 2021, Bayberry was dissolved with the Nevada Secretary of State as it was non-operational after the merger with the Company. On November 21, 2019, we acquired Corvus Consulting, LLC, (“Corvus”), a Virginia limited liability company.
On June 12, 2019, the Company acquired Bayberry Acquisition Corporation, a Nevada corporation (“Bayberry” and, as context requires, the “Bayberry Acquisition”). On February 23, 2021, Bayberry was dissolved with the Nevada Secretary of State as it was non-operational after the merger with the Company. On November 21, 2019, we acquired Corvus Consulting, LLC, (“Corvus”), a Delaware limited liability company.
It should not be relied upon for investment purposes, nor is it incorporated by reference into this Annual Report on Form 10-K (Form 10-K). Throughout this Form 10-K, we incorporate by reference information from parts of other documents filed with the U.S. Securities and Exchange Commission (“SEC”).
It should not be relied upon for investment purposes, nor is it incorporated by reference into this Annual Report on Form 10-K (“Form 10-K”). Throughout this Form 10-K, we incorporate by reference information from parts of other documents filed with the U.S. Securities and Exchange Commission (“SEC”).
We are at the forefront of developing technologies that meet the challenges of 5G wireless communications both on and off the battlefield, millimeter wave, and the use of lasers for free space optical communications and long-range sensing. • Engineering Services – Castellum provides platform integration, modernization, and sustainment; system engineering; naval architecture; training and simulation services; and logistics engineering to help our customers achieve a decisive tactical edge.
We are at the forefront of developing technologies that meet the challenges of 5G wireless communications both on and off the battlefield, millimeter wave, and the use of lasers for free space optical communications and long-range sensing. 3 Table of Contents • Engineering Services – Castellum provides platform integration, modernization, and sustainment; system engineering; naval architecture; training and simulation services; and logistics engineering to help our customers achieve a decisive tactical edge.
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 a Continuing Resolution (“CR”) by the USG to fund its operations.
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 a CR by the USG to fund its operations.
We specialize in intelligence analysis, software development, software engineering, turnkey system development, program management, strategic and mission planning, information assurance and cybersecurity and policy along with analysis support. 5 Table of Contents Our government clients include cabinet-level departments of the USG, U.S. Army, U.S. Navy, U.S. Marine Corp, Special Operations, as well as other federal and civilian agencies.
We specialize in intelligence analysis, software development, software engineering, turnkey system development, program management, strategic and mission planning, information assurance, cybersecurity, and policy along with analysis support. Our government clients include cabinet-level departments of the USG, U.S. Army, U.S. Navy, U.S. Marine Corp, Special Operations, as well as other federal and civilian agencies.
Essentially all contracts with the USG, and many contracts with other 4 Table of Contents government entities, permit the government customer to terminate the contract at any time for the convenience of the government or for default by the contractor. None of Castellum’s subsidiaries have had contract work terminated for non-performance.
Essentially all contracts with the USG, and many contracts with other government entities, permit the government customer to terminate the contract at any time for the convenience of the government or for default by the contractor. None of Castellum’s subsidiaries have had contract work terminated for non-performance.
We are in continuing competition for highly skilled professionals in virtually all of our market areas. The success and growth of our business are significantly correlated with our ability to recruit, train, promote and retain high quality people at all levels of the organization.
We are in continuing competition for highly skilled professionals in virtually all of our market areas. The success and growth of our business are significantly correlated with our ability to 8 Table of Contents recruit, train, promote, and retain high quality people at all levels of the organization.
Due to our success in completing six acquisitions over the previous three years and given our executive officers’ and key managers’ networks of contacts in the IT, telecom, cybersecurity, and defense sectors, we believe that we are well positioned to continue to execute our business strategy given a pipeline of identified and acquisition targets.
Due to our success in completing seven acquisitions over the previous four years and given our executive officers’ and key managers’ networks of contacts in the IT, telecom, cybersecurity, and defense sectors, we believe that we are well positioned to continue to execute our business strategy given a pipeline of identified and acquisition targets.
We also serve state and local agencies and commercial clients, working to solve their hardest and most sophisticated cyber challenges, and have one international client. Contract Backlog We define backlog to include the following three components: • Funded Backlog .
We also serve state and local agencies and commercial clients, working to solve their hardest and most sophisticated cyber challenges, and currently support one international client. Contract Backlog We define backlog to include the following three components: • Funded Backlog .
Research and Development The Company from time to time engages in research and development relative to its service offerings; however, the amounts expended for such efforts are not material to the Company’s financial statements. 6 Table of Contents Intellectual Property The Company currently has no patents or trademarks that it believes to be material to the business.
Research and Development The Company from time to time engages in research and development relative to its service offerings; however, the amounts expended for such efforts are not material to the Company’s financial statements. Intellectual Property The Company currently has no patents or trademarks that it believes to be material to the business.
We maintain and monitor government owned data centers. We are subject matter experts in electronic and electromagnetic warfare. We perform advanced data analytics on litigation data in support of the Department of Justice. Lastly, through the Company’s IW/IO operations, Castellum provides key services to governments of other nations. International Presence .
We are subject matter experts in electronic and electromagnetic warfare. We perform advanced data analytics on litigation data in support of the Department of Justice. Lastly, through the Company’s IW/IO operations, Castellum provides key services to governments of other nations. International Presence .
Our software-defined, full-spectrum cyber, electronic warfare, and C-UAS solutions provide electromagnetic spectrum advantage and deliver precision effects against national security 3 Table of Contents threats.
Our software-defined, full-spectrum cyber, electronic warfare, and C-UAS solutions provide electromagnetic spectrum advantage and deliver precision effects against national security threats.
Much of our business is won through submission of formal competitive bids. Government and commercial customers typically base their decisions regarding contract awards on their assessment of the quality of past performance, compliance with proposal requirements, price, and other factors. The terms, conditions, and form of government contract bids, however, are in most cases specified by the customer.
Government and commercial customers typically base their decisions regarding contract awards on their assessment of the quality of past performance, compliance with proposal requirements, price, and other factors. The terms, conditions, and form of government contract bids, however, are in most cases specified by the customer.
The implementation of the ADP PEO has allowed for the 8 Table of Contents extension of benefits not previously offered to include a broad suite of additional services at reduced cost to the employees (such as financial planning, legal services, additional life insurance, and long-term care).
The implementation of the ADP PEO has allowed for the extension of benefits not previously offered to include a broad suite of additional services at reduced cost to the employees (such as financial planning, legal services, additional life insurance, and long-term care). At the time of the GTMR acquisition, the GTMR employees were subject to a legacy benefit program.
We have a relatively small share of the addressable market for our solutions and services and intend to achieve growth and increase market share both organically and through strategic acquisitions.
We know of no single competitor that is dominant in our fields of technology. We have a relatively small share of the addressable market for our solutions and services and intend to achieve growth and increase market share both organically and through strategic acquisitions.
As of December 31, 2022, we employed 207 full and part-time employees with forty-nine percent (49%) of our employees holding degrees in science, technology, engineering, or mathematics fields, twenty-eight percent (28%) holding advanced degrees, and eighty-four percent (84%) of our employees holding security clearances. We also retain 11 independent contractors.
As of December 31, 2023, we employed 260 full and part-time employees with sixty-five percent (65%) of our employees holding degrees in science, technology, engineering, or mathematics fields, twenty-two percent (22%) holding advanced degrees, and eighty-four percent (84%) of our employees holding security clearances. We also retain 11 independent contractors.
Although there can be no assurance that the Opportunity Pipeline can be converted to revenues, the Company expects that the total value of the Opportunity Pipeline to be approximately $475 million.
Although there can be no assurance that the Opportunity Pipeline can be converted to revenues, the Company believes that the total value of the Opportunity Pipeline to be approximately $527 million as of December 31, 2023.
Benefits are viewed as a critical tool for employee recruitment and retention. To that end, Castellum has migrated over half of its employees from their legacy benefits programs to the ADP Professional Employer Organization (“PEO”), with the balance of its employees targeted to be migrated in 2023.
Benefits are viewed as a critical tool for employee recruitment and retention. To that end, Castellum has migrated all of its employees from their legacy benefits programs to the ADP Professional Employer Organization (“PEO”), prior to the acquisition of Global Technology and Management Resources, Inc. (“GTMR”) in March of 2023.
These services are applicable to customers in the United States government (“USG”), financial services, healthcare, and other users of large data applications. They can be delivered to on-premises enclaves or customers who rely upon cloud-based infrastructures. The Company has worked with multiple business brokers and contacts within their business network to identify potential acquisitions.
They can be delivered to on-premises enclaves or customers who rely upon cloud-based infrastructures. The Company has worked with multiple business brokers and contacts within their business network to identify potential acquisitions.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements for our annual stockholders’ meetings and amendments to those reports are available free of charge on our website www.castellumus.com / investor-relations.html , as soon as reasonably practical after we electronically file the material with, or furnish it to, the SEC. [In addition, copies of our annual report will be made available, free of charge, upon written request.] The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including Castellum, Inc.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements for our annual stockholders’ meetings and amendments to those reports are available free of charge on our website www.castellumus.com / i nvestor-relations.html , as soon as reasonably practical after we electronically file the material with, or furnish it to, the SEC.
Each of those contracts are associated with the Company’s areas of core expertise, as follows: (i) an annual contract with NAVAIR that contains multiple renewal options is a CPFF contract that goes to the systems engineering and design/software engineering and development expertise where the Company has developed software that manages the aircraft launch and recovery operations on aircraft carriers, (ii) an annual contract with Perspecta with multiple renewal option periods is a T&M contract which supports the cyber and EW work done at the Army Staff Level, and (iii) an annual contract with CACI that contains multiple renewal options is a T&M contract that leverages expertise in EW and is associated with developing a 5G spectrum management strategy and policy.
Each of those contracts are associated with the Company’s areas of core expertise, as follows: (i) an annual contract with NAVAIR that contains multiple renewal options is a CPFF contract covering systems engineering, design/software engineering, and development expertise where the Company has developed software that manages the aircraft launch and recovery operations on aircraft carriers, (ii) an annual contract with Peraton with multiple renewal option periods is a T&M contract which supports the cyber and EW work done at the Army Staff Level, and (iii) an annual contract with NAVSEA that contains multiple renewal options is a CPFF contract covering engineering and technical services for the analysis, design, prototyping, test and evaluation, integration, project management, implementation, and documentation of various Command, Control, Communications, and Computer Intelligence Surveillance Reconnaissance (“C4ISR”) sensor systems and subsystems for Department of Defense.
Our marketing and new business development is conducted by many of our officers and managers including the CEO, COO, other executive officers, and other key managers. We employ business development, capture and proposal writer professionals who identify and qualify major contract opportunities, primarily in the USG market and submit bids for those opportunities.
We employ business development, capture and proposal writer professionals who identify and qualify major contract opportunities, primarily in the USG market and submit bids for those opportunities. Much of our business is won through submission of formal competitive bids.
The USG has a broad range of actions it can instigate to enforce its procurement law and policies. These include proposing a contractor, certain of its operations or individual employees for debarment or suspending or debarring a contractor, certain of its operations or individual employees from future government business.
These include proposing a contractor, certain of its operations, or individual employees for debarment; or, suspending or debarring a contractor, certain of its operations or individual employees from future government business.
Our contracts and subcontracts are composed of a wide range of contract types, including fixed firm price (“FFP”), cost plus fixed fee (“CPFF”), time and materials (“T&M”), labor hour, indefinite delivery/indefinite quantity (“IDIQ”) and government wide acquisition contracts (“GWACS”) such as U.S. General Services Administration (“GSA”) schedule contracts, substantially all of which are annual contracts, with options to renew.
Additionally, as with other government contractors, our business is subject to government customer funding decisions and actions that are beyond our control. 4 Table of Contents Our contracts and subcontracts are composed of a wide range of contract types, including firm fixed price (“FFP”), cost plus fixed fee (“CPFF”), time and materials (“T&M”), indefinite delivery/indefinite quantity (“IDIQ”), and government wide acquisition contracts (“GWACS”) such as U.S.
Although we operate under the risk of such terminations with the potential to have a material impact on operations, they are not common. Additionally, as with other government contractors, our business is subject to government customer funding decisions and actions that are beyond our control.
Although we operate under the risk of such terminations with the potential to have a material impact on operations, they are not common.
We expect to recognize revenue from a substantial portion of funded backlog within the next 24 months. However, given the uncertainties discussed above, as well as the risks described in Budget Environment, we can give no assurance that we will be able to convert our backlog into revenue in any particular period, if at all.
However, given the uncertainties discussed above, as well as the risks described in Budget Environment, we can give no assurance that we will be able to convert our backlog into revenue in any particular period, if at all. 6 Table of Contents Competition We operate in a highly competitive industry that includes many entities, some of which are larger in size and have greater financial resources than we have.
Item 1. Business Overview Castellum, Inc. is focused on acquiring and growing technology companies in the areas of cybersecurity, IT, electronic warfare, information warfare, and information operations with businesses in the defense, federal, civilian, and commercial markets. Services include intelligence analysis, software development, software engineering, program management, strategic and mission planning, information assurance, cybersecurity and policy support, and data analytics.
Item 1. Business Overview Castellum is focused on building a large, successful technology company in the areas of cybersecurity, IT, electronic warfare, information warfare, and information operations with businesses in the defense, federal, civilian, and commercial markets.
To mitigate the risk of CMMC compliance the Company has employed a senior executive whose full-time responsibility is compliance. Regarding CMMC compliance, this individual is considered a certified assessor and is preparing the Company for CMMC certification. USG contracts are, by the terms, subject to termination by the USG either for convenience or default by the contractor.
To ensure CMMC compliance, the Company has a senior executive on its management team whose responsibility includes preparing the Company for CMMC certification. USG contracts are, by their terms, subject to termination by the USG either for convenience or default by the contractor. In addition, USG contracts are conditioned upon the continuing availability of Congressional appropriations.
In addition, USG contracts are conditioned upon the continuing availability of Congressional appropriations. Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract performance could take many years.
Congress usually appropriates funds for a given program on a September 30 fiscal year basis, even though contract performance could take many years. As is common in the industry, our Company is subject to business risk, including changes in governmental appropriations, national defense polices, service modernization plans, and availability of funds.
As is common in the industry, our Company is subject to business risk, including changes in governmental appropriations, national defense polices, service modernizations plans, and availability of funds. Any of these factors could materially adversely affect our Company's business with the USG in the future.
Any of these factors could materially adversely affect our Company's business with the USG in the future. The USG has a broad range of actions it can utilize to enforce its procurement law and policies.
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Because most government contracts renew annually, the Company does not have a material number of multi-year contracts. Typically, the prime contract will dictate the terms of the subcontracts including, among other things, the workshare percentages, mechanics of payment terms, and the process for operational management.
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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 are applicable to customers in the United States government (“USG”), financial services, healthcare, and other users of large data applications.
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Competition We operate in a highly competitive industry that includes many firms, some of which are larger in size and have greater financial resources than we have. We know of no single competitor that is dominant in our fields of technology.
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Our marketing and new business development is conducted by many of our officers and managers including the Chief Executive Officer (“CEO”), Chief Operating Officer (“COO”), Chief Strategy Officer and other executive officers, and other key managers.
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General Services Administration (“GSA”) schedule contracts, substantially all of which are annual contracts, with options to renew. Because most government contracts renew annually, the Company does not have a material number of multi-year contracts.
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In the year ending December 31, 2023, the top three revenue-producing contracts, some of which consist of multiple task orders, accounted for fifty-two percent (52%) of our revenue, or $23,639,493.
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Budgetary Environment On December 29, 2022, President Joe Biden signed the Consolidated Appropriations Act of 2023 which was a $1.7 trillion omnibus spending bill. Since that time, there have been a series of continuing resolutions (“CR or CRs”) in the absence of a budget.
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While we cannot predict the passage of a budget, the CRs have had bipartisan support for the areas in which we support National Security interests. Over 99% of our work is considered mission critical and has not been identified for employee furlough when faced with the risk of a government shutdown.
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Depending on their scope, duration, and other factors, CRs can negatively impact our business due to delays in new program starts, delays in contract award decisions, and other factors. The Company’s most recent experience with CRs is that organic growth is impacted, but the cybersecurity related operations remain core to what has become a bipartisan National Security focus.
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However, there is the risk that when a CR expires, unless appropriations bills have been passed by Congress and signed by the then President, or a new CR is passed and signed into law, the government must cease operations, or shutdown, except in certain emergency situations or when the law authorizes continued activity.
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During Covid our work was deemed a key component of National Security and continued unabated which would suggest that lacking a CR we are likely to continue to operate largely unaffected but such an assumption may prove to be incorrect.
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We continuously review our operations in an attempt to identify programs potentially at risk from CRs so that we can consider appropriate contingency plans. We believe that less than 5% of our employees would be at risk due to a CR.
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We expect to recognize revenue from a substantial portion of funded backlog within the next 24 months.
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Through the open-enrollment process which will occur during the second quarter of 2024, the Company expects its employees, including the employees of GTMR, to migrate to the same benefit plan.
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In addition, copies of our annual report will be made available, free of charge, upon written request. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements, and other information regarding SEC registrants, including Castellum, Inc.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

62 edited+8 added−22 removed134 unchanged
Biggest changeRisks Related to our Indebtedness Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt. We have substantial indebtedness. We have approximately $13,123,878 (or $10,073,293 net of debt discount) of debt as of December 31, 2022, the majority of which matures in calendar year 2024.
Biggest changeDuring the third quarter of 2023, due to decline in stock price, Management determined that a triggering event occurred representing an indicator of goodwill impairment, resulting in a non-cash charge of $6,919,094. 19 Table of Contents Risks Related to our Indebtedness Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
Our existing contracts typically expire after some period of time and must be “re-competed.” There is no guarantee that we will win such re-compete efforts; • government certification requirements applicable to our products may change and in doing so restrict our ability to sell into the U.S. federal government sector until we have attained the revised certification; • government demand and payment for our products and services may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products and services; • governments can generally terminate our contracts “for convenience”, meaning we could lose part or all of our revenue on short notice; • governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our services, which would adversely impact our revenue and results of operations, or institute fines or civil or criminal liability if the audit uncovers improper or illegal activities; and 11 Table of Contents • when we are a subcontractor, we have less control over the execution and success of the contract with the government.
Our existing contracts typically expire after some period of time and must be “re-competed.” There is no guarantee that we will win such re-compete efforts; • government certification requirements applicable to our products may change and in doing so restrict our ability to sell into the U.S. federal government sector until we have attained the revised certification; • government demand and payment for our products and services may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products and services; • governments can generally terminate our contracts “for convenience”, meaning we could lose part or all of our revenue on short notice; 11 Table of Contents • governments routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government refusing to continue buying our services, which would adversely impact our revenue and results of operations, or institute fines or civil or criminal liability if the audit uncovers improper or illegal activities; and • when we are a subcontractor, we have less control over the execution and success of the contract with the government.
Some significant law and regulations that affect us include the following: • the FAR, and agency regulations supplemental to FAR, which regulate the formation, administration, and performance of USG contracts; • the False Statements Act, which imposes civil and criminal liability for making false statements to the USG; • the Truthful Cost or Pricing Data Statute (formerly known as the “Truth in Negotiations Act”), which requires certification and disclosure of cost and pricing data in connection with the negotiation of certain contracts, modifications, or task orders; • the Procurement Integrity Act, which regulates access to competitor bid and proposal information and certain internal government procurement sensitive information, and our ability to provide compensation to certain former government procurement officials; • laws and regulations restricting the ability of a contractor to provide gifts or gratuities to employees of the USG, including the “FCPA” which prohibits U.S. citizens and entities from bribing foreign government officials to benefit their business interests; • post-government employment laws and regulations, which restrict the ability of a contractor to recruit and hire current employees of the USG and deploy former employees of the USG; • laws, regulations, and executive orders restricting the handling, use, and dissemination of information classified for national security purposes or determined to be “controlled unclassified information” or “for official use only,” and the export of certain products, services, and technical data, including requirements regarding any applicable licensing of our employees involved in such work; • laws, regulations, and executive orders regulating the handling, use, and dissemination of personally identifiable information in the course of performing a USG contract; • international trade compliance laws, regulations, and executive orders that prohibit business with certain sanctioned entities and require authorization for certain exports or imports in order to protect national security and global stability, including The International Traffic in Arms Regulations that controls the manufacture, sale, and distribution of defense and space-related articles and services as defined in the United States Munitions List); • laws, regulations, and executive orders governing organizational conflicts of interest that may restrict our ability to compete for certain USG contracts because of the work that we currently perform for the USG or may require that we take measures such as firewalling off certain employees or restricting their future work activities due to the current work that they perform under a USG contract; • laws, regulations, and executive orders that impose requirements on us to ensure compliance with requirements and protect the USG from risks related to our supply chain such as compliance with CMMC; • laws, regulations, and mandatory contract provisions providing protections to employees or subcontractors seeking to report alleged fraud, waste, and abuse related to a USG contract; • the Contractor Business Systems rule, which authorizes DoD agencies to withhold a portion of our payments if we are determined to have a significant deficiency in our accounting, cost estimating, purchasing, earned value management, material management and accounting, and/or property management system; and • the Cost Accounting Standards and Cost Principles, which impose accounting and allowability requirements that govern our right to reimbursement under certain cost-based USG contracts and require consistency of accounting practices over time.
Some significant law and regulations that affect us include the following: • the FAR, and agency regulations supplemental to FAR, which regulate the formation, administration, and performance of USG contracts; • the False Statements Act, which imposes civil and criminal liability for making false statements to the USG; • the Truthful Cost or Pricing Data Statute (formerly known as the “Truth in Negotiations Act”), which requires certification and disclosure of cost and pricing data in connection with the negotiation of certain contracts, modifications, or task orders; • the Procurement Integrity Act, which regulates access to competitor bid and proposal information and certain internal government procurement sensitive information, and our ability to provide compensation to certain former government procurement officials; • laws and regulations restricting the ability of a contractor to provide gifts or gratuities to employees of the USG, including the FCPA which prohibits U.S. citizens and entities from bribing foreign government officials to benefit their business interests; • post-government employment laws and regulations, which restrict the ability of a contractor to recruit and hire current employees of the USG and deploy former employees of the USG; • laws, regulations, and executive orders restricting the handling, use, and dissemination of information classified for national security purposes or determined to be “controlled unclassified information” or “for official use only,” and the export of certain products, services, and technical data, including requirements regarding any applicable licensing of our employees involved in such work; • laws, regulations, and executive orders regulating the handling, use, and dissemination of personally identifiable information in the course of performing a USG contract; • international trade compliance laws, regulations, and executive orders that prohibit business with certain sanctioned entities and require authorization for certain exports or imports in order to protect national security and global stability, including The International Traffic in Arms Regulations that controls the manufacture, sale, and distribution of defense and space-related articles and services as defined in the United States Munitions List); • laws, regulations, and executive orders governing organizational conflicts of interest that may restrict our ability to compete for certain USG contracts because of the work that we currently perform for the USG or may require that we take measures such as firewalling off certain employees or restricting their future work activities due to the current work that they perform under a USG contract; • laws, regulations, and executive orders that impose requirements on us to ensure compliance with requirements and protect the USG from risks related to our supply chain such as compliance with CMMC; • laws, regulations, and mandatory contract provisions providing protections to employees or subcontractors seeking to report alleged fraud, waste, and abuse related to a USG contract; • the Contractor Business Systems rule, which authorizes DoD agencies to withhold a portion of our payments if we are determined to have a significant deficiency in our accounting, cost estimating, purchasing, earned value management, material management and accounting, and/or property management system; and 12 Table of Contents • the Cost Accounting Standards and Cost Principles, which impose accounting and allowability requirements that govern our right to reimbursement under certain cost-based USG contracts and require consistency of accounting practices over time.
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.
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.
If our prime contractors fail to maintain their relationships with the governmental agency and fulfill their contractual obligations, our performance as a subcontractor and our ability to obtain future business could be materially and adversely impacted and our actual results could differ materially and adversely from those anticipated.
If our prime contractors fail to maintain their relationships with the applicable governmental agency and fulfill their contractual obligations, our performance as a subcontractor and our ability to obtain future business could be materially and adversely impacted and our actual results could differ materially and adversely from those anticipated.
Any security breach or system failure in such systems could result in an interruption of our customer’s operations, significant delays under a contract, loss of revenue, claims for damages, contract termination and material adverse effect on our results of operations.
Any security breach or system failure in such systems could result in an interruption of our customer’s operations, significant delays under a contract, loss of revenue, claims for damages, contract termination, and have a material adverse effect on our results of operations.
Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder, and Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suites brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder.
Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder, and Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder.
This competitive bidding process presents a number of risks, including the following: • we bid on programs before the completion of their design, which may result in unforeseen technological difficulties and cost overruns; • we expend substantial cost and managerial time and efforts to prepare bids and proposals for contracts that we may not win; • we may be unable to estimate accurately the resources and cost structure that will be required to service any contract we win; and • we may encounter expense and delay if our competitors protest or challenge awards or contracts to us in competitive bidding, and any such protest or challenge could result in the resubmission of bids on modified specifications, or in termination, reduction, or modification of the awarded contract.
This competitive bidding process presents a number of risks, including the following: • we bid on programs before the completion of their design, which may result in unforeseen technological difficulties and cost overruns; 14 Table of Contents • we expend substantial cost and managerial time and efforts to prepare bids and proposals for contracts that we may not win; • we may be unable to estimate accurately the resources and cost structure that will be required to service any contract we win; and • we may encounter expense and delay if our competitors protest or challenge awards or contracts to us in competitive bidding, and any such protest or challenge could result in the resubmission of bids on modified specifications, or in termination, reduction, or modification of the awarded contract.
If we encounter such problems in the future, our actual results could differ materially and adversely from those anticipated. Our earnings and margins may vary based on the mix of our contracts and programs. At December 31, 2022, our backlog included cost reimbursable, T&M, and FFP contracts. Cost reimbursable and T&M contracts generally have lower profit margins than FFP contracts.
If we encounter such problems in the future, our actual results could differ materially and adversely from those anticipated. Our earnings and margins may vary based on the mix of our contracts and programs. At December 31, 2023, our backlog included cost reimbursable, T&M, and FFP contracts. Cost reimbursable and T&M contracts generally have lower profit margins than FFP contracts.
Our Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws (i) authorize the issuance of “blank check” preferred stock that could be issued by our Board to thwart a takeover attempt; (ii) provide that vacancies on our Board, including newly created directorships, may be filled by a majority vote of directors then in office, (iii) provide that the Board shall have the sole power to adopt, amend, or repeal the Amended and Restated Bylaws, and (iv) requires a stockholder to provide advance written notice of a stockholder proposal.
Our Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws (i) authorize the issuance of “blank check” preferred stock that could be issued by our Board to thwart a takeover attempt; (ii) provide that vacancies on our Board, including newly created directorships, may be filled by a majority vote of directors then in office, (iii) provide that the Board shall 21 Table of Contents have the sole power to adopt, amend, or repeal the Amended and Restated Bylaws, and (iv) requires a stockholder to provide advance written notice of a stockholder proposal.
If the USG or any of our other customers or any prime contractors for who we are a subcontractor fail to pay or delays the payment of their outstanding invoices for any reason, our business and financial condition may be materially and adversely affected.
If the USG or any of our other customers or any prime contractors for which we are a subcontractor fail to pay or delays the payment of their outstanding invoices for any reason, our business and financial condition may be materially and adversely affected.
In addition, some of our engagements obligate us to provide ongoing maintenance and other supporting or ancillary services on a fixed-price basis or with limitations on our ability to increase prices. Many of our engagements are also on a time-and-material (T&M) basis.
In addition, some of our engagements obligate us to provide ongoing maintenance and other supporting or ancillary services on a fixed-price basis or with limitations on our ability to increase prices. Many of our engagements are also on a T&M basis.
Finally, if a court were to find this provision of our Amended and Restated Articles of Incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, 22 Table of Contents we may incur additional costs associated with resolving such matters in other jurisdictions, which could have a material adverse effect on us.
Finally, if a court were to find this provision of our Amended and Restated Articles of Incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could have a material adverse effect on us.
If we are unable to prevent third parties from infringing or misappropriating our proprietary information, our competitive position could be harmed, and our actual results could differ materially and adversely from those anticipated. 17 Table of Contents Our annual revenue and operating results could be volatile due to the unpredictability of the USG’s budgeting process and policy priorities.
If we are unable to prevent third parties from infringing or misappropriating our proprietary information, our competitive position could be harmed, and our actual results could differ materially and adversely from those anticipated. Our annual revenue and operating results could be volatile due to the unpredictability of the USG’s budgeting process and policy priorities.
The inability of any member of our management team to operate effectively in their position, or for the management team to effectively work together, could materially and adversely affect our operating results and future prospects. We may have difficulty raising additional capital, which could deprive us of necessary resources.
The inability of any member of our management team to operate effectively in their position, or for the management team to effectively work together, could materially and adversely affect our operating results and future prospects. 10 Table of Contents We may have difficulty raising additional capital, which could deprive us of necessary resources.
The loss of a substantial number of our teaming partners, our possible inability to replace them, or the failure to recruit additional teaming partners could materially and adversely affect our results of operations. 13 Table of Contents We are exposed to the credit risk of some of our teaming partners, which could result in material losses.
The loss of a substantial number of our teaming partners, our possible inability to replace them, or the failure to recruit additional teaming partners could materially and adversely affect our results of operations. We are exposed to the credit risk of some of our teaming partners, which could result in material losses.
Such risks include: • limited operating history at our current scale; • our ability to raise capital to develop our business and fund our operations; 9 Table of Contents • our ability to anticipate and adapt to developing markets; • acceptance by our customers; • limited marketing experience; • competition from competitors with substantially greater financial resources and assets; and • the ability to identify, attract, and retain qualified personnel.
Such risks include: • limited operating history at our current scale; • our ability to raise capital to develop our business and fund our operations; • our ability to anticipate and adapt to developing markets; • acceptance by our customers; • limited marketing experience; • competition from competitors with substantially greater financial resources and assets; and • the ability to identify, attract, and retain qualified personnel.
These changes could impair our ability to obtain new contracts or win re-competed contracts or adversely affect our future profit margin. Any new contracting methods could be costly or administratively difficult for us to satisfy and, as a result, could cause actual results to differ materially and adversely from those anticipated.
These changes could impair our ability to obtain new contracts or win re-competed contracts or adversely affect our future profit margin. Any new contracting methods could be costly or 15 Table of Contents administratively difficult for us to satisfy and, as a result, could cause actual results to differ materially and adversely from those anticipated.
Given the magnitude of our revenue derived from contracts with the DoD, the DCAA is our relevant government audit agency. The DCAA audits the adequacy of our internal control systems and policies including, among other areas, 12 Table of Contents compensation.
Given the magnitude of our revenue derived from contracts with the DoD, the DCAA is our relevant government audit agency. The DCAA audits the adequacy of our internal control systems and policies including, among other areas, compensation.
The increases to our borrowing costs have not impacted (and are not expected to impact) our ability to make timely payments. Risks Related to our Acquisitions We may have difficulty identifying and executing acquisitions on favorable terms and therefore may grow more slowly than we historically have grown.
The increases to our borrowing costs have not impacted (and are not expected to impact) our ability to make timely payments. 18 Table of Contents Risks Related to our Acquisitions We may have difficulty identifying and executing acquisitions on favorable terms and therefore may grow more slowly than we historically have grown.
Our performance as a subcontractor on a government contract is dependent on our prime contractor’s ability to satisfactorily maintain its relationship with the government agency and fulfilling its obligations under their contract.
Our performance as a subcontractor on a government contract is dependent on our prime contractor’s ability to satisfactorily maintain its relationship with the applicable government agency and fulfill its obligations under their contract.
Certain key members of our management team lack public company experience in their positions and our executive management team has limited time working together. The members of our team do not all have experience working in their roles for a public company, including our CEO, COO, and CFO. The management team also has limited experience working together as a team.
Certain key members of our management team lack significant public company experience in their positions and our executive management team has limited time working together. The members of our team do not all have significant prior experience working in their roles for a public company, including our CEO, COO, and CFO.
The loss of qualified executives and key employees, or our inability to attract, retain, and motivate high-quality executives and employees required for the planned expansion of our business, may harm our operating results and impair our ability to grow. We depend on the continued services of our key personnel, including Mark C. Fuller, our Chief Executive Officer (“CEO”), David T.
The loss of qualified executives and key employees, or our inability to attract, retain, and motivate high-quality executives and employees required for the planned expansion of our business, may harm our operating results and impair our ability to grow. We depend on the continued services of our key personnel, including Mark C. Fuller, our CEO, David T.
Our management collectively owns a substantial amount of our common stock. Collectively, our officers and directors own or exercise voting and investment control of approximately 45.0% of our outstanding common stock and control 44.4% of the voting power of the Company.
Our management collectively owns a substantial amount of our common stock. Collectively, our officers and directors own or exercise voting and investment control of approximately 44.4% of our outstanding common stock and control 43.8% of the voting power of the Company.
As a result of such failures, we could also become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, and become subject to litigation from investors and stockholders, which could harm our reputation, financial condition or divert financial and management resources from our core business and would have a material adverse effect on our business, financial condition, and results of operations.
As a result of such failures, we could also become subject to investigations by the NYSE American, the SEC, or other regulatory authorities, and become subject to litigation from investors and stockholders, which could harm our reputation, financial condition, or divert financial and management resources from our core business and would have a material adverse effect on our business, financial condition, and results of operations.
The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information.
The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a 20 Table of Contents standardized risk disclosure document containing specified information.
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 will increase our cost of debt and our interest expense thereby reducing our pre-tax income and net income.
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.
We generated 8% of our total revenue in the year ended December 31, 2022, 19 percent of our total revenue in the year ended December 31, 2021, and 21 percent of our total revenue in the year ended December 31, 2020, from FFP contracts. FFP contracts require us to price our contracts by predicting our expenditures in advance.
We generated 7% of our total revenue in the year ended December 31, 2023, 8% of our total revenue in the year ended December 31, 2022, and 19% of our total revenue in the year ended December 31, 2021, from FFP contracts. FFP contracts require us to price our contracts by predicting our expenditures in advance.
Any costs found to be improperly allocated or assigned to contracts will not be reimbursed, and any such costs already reimbursed 15 Table of Contents must be refunded and certain penalties may be imposed.
Any costs found to be improperly allocated or assigned to contracts will not be reimbursed, and any such costs already reimbursed must be refunded and certain penalties may be imposed.
We had an accumulated deficit of $26,094,570 as of December 31, 2022 and we expect to continue to generate a net loss in the year ending December 31, 2023. As a result, we are incurring net losses, and it is possible that we may not be able to achieve the revenue levels necessary to achieve and sustain net profitability.
We had an accumulated deficit of $43,982,900 as of December 31, 2023, and we expect to continue to generate a net loss in the year ending December 31, 2024. As a result, we are incurring net losses, and it is possible that we may not be able to achieve the revenue levels necessary to achieve and sustain net profitability.
Should our business fail to generate cash flow from operations sufficient to service our debt and make necessary capital expenditures we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining equity capital on terms that may be onerous or highly dilutive.
Financial Statements on this Annual Report on Form 10-K. Should our business fail to generate cash flow from operations sufficient to service our debt and make necessary capital expenditures we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining equity capital on terms that may be onerous or highly dilutive.
Since the majority of our revenue comes from the USG, changes in USG budgetary priorities, such as for homeland security or to address global pandemics like COVID-19, or actions taken to address government budget deficits, the national debt, and/or prevailing economic conditions, could directly affect our financial performance.
Since the majority of our revenue comes from the USG, changes in USG budgetary priorities, such as for homeland security or to address Social Security or Medicare reform, or actions taken to address government budget deficits, the national debt, and/or prevailing economic conditions, could directly affect our financial performance.
Sales to United States (“U.S.”), federal, state, and local governmental agencies have in the past accounted for, and may in the future account for, substantially all of our revenue.
Sales to U.S federal, state, and local governmental agencies have in the past accounted for, and may in the future account for, substantially all of our revenue.
Our insurance, including for errors and omissions liability and property and business interruption, may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, our actual results could differ materially and adversely from those anticipated.
Our insurance, including for errors and omissions liability and property and business interruption, may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, our actual results could differ materially and adversely from those anticipated. 17 Table of Contents Our failure to adequately protect our confidential information and proprietary rights may harm our competitive position.
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.Our backlog may not result in actual revenue in any particular period, or at all, which could cause our actual results to differ materially and adversely from those anticipated.
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 are focused on acquiring and growing technology companies in the areas of information technology (“IT”), electronic warfare, information warfare, and cybersecurity with businesses in the governmental and commercial markets. Since November 2019, we have executed our business plan and completed six acquisitions.
We are focused on building a large, successful technology company in the areas of information technology (“IT”), electronic warfare, information warfare, and cybersecurity with businesses in the governmental and commercial markets. Since November 2019, we have executed our business plan and completed seven acquisitions.
If we are unable to consistently win new contract awards over any extended 14 Table of Contents period, our business and prospects will be adversely affected and that could cause our actual results to differ materially and adversely from those anticipated.
If we are unable to consistently win new contract awards over any extended period, our business and prospects will be adversely affected and that could cause our actual results to differ materially and adversely from those anticipated. If we are unable to win prime contracts, or acquire companies with prime contract vehicles, our business and prospects will be adversely affected.
Many of the systems we work on involve managing and protecting information involved in national security and other sensitive government functions. A security breach in one of these systems could prevent us from having access to such critically sensitive systems. Other examples of employee misconduct could include timecard fraud and violations of the Anti-Kickback Act of 1986.
A security breach in one of these systems could 16 Table of Contents prevent us from having access to such critically sensitive systems. Other examples of employee misconduct could include timecard fraud and violations of the Anti-Kickback Act of 1986.
As a result, unless required by a stock exchange rule, investors may be prevented from affecting matters involving our Company, including: • the composition of our Board of Directors and, through it, any determination with respect to our business direction and policies, including the appointment and removal of officers; • any determination with respect to mergers or other business combinations; • our acquisition or disposition of assets; and • our corporate financing activities.
As a result, unless required by a stock exchange rule, investors may be prevented from affecting matters involving our Company, including: • the composition of our Board of Directors (the “Board”) and, through it, any determination with respect to our business direction and policies, including the appointment and removal of officers; • any determination with respect to mergers or other business combinations; • our acquisition or disposition of assets; and • our corporate financing activities. 22 Table of Contents Furthermore, this concentration of voting power could have the effect of delaying, deterring, or preventing a change of control or other business combination that might otherwise be beneficial to our stockholders.
Our work with each of these key personnel is subject to changes and/or termination, and our inability to effectively retain the services of our key management personnel, could materially and adversely affect our operating results and future prospects.
Bell, our CFO, Glen R. Ives, our Chief Operating Officer (“COO”), and Jay O. Wright, our Chief Strategy Officer and General Counsel. Our work with each of these key personnel is subject to changes and/or termination, and our inability to effectively retain the services of our key management personnel, could materially and adversely affect our operating results and future prospects.
Sales of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock. We may issue substantial amounts of common stock in the future, which would dilute the percentage ownership held by the investors who purchase shares of our common stock in this offering.
We may issue substantial amounts of common stock in the future, which would dilute the percentage ownership held by the investors who purchase shares of our common stock in any such offering.
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.
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.
We also face indirect competition from certain government agencies that perform services for themselves similar to those marketed by us. If we are unable to anticipate or effectively react to these competitive challenges, our competitive position could weaken, and we could experience a decline in our growth rate or revenue that could adversely affect our business and results of operations.
If we are unable to anticipate or effectively react to these competitive challenges, our competitive position could weaken, and we could experience a decline in our growth rate or revenue that could adversely affect our business and results of operations.
Our agreements with our teaming partners are generally non-exclusive, meaning our teaming partners may offer customers services from several different companies, including services that compete with ours.
We expect that sales through teaming partners will continue to be a significant percentage of our revenue. Our agreements with our teaming partners are generally non-exclusive, meaning our teaming partners may offer customers services from several different companies, including services that compete with ours.
Any future debt financing could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, 10 Table of Contents which may make it more difficult for us to obtain additional capital and to pursue business opportunities.
Any future debt financing could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. There can be no assurance that such additional capital will be available, on a timely basis, or on terms acceptable to us.
Risks Related to our Business, Industry and Operations We lack a long-term operating history on which to evaluate our consolidated business and determine if we will be able to execute our business plan, and we can give no assurance that our operations will result in sustained profitability.
Additional risks and uncertainties not presently known to us or that we currently believe are not material may also impair our business, financial condition, results of operations, and growth prospects. 9 Table of Contents Risks Related to our Business, Industry and Operations We lack a long-term operating history on which to evaluate our consolidated business and determine if we will be able to execute our business plan, and we can give no assurance that our operations will result in sustained profitability.
Additionally, we have certain potential dilutive instruments, of which the conversion of these instruments could result in dilution to stockholders: As of March 10, 2023 the maximum potential dilution is 25,561,017 shares and includes Series A preferred stock convertible into approximately 587,500 shares of common stock, Series C preferred stock convertible into 481,250 shares of common stock, convertible promissory notes convertible into 13,044,681 shares of common stock, options granted convertible into 6,425,000 shares of common stock, and warrants granted convertible into 5,022,586 shares of common stock.
Additionally, we have certain potential dilutive instruments, of which the conversion of these instruments could result in dilution to stockholders: As of March 15, 2024 the maximum potential dilution is 28,274,400 shares and includes Series A preferred stock convertible into approximately 587,500 shares of common stock, Series C preferred stock convertible into 481,250 shares of common stock, options granted convertible into 8,243,437 shares of common stock, and warrants granted convertible into 18,962,212 shares of common stock.
Our failure to adequately protect our confidential information and proprietary rights may harm our competitive position. Our success depends, in part, upon our ability to protect our proprietary information. Although our employees are subject to confidentiality obligations, this protection may be inadequate to deter misappropriation of our proprietary information.
Our success depends, in part, upon our ability to protect our proprietary information. Although our employees are subject to confidentiality obligations, this protection may be inadequate to deter misappropriation of our proprietary information. In addition, we may be unable to detect unauthorized use of our proprietary information in order to take appropriate steps to enforce our rights.
Any of these outcomes could cause our actual results to differ materially and adversely from those anticipated. 19 Table of Contents We have substantial investments in recorded goodwill as a result of prior acquisitions and change in future business conditions could cause these investments to become impaired, requiring substantial write-downs that would reduce our operating income.
We have substantial investments in recorded goodwill as a result of prior acquisitions and a change in future business conditions could cause these investments to become impaired, requiring substantial write-downs that would reduce our operating income. Goodwill accounts for $10,716,907 of our recorded total assets as of December 31, 2023.
Moreover, any acquired business may fail to generate the revenue or net income we expected or produce the efficiencies or cost-savings we anticipated.
Moreover, any acquired business may fail to generate the revenue or net income we expected or produce the efficiencies or cost-savings we anticipated. Any of these outcomes could cause our actual results to differ materially and adversely from those anticipated.
If the IRS or other tax authority successfully contests a tax position that we take, we may be required to pay additional taxes, interest, or fines that may adversely affect our results of operations and financial position. 21 Table of Contents Anti-takeover provisions in our charter documents and Nevada law could discourage, delay, or prevent a change in control of our Company and may affect the trading price of our common stock.
If the IRS or other tax authority successfully contests a tax position that we take, we may be required to pay additional taxes, interest, or fines that may adversely affect our results of operations and financial position.
A majority of our contracts are only partially funded at any point during their full performance period and unfunded contract work is subject to future appropriations by Congress. As a result of a lack of appropriated funds or efforts to reduce USG spending, our backlog may not result in revenue or may be delayed.
Many of our USG contracts include multi-year performance periods in which Congress appropriates funds on an annual basis. A majority of our contracts are only partially funded at any point during their full performance period and unfunded contract work is subject to future appropriations by Congress.
Depending upon the value of the matters affected, an OCI issue that precludes our participation in or performance of a program or contract could cause our actual results to differ materially and adversely from those anticipated.
Depending upon the value of the matters affected, an OCI issue that precludes our participation in or performance of a program or contract could cause our actual results to differ materially and adversely from those anticipated. 13 Table of Contents If we are unable to maintain successful relationships with our teaming partners, our ability to market, sell, and distribute our services will be limited, and our business, financial position, and results of operations will be harmed.
If our backlog estimate is inaccurate and we fail to realize those amounts as revenue, our future operating results could be materially and adversely affected. Employee misconduct, including security breaches, could result in the loss of customers and our suspension or debarment from contracting with the USG.
As a result of a lack of appropriated funds or efforts to reduce USG spending, our backlog may not result in revenue or may be delayed. If our backlog estimate is inaccurate and we fail to realize those amounts as revenue, our future operating results could be materially and adversely affected.
There can be no assurance that such additional capital will be available, on a timely basis, or on terms acceptable to us. If we are unsuccessful in raising additional capital or the terms of raising such capital are unacceptable, then we may have to modify our business plan and/or curtail our planned activities and other operations.
If we are unsuccessful in raising additional capital or the terms of raising such capital are unacceptable, then we may have to modify our business plan and/or curtail our planned activities and other operations. Sales of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock.
We may be unable to prevent our employees from engaging in misconduct, fraud, or other improper activities that could adversely affect our business and reputation. Misconduct could include the failure to comply with USG procurement regulations, regulations regarding the protection of classified information, and legislation regarding the pricing of labor and other costs in government contracts.
Employee misconduct, including security breaches, could result in the loss of customers and our suspension or debarment from contracting with the USG. We may be unable to prevent our employees from engaging in misconduct, fraud, or other improper activities that could adversely affect our business and reputation.
Principally, a decrease in expected reporting unit cash flows or changes in market conditions may indicate potential impairment of recorded goodwill.
We evaluate the recoverability of recorded goodwill amounts annually or when evidence of potential impairment exists. The annual impairment test is based on several factors requiring judgment. Principally, a decrease in expected reporting unit cash flows or changes in market conditions may indicate potential impairment of recorded goodwill.
If we are unable to win prime contracts, or acquire companies with prime contract vehicles, our business and prospects will be adversely affected. In addition, upon the expiration of a contract, if the customer requires further services of the type provided by the contract, there is frequently a competitive rebidding process.
In addition, upon the expiration of a contract, if the customer requires further services of the type provided by the contract, there is frequently a competitive rebidding process.
The market for our products and services is intensely competitive and characterized by rapid changes in technology, customer requirements, industry standards, and frequent 16 Table of Contents new product introductions and improvements.
The market for our products and services is intensely competitive and characterized by rapid changes in technology, customer requirements, industry standards, and frequent new product introductions and improvements. We anticipate continued challenges from current competitors, which in many cases are more established and enjoy greater resources than us, as well as by new entrants into the industry.
The lack of liquidity of our securities as a result of the inability to sell under Rule 144 for a longer period of time than a non-former shell company could adversely affect our stock price. 20 Table of Contents Our failure to meet the continued listing requirements of the NYSE American could result in a delisting of our common stock and subject us to the penny stock rules.
Our failure to meet the continued listing requirements of the NYSE American could result in a delisting of our common stock and subject us to the penny stock rules.
Without additional Congressional appropriations, some of the contracts included in our backlog will remain unfunded, which could materially and adversely affect our future operating results. Many of our USG contracts include multi-year performance periods in which Congress appropriates funds on an annual basis.
Our backlog may not result in actual revenue in any particular period, or at all, which could cause our actual results to differ materially and adversely from those anticipated. Without additional Congressional appropriations, some of the contracts included in our backlog will remain unfunded, which could materially and adversely affect our future operating results.
We anticipate continued challenges from current competitors, which in many cases are more established and enjoy greater resources than us, as well as by new entrants into the industry. Non-traditional players have entered the market and have established positions related to such areas as cloud computing, cyber, satellite operations and business systems.
Non-traditional players have entered the market and have established positions related to such areas as cloud computing, cyber, satellite operations, and business systems. We also face indirect competition from certain government agencies that perform services for themselves similar to those marketed by us.
Removed
Additional risks and uncertainties not presently known to us or that we currently believe are not material may also impair our business, financial condition, results of operations, and growth prospects.
Added
The management team also has limited experience working together as a team.
Removed
Bell, our Chief Financial Officer (“CFO”), Glen R. Ives, our Chief Operating Officer (“COO”), and Jay O. Wright, our Chief Strategy Officer and General Counsel.
Added
Misconduct could include the failure to comply with USG procurement regulations, regulations regarding the protection of classified information, and legislation regarding the pricing of labor and other costs in government contracts. Many of the systems we work on involve managing and protecting information involved in national security and other sensitive government functions.
Removed
In connection with the public offering of our common stock, we and our officers, directors and certain stockholders have agreed, subject to customary exceptions, not to, without the prior written consent of EF Hutton, division of Benchmark Investments, LLC, the representative of the underwriters of the public offering, during the period ending twelve months from the date of the public offering in the case of the Company and 180 days from the date of the public offering in the case of our directors, officers, and stockholders who beneficially own more than 5% of our common stock directly or indirectly, offer to sell, pledge or otherwise transfer or dispose of any of shares of our common stock, enter into any swap or other derivatives transaction that transfers to another any of the economic benefits or risks of ownership of shares of our common stock, make any demand for or exercise any right or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any shares of common stock or securities convertible into or exercisable or exchangeable for common stock or any other securities of the Company or publicly disclose the intention to do any of the foregoing.
Added
We have substantial indebtedness. We have $12,456,407 of debt as of December 31, 2023, the majority of which originally matured in calendar year 2024 and the terms of which have subsequently been amended to extend the maturity date to calendar year 2026. See subsequent events under Note 16 Part II Item 8.
Removed
After the holding periods have expired, the directors and officers and other beneficial stockholders may elect to sell a substantial number of shares of common stock in the public market which could adversely affect the market price of our common stock.
Added
Low Trading Price of Common Stock on the NYSE American Our common stock was approved for listing on the NYSE American and began trading there on October 13, 2022. The closing price of our common stock has been below $1.00 for more than thirty (30) consecutive trading days.
Removed
If we are unable to maintain successful relationships with our teaming partners, our ability to market, sell, and distribute our services will be limited, and our business, financial position, and results of operations will be harmed. We expect that sales through teaming partners will continue to be a significant percentage of our revenue.
Added
In the case of a company whose common stock sells for a low price per share for a substantial period of time, the NYSE American continued listing rules permit the exchange to de-list a listed company in the event it fails to effect a reverse split of such shares within a reasonable time after being notified that the exchange deems such action to be appropriate under the circumstances.
Removed
In addition, we may be unable to detect unauthorized use of our proprietary information in order to take appropriate steps to enforce our rights.
Added
We have not received any such notification from the NYSE American but could receive it in the future.
Removed
The effects of health epidemics, pandemics and similar outbreaks may have material adverse effects on our business, financial position, results of operations, and/or cash flows. We face various risks related to health epidemics, pandemics, and similar outbreaks, including the global outbreak of COVID-19.
Added
In the event we received such a notice from the NYSE American and failed to comply within a reasonable time after receiving such notice with its request to effect a reverse stock split of our common shares, our shares of common stock could be delisted from the NYSE American.
Removed
The COVID-19 pandemic and the mitigation efforts to control its spread have adversely impacted the U.S and global economies, leading to disruptions and volatility in global capital markets.
Added
Anti-takeover provisions in our charter documents and Nevada law could discourage, delay, or prevent a change in control of our Company and may affect the trading price of our common stock.
Removed
The continued spread of COVID-19 may have a material adverse effect on our business, financial position, results of operations, and/or cash flows as the result of significant portions of our workforce being unable to work due to illness, quarantines, government actions, facility closures or other restrictions; the inability for us to fully perform on our contracts; delays or limits to the ability of the USG or other customers to make timely payments; incurrence of increased costs which may not be recoverable; adverse impacts on our access to capital; or other unpredictable events.
Removed
We continue to monitor the effect of COVID-19 on our business, but we cannot predict the full impact of Covid-19 as the extent of the impact will depend on the duration and spread of the pandemic and the actions taken by federal, state, local, and foreign governments to prevent the spread of COVID-19. U.S.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changePetersburg, Florida (Corvus) • Augusta, Georgia (Corvus) • Vienna, Virginia (Merrison) • Toms River, New Jersey (SSI) We believe our existing facilities are adequate to meet our current requirements. We do not own any real property.
Biggest changeAs of December 31, 2023, our subsidiaries lease property at the following locations: ● Augusta, Georgia ● Vienna, Virginia ● Toms River, New Jersey ● Hollywood, Maryland We believe our existing facilities are adequate to meet our current requirements. We do not own any real property. 24 Table of Contents
Item 2. Properties Our principal executive offices are located at 3 Bethesda Metro Center, Suite 700 Bethesda, Maryland 20814 in a shared office space leased from Regus. As of December 31, 2022, our subsidiaries lease property at the following locations: • St.
Item 2. Properties Our principal executive offices are located at 3 Bethesda Metro Center, Suite 700 Bethesda, Maryland 20814 in a shared office space leased from Regus.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeNeither 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 4 Mine Safety Disclosures Not applicable. 24 Table of Contents Part II
Biggest changeNeither 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 4 Mine Safety Disclosures Not applicable. 25 Table of Contents Part II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeAs consideration for our acquisition of the assets of Lexington Solutions Group, LLC (“LSG”) on May 4, 2022, the Company issued 600,000 shares of common stock, which we valued at approximately $3,000,000, set forth in the Amendment No. 1 to the LSG Business Acquisition Agreement. 25 Table of Contents In May, 2022, 535,000 shares of Series B preferred stock were converted into 2,675,000 shares of common stock, and 7,500 shares of common stock were issued in consideration for professional services rendered, which we valued at approximately $34,000.
Biggest changeAs further inducement to enter into the SPA, Crom was issued 125,000 common shares. 26 Table of Contents As consideration for our acquisition of the assets of Lexington Solutions Group, LLC (“LSG”) on May 4, 2022, the Company issued 600,000 shares of common stock, which we valued at approximately $3,000,000, set forth in the Amendment No. 1 to the LSG Business Acquisition Agreement.
On August 5, 2021, we issued warrants to two executive officers pursuant to the terms of their employment agreements to purchase an aggregate of 320,000 shares of common stock at an exercise price of $3.40 per share. 27 Table of Contents On August 12, 2021, we issued warrants to two executive officers pursuant to the terms of their employment agreements to purchase an aggregate of 1,450,851 shares of common stock at an exercise price of $2.00 per share.
On August 5, 2021, we issued warrants to two executive officers pursuant to the terms of their employment agreements to purchase an aggregate of 320,000 shares of common stock at an exercise price of $3.40 per share. 28 Table of Contents On August 12, 2021, we issued warrants to two executive officers pursuant to the terms of their employment agreements to purchase an aggregate of 1,450,851 shares of common stock at an exercise price of $2.00 per share.
Unregistered Sales of Securities Unless specifically noted otherwise, the issuances described in this subsection were made in reliance on the private placement exemption pursuant to Section 4(a)(2) of the Securities Act because the issuances did not involve a public offering. 2022 Issuances Common Stock In the three months ended March 31, 2022, we issued (a) 15,000 shares of common stock in accordance with the Series C Preferred Stock subscription agreements, (b) 15,000 shares of common stock in the exercise of stock options, for which we received $12,000, and (c) 7,500 shares of common stock that vest over twelve months to an advisory board member, which we valued at approximately $30,000.
Unregistered Sales of Securities Unless specifically noted otherwise, the issuances described in this subsection were made in reliance on the private placement exemption pursuant to Section 4(a)(2) of the Securities Act because the issuances did not involve a public offering. 2023 Issuances On November 20, 2023, we issued an aggregate of 30,000 shares of common stock to four advisory board members in consideration of services rendered, which we valued at approximately $28,560. 2022 Issuances Common Stock In the three months ended March 31, 2022, we issued (a) 15,000 shares of common stock in accordance with the Series C Preferred Stock subscription agreements, (b) 15,000 shares of common stock in the exercise of stock options, for which we received $12,000, and (c) 7,500 shares of common stock that vest over twelve months to an advisory board member, which we valued at approximately $30,000.
On August 25, 2021, we issued 2,600,000 shares of common stock in connection with the acquisition of SSI, valued at approximately $5,200,000.
On August 25, 2021, we issued 2,600,000 shares of common stock in connection with the acquisition of Specialty Systems, Inc. (“SSI”), valued at approximately $5,200,000.
Common Stock On April 29, 2021 and June 15, 2021, we issued 1,114,023 shares of common stock in connection with the acquisition of MFSI, valued at approximately $1,800,000. On August 6, 2021, we issued 500,000 shares of common stock in connection with the acquisition of Merrison, valued at approximately $1,700,000.
Common Stock On April 29, 2021 and June 15, 2021, we issued 1,114,023 shares of common stock in connection with the acquisition of Mainnerve Federal Services, Inc., valued at approximately $1,800,000. On August 6, 2021, we issued 500,000 shares of common stock in connection with the acquisition of Merrison Technologies, LLC, valued at approximately $1,700,000.
Unsecured Note Payable On August 12, 2021, we issued the Kaunitz Note, in the principal amount of $400,000 that has a maturity date of December 31, 2024 and bears interest at a rate of five percent (5%).
Unsecured Note Payable On August 12, 2021, we issued a note to Emil Kaunitz in the principal amount of $400,000 that has a maturity date of December 31, 2024 and bears interest at a rate of five percent (5%). The maturity date and other terms of this note were subsequently amended.
Since October 13, 2022, our common stock has been listed for trading on the New York Stock Exchange (“NYSE”) American under the symbol “CTM”.
Since October 13, 2022, our common stock has been listed for trading on the NYSE American under the symbol “CTM”.
Use of Proceeds 28 Table of Contents On October 12, 2022, the registration statement on Form S-1 (File No. 333-267249) for our initial public offering (“Public Offering”) of our common stock was declared effective by the Securities and Exchange Commission (the “SEC”).
Financial Statements on this Annual Report on Form 10-K. Use of Proceeds On October 12, 2022, the registration statement on Form S-1 (File No. 333-267249) for our initial public offering (“Public Offering”) of our common stock was declared effective by the Securities and Exchange Commission (the “SEC”).
Holders of Record As of March 10, 2023, there were 42,255,592 shares of common stock outstanding held by approximately 211 holders of record (not including an indeterminate number of beneficial holders of stock held in street name), and the last reported sale price of our common stock on the NYSE American on March 10, 2023 was $1.05.
Holders of Record As of March 15, 2024, there were 53,029,915 shares of common stock outstanding held by approximately 214 holders of record (not including an indeterminate number of beneficial holders of stock held in street name), and the last reported sale price of our common stock on the NYSE American on March 15, 2024 was $0.27.
Convertible Note Payable On February 1, 2021, the First Buckhout Charitable Remainder Trust (“BCR”) Trust Note and the Second BCR Trust Note, which were issued in connection with acquisition of Corvus Consulting, Inc.
Convertible Note Payable On February 1, 2021, the First Buckhout Charitable Remainder Trust (“BCR”) Trust Note and the Second BCR Trust Note, which were issued in connection with acquisition of Corvus Consulting, LLC were combined into one new note in the principal amount of $4,279,617 referred to as the Third BCR Trust Note, that has a maturity date of February 1, 2024.
Refer to subsequent events in Note 16 under Part II, Item 8 on this Annual Report on Form 10-K for details. 2021 Issuances Preferred Stock 26 Table of Contents On September 16, 2021, September 23, 2021, October 20, 2021, November 18, 2021, November 23, 2021, and December 9, 2021, we issued a total of 620,000 shares of Series C Preferred Stock, for proceeds of $620,000, to various outside investors to finance the Company’s operations, acquisitions, and development.
On February 13, 2023, the Company entered into a series of transactions with Crom to pay off the total amount currently owed under the terms of the convertible promissory note. 2021 Issuances 27 Table of Contents Preferred Stock On September 16, 2021, September 23, 2021, October 20, 2021, November 18, 2021, November 23, 2021, and December 9, 2021, we issued a total of 620,000 shares of Series C Preferred Stock, for proceeds of $620,000, to various outside investors to finance the Company’s operations, acquisitions, and development.
The Second BCR Trust Note had an interest rate of five percent (5%) and is convertible into common stock of the Company at $0.26 per share.
The interest rate remains at five percent (5%) per annum and required monthly principal payments of $10,000. The Third BCR Trust Note is convertible into common stock of the Company at $0.26 per share. The maturity date and other terms of this note were subsequently amended. See subsequent events under Note 16 Part II Item 8.
Removed
As further inducement to enter into the SPA, Crom was issued 125,000 common shares.
Added
In May, 2022, 535,000 shares of Series B preferred stock were converted into 2,675,000 shares of common stock, and 7,500 shares of common stock were issued in consideration for professional services rendered, which we valued at approximately $34,000.
Removed
On February 13, 2023, the Company entered into a series of transactions with Crom to pay off the total amount currently owed under the terms of the convertible promissory note.
Added
See subsequent events under Note 16 Part II Item 8. Financial Statements on this Annual Report on Form 10-K.
Removed
(“Corvus”) were combined into one new note in the principal amount of $4,279,617 referred to as the Third BCR Trust Note, that has a maturity date of February 1, 2024. The interest rate remains at five percent (5%) per annum and required monthly principal payments of $10,000.
Added
As planned, we paid $500,000 to satisfy, in part, principal remaining under the amended and restated convertible promissory note payable to the Buckhout Charitable Remainder Trust, funded, in part, the acquisition of GTMR, and have used remaining funds for working capital and general corporate purposes.
Removed
The Third BCR Trust Note is convertible into common stock of the Company at $0.26 per share. 2020 Issuances Common Stock On May 2, 2020, we issued 550,000 shares of common stock, which we valued at approximately $110,000, to a director in partial satisfaction for the repayment of a director’s notes plus accrued interest.
Added
Issuer Purchases of Equity Securities We did not repurchase any equity securities during the year ended December 31, 2023. 29 Table of Contents Item 6. [ Reserved ]
Removed
On June 12, 2020, we issued 110,000 shares of common stock at $1.00 per share to two existing stockholders of the Company, which we valued at $110,000. On August 10, 2020, we issued 6,732 shares of common stock at $1.49 per share to the former chief executive officer of Corvus, which we valued at approximately $10,000.
Removed
Stock Options On January 21, 2020, we granted options to two advisory board members to purchase 100,000 shares of common stock at an exercise price of $0.80 per share for services rendered.
Removed
On February 1, 2020, we granted options to an advisory board member and employees to purchase 1,209,375 shares of common stock at an exercise price of $0.80 per share.
Removed
Convertible Note Payable On March 31, 2020, in connection with our acquisition of Corvus, we issued the Second BCR Trust Note in the principal amount of $670,138 that had a maturity date of November 21, 2022.
Removed
As of the date of this Annual Report on Form 10-K, we cannot predict with certainty all of the particular uses for the net proceeds, or the amounts that we will actually spend on the uses set forth in the prospectus. Issuer Purchases of Equity Securities We did not repurchase any equity securities during the year ended December 31, 2022.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeThe increase in net cash provided (used) by financing activities was primarily due to the proceeds from uplisting to the NYSE American, proceeds from notes payable obtained in 2022, and issuance of preferred and common stock. This increase was partially offset by repayments of notes payable and a repayment of amounts to due to seller.
Biggest changeFinancing activities During the year ended December 31, 2023, we used $(104,623) in financing activities, primarily due to reduction in proceeds from issuance of preferred and common stock, the reduction in proceeds from notes payable, and an increase in payments on notes payable, compared to net cash provided by financing activities of $1,972,100, for the year ended December 31, 2022. 36 Table of Contents Critical Accounting Policies and Estimates The following is not intended to be a comprehensive list of our accounting policies or estimates.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards.
Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax reporting purposes, net operating loss carryforwards, and other tax credits measured by applying currently enacted tax laws.
Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax reporting purposes, net operating loss carryforwards, and other tax credits measured by applying currently enacted tax laws.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Year Ended December 31, Amount of Increase (Decrease) % Change 2022 2021 Revenues $ 42,190,643 $ 25,067,450 $ 17,123,193 68.3 % Cost of revenues 24,593,326 13,992,898 10,600,428 75.8 % Gross profit 17,597,317 11,074,552 6,522,765 58.9 % Operating expenses: Indirect costs 11,859,401 3,409,649 8,449,752 247.8 % Overhead 1,560,252 850,999 709,253 83.3 % General and administrative expenses 13,586,600 14,539,053 (952,453) (6.6) % Loss from change in fair value of contingent earnout 555,000 — 555,000 100.0 % Total operating expenses 27,561,253 18,799,701 8,761,552 46.6 % Loss from operations (9,963,936) (7,725,149) (2,238,787) 29.0 % Other income (expense) (4,124,506) (2,477,924) (1,646,582) 66.5 % Loss before income taxes and preferred stock dividends (14,088,442) (10,203,073) (3,885,369) 38.1 % Income tax benefit (expense) (819,596) 2,656,643 (3,476,239) (130.9) % Net loss (14,908,038) (7,546,430) (7,361,608) 97.6 % Preferred stock dividend 100,516 12,290 88,226 717.9 % Net loss to common shareholders $ (15,008,554) $ (7,558,720) $ (7,449,834) 98.6 % Revenue Total revenues increased by $17,123,193 or 68.3% to $42,190,643 for the year ended December 31, 2022 from $25,067,450 for the year ended December 31, 2021.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Year Ended December 31, Amount of Increase (Decrease) % Change 2022 2021 Revenues $ 42,190,643 $ 25,067,450 $ 17,123,193 68.3 % Cost of revenues 24,593,326 13,992,898 10,600,428 75.8 % Gross profit 17,597,317 11,074,552 6,522,765 58.9 % Operating expenses: Indirect costs 11,859,401 3,409,649 8,449,752 247.8 % Overhead 1,560,252 850,999 709,253 83.3 % General and administrative expenses 13,586,600 14,539,053 (952,453) (6.6) % Loss from change in fair value of contingent earnout 555,000 — 555,000 100.0 % Total operating expenses 27,561,253 18,799,701 8,761,552 46.6 % Loss from operations (9,963,936) (7,725,149) (2,238,787) 29.0 % Other income (expense) (4,124,506) (2,477,924) (1,646,582) 66.5 % Loss before income taxes and preferred stock dividends (14,088,442) (10,203,073) (3,885,369) 38.1 % Income tax benefit (expense) (819,596) 2,656,643 (3,476,239) (130.9) % Net loss (14,908,038) (7,546,430) (7,361,608) 97.6 % Preferred stock dividend 100,516 12,290 88,226 717.9 % Net loss to common shareholders $ (15,008,554) $ (7,558,720) $ (7,449,834) 98.6 % Revenues Total revenues increased by $17,123,193 or 68.3% to $42,190,643 for the year ended December 31, 2022 from $25,067,450 for the year ended December 31, 2021.
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.
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.
The Company recognizes these compensation costs, on a pro rata basis over the requisite service period of each vesting tranche of each award for service-based grants, and as the criteria is achieved for performance-based grants. 37 Table of Contents In determining the grant date fair value of share-based awards, we must estimate the expected volatility, forfeitures, and performance attributes.
The Company recognizes these compensation costs, on a pro rata basis over the requisite service period of each vesting tranche of each award for service-based grants, and as the criteria is achieved for performance-based grants. In determining the grant date fair value of share-based awards, we must estimate the expected volatility, forfeitures, and performance attributes.
The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they were filed. We have filed our 2020 and 2021 federal and state tax returns.
The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they were filed. We have filed our 2021 and 2022 federal and state tax returns.
The principles in the standard are applied in five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the 36 Table of Contents performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
The principles in the standard are applied in five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
Priced contract options represent 100% of the revenue value of all future contract option periods under existing contracts that may be exercised at our clients’ option and for which funding has not been appropriated or otherwise authorized.
Priced contract options represent 100% of the potential revenue value of all scheduled and unscheduled 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.
Operating Expenses Our operating expenses include indirect costs, overhead, and general and administrative expenses. • Indirect costs consist of expenses generally associated with bonuses and fringe benefits, including employee health and medical insurance, 401k matching contributions, and payroll taxes. • Overhead consists of expenses associated with the support of operations or production, including labor for management of contracts, operations, training, supplies, and certain facilities to perform customer work. • General and administrative expenses consist primarily of corporate and administrative labor expenses, administrative bonuses, legal expenses, IT expenses, and insurance expenses.
Gross profit margin is our gross profit divided by our revenues. 30 Table of Contents Operating Expenses Our operating expenses include indirect costs, overhead, and general and administrative expenses. • Indirect costs consist of expenses generally associated with bonuses and fringe benefits, including employee health and medical insurance, 401k matching contributions, and payroll taxes. • Overhead consists of expenses associated with the support of operations or production, including labor for management of contracts, operations, training, supplies, and certain facilities to perform customer work. • General and administrative expenses consist primarily of corporate and administrative labor expenses, administrative bonuses, legal expenses, IT expenses, and insurance expenses.
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.
Gross Profit and Gross Profit Margin Our gross profit comprises our revenues less our cost of revenues.
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 .
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 .
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.
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.
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.
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.
Information about our cash flows is presented in our statements of cash flows and is summarized in the following table: Twelve Months Ended December 31, 2022 2021 2020 Net cash provided by (used in): Operating activities $ 990,163 $ (1,350,136) $ 1,006,091 Investing activities (339,282) 808,834 (5,450) Financing activities $ 1,972,100 $ 146,835 $ 109,000 Comparison of the Years Ended December 31, 2022 and 2021 Operating activities Net cash provided by operating activities increased to $990,163, for the year ended December 31, 2022, from $(1,350,136) for the year ended December 31, 2021.
Information about our cash flows is presented in our statements of cash flows and is summarized in the following table: Twelve Months Ended December 31, 2023 2022 2021 Net cash (used in) provided by: Operating activities $ (2,264,447) $ 990,163 $ (1,350,136) Investing activities (440,985) (339,282) 808,834 Financing activities $ (104,623) $ 1,972,100 $ 146,835 Comparison of the Years Ended December 31, 2023 and 2022 Operating activities We used $(2,264,447) in operating activities for the year ended December 31, 2023, compared to $990,163 provided by operating activities for the year ended December 31, 2022.
This increase was driven primarily by the increased level of effort on contracts proportionate to the growth of revenues due to the acquisition activity noted above. Gross Profit Total gross profit increased by $6,522,765 or 58.9% to $17,597,317 for the year ended December 31, 2022 from $11,074,552 for the year ended December 31, 2021.
Gross Profit Total gross profit increased by $6,522,765 or 58.9% to $17,597,317 for the year ended December 31, 2022 from $11,074,552 for the year ended December 31, 2021. This increase was driven primarily by the growth in revenues due to contributions from SSI, Merrison and LSG, offset by costs of revenues as noted above.
For information related to these cash requirements, refer to Note 6, Note 7, Note 8 and Note 9 under Part II, Item 8, of this Annual Report on Form 10-K.
For more information related to these transactions, refer to Note 16 under Part II, Item 8, of this Annual Report on Form 10-K.
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.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
As of December 31, 2022, we had $4,640,896 of cash and cash equivalents on hand and unused borrowing capacity of $649,975 from our revolving line of credit.
As of December 31, 2023, we had $1,830,841 of cash and cash equivalents on hand and unused borrowing capacity of $324,975 from our revolving line of credit.
In addition to constantly innovating and enhancing our organic capabilities, Castellum is executing strategic acquisitions of firms that share our passionate commitment to U.S. national security and have a history of bringing exceptional value to their clients.
In addition to constantly innovating and enhancing our organic capabilities, Castellum is executing strategic acquisitions of technology companies in the areas of cybersecurity, information technology (“IT”), electronic warfare, information warfare, and information operations with businesses in the defense, federal, civilian, and commercial markets that share our passionate commitment to U.S. national security and have a history of bringing exceptional value to their clients.
We believe our existing cash and cash equivalents provided by our ongoing operations together with funds available under our credit facilities will be sufficient to meet our working capital, capital expenditures and cash needs for the next 12 months and beyond. Uses Our material cash requirements from known contractual and other obligations primarily relate to payments on our credit facilities.
We believe our existing cash and cash equivalents provided by our ongoing operations, together with funds available through the transactions noted above, will be sufficient to meet our working capital, capital expenditures, and cash needs for the next 12 months and beyond.
The following table summarizes the value of our contract backlog as of December 31, 2022: Backlog Funded $ 15,015,214 Unfunded $ 8,903,289 Priced Options $ 57,426,973 Total Backlog $ 81,345,476 Our total backlog consists of remaining performance obligations, certain orders under contracts for which the original period of performance has expired, and unexercised option periods and other unexercised optional orders.
The following table summarizes the value of our contract backlog as of December 31, 2023: Backlog Funded $ 17,423,419 Unfunded $ 15,558,445 Priced Options $ 75,032,776 Total Backlog $ 108,014,640 Our total 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 unscheduled optional orders.
This increase was driven primarily by the growth in revenues due to contributions from SSI, Merrison and LSG, offset by costs of revenues as noted above. Operating expenses Total operating expenses increased by $8,761,552 or 46.6% to $27,561,253 for the year ended December 31, 2022 from $18,799,701 for the year ended December 31, 2021.
Operating expenses Total operating expenses increased by $8,761,552 or 46.6% to $27,561,253 for the year ended December 31, 2022 from $18,799,701 for the year ended December 31, 2021.
Business Overview We are a technology company focused on leveraging the power of information technology to help solve our nation’s most pressing national security challenges. We provide USG and commercial clients with Cybersecurity, Software Development, Systems Engineering, Information / Electronic Warfare, Program Support, and Data Analytics services.
Business Overview We are a technology company focused on leveraging the power of information technology to help solve our nation’s most pressing national security challenges.
Due to the many variables inherent in the estimation of a business’s fair value and the relative size of our goodwill, if different assumptions and estimates were used, it could have an adverse effect on our impairment analysis.
Due to the many variables inherent in the estimation of a business’s fair value and the relative size of our goodwill, if different assumptions and estimates were used, it could have an adverse effect on our impairment analysis. 37 Table of Contents During the third quarter of 2023, due to decline in stock price, Management determined that a triggering event occurred representing an indicator of goodwill impairment, resulting in a non-cash charge of $6,919,094.
This increase in net cash provided by operating activities was primarily driven by an increase in revenues, decreases in accounts receivables (due to timing of collections), as well as noncash adjustments related to stock based compensation, depreciation and amortization, and a change in accounts receivable during the year ended December 31, 2022.
This decrease in net cash from operating activities was primarily driven by an increase in net loss, increases in accounts receivables (due to timing of collections), as well as noncash adjustments related to changes in the fair value of derivative liabilities and contingent earnout during the year ended December 31, 2023.
This requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. Management evaluates their tax positions on a quarterly basis.
Differences between statutory tax rates and effective tax rates relate to permanent tax differences. We follow ASC 740-10 Accounting for Uncertainty in Income Taxes. This requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. Management evaluates their tax positions on a quarterly basis.
This increase was driven largely by the contributions from the acquisitions of SSI and Merrison during the third quarter of 2021 as well as the contributions from LSG acquired during the second quarter of 2022. 31 Table of Contents Cost of revenues Total cost of revenues increased by $10,600,428 or 75.8% to $24,593,326 for the year ended December 31, 2022 from $13,992,898 for the year ended December 31, 2021.
Cost of revenues 33 Table of Contents Total cost of revenues increased by $10,600,428 or 75.8% to $24,593,326 for the year ended December 31, 2022 from $13,992,898 for the year ended December 31, 2021. This increase was driven primarily by the increased level of effort on contracts proportionate to the growth of revenues due to the acquisition activity noted above.
Critical Accounting Policies and Estimates The following is not intended to be a comprehensive list of our accounting policies or estimates. Our significant accounting policies are more fully described in Note 2 — Summary of Significant Accounting Policies to our annual audited consolidated financial statements, included elsewhere in the document.
Our significant accounting policies are more fully described in Note 2 — Summary of Significant Accounting Policies to our annual audited consolidated financial statements, included elsewhere in the document. In preparing our financial statements and accounting for the underlying transactions and balances, we apply our accounting policies and estimates as disclosed in the Notes.
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 (“DCAA”)-approved provisional burdens plus fee.
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 (“DCAA”)-approved provisional burdens plus fee. The provisional indirect rates are adjusted and billed at actual at year end.
As with all government contracts there is no guarantee the customer will have future funding or exercise their contract option in the out-years. Other budget risks are discussed in the Budget Environment. Our backlog includes orders under contracts that in some cases extend for several years.
Including priced options that have been awarded but not yet scheduled of $46,431,225, our grand total backlog is $154,445,865. The remainder is expected to be recognized thereafter. As with all government contracts there is no guarantee the customer will have future funding or exercise their contract option in the out-years. Other budget risks are discussed in the Budget Environment.
The Company’s registration statement on Form S-1, as amended (File No. 333-267249) relating to the offering was declared effective by the U.S. Securities and Exchange Commission on October 12, 2022. 29 Table of Contents Key Components of Our Results of Operations Revenues Our revenues are primarily derived from services provided to the U.S. federal, state and local governments.
The Company’s registration statement on Form S-1, as amended (File No. 333-267249) relating to the offering was declared effective by the U.S. Securities and Exchange Commission on October 12, 2022. On December 1, 2023, the Company filed a universal shelf registration statement on Form S-3 (File No. 333-275840) which was declared effective by the U.S.
Investing activities Net cash provided by (used in) investing activities decreased to $(339,282), for the year ended December 31, 2022, from $808,834, for the year ended December 31, 2021.
Investing activities Net cash used in investing activities increased to $(440,985), for the year ended December 31, 2023, from $(339,282), for the year ended December 31, 2022. The increase in net cash used in investing activities was primarily due to the cash paid in the acquisition of GTMR during 2023.
As of December 31, 2022, the Company had $81,345,476 of remaining performance obligations. We expect to recognize 34 Table of Contents approximately 52% of the remaining performance obligations over the next 12 months, and approximately 75% over the next 24 months. The remainder is expected to be recognized thereafter.
Excluding unscheduled options orders, as of December 31, 2023, the Company had $108,014,640 of funded, unfunded and scheduled priced options. We expect to recognize approximately 34% of the remaining performance obligations over the next 12 months, and approximately 57% over the next 24 months.
Removed
We also offer subject matter expertise in artificial intelligence / machine learning, 5G technologies, model-based systems engineering, program management, information assurance, intelligence analysis, and CMMC compliance.
Added
We provide clients in the United States government (“USG”), financial services, healthcare, and other users of large data applications with services which include intelligence analysis, software development, software engineering, program management, strategic and mission planning, information assurance, cybersecurity and policy support, data analytics, and MBSE.
Removed
Realized Gain on Investment Realized gain on investment related to a sale of an investment in a private company held by MFSI.
Added
Securities and Exchange Commission on December 12, 2023. Key Components of Our Results of Operations 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.
Removed
The effect on deferred tax assets and liabilities of a change in 30 Table of Contents tax rates is recognized in income in the period that includes the enactment date. Differences between statutory tax rates and effective tax rates relate to permanent tax differences. We follow ASC 740-10 Accounting for Uncertainty in Income Taxes.
Added
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 31 Table of Contents Year Ended December 31, Amount of Increase (Decrease) % Change 2023 2022 Revenues $ 45,243,812 $ 42,190,643 $ 3,053,169 7.2 % Cost of revenues 26,568,485 24,593,326 1,975,159 8.0 % Gross profit 18,675,327 17,597,317 1,078,010 6.1 % Operating expenses: Indirect costs 8,935,113 11,859,401 (2,924,288) (24.7) % Overhead 1,884,059 1,560,252 323,807 20.8 % General and administrative expenses 17,697,886 13,586,600 4,111,286 30.3 % Goodwill impairment loss 6,919,094 — 6,919,094 100.0 % (Gain) Loss from change in fair value of contingent earnout (92,000) 555,000 (647,000) (116.6) % Total operating expenses 35,344,152 27,561,253 7,782,899 28.2 % Loss from operations (16,668,825) (9,963,936) (6,704,889) 67.3 % Other income (expense) (2,388,470) (4,124,506) 1,736,036 (42.1) % Loss before income taxes and preferred stock dividends (19,057,295) (14,088,442) (4,968,853) 35.3 % Income tax benefit (expense) 1,257,117 (819,596) 2,076,713 (253.4) % Net loss (17,800,178) (14,908,038) (2,892,140) 19.4 % Preferred stock dividend 118,152 100,516 17,636 17.5 % Net loss to common shareholders $ (17,918,330) $ (15,008,554) $ (2,909,776) 19.4 % Revenue Total revenues increased by $3,053,169 or 7.2% to $45,243,812 for the year ended December 31, 2023 from $42,190,643 for the year ended December 31, 2022.
Removed
This increase was primarily driven by the increase in deferred tax expense as well as overall revenue growth from the prior year through inorganic contributions from SSI, Merrison and LSG. 32 Table of Contents Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 Year Ended December 31, Amount of Increase (Decrease) % Change 2021 2020 Revenues $ 25,067,450 $ 13,338,667 $ 11,728,783 87.9 % Cost of revenues 13,992,898 7,161,627 6,831,271 95.4 % Gross profit 11,074,552 6,177,040 4,897,512 79.3 % Operating expenses: Indirect costs 3,409,649 1,679,783 1,729,866 103.0 % Overhead 850,999 276,855 574,144 207.4 % General and administrative expenses 14,539,053 5,688,551 8,850,502 155.6 % Loss from change in fair value of contingent earnout — — — 100.0 % Total operating expenses 18,799,701 7,645,189 11,154,512 145.9 % Loss from operations (7,725,149) (1,468,149) (6,257,000) 426.2 % Other income (expense) (2,477,924) (2,295,906) (182,018) 7.9 % Loss before income taxes and preferred stock dividends (10,203,073) (3,764,055) (6,439,018) 171.1 % Income tax benefit (expense) 2,656,643 1,056,562 1,600,081 151.4 % Net loss (7,546,430) (2,707,493) (4,838,937) 178.7 % Preferred stock dividend 12,290 — 12,290 100.0 % Net loss to common shareholders $ (7,558,720) $ (2,707,493) $ (4,851,227) 179.2 % Revenues Revenues were $25,067,450 for 2021 as compared to $13,338,667 for 2020.
Added
This increase in revenue was due to the acquisition of GTMR (“GTMR Acquisition”), partially offset by lost positions on ongoing contracts principally at SSI and Corvus reducing revenue. Cost of revenues Total cost of revenues increased by $1,975,159 or 8.0% to $26,568,485 for the year ended December 31, 2023 from $24,593,326 for the year ended December 31, 2022.
Removed
This $11,728,783 increase was primarily driven by the contribution from acquisitions completed in Q3 and Q4 2021. Incremental contributions from those acquisitions were $10,938,015, which was complemented by a $790,7668 increase in organic sales, which were $14,129,435 in 2021. Cost of revenues Cost of revenues was $13,992,898 for 2021 as compared to $7,161,627 for 2020.
Added
This increase was driven primarily by the net increased level of effort on contracts proportionate to the changes in revenue noted above. Gross Profit Total gross profit increased by $1,078,010 or 6.1% to $18,675,327 for the year ended December 31, 2023 from $17,597,317 for the year ended December 31, 2022. This increase was driven by changes in revenue noted above.
Removed
This $6,831,271 increase was primarily driven by the revenue increases contributed by the acquisitions noted above, accounting for $6,250,769 of the total increase.
Added
Operating expenses Total operating expenses increased by $7,782,899 or 28.2% to $35,344,152 for the year ended December 31, 2023 from $27,561,253 for the year ended December 31, 2022. The decrease in indirect cost of $(2,924,288) was driven primarily by a reduction in acquisition based bonuses to certain executives from 2022, as well as cost savings implemented in 2023.
Removed
As a percentage of revenue, cost of revenue was 55.8% for 2021 (54.8% for organic and 57.1% for acquisition activity), an increase of 2.1% from 53.7% for 2020, which was driven primarily by a higher-cost contract mix resident at Merrison and SSI. Gross Profit Gross profit was $11,074,552 for 2021 as compared to $6,177,040 for 2020.
Added
The increase in overhead costs of $323,807 is related to increases in lease expense due to the GTMR Acquisition.
Removed
This $4,897,512 increase was primarily driven by acquisitions, contributing $4,687,246 in total, which was complemented by a $210,266 increase in organic gross profit, for a total of $6,387,306.
Added
The increase in general and administrative costs of $4,111,286 consist of increases in non cash stock based compensation granted to certain employees, as well as increases in general and administrative salary expense as we in-sourced certain functions such as accounting and business development.
Removed
Gross profit margin was 44.2% for 2021 (45.2% for organic and 42.9% for acquisition activity), a decrease of 2.1% from 46.3% for 2020, which was driven primarily by the higher cost contract mix present at Merrison and SSI. Operating expenses Indirect costs were $3,409,649 for 2021 as compared to $1,679,783 for 2020.
Added
The recognition of goodwill impairment resulted from a loss recorded during the 32 Table of Contents third quarter of 2023. The decrease in the loss from change in fair value of contingent earnout is due to adjustments as we finalized the amount after the earnout period ended in late 2023.
Removed
This $1,729,866 increase resulted from a $2,068,091 increase from acquisition activity, which was slightly offset by a $338,225 decrease in organic activity, which 33 Table of Contents totaled $1,341,558 for 2021.
Added
Other income (expense) Other income (expense) decreased by $1,736,036 or (42.1)% to $(2,388,470) for the year ended December 31, 2023 from $(4,124,506) for the year ended December 31, 2022.
Removed
This decrease in indirect costs for legacy is primarily due to a $537,998 decrease in costs related to policy changes to vacation, holiday, and sick leave, offset by an increase of $199,773 in other fringe benefits costs consisting primarily of health insurance costs driven by an increase in headcount. Overhead was $850,999 for 2021 as compared to $276,855 for 2020.
Added
This decrease was primarily driven by decreases in the fair value of the derivative liability offset by an increase in interest expense due to rate increases during 2023 on our variable rate debt under our agreement with Live Oak Bank.
Removed
This $574,144 increase was primarily due to an increase of $420,324 resulting from activity related to acquisitions, with legacy activities contributing a $127,113 thousand increase in recruiting expenses related to scope of work changes related to existing contracts.
Added
Income tax benefit (expense) Income tax benefit (expense) increased by $2,076,713 or (253.4)% to $1,257,117 for the year ended December 31, 2023 from $(819,596) for the year ended December 31, 2022. This increase was primarily driven by the increase in deferred tax liabilities from the acquisition of GTMR and subsequent release of valuation allowance.
Removed
General and administrative expenses were $14,539,054 for 2021 as compared to $5,688,551 for 2020. $2,324,663 of this increase was due to activity related to acquisitions, while $4,448,632 related to executive compensation increases (with newly hired executives’ base pay and other executive bonuses), and $1,886,167 related to stock-based compensation (arising primarily from time-based vesting for newly hired executives and for performance-based compensation for other executives).
Added
This increase was driven largely by the contributions from the acquisitions of SSI and Merrison during the third quarter of 2021 as well as the contributions from LSG acquired during the second quarter of 2022.
Removed
Other income (expense) Realized gain on investment was $38,851 for 2021 as compared to $0 for 2020. This $38,851 increase was due to a gain from an investment in a private company sold by MFSI in 2021. Interest expense, net of interest income was $2,516,775 for 2021 as compared to $2,295,906 for 2020.
Added
This increase was primarily due to the Company establishing a full valuation allowance against its deferred tax assets. 34 Table of Contents Contract Backlog We define backlog to include the following three components: • Funded Backlog .
Removed
This $220,869 increase relates to $106,149 of interest expense relating to an acquisition, the majority of which related to interest on the Live Oak Term Banking Company note secured to acquire SSI. $112,025 of the increase related to amortization of discounts for legacy debt.
Added
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 used the proceeds from the Security Offering to pay the outstanding principal and accrued interest owed on a Note Payable to 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. • In February 2024, we entered into a new $4,000,000 revolving credit facility with Live Oak Banking Company which matures on February 22, 2025 (the “New Live Oak Revolver”).
Removed
Income tax (expense) benefit Benefit from income taxes was $2,656,643 for 2021 as compared to $1,056,562 for 2020. This $1,600,081 increase was the result of the overall increase in operating expenses relative to revenues, (the largest driver being certain general and administrative expenses (“G&A”) expense referenced above), with an immaterial impact from changes in the effective tax rate.
Added
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. We also made payments of $1,209,617 35 Table of Contents to the holders of two notes payable noted below.
Removed
The decrease in net cash provided by (used in) investing activities was primarily due to the cash paid in the acquisition of LSG during 2022 and the cash received from the acquisitions of MFSI, Merrison, and SSI as well as the sale of an investment in a private company held by MFSI in 2021.
Added
We have unused borrowing capacity of approximately $2,165,383 under the New Live Oak Revolver. • In February 2024, we agreed with Robert Eisiminger to extend the maturity dates of two notes payable totaling $6,000,000 from September 30, 2024, to August 31, 2026.
Removed
Financing activities 35 Table of Contents Net cash provided by financing activities increased to $1,972,100, for the year ended December 31, 2022, from $146,835, for the year ended December 31, 2021.
Added
We also accessed the New Live Oak Revolver to pay 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.
Removed
Comparison of the Years Ended December 31, 2021 and 2020 Operating activities Net cash used in operations in 2021 increased to $(1,350,136) compared to net cash flow provided by operations in 2020 of $1,006,091, a difference of $(2,356,227).
Added
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. Commencing in September 2024, we will monthly principal payments of $100,000 for 24 months.
Removed
This decrease in operating cash flows period over period is driven by an increase in net loss of $(4,838,937), decreases in accounts receivables (primarily due to the timing of collections) and contract assets of $(2,295,437), a $(1,664,647) decrease in deferred tax provision (our deferred tax benefit increased), offset by $5,982,475 increase in non-cash stock-based compensation expense.
Added
Uses Our material cash requirements from known contractual and other obligations primarily relate to payments on our credit facilities. For information related to these cash requirements, refer to Note 6 , Note 7 , Note 8 , Note 9 , and Note 16 under Part II, Item 8, of this Annual Report on Form 10-K.
Removed
Investing activities Net cash provided by investing activities for 2021 was $808,834 compared to net cash flow used in investing activities for 2020 of $(5,450), a difference of $814,284.
Removed
This increase in investing cash flows primarily resulted from $453,480 received in 2021 resulting from acquisitions of MFSI, Merrison, and SSI (net of amounts paid), as well as $365,572 received from the sale of two investments in private companies held by MFSI.
Removed
Financing activities Net cash flow provided by financing activities was $146,835 in 2021 compared to net cash flow of $109,000 provided by financing activities in 2020, a difference of $37,835.
Removed
This increase in financing cash flows was primarily a result of 2021 activities, including a $525,000 increase in proceeds from issuance of preferred and common stock over 2020 related to acquisition funding and capital raised from accredited investors, offset by decreases of $(470,626) due to repayments of notes payable related to the acquisitions of SSI and Corvus.
Removed
In preparing our financial statements and accounting for the underlying transactions and balances, we apply our accounting policies and estimates as disclosed in the Notes.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

3 edited+0 added−0 removed2 unchanged
Biggest changeRising interest rates are likely to increase our interest expense in the future. 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.
Biggest changeRising interest rates would increase our interest expense in the future. Such additional cost would need to be funded out of existing cash or additional financing. Future increase in interest rates are not 38 Table of Contents expected to materially impact our Company’s liquidity.
The Live Oak Revolving Note is a variable rate instrument with a per annum interest rate equal to the prime rate as quoted in the Wall Street Journal (the “Prime Rate”), plus two percentage points (2.75%). Additionally, the Live Oak Term Loan Note has a per annum interest rate equal to the Prime Rate, plus three percentage points (3%).
The Live Oak Revolving Note is a variable rate instrument with a per annum interest rate equal to the prime rate as quoted in the Wall Street Journal (the “Prime Rate”), plus two percentage points (2.00%). Additionally, the Live Oak Term Loan Note has a per annum interest rate equal to the Prime Rate, plus three percentage points (3%).
The Company has no other debt obligations tied to the Prime Rate, Secured Overnight Financing Rate (“SOFR”), or London Interbank Offered Rate (“ LIBOR”). 38 Table of Contents
The Company has no other debt obligations tied to the Prime Rate, Secured Overnight Financing Rate (“SOFR”), or London Interbank Offered Rate (“ LIBOR”). 39 Table of Contents

Other CTM 10-K year-over-year comparisons