Notes to Consolidated Financial Statements
Note 1: Nature of Operations
Castellum, Inc. (the “Company”) is focused on building a large, successful technology company in the areas of information technology, electronic warfare, information warfare and cybersecurity with businesses in the governmental and commercial markets. Services include intelligence analysis, software development, software engineering, program management, strategic planning, information assurance and cybersecurity and policy along with analysis support. These services, which largely focus on securing data and establishing related policies, are applicable to customers in the federal government, financial services, healthcare and other users of large data applications. The services can be delivered to legacy, customer owned networks or customers who rely upon cloud-based infrastructures. The Company has worked with multiple business brokers and contacts within their business network to identify potential acquisitions.
Bayberry Acquisition Corporation (“Bayberry”) was a wholly owned subsidiary of the Company. Jay Wright and Mark Fuller controlled and managed Bayberry and were named officers and directors of the Company upon the acquisition of Bayberry. The transaction was accounted for as a reverse merger. As a result, Bayberry was considered the accounting acquirer. On February 23, 2021, Bayberry was dissolved with the Nevada Secretary of State as there was no activity, and Bayberry was non-operational post-merger with Castellum.
Corvus Consulting, LLC (“Corvus”), acquired in November 2019, is a wholly owned subsidiary of the Company. Corvus provides scientific, engineering, technical, operational support, and training services to federal government and commercial clients. Corvus focuses on Cyberspace Operations, Electronic Warfare, Information Operations, Intelligence and Joint/Electromagnetic Spectrum Operations. The specialties of Corvus range from high-level policy development and Congressional liaison to requirements analysis, DOTMLPF-p development assistance and design services for hardware and software systems fulfilling the mission needs of the Department of Defense and Intelligence Communities.
The Company entered into a definitive merger agreement with Mainnerve Federal Services, Inc. dba MFSI Government Group, a Delaware corporation (“MFSI”), effective as of January 1, 2021. This acquisition closed on February 11, 2021. MFSI, a government contractor, has built strong relationships with numerous customers, in the software engineering and IT arena. MFSI provides services in data security and operations for Army, Navy and Intelligence Community clients, and currently works as a software engineering/development, database administration and data analytics subcontractor.
The Company acquired Merrison Technologies, LLC, a Virginia limited liability company (“Merrison”), on August 5, 2021. Merrison, is a government contractor with expertise in software engineering and IT in the classified arena. Effective December 1, 2023, all operations, contracts and employees were merged into the Corvus entity and Merrison was dissolved with the Virginia Secretary of State.
Specialty Systems, Inc. (“SSI”) was acquired August 12, 2021. SSI is a New Jersey based government contractor that provides critical mission support to the Navy at Joint Base McGuire-Dix-Lakehurst in the areas of software engineering, cyber security, systems engineering, program support and network engineering.
The Company acquired certain business assets from The Albers Group, LLC located in Pax River, Maryland (“Pax River”) which closed on November 16, 2021 in an asset purchase for up to 550,000 shares of common stock and cash of $200,000 paid monthly over a 10-month period starting February 2022 upon the satisfaction of conditions in the acquisition agreement.
The Company acquired Lexington Solutions Group, LLC (“LSG”), on April 15, 2022. LSG is a government contractor with a wide range of national security, strategic communication, and management consulting services.
The Company acquired Global Technologies Management Resources, Inc. (“GTMR”) on March 23, 2023. GTMR is a government contractor based in Hollywood, Maryland near Naval Air Station Patuxent River.
On July 19, 2021, the Company filed a Certificate of Amendment with the State of Nevada to change the par value of all common and preferred stock to all be $0.0001. All changes to the par value dollar amount for these classes of stock and adjustment to additional paid in capital have been made retroactively.
On October 13, 2022, the Company completed a $3,000,000 public offering, a 1-for-20 Reverse Stock Split of its common shares, and an uplisting to the NYSE American exchange. All share and per share figures related to the common stock have been retroactively adjusted in accordance with SEC Staff Accounting Bulletin (“SAB”) Topic 4C.
Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of Castellum, Inc. and its subsidiaries, collectively referred to as “the Company”. All significant intercompany accounts and transactions have been eliminated in consolidation. Castellum, Inc. owns 100% of Corvus, MFSI, Merrison (until dissolved as of December 1, 2023), and SSI.
The Company applies the guidance of Topic 805 Business Combinations of the Financial Accounting Standards Board Accounting Standards Codification (“ASC”).
The Company accounted for these acquisitions as business combinations and the difference between the consideration paid and the net assets acquired was first attributed to identified intangible assets and the remainder of the difference was applied to goodwill.
Reclassification
The Company has reclassified certain amounts in the 2022 financial statements to comply with the 2023 presentation. These principally relate to classification of “Gain on Disposal of Fixed Assets” to “Other” on our consolidated statements of operations. The reclassifications had no impact on total net loss or net cash flows for the years ended December 31, 2023 and 2022.
Business Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM, the Chief Executive Officer, reviews consolidated results of operations to make decisions. The Company maintains one operating and reportable segment, which is the delivery of products and services in the areas of information technology, electronic warfare, information warfare and cybersecurity in the governmental and commercial markets.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. These estimates include, but are not limited to, management’s estimate of provisions required for uncollectible accounts receivable, the acquired value of the intangible assets, impaired value of intangible assets, liabilities to accrue, cost incurred in the satisfaction of performance obligations, fair value for consideration elements of business combinations, permanent and temporary differences related to income taxes and determination of the fair value of stock awards. Actual results could differ from those estimates.
Cash
Cash consists of cash and demand deposits with an original maturity of three months or less. The Company holds no cash equivalents as of December 31, 2023 and 2022, respectively. The Company maintains cash balances in excess of the FDIC insured limit at a single bank. The Company does not consider this risk to be material.
Fixed Assets and Long-Lived Assets, Including Intangible Assets and Goodwill
Fixed assets are stated at cost. Depreciation on fixed assets is computed using the straight-line method over the estimated useful lives of the assets, which range from three to 15 years for all classes of fixed assets.
ASC 360 requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company has adopted Accounting Standard Update (“ASU”) 2017-04 Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment effective April 1, 2017.
The Company reviews recoverability of long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets.
Intangible assets with finite useful lives are stated at cost less accumulated amortization and impairment. Intangible assets capitalized as of December 31, 2023 represent the valuation of the Company’s customer relationships, trade names, backlog and non-compete agreements which were acquired in the acquisitions. These intangible assets are being amortized on either the straight-line basis over their estimated average useful lives (certain trademarks, tradenames, backlog and non-compete agreements) or are being amortized based on the present value of the future cash flows (customer relationships, certain tradenames, backlog, and non-compete agreements). Amortization expense of the intangible assets runs through March 2038.
The Company assesses the impairment of identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers to be important which could trigger an impairment review include the following:
1.Significant underperformance relative to expected historical or projected future operating results;
2.Significant changes in the manner of use of the acquired assets or the strategy for the overall business; and
3.Significant negative industry or economic trends.
When the Company determines that the carrying value of intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, the Company records an impairment charge. The Company measures any impairment based on fair value. Significant management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows.
When the Company acquires a controlling financial interest through a business combination, the Company uses the acquisition method of accounting to allocate the purchase consideration to the assets acquired and liabilities assumed, which are recorded at fair value. Any excess of purchase consideration over the net fair value of the net assets acquired is recognized as goodwill.
Prior to 2022, the Company performed its annual goodwill and intangible asset impairment test at the end of the fourth quarter. In 2022, the Company changed the date of its annual goodwill and intangible asset impairment assessment to the first day of the fourth quarter. The Company believes this change does not represent a material change in method of applying an accounting principle. This voluntary change is preferable under the circumstances as it results in better alignment with the timing of the Company’s long-range planning and forecasting process and provides the Company with additional time to complete its annual goodwill impairment testing in advance of its year-end reporting. This change does not delay, accelerate, or avoid an impairment of goodwill.
During the third quarter of 2023, due to decline in stock price, Management determined that a triggering event occurred representing an indicator of goodwill impairment and requiring goodwill impairment testing for each of its reporting units as of September 30, 2023. Management elected to bypass a qualitative assessment and performed a quantitative assessment, including a market capitalization reconciliation, to evaluate the performance of its reporting units. The impairment assessment resulted in a non-cash goodwill impairment charge related to all three reporting units totaling $6,919,094. Given the date of this assessment, Management concluded it satisfied the Company’s annual assessment requirement. Additionally, during the fourth quarter of 2023, Management considered whether there were any additional triggering events that would represent indicators of impairment and determined there were none.
Subsequent Events
Subsequent events were evaluated through March 21, 2024, the date the consolidated financial statements for the year ended December 31, 2023 were issued.
Revenue Recognition
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”).
The Company accounts for a contract with a customer that is within the scope of this Topic only when the five steps of revenue recognition under ASC 606 are met.
The five core principles will be evaluated for each service provided by the Company and is further supported by applicable guidance in ASC 606 to support the Company’s recognition of revenue.
Revenue is derived primarily from services provided to the federal government. The Company enters into agreements with customers that create enforceable rights and obligations and for which it is probable that the Company will collect the consideration to which it will be entitled as services and solutions are transferred to the customer. The Company also evaluates whether two or more agreements should be accounted for as one single contract.
When determining the total transaction price, the Company identifies both fixed and variable consideration elements within the contract. The Company estimates variable consideration as the most likely amount to which the Company expects to be entitled limited to the extent that it is probable that a significant reversal will not occur in a subsequent period.
At contract inception, the Company determines whether the goods or services to be provided are to be accounted for as a single performance obligation or as multiple performance obligations. For most contracts, the customers require the Company to perform several tasks in providing an integrated output and, hence, each of these contracts are deemed as having only one performance obligation. When contracts are separated into multiple performance obligations, the Company allocates the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised services underlying each performance obligation.
This evaluation requires professional judgment, and it may impact the timing and pattern of revenue recognition. If multiple performance obligations are identified, the Company generally uses the cost plus a margin approach to determine the relative standalone selling price of each performance obligation. The Company does not assess whether a contract contains a significant financing component if the Company expects, at contract inception, that the period between when payment by the client and the transfer of promised services to the client occur will be less than one year.
The Company currently generates its revenue from three different types of contractual arrangements: cost plus fixed fee (“CPFF”), firm-fixed-price contracts (“FFP”) and time-and-materials (“T&M”) contracts. The Company generally recognizes revenue over time as control is transferred to the customer, based on the extent of progress towards satisfaction of the performance obligation. The selection of the method used to measure progress requires judgment and is dependent on the contract type and the nature of the goods or services to be provided.
For CPFF contracts, the Company uses input progress measures to derive revenue based on hours worked on contract performance as follows: direct costs plus Defense Contract Audit Agency (“DCAA”) approved provisional burdens plus fee. The provisional indirect rates are adjusted and billed at actual at year end. Revenue from FFP contracts is generally recognized ratably over the contract term, using a time-based measure of progress, even if billing is based on other metrics or milestones, including specific deliverables. For T&M contracts, the Company uses input progress measures to estimate revenue earned based on hours worked on contract performance at negotiated billing rates, plus direct costs and indirect cost burdens associated with materials and the direct expenses incurred in performance of the contract.
These arrangements generally qualify for the “right-to-invoice” practical expedient where revenue is recognized in proportion to billable consideration. FFP Level-Of-Effort contracts are substantially similar to T&M contracts except that the Company is required to deliver a specified level of effort over a stated period. For these contracts, the Company estimates revenue earned using contract hours worked at negotiated bill rates as the Company delivers the contractually required workforce.
Revenue generated by Contract Support Service contracts is recognized over time as services are provided, based on the transfer of control. Revenue generated by FFP contracts is recognized over time as performance obligations are satisfied. Most contracts do not contain variable consideration and contract modifications are generally minimal. For these reasons, there is not a significant impact of electing these transition practical expedients.
Revenue generated from contracts with federal, state, and local governments is recorded over time, rather than at a point in time. Under the Contract Support Services contracts, the Company performs software design work as it is assigned by the customer, and bills the customer, generally semi-monthly, on either a CPFF or T&M basis, as labor hours are expended. Certain other government contracts for software development have specific deliverables and are structured as FFP contracts, which are generally billed as the performance obligations under the contract are met. Revenue recognition under FFP contracts require judgment to allocate the transaction price to the performance obligations. Contracts may have terms up to five years.
Contract accounting requires judgment relative to assessing risks and estimating contract revenue and costs and assumptions for schedule and technical issues. Due to the size and nature of contracts, estimates of revenue and costs are subject to a number of variables. For contract change orders, claims or similar items, judgment is required for estimating the amounts, assessing the potential for realization and determining whether realization is probable. Estimates of total contract revenue and costs are continuously monitored during the term of the contract and are subject to revision as the contract progresses. From time to time, facts develop that require revisions of revenue recognized or cost estimates. To the extent that a revised estimate affects the current or an earlier period, the cumulative effect of the revision is recognized in the period in which the facts requiring the revision become known.
The Company accounts for contract costs in accordance with ASC Topic 340-40, Contracts with Customers. The Company recognizes the cost of sales of a contract as expense when incurred or at the time a performance obligation is satisfied. The Company recognizes an asset from the costs to fulfill a contract only if the costs relate directly to a contract, the costs generate or enhance resources that will be used in satisfying a performance obligation in the future and the costs are expected to be recovered. The incremental costs of obtaining a contract are capitalized unless the costs would have been incurred regardless of whether the contract was obtained.
The following table disaggregates the Company’s revenue by contract type for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| Revenue: | | | | | |
| Time and material | $ | 25,631,786 | | | $ | 25,302,224 | | | $ | 15,381,979 | |
| Firm fixed price | 3,129,520 | | | 3,350,084 | | | 4,864,638 | |
| Cost plus fixed fee | 16,482,505 | | | 13,538,335 | | | 4,745,646 | |
| Other | — | | | — | | | 75,187 | |
| Total | $ | 45,243,811 | | | $ | 42,190,643 | | | $ | 25,067,450 | |
Contract Balances
Contract assets include unbilled amounts typically resulting from FFP contracts when the revenue recognized exceeds the amounts billed to the customer on uncompleted contracts. Contract liabilities consist of billings in excess of costs and estimated earnings on uncompleted contracts.
In accordance with industry practice, contract assets and liabilities related to costs and estimated earnings in excess of billings on uncompleted contracts, and billings in excess of costs and estimated earnings on uncompleted contracts, have been classified as current. The contract cycle for certain long-term contracts may extend beyond one year; thus, collection of the amounts related to these contracts may extend beyond one year.
Derivative Financial Instruments
Derivatives are recorded on the consolidated balance sheet at fair value. The conversion features of certain of the convertible instruments are embedded derivatives and are separately valued and accounted for on the consolidated balance sheet with changes in fair value recognized during the period of change as a separate component of other income/expense. Valuations derived from various models are subject to ongoing internal and external verification and review. The model
used incorporates market-sourced inputs such as interest rates and stock price volatilities. Selection of these inputs involves management’s judgment and may impact net income (loss).
With the issuance of the July 2017 FASB ASU 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815),” which addresses the complexity of accounting for certain financial instruments.
Under current GAAP, an equity-linked financial instrument that otherwise is not required to be classified as a liability under the guidance Topic 480 is evaluated under the guidance in Topic 815, Derivatives and Hedging, to determine whether it meets the definition of a derivative. If it meets that definition, the instrument (or embedded feature) is evaluated to determine whether it is indexed to an entity’s own stock as part of the analysis of whether it qualifies for a scope exception from derivative accounting.
Generally, for warrants and conversion options embedded in financial instruments that are deemed to have a debt host (assuming the underlying shares are readily convertible to cash or the contract provides for net settlement such that the embedded conversion option meets the definition of a derivative), a reporting entity is required to classify the freestanding financial instrument or the bifurcated conversion option as a liability, which the entity must measure at fair value initially and at each subsequent reporting date.
The amendments in this accounting standards update revise the guidance for instruments with embedded features in Subtopic 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, which is considered in determining whether an equity-linked financial instrument qualifies for a scope exception from derivative accounting.
Accounts Receivable and Concentration of Credit Risk
An allowance for credit losses is based on management’s estimate of the overall collectability of accounts receivable, considering historical losses. Based on these same factors, individual accounts are charged off against the allowance when management determines those individual accounts are uncollectible. Credit extended to customers is generally uncollateralized. Past-due status is based on contractual terms. The Company does not charge interest on accounts receivable; however, United States (“U.S.”) government agencies may pay interest on invoices outstanding more than 30 days. Interest income is recorded when received. As of December 31, 2023 and 2022, management did not consider an allowance for credit losses is necessary.
The Company’s customer base is concentrated with a relatively small number of customers. The Company does not generally require collateral or other security to support accounts receivable. To reduce credit risk, the Company performs ongoing credit evaluations on its customers’ financial condition. The Company establishes allowances for credit losses based upon factors surrounding the credit risk of customers, historical trends and other information.
For the years ended December 31, 2023, 2022, and 2021, the Company had three customers represent 52%, 62%, and 61% of revenue earned, respectively. Any customer that represents 10% or greater of total revenue represents a risk. The Company also has three customers that represent 54% of the total accounts receivable as of December 31, 2023 and four customers that represented 60% of the total accounts receivable as of December 31, 2022.
Accounting for Income Taxes
Income taxes are accounted for under the asset and liability method. We estimate our income taxes in each of the jurisdictions where the Company operates. This process involves estimating our current tax expense or benefit together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will not be realized. In making this assessment, we consider the availability of loss carryforwards, projected reversals of deferred tax liabilities, projected future taxable income, and ongoing prudent and feasible tax planning strategies.
We are subject to income taxes in the federal and state tax jurisdictions based upon our business operations in those jurisdictions. Significant judgment is required in evaluating uncertain tax positions. We record uncertain tax positions in accordance with ASC 740-10 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position, and (2) with respect to those tax
positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority. Management evaluates its tax positions on a quarterly basis.
The Company files income tax returns in the U.S. federal tax jurisdiction and various state tax jurisdictions. The federal and state income tax returns of the Company are subject to examination by the Internal Revenue Service (“IRS”) and state taxing authorities, generally for three years after they were filed.
Share-Based Compensation
The Company follows ASC 718 Compensation – Stock Compensation and has adopted ASU 2017-09 Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting. The Company calculates compensation expense for all awards granted, but not yet vested, based on the grant-date fair values. The Company recognizes these compensation costs, on a pro rata basis over the requisite service period of each vesting tranche of each award for service-based grants, and as the criteria is achieved for performance-based grants.
The Company adopted ASU 2016-09 Improvements to Employee Share-Based Payment Accounting. Cash paid when shares are directly withheld for tax withholding purposes is classified as a financing activity in the statement of cash flows.
Fair Value of Financial Instruments
ASC 825 Financial Instruments requires the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company’s financial instruments: The carrying amount of cash, accounts receivable, prepaid and other current assets, accounts payable and accrued liabilities, approximate fair value because of the short-term maturity of those instruments. The fair value of debt reflects the price at which the debt instrument would transact between market participants, in an orderly transaction at the measurement date. The fair value of the equity consideration from business combinations are measured using the price of our common stock at the measurement date, along with applying an appropriate discount for lack of marketability. For contingent liabilities from business combinations, the fair value is measured on the acquisition date using an option pricing model. The Company does not utilize derivative instruments for hedging purposes.
Earnings (Loss) Per Share of Common Stock
Basic net income (loss) per common share is computed using the weighted average number of common shares outstanding, as well as a warrant to purchase 1,080,717 shares of common stock for a total aggregate exercise price of $1 granted in connection with the $5,600,000 note payable maturing September 30, 2024, as the cash consideration for the holder/grantee to receive common shares was determined to be nonsubstantive. Diluted earnings per share (“EPS”) include additional dilution from common stock equivalents, such as convertible notes, preferred stock, stock issuable pursuant to the exercise of stock options and all other warrants. Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for periods presented, so only the basic weighted average number of common shares are used in the computations. The Company subtracts dividends on preferred stock when calculating earnings (loss) per share. Refer to Note 16, Subsequent Events. Recent Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This update requires disaggregated information about a reporting entity’s effective tax rate reconciliations as well as information on income taxes paid. This update is effective for annual periods beginning in our fiscal year ending December 31, 2025. Early adoption is permitted. We are currently evaluating the impact that this update will have on our financial statement disclosures.
Note 3: Acquisitions
The Company has completed the following acquisitions to achieve its business purposes as discussed in Note 1; GTMR
On March 22, 2023, the Company entered into an agreement and plan of merger with GTMR. This acquisition was accounted for as a business combination whereby GTMR became a 100% owned subsidiary of the Company. The
Company acquired GTMR to expand our capabilities, increase market share, gain access to new contracts, and achieve cost efficiencies through synergies and economies of scale.
As the acquisition was an equity acquisition of GTMR, certain assets of the acquisition (intangible assets and goodwill) are not considered deductible for tax purposes.
The following represents the preliminary assets and liabilities acquired in this acquisition:
| | | | | | | | | | | |
| March 31, 2023 | Adjustments | December 31, 2023 |
| Cash | $ | 475,000 | | $ | — | | $ | 475,000 | |
| Accounts receivable and other receivables | 1,380,203 | | (9,384) | | 1,370,819 | |
| Income tax receivable | 155,449 | | (127,992) | | 27,457 | |
| Prepaid expenses | 116,892 | | (30,856) | | 86,036 | |
| Other assets | 17,182 | | — | | 17,182 | |
| Furniture and equipment | 163,301 | | 103,760 | | 267,061 | |
| Right of use asset - operating lease | — | | 641,392 | | 641,392 | |
| Customer relationships | 2,426,000 | | — | | 2,426,000 | |
| Right of use - finance lease | — | | 17,456 | | 17,456 | |
| Tradename | 517,000 | | — | | 517,000 | |
| Backlog | 1,774,000 | | — | | 1,774,000 | |
| Goodwill | 1,822,466 | | 279,571 | | 2,102,037 | |
| Deferred tax liability | (1,244,368) | | (242,093) | | (1,486,461) | |
| Lease liability - operating lease | (17,608) | | (603,799) | | (621,407) | |
| Lease liability - finance lease | — | | (12,549) | | (12,549) | |
| Accounts payable and accrued expenses | (1,030,957) | | 141,341 | | (889,616) | |
| Net assets acquired | $ | 6,554,560 | | $ | 156,847 | | $ | 6,711,407 | |
The consideration paid for GTMR was as follows:
| | | | | |
| Cash | $ | 470,233 | |
| Due to Seller | 350,000 | |
| Other consideration | 17,791 | |
| Cash from factoring | 411,975 | |
| Common stock | 5,304,561 | |
| Accounts receivable note | 156,847 | |
| Total consideration paid | $ | 6,711,407 | |
The GTMR Acquisition has been accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the total acquisition consideration price was allocated to the assets acquired and liabilities assumed based on their preliminary estimated fair values. The fair value measurements utilize estimates based on key assumptions of the GTMR Acquisition, and historical and current market data. The excess of the purchase price over the total of the estimated fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed is recognized as goodwill. To determine the fair values of tangible and intangible assets acquired and liabilities assumed for GTMR, we engaged a third-party independent valuation specialist. Intangible assets, which are primarily comprised of customer relationships and backlog, were valued using the excess earnings discounted cash flow method. On the date of the acquisition, the Company simultaneously factored $411,975 of the accounts receivable from GTMR to finance the acquisition.
The Company had received a preliminary valuation from its specialist and recorded the value of the assets and liabilities acquired based on historical inputs and data as of March 22, 2023. The allocation of the purchase price is based on the best information available. The Company paid $185,896 in transaction costs of GTMR, which was excluded from the purchase price and issued an accounts receivable note (“Accounts Receivable Note”) and held back $350,000, the details for which have been discussed in amounts due to seller in Note 9.
During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date. The measurement period for the GTMR acquisition is currently open and may remain open until March 22, 2024, but we do not anticipate any further adjustments.
During the measurement period, the Company recorded several adjustments to goodwill as a result of GTMR's adoption of ASC 842, tax adjustments, and an update to the fair value of acquired furniture and equipment. These measurement period adjustments were subsequently identified as a result of the completion of third party accounting assistance.
The Company also recorded a measurement period adjustment to goodwill as a result of finalizing the transaction price. The Company entered into an accounts receivable note payable due to the sellers four months after the closing date of the transaction, subject to the adjustment of any net working capital deficiencies. This amount was determined to be $156,847.
Lexington Solutions Group (“LSG”)
On April 15, 2022, the Company entered into Amendment No. 1 to Business Acquisition Agreement (“LSG Business Acquisition Agreement”) with LSG to acquire the assets of LSG. This LSG Business Acquisition Agreement superseded the Business Acquisition Agreement originally entered into on February 11, 2022. Under the terms of the LSG Business Acquisition Agreement, the Company acquired assets and assumed liabilities of LSG for consideration as follows: (a) 625,000 shares of common stock (600,000 shares paid at closing (issued on May 4, 2022) and 25,000 shares to be held and due within three business days of payment of the second tranche of cash described below); and (b) cash payments as follows: $250,000 due at closing (“initial cash payment”); $250,000 plus or minus any applicable post-closing adjustments paid on the date that is six months after the closing date (“second tranche”) (paid in October 2022); and $280,000 that was due no later than 10 months after the closing date of the acquisition (paid in January 2023).
As the acquisition was of the assets of LSG, intangible assets and goodwill are considered deductible for tax purposes.
The following represents the assets and liabilities acquired in this acquisition:
| | | | | |
| Receivable from Seller | $ | 413,609 | |
| Due from employee/travel advance | 5,000 | |
| Miscellaneous license | 2,394 | |
| Customer relationships | 785,000 | |
| Non-compete agreements | 10,000 | |
| Backlog | 489,000 | |
| Goodwill | 1,471,000 | |
| Net Assets acquired | 3,176,003 | |
| |
| The consideration paid for the acquisition of LSG was as follows: | |
| |
Common stock (600,000 shares issued May 4, 2022) | 2,280,000 | |
Holdback shares (25,000 shares due six months after the closing date) | 95,000 | |
| Cash | 521,003 | |
| Due to seller (cash) | 280,000 | |
| $ | 3,176,003 | |
The LSG acquisition has been accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the total acquisition consideration price was allocated to the assets acquired and liabilities assumed based on their preliminary estimated fair values. The fair value measurements utilize estimates based on key assumptions of the LSG acquisition, and historical and current market data. The excess of the purchase price over the total of the estimated fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed is recognized as goodwill. To
determine the fair values of tangible and intangible assets acquired and liabilities assumed for LSG, the Company engaged a third-party independent valuation specialist.
The Company had received a valuation from its specialist and recorded the value of the assets and liabilities acquired based on historical inputs and data as of April 15, 2022. The allocation of the purchase price is based on the best information available. The Company paid $44,752 in transaction costs of LSG, which was excluded from the purchase price. During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date. There have been no adjustments for the year ended December 31, 2023 and the measurement period was closed April 15, 2023.
For all acquisitions disclosed, there were no transaction costs that were not recognized as an expense.
The following table shows unaudited pro-forma results for the year ended December 31, 2023 and 2022, as if the acquisitions of GTMR and LSG had occurred on January 1, 2022. These unaudited pro forma results of operations are based on the historical financial statements of each of the companies.
| | | | | |
| For the year ended December 31, 2023 | |
| Revenues | $ | 47,890,783 | |
| Net loss | $ | (17,893,806) | |
| Net loss per share - basic | $ | (0.37) | |
| |
| For the year ended December 31, 2022 | |
| Revenues | $ | 54,080,245 | |
| Net loss | $ | (14,816,304) | |
| Net loss per share - basic | $ | (0.53) | |
Revenue attributable to the GTMR acquisition included in our consolidated statement of operations for the year ended December 31, 2023, was $7,779,478.
Note 4: Fixed Assets
Fixed assets consisted of the following as of December 31:
| | | | | | | | | | | |
| 2023 | | 2022 |
| Equipment and software | $ | 258,091 | | | $ | 141,732 | |
| Furniture | 43,119 | | | 32,574 | |
| Automobile | 43,928 | | | — | |
| Leasehold improvements | 192,959 | | | 83,266 | |
| Total fixed assets | 538,097 | | | 257,572 | |
| Accumulated depreciation | (227,927) | | | (84,222) | |
| Fixed assets, net | $ | 310,170 | | | $ | 173,350 | |
Depreciation expense for the years ended December 31, 2023, 2022, and 2021 was $148,512, $62,026, and $19,120 respectively.
Note 5: Intangible Assets and Goodwill
Intangible assets consisted of the following as of December 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2023 |
| | | Gross carrying value | | Accumulated Amortization | | Net carrying value |
| Customer relationships | 4.5– 15 years | | $ | 11,961,000 | | | $ | (5,529,674) | | | $ | 6,431,326 | |
| Trade name | 4.5 years | | 783,000 | | | (363,938) | | | 419,062 | |
| Trademark | 15 years | | 533,864 | | | (145,277) | | | 388,587 | |
| Backlog | 2 years | | 3,210,000 | | | (1,513,986) | | | 1,696,014 | |
| Non-compete agreement | 3-4 years | | 684,000 | | | (648,125) | | | 35,875 | |
| | | $ | 17,171,864 | | | $ | (8,201,000) | | | $ | 8,970,864 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 |
| Customer relationships | 4.5– 15 years | | $ | 9,535,000 | | | $ | (3,916,501) | | | $ | 5,618,499 | |
| Trade name | 4.5 years | | 266,000 | | | (245,336) | | | 20,664 | |
| Trademark | 15 years | | 533,864 | | | (88,119) | | | 445,745 | |
| Backlog | 2 years | | 1,436,000 | | | (1,077,616) | | | 358,384 | |
| Non-compete agreement | 3-4 years | | 684,000 | | | (493,125) | | | 190,875 | |
| | | $ | 12,454,864 | | | $ | (5,820,697) | | | $ | 6,634,167 | |
| | | | | | | |
The intangible assets, with the exception of the trademarks, were recorded as part of the acquisitions of Corvus, MFSI, Merrison, LSG, SSI and GTMR. Amortization expense for the years ended December 31, 2023, 2022, and 2021 was $2,380,303, $1,970,433, and $1,867,108 respectively, and the intangible assets are being amortized based on the estimated future lives as noted above.
Future amortization of the intangible assets for the next five years as of December 31 are as follows:
| | | | | |
| 2024 | $ | 2,074,686 | |
| 2025 | 1,453,000 | |
| 2026 | 1,242,863 | |
| 2027 | 1,034,302 | |
| 2028 | 543,592 | |
| Thereafter | 2,622,421 | |
| Total | $ | 8,970,864 | |
The following table presents changes to goodwill for the years ended December 31, 2023 and 2022 for each reporting unit:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corvus | | SSI | | MFSI | | Merrison | | Total |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| December 31, 2021 | $ | 4,136,011 | | | $ | 8,461,150 | | | $ | 685,073 | | | $ | 780,730 | | | $ | 14,062,964 | |
| Goodwill acquired through acquisitions | 1,471,000 | | | — | | | — | | | — | | | 1,471,000 | |
| Merrison subsumed into Corvus | 780,730 | | | — | | | — | | | (780,730) | | | — | |
| December 31, 2022 | 6,387,741 | | | 8,461,150 | | | 685,073 | | | — | | | 15,533,964 | |
| Goodwill acquired through acquisitions | — | | | 2,102,037 | | | — | | | — | | | 2,102,037 | |
| Impairment loss | (4,429,000) | | | (1,845,094) | | | (645,000) | | | — | | | (6,919,094) | |
| December 31, 2023 | $ | 1,958,741 | | | $ | 8,718,093 | | | $ | 40,073 | | | $ | — | | | $ | 10,716,907 | |
Note 6: Convertible Promissory Notes – Related Party
The Company entered into convertible promissory notes – related party as follows as of December 31:
| | | | | | | | | | | |
| 2023 | | 2022 |
Convertible note payable with a trust related to one of the Company’s former directors, convertible at $0.260 per share, at 5% interest, (extinguished on April 4, 2022 for new note) | $ | 3,209,617 | | | $ | 3,209,617 | |
| Total Convertible Notes Payable – Related Party | $ | 3,209,617 | | | $ | 3,209,617 | |
| | | |
| Less: Debt discount | (971,405) | | | (2,210,187) | |
| $ | 2,238,212 | | | $ | 999,430 | |
Interest expense which includes amortization of discount and premium for the years ended December 31, 2023 and 2022 was $1,399,262 and $1,535,840, respectively. The amount of the debt discount recorded related to the conversion feature granted to the note holder was evaluated for characteristics of liability or equity and was determined to be equity under ASC 470 and ASC 480. The Company recognized this as additional paid in capital, and the discount is being amortized over the life of the note.
On February 1, 2021, the two promissory notes with The Buckhout Charitable Remainder Trust (Laurie Buckhout – Trustee), were combined into one new note in the principal balance of $4,279,617, that has a new maturity date of February 1, 2024. The interest rate remains at 5% per annum. The conversion terms have remained at $0.26 per share. It was determined that under ASC 470, the debt amendment was considered a modification. Then again on August 12, 2021, the convertible note was amended to remove the principal payments and extend the debt further to September 30, 2024. It was determined that under ASC 470, the debt amendment was considered a modification.
On April 4, 2022, the Company entered into a letter agreement with The Buckhout Charitable Remainder Trust (Laurie Buckhout – Trustee) whereby the Company made a partial repayment of $500,000 (“First Payment”) to reduce the note from $4,209,617 to $3,709,617. The First Payment of $500,000 was paid from proceeds from Crom Cortana Fund, LLC (“Crom”) as part of a unit agreement under the Securities Purchase Agreement (“SPA”) entered into with Crom on April 4, 2022. The Company commenced accruing interest on March 1, 2022, however, no payment of interest was due through October 31, 2022. The Company originally intended to make a second payment (“Second Payment”) of $2,709,617 at the time of an anticipated secondary offering, initially expected to occur on or about August 1, 2022, subject to extensions through October 31, 2022. However, given the timing of our secondary offering, the Second Payment did not occur during the third quarter of 2022 and the Company negotiated an extension of the Second Payment to October 31, 2022. In October 2022, the Company made an advanced principal payment of $500,000, further reducing the principal of the convertible promissory note to $3,209,617.
On February 22, 2024, the Company entered into a new note payable with the Buckout Charitable Remainder Trust. As a result, a majority of the balance is reflected in non-current liabilities. Refer to subsequent events in Note 16 for more detail.
Note 7: Notes Payable
The Company entered into notes payable as follows as of December 31:
| | | | | | | | | | | |
| 2023 | | 2022 |
Note payable at 7% originally due November 2023, maturing September 30, 2024 (a) | $ | 5,600,000 | | | $ | 5,600,000 | |
Note payable at 10% interest dated February 28,2022 and matures the earlier of (i) September 30, 2024 or (ii) the acceleration of the obligations as contemplated under the promissory note including the successful completion of an equity offering of at least $15,000,000 (b) | 400,000 | | | 400,000 | |
Note payable at 12% interest dated April 6, 2023 and matures the earlier of (i) September 30, 2024 or (ii) the acceleration of the obligations as contemplated under the promissory note (c) | 400,000 | | | — | |
Convertible note payable, convertible at $1.60 per share, at 7%, maturing April 4, 2023 (d) | — | | | 890,000 | |
Convertible note payable, convertible at $1.20 per share, at 10%, maturing February 13, 2024 (d) | 840,000 | | | — | |
Term note payable, at prime plus 3% interest, applied on a deferred basis (8.50% at December 31, 2023 and 6.25% at December 31, 2022) maturing August 11, 2024 | 981,764 | | | 2,324,236 | |
| Total Notes Payable | 8,221,764 | | | 9,214,236 | |
| Less: Debt Discount | (146,989) | | | (840,398) | |
| $ | 8,074,775 | | | $ | 8,373,838 | |
(a)On August 12, 2021, the note payable was amended to extend the debt to September 30, 2024. It was determined that under ASC 470, the debt amendment was considered a modification. The amount of the debt discount recorded related to the warrants granted to the note holder was evaluated for characteristics of liability or equity and was determined to be equity under ASC 470 and ASC 480.
(b)On February 28, 2022, the Company was obligated to issue 125,000 shares of common stock as further consideration for making this loan to the Company. The shares were issued in April 2022.
(c)On April 6, 2023, the Company entered into a promissory note with principal balance of $400,000 bearing interest at 12% per annum. This promissory note matures at the earlier of September 30, 2024 or at the acceleration of the obligations under the promissory note (together with those discussed in a and b above, “Eisiminger Notes”). Interest is paid in monthly installments and the total principal is due upon maturity.
(d)On February 13, 2023, the Company entered into a series of transactions with Crom Cortana Fund LLC (“Crom”), the primary purpose of which is related to the GTMR Acquisition entered into on March 22, 2023. In connection therewith, the Company and Crom entered into an agreement to pay off the amount owed to Crom under the terms of the convertible promissory note in the original principal amount of $1,050,000 due April 4, 2023 ("Prior Crom Note"). In consideration of a $300,000 cash payment and 556,250 shares of common stock representing conversion of the remaining principal balance of the Company’s obligations under the Prior Crom Note are deemed satisfied reducing the balance to zero; we induced conversion of the debt, which effectively extinguished the debt. Simultaneously therewith, the parties entered into the Securities Purchase Agreement (the “2023 SPA”) pursuant to which Crom purchased (a) a convertible promissory note in the principal amount of $840,000 (the “2023 Note Payable”), which matures February 13, 2024 and bears interest at a per annum rate equal to 10% to be paid monthly, and (b) a warrant pursuant to which Crom has the right to purchase up to 700,000 shares of the Company’s common stock (the “2023 Warrant”) at an exercise price of $1.38 which expires 60 months from the date of issuance. The proceeds of the 2023 Note Payable were used primarily to fund the GTMR acquisition, as well as fund the aforementioned debt repayment.
Interest expense, which includes amortization of discount, for the years ended December 31, 2023, 2022, and 2021 was $1,732,265, $1,874,142, and $859,744 respectively.
On April 4, 2022, the Company secured a $950,000 revolving credit facility with Live Oak Bank (“Revolving Credit Facility”). The Revolving Credit Facility matures on March 28, 2029, and draws on it are charged interest at the rate of
prime plus 2.75% per annum. Interest is payable monthly. The outstanding balance as of December 31, 2023 and December 31, 2022, under the Revolving Credit Facility was $625,025 and $300,025, respectively.
On February 22, 2024, the Company extended the maturity date of the Eisiminger Notes. As a result, the majority of the balance is reflected in non-current liabilities. Refer to subsequent events in Note 16 for more detail. Due to the subsequent events described under Note 16, the total principal payments on our notes payable for the next three years are as follows: | | | | | |
2024 | $ | 2,221,764 | |
2025 | — | |
2026 | 6,000,000 | |
| Total | $ | 8,221,764 | |
Note 8: Note Payable – Related Party
The Company entered into a note payable – related party as follows as of December 31:
| | | | | | | | | | | |
| 2023 | | 2022 |
Note payable at 5% due December 31, 2024, in connection with the acquisition of SSI | $ | 400,000 | | | $ | 400,000 | |
Interest expense for both the years ended December 31, 2023 and 2022 was $20,000. Interest expense for the year ended December 31, 2021, was $7,726.
On February 16, 2024, the Company extended the maturity date of this note. As a result, the balance is reflected in non-current liabilities. Refer to subsequent events in Note 16 for more detail. Note 9: Amount Due To Seller
In the acquisition of GTMR, the Company was obligated to pay $1,250,000 which included $350,000 held back to satisfy any net working capital deficiencies. This balance was originally scheduled to be paid six months following the closing date, however, payment has been postponed and the unpaid balance of $350,000 will accrue interest at an annual rate of 5% until it is paid in full in July of 2024. The $350,000 is recorded in current liabilities on the Company's Consolidated Balance Sheets as of December 31, 2023.
In the acquisition of GTMR, the Company also issued an Accounts Receivable Note to the sellers of GTMR whereby the Company is obligated to pay the sellers a principal amount of $206,587, adjusted for deficiencies in net working capital, for four months following the closing date of the acquisition. The Company determined a net working capital deficiency of $49,740 resulting in an amount due to the sellers of $156,847. This amount was paid in full during the three months ended September 30, 2023.
In the acquisition of LSG, the Company was obligated to pay $3,176,003, which included cash of $780,000 and a working capital adjustment of $21,003. Of this amount, $521,003 was paid by December 31, 2022. The remaining $280,000 of this balance was paid on January 23, 2023.
Note 10: Stockholders’ Equity (Deficit)
On October 13, 2022, the Company effected a 1-for-20 reverse split of our authorized and outstanding shares of common stock. As a result of the Reverse Stock Split, all authorized and outstanding common stock and per share amounts in this Annual Report on Form 10-K, including but not limited to, the consolidated financial statements and footnotes included herein, have been adjusted to reflect the Reverse Stock Split for all periods presented.
Preferred Stock
The Company has 50,000,000 shares of preferred stock authorized. The Company has designated a Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. The Series B Preferred Stock was fully converted into Common Stock during 2022, and as such, there is no outstanding Series B Preferred Stock as of December 31, 2023.
Series A Preferred Stock
The Company has designated 10,000,000 shares of Series A Preferred Stock, par value of $0.0001.
On April 7, 2022, the Company amended the Certificate of Designation for its Series A Preferred Stock to (a) provide for an annualized dividend of $0.0125 per share to be paid monthly; (b) amend the conversion ratio for each share of Series A Preferred Stock to convert into two shares of common stock instead of 20 shares of common stock; and (c) provide for the Company to have the option to repurchase the Series A Preferred Stock at any time at a price of $1 per share. In connection with the Amendment to the Certificate of Designation, former officers of the Company (“Former Officers”) entered into a letter agreement dated April 4, 2022 with Crom and the Company for Crom to purchase 1,750,000 shares of Common Stock from the officers for $455,000, the proceeds of which were paid directly to the Former Officers. The letter agreement also provided for the Former Officers to sell certain amounts of the common stock they own through the date of the public offering.
As of December 31, 2023 and December 31, 2022, the Company had 5,875,000 shares of Series A Preferred Stock issued and outstanding, respectively. The 5,875,000 shares were issued to the Former Officers of the Company in settlement of debt. For the year ended December 31, 2023, the Company has total preferred stock dividends recognized of $118,152, of which $72,624 is related to Series A Preferred Stock dividends.
Series B Preferred Stock
The Company has designated 10,000,000 shares of Series B Preferred Stock, par value of $0.0001. On October 17, 2022 the Company issued a total of 15,375,000 shares of Common Stock in connection with the conversion of all of its Series B preferred shares outstanding in connection with its public offering. As of December 31, 2023 and December 31, 2022, the Company had 0 and 3,610,000 shares of Series B Preferred Stock issued and outstanding, respectively. The 3,610,000 shares were issued to the shareholders, who are also directors of the Company, for the Bayberry acquisition in June 2019.
Series C Preferred Stock
The Company has designated 10,000,000 shares of Series C Preferred Stock, par value of $0.0001 (effective July 19, 2021). In the year ended December 31, 2022, the Company raised $150,000 for 150,000 shares of Series C Preferred Stock. In the year ended December 31, 2021, the Company raised $620,000 for 620,000 shares of Series C Preferred Stock along with 1,240,000 common shares. Each share of the Series C Preferred Stock is convertible into 0.625 common shares, and the Series C Preferred Stock pays a $0.06 dividend per Series C Preferred share per year. The dividend commenced accruing when the Series C Preferred Shares were fully designated and issued.
For the year ended December 31, 2023, the Company has total preferred stock dividends recognized of $118,152 of which $45,528 is related to Series C Preferred Stock dividends. The Series C Preferred Stockholders under their subscription agreements were issued 0.1 common shares per Series C Preferred share for their investment. As a result, the Company issued 62,000 common shares for the 620,000 Series C Preferred shares purchased. As of December 31, 2022, another $25,000 was raised for an additional 25,000 Series C Preferred shares and 2,500 common shares that were not issued as of the balance sheet date. The $25,000 is reflected as an obligation to issue shares on the Consolidated Balance Sheet as of December 31, 2022.
Common Stock
The Company has 3,000,000,000 shares of common stock, par value $0.0001 authorized. The Company had 47,672,427 and 41,699,363 shares issued and outstanding as of December 31, 2023 and 2022, respectively. The holders of the Company’s Common Stock are entitled to one vote for each share of common stock held.
On October 17, 2022, the Company closed its public offering of 1,500,000 shares of common stock consisting of 1,350,000 shares sold by the Company and 150,000 shares sold by certain selling stockholders, at a public offering price of $2.00 per share. In connection therewith, the Company issued 1,231 shares of common stock to stockholders with fractional shares resulting from the Reverse Stock Split.
Warrants
The following represents a summary of warrants for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 |
| Number | | Weighted
Average
Exercise
Price | | Number | | Weighted
Average
Exercise
Price |
| Beginning balance | 5,678,836 | | $ | 1.84 | | | 3,161,568 | | $ | 1.60 | |
| | | | | | | |
| Granted | 1,765,862 | | 1.17 | | | 2,517,268 | | 2.20 | |
| Ending balance | 7,444,698 | | $ | 1.68 | | | 5,678,836 | | $ | 1.84 | |
| Intrinsic value of warrants | $ | 327,214 | | | | | $ | 1,374,303 | | | |
| Weighted Average Remaining Contractual Life (Years) | 4.70 | | | | | | |
Options
As of December 31, 2023, the Company has granted 522,265 shares of common stock under the Stock Incentive Plan. In addition, on November 9, 2021, the Company approved the 2021 Stock Incentive Plan (“Stock Incentive Plan”) that authorizes the Company to grant up to 2,500,000 shares of common stock. Prior to this date, the granting of options was not done pursuant to the terms of a stock incentive plan.
The following represents a summary of options for the years ended December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in Years) | | Weighted-Average Fair Value |
| Outstanding, December 31, 2021 | 4,594,688 | | | $ | 2.09 | | | 6.21 | | $ | 3.72 | |
| Granted | 2,585,000 | | | 3.45 | | | 6.25 | | 3.34 | |
| Exercised | (15,000) | | | 0.80 | | | | | |
| Forfeited | (739,688) | | | 2.41 | | | | | |
| Outstanding December 31, 2022 | 6,425,000 | | | 2.69 | | | 5.63 | | 4.26 | |
| Granted | 1,932,500 | | | 1.48 | | | 6.19 | | 1.10 | |
| Exercised | — | | | — | | | | | |
| Forfeited | (114,063) | | | 2.00 | | | | | |
| Outstanding December 31, 2023 | 8,243,437 | | | $ | 2.41 | | | 4.98 | | $ | 3.58 | |
| | | | | | | |
| As of December 31, 2023 | | | | | | | |
| Vested and Exercisable | 4,620,822 | | | $ | 2.44 | | | 4.70 | | $ | 3.20 | |
Stock based compensation expense related to stock options for the years ended December 31, 2023 and 2022 was $5,923,200 and $4,985,233, respectively, which is comprised of $4,675,129 and $3,852,606 in service-based grants and $1,248,071 and $1,132,627 in performance-based grants, for the years ended December 31, 2023 and 2022, respectively.
In accordance with ASC 718-10-50, the Company measures the fair value of its share-based payment arrangements using the Black-Scholes model. The Company measures the share-based compensation on the grant date using the following assumptions:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
| Expected term | 7 years | | 7 years |
| Expected volatility | 161.61% - 166.14% | | 135.00%– 177.00% |
| Expected dividend yield | — | | | — | |
| Risk-free interest rate | 3.48% - 3.89% | | 0.10 | % |
The Company measures the share-based compensation for all stock options and warrants that are not considered derivative liabilities using the Black-Scholes method with these assumptions, and any changes to these inputs can produce significantly higher or lower fair value measurements. The weighted average grant date fair value of the options granted during the years ended December 31, 2023 and 2022 was $1.10 and $3.34, respectively. The risk-free interest rate is based on the yield of a zero coupon U.S. Treasury Security with a maturity equal to the expected life of the stock option from the date of the grant. The assumption for expected volatility is based on the historical volatility of the Company. Aside from dividends paid on preferred shares, it is the Company's intent to retain all profits for the operations of the business for the foreseeable future, as such the dividend yield assumption is zero.
Note 11: Fair Value
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP sets forth a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels are as follows:
Level 1 – defined as observable inputs, such as quoted market prices in active markets.
Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3 – defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.
Our financial assets and liabilities subject to the three-level fair value hierarchy consist principally of cash and cash equivalents, accounts receivable, accounts payable, contingent consideration and derivative liabilities. The estimated fair value of cash and cash equivalents, accounts receivable, fixed interest debt and accounts payable approximates their carrying value.
On April 4, 2022, the Company issued common stock, a convertible note, and warrants in a securities purchase agreement (“SPA”), with Crom (“2022 Crom SPA”). The Company had evaluated the conversion option liability in the convertible note and the warrants to determine proper accounting treatment and determined them to be derivative liabilities (“Derivative Liabilities”).
On February 13, 2023, the 2022 Crom SPA was terminated through an induced conversion thereby extinguishing the conversion option liability associated with the 2022 Crom note; the warrants were not affected. Concurrent with the termination of the 2022 Crom SPA, the Company issued common stock, a convertible note, and warrants in an SPA with Crom . The Company evaluated the conversion option in this convertible note and these warrants to determine proper accounting treatment and determined them to be derivative liabilities (also “Derivative Liabilities”). The Derivative Liabilities had and have been accounted for utilizing ASC 815 “Derivatives and Hedging.”
The Company recognized liabilities for the estimated fair values of the Derivative Liabilities. The estimated fair values of these liabilities were calculated using a binomial pricing model with key input variables by an independent third party, as of the date of issuance, with changes in fair value recorded as gains or losses on revaluation in other income (expense).
The contingent earnout included in total consideration for the SSI acquisition as of December 31, 2022, presented as part of current liabilities on the Consolidated Balance Sheets, was measured at fair value on a recurring basis using the present value approach, which incorporates factors such as revenue growth and forecasted adjusted EBITDA to estimate expected value. Changes in fair value of the contingent earnout were recorded as gains or losses on revaluation in operating expenses on the Consolidated Statements of Operations until the earnout amount was settled with the sellers of SSI. On February 15, 2024, the Company agreed to the amount and timing of the earnout payout. Please see Note 16 for subsequent events.
The Company determined that the significant inputs used to value the Derivative Liabilities and the contingent earnout fall within Level 3 of the fair value hierarchy. As a result, the Company has determined that the valuation of its Derivative Liabilities and contingent earnout are classified in Level 3 of the fair value hierarchy as shown in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2023 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Derivative Liabilities | | $ | — | | | $ | — | | | $ | 157,600 | | | $ | 157,600 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | |
| Derivative Liabilities | | $ | — | | | $ | — | | | $ | 824,000 | | | $ | 824,000 | |
| Contingent earnout | | $ | — | | | $ | — | | | $ | 812,000 | | | $ | 812,000 | |
| Total | | $ | — | | | $ | — | | | $ | 1,636,000 | | | $ | 1,636,000 | |
The Company’s Derivative Liabilities as of December 31 are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | Inception |
| Fair value of conversion option in 2022 Crom convertible note | | $ | — | | | $ | 191,000 | | | $ | 314,000 | |
Fair Value of 656,250 warrants on April 4, 2022 | | $ | 66,000 | | | $ | 633,000 | | | $ | 378,000 | |
| Fair value of conversion option in 2023 Crom convertible note | | $ | 200 | | | $ | — | | | $ | 162,000 | |
Fair value of 700,000 warrants on February 13, 2023 | | $ | 91,400 | | | $ | — | | | $ | 259,000 | |
| | $ | 157,600 | | | $ | 824,000 | | | |
During the year ended December 31, 2023, 2022, and 2021 the Company recognized changes in the fair value of the Derivative Liabilities of $666,400, $824,000, and $0 respectively.
Activity related to the Derivative Liabilities for the year ended December 31, 2023 is as follows:
| | | | | | | | |
| Beginning balance as of December 31, 2022 | | $ | (824,000) | |
| Issuance of Derivative Liabilities | | (421,000) | |
| | |
| Change in fair value of Derivative Liabilities | | 1,087,400 | |
| Ending balance as of December 31, 2023 | | $ | (157,600) | |
Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of the Derivative Liabilities is estimated using a binomial valuation model. The assumptions, inputs and methodologies the Company uses in determining fair value result in inherent uncertainty due to the application of judgment. The following assumptions were used for the periods as follows:
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
| Stock Price | | $ | 0.30 | | | $ | 1.26 | |
| Conversion option - convertible note | | 1.20 | | | 1.60 | |
| Strike price - warrants | | 1.38 - 1.84 | | 1.84 | |
| Term | | 0.12 years - 4.10 years | | 0.26 years - 4.26 years |
| Volatility | | 98.00% - 148.30% | | 121.00% - 156.50% |
| Market yield - conversion option | | 17.40 | % | | 10.30 | % |
| Risk-free rate | | 3.90% - 5.60% | | 4.10% - 4.40% |
Note 12: Related-Party Transactions
During 2023, the Company granted warrants to two of its officers pursuant to the employment agreements with these officers as a bonus for closing the GTMR Acquisition.
During 2022, the Company repaid $1,000,000 of note principal to a member of its Board of Directors in relation to payments on its related party note payable. For details on this note payable refer to Note 6.
In June 2021, the Company raised $220,000 for 220,000 shares of the to be designated Series C Preferred Stock along with 440,000 common shares from the newly hired Chief Growth Officer of the Company.
In January 2021, August 2021, November 2021 and April 2022, the Company granted warrants to two of its officers pursuant to the employment agreements with these officers as a bonus for closing the MFSI, Merrison, SSI, Pax River (assets purchased from The Albers Group, LLC) and LSG transactions.
Note 13: Defined Contribution Plan
The Company and its subsidiaries maintain 401(k) plans as a defined contribution retirement plan for all eligible employees. Each 401(k) plan provides for tax-deferred contributions of employees’ salaries, limited to a maximum annual amount as established by the IRS. The plans enroll employees immediately with no age or service requirement.
The aggregate 401(k) Plan employer match was $882,707, $651,353 and $434,267 in the years ended December 31, 2023, 2022 and 2021, respectively.
Note 14: Commitments
The Company, since April 2020, has entered into a series of employment agreements with management and key employees. The employment agreements are generally for terms ranging from three to four years and stipulate the compensation which include base pay and bonuses, as well as non-cash compensation (warrants or stock options) that are to be issued to the employee. The employment agreements run through June 30, 2025.
On April 1, 2020, the Company entered into employment agreements with both Mark Fuller and Jay Wright (the “Two Officers”). The agreements have a term of three years. Pursuant to the agreements, each of the Two Officers have a base salary of $240,000 per year and may be increased to $25,000 per month upon reaching an annualized revenue run rate of $25,000,000 or greater (which occurred in 2021), $30,000 per month upon reaching an annualized revenue of $50,000,000 or greater (which occurred in March, 2023), or $40,000 per month upon reaching an annualized revenue run rate of $75,000,000 or greater.
The Company shall pay to the Two Officers a cash bonus equal to the lesser of (i) one percent (1%) of the trailing twelve months revenues of each company acquired during the term of the employment agreement, or (ii) four percent (4%) of the trailing twelve month EBITDA of each business acquired during the term of the employment agreement, provided that, for a bonus to be due, such acquisition must be accretive to the Company on both a revenue per share and EBITDA per share basis. Additionally, the Company shall issue 1 warrant to each of the Two Officers for each $1 of revenue acquired in any
such acquisition with a 7-year term and a strike price equal to the price used in such acquisition or if no stock is used, the 30-day moving average closing price of the Company’s stock.
An additional bonus of $50,000 and 500,000 warrants with a $2.00 strike price shall be paid to the the Two Officers upon the Company commencing trading on either the Nasdaq or the NYSE American (which occurred on October 13, 2022), and an additional bonus of $125,000 and 1,250,000 warrants with a $2.40 strike price shall be paid to each of the Two Officers upon the Company joining the Russell 3000 and/or Russell 2000 stock index(ices).
On July 1, 2021, the Company entered into an employment agreement with its Chief Growth Officer for a period of four years, expiring June 30, 2025. Pursuant to the agreements, the Chief Growth Officer has a base salary of $250,000 per year and may be increased to $25,000 per month upon the Navy division reaching an annualized revenue run rate of $25,000,000 or greater (which occurred in 2021), $30,000 per month upon the Navy division reaching an annualized revenue of $60,000,000 or greater, or $40,000 per month upon the Navy division reaching an annualized revenue run rate of $100,000,000 or greater.
The Chief Growth Officer is entitled to a bonus at the discretion of the Board of Directors annually. In addition, the Chief Growth Officer was granted 1,500,000 stock options, which 750,000 are considered time based grants over a vesting period of four years; and 750,000 are performance based grants as follows: (a) 250,000 upon the closing of an acquisition in the Navy division of a company with annualized revenue of $12 million or greater; (b) 250,000 upon the Navy division achieving $25 million in revenue and $2.5 million in EBITDA in any 12 month period; and (c) 250,000 upon the overall Company achieving $100 million in revenue run rate based on quarterly performance (i.e. $25 million in any calendar quarter).
On August 5, 2021, the Company and the former executive of Merrison (the “Executive”) entered into an employment agreement for a period of three years through August 5, 2024. Under the employment agreement, the Executive shall be paid a base salary of $220,000 annually and receive 150,000 stock options. In addition, the Executive will be provided a bonus of $80,000 payable annually on August 31 each year, starting August 31, 2022, if and only if Merrison maintains an annualized net income of $500,000 for the one-year period ending on the applicable August 31.
On August 12, 2021, the Company entered into several employment agreements for three-year periods with the two executives of SSI as well as three key management personnel. These agreements all contain base salaries and bonus criteria. In addition, the three key management personnel received 300,000 stock options each, of which one of those three retired December 31, 2021.
On April 25, 2022, the Company entered into an employment agreement with its Chief Financial Officer (“CFO”). The employment agreement has a term of three years and five days and automatically renews for successive one-year periods unless terminated by the Company or the CFO, with 90 days advance notice of its intent not to renew. The agreement provides for an annual base salary of $275,000 (the “CFO Base Salary”). The CFO Base Salary will increase as follows: (i) $25,000 per month upon the Company achieving an annualized revenue run rate of $50,000,000 or greater (which occurred in March, 2023); (ii) $35,000 per month upon the Company achieving an annualized revenue run rate of $75,000,000 or greater; (iii) $40,000 per month upon the Company reaching an annualized revenue run rate of $150,000,000 or greater and EBITDA margin of no less than 7%; and (iv) $45,000 per month upon the Company reaching an annualized revenue run rate of $300,000,000 or greater and adjusted EBITDA margin of no less than 8%.
Additionally, the CFO shall be eligible to earn a performance bonus at the discretion of the Board of the Company with target bonuses that are the following percentages of CFO Base Salary based on certain performance criteria set forth in the employment agreement: (i) 50% of CFO Base Salary of less than $35,000 per month; (ii) 60% of CFO Base Salary of $35,000 to less than $40,000 per month; and (iii) 100% of CFO Base Salary of $40,000 or more per month. The performance criteria include (a) ensure on time filing of all periodic filings (Form 10Q and Form 10K) and event driven filings (Schedule 13(d), Section 16 filings (Forms 3, 4, and 5) and Form 8K); (b) ensure on time filings and payment of all federal, state and local tax obligations; and (c) prepare an annual consolidated draft budget based on subsidiary budgets by October 31 each year. The CFO is entitled to earn an additional bonus of (i) $50,000 and 500,000 warrants to purchase the Company’s common stock with an exercise price of $2.00 upon the Company’s common stock trading on any tier of the Nasdaq or the New York Stock Exchange (which occurred on October 13, 2022), and (ii) $100,000 and 750,000 warrants to purchase the Company’s common stock with an exercise price of $2.40 upon the Company joining the Russell 3000 and/or Russell 2000 stock index(ices). The Board of the Company may pay an additional bonus (separate from any target) in its sole discretion.
As an additional incentive for entering into the employment agreement, the CFO was granted 1,800,000 stock options to purchase the Company’s common stock at an exercise price of $3.80 per share which vest ratably over the first 36 months of employment with the Company.
On March 22, 2023, the Company entered into a three year employment agreement with an executive in connection with the GTMR Acquisition. The agreement provides an annual base salary of $200,000 and bonus criteria. As an additional incentive for entering into the employment agreement, the executive received 300,000 incentive stock options issued pursuant to the terms of the Stock Incentive Plan.
Note 15: Income Taxes
The following table summarizes the significant differences between the U.S. federal statutory tax rate and the Company’s effective tax rate for financial statement purposes for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| Federal income taxes at statutory rate | 21.00 | % | | 21.00 | % | | 21.00 | % |
| State income taxes at statutory rate | 2.20 | % | | 3.50 | % | | 7.61 | % |
| Change in tax rate | (0.80) | % | | (2.90) | % | | (1.58) | % |
| Permanent differences | (3.60) | % | | (7.70) | % | | (0.98) | % |
| Other | 0.50 | % | | (1.70) | % | | (0.04) | % |
| Goodwill impairment | (6.30) | % | | — | % | | — | % |
| Change in valuation allowance | (6.40) | % | | (17.90) | % | | — | % |
| Totals | 6.60 | % | | (5.70) | % | | 26.01 | % |
The following is a summary of the net deferred tax asset (liability) as of December 31:
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| Deferred tax assets: | | | | | |
| Deferred interest | $ | 698,231 | | | $ | — | | | $ | — | |
| Lease liabilities | 160,042 | | | 8,973 | | | — | |
| Accrued expenses | 352,346 | | | 148,776 | | | 95,673 | |
| Stock compensation | 3,530,993 | | | 3,008,318 | | | 2,358,218 | |
| Transaction costs | 44,665 | | | 41,817 | | | 53,881 | |
| Other | 160 | | | 149,153 | | | 2,407 | |
| Total deferred tax assets | 4,786,437 | | | 3,357,037 | | | 2,510,179 | |
| | | | | |
| Deferred tax liabilities: | | | | | |
| Intangible assets | (1,348,275) | | | (939,607) | | | (1,334,460) | |
| ROU Assets | (156,788) | | | (9,052) | | | — | |
| Property and equipment | (55,164) | | | (8,569) | | | (14,312) | |
| Debt discount | (256,788) | | | (741,579) | | | (400,064) | |
| Cash to accrual method change | (136,667) | | | (43,443) | | | (151,310) | |
| | | | | |
| Total deferred tax liabilities | (1,953,682) | | | (1,742,250) | | | (1,900,146) | |
| | | | | |
| Valuation allowance | $ | (2,839,047) | | | $ | (1,614,787) | | | $ | — | |
| | | | | |
| Net deferred tax assets (liabilities) | $ | (6,292) | | | $ | — | | | $ | 610,033 | |
| | | | | |
A full valuation allowance was established in the second quarter of 2022 due to the uncertainty of the utilization of deferred tax assets in future periods. In evaluating the Company’s ability to realize the deferred tax assets, management considered
all available positive and negative evidence, including cumulative historic earnings, reversal of temporary differences, projected taxable income and tax planning strategies. The Company’s negative evidence, largely related to the Company's historical pre-tax net losses, currently outweighs its positive evidence of future taxable income therefore it is more-likely-than-not that the Company will not realize a significant portion of our deferred tax assets. The amount of the deferred tax asset to be realized in the future could however be adjusted if objective negative evidence is no longer present.
The Company classifies accrued interest and penalties, if any, for unrecognized tax benefits as part of income tax expense. The Company did not accrue any penalties or interest as of December 31, 2023 and 2022.
The provision (benefit) for income taxes for the years ended December 31 are as follows:
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| Current | $ | 223,049 | | | $ | 209,563 | | | $ | 238,928 | |
| Deferred | (1,480,166) | | | 610,033 | | | (2,895,571) | |
| | | | | |
| Total | $ | (1,257,117) | | | $ | 819,596 | | | $ | (2,656,643) | |
Note 16: Subsequent Events
On January 25, 2024 the Company entered into a securities purchase agreement (the “SPA”) with an institutional investor, pursuant to which the Company agreed to sell and issue, in a registered direct offering, an aggregate of (i) 5,243,967 shares of the Company’s common stock, at a purchase price of $0.32 per share and accompanying warrant (the “Warrant”) and (ii) 3,193,534 pre-funded warrants (the “Pre-funded Warrant(s)”) to purchase up to an aggregate of 3,193,534 shares of common stock at a purchase price of $0.319 per Pre-funded Warrant and accompanying Warrant, for aggregate gross proceeds to the Company of approximately $2.7 million, before deducting the placement agent fees and estimated offering expenses payable by the Company (the “Registered Offering”).
Pursuant to the terms of the SPA, in a concurrent private placement (the “Private Placement” and together with the Registered Offering, the “Offering”), the Company also sold and issued to the Purchaser warrants (the “Warrants”) to purchase up to 8,437,501 shares of common stock. The Warrants will become exercisable upon receipt of shareholder approval, expire five years from such approval, and have an exercise price of $0.35 per share. The shares, the Pre-Funded Warrants, and the Pre-Funded Warrant Shares are being offered pursuant to a shelf registration statement on Form S-3 (File No. 333-275840), which was declared effective by the U.S. Securities and Exchange Commission (the “SEC”) on December 12, 2023, and a related prospectus supplement dated January 25, 2024, related to the Registered Offering. The Offering closed on January 29, 2024.
Pursuant to a placement agency agreement dated as of January 25, 2024 (the “Placement Agency Agreement”), the Company engaged Maxim Group LLC (“Maxim”) to act as the lead placement agent in connection with the Offering. At closing, the Company paid Maxim (i) a cash fee equal to 7.0% of the aggregate gross proceeds of the Offering and (ii) reimbursed Maxim for all reasonable and documented out-of-pocket expenses of $60,000, which included the reasonable fees, costs, and disbursements of its legal counsel.
On February 13, 2024 the Company paid the outstanding principal and accrued interest owed on the 2023 Note Payable to Crom in the amount of $847,000.
On February 16, 2024 the Company entered into a letter agreement to (i) extend the maturity date from December 31, 2024 to August 1, 2025 on the note payable dated August 12, 2021 in the principal amount of $400,000 that was issued in connection with the acquisition of SSI and (ii) require monthly principal payments of $50,000 per month for eight months commencing on the maturity date. All other terms of the note payable remain unchanged.
On February 15, 2024 the Company entered into an agreement with the former shareholders of SSI concerning, among other things, the amount and timing of the earnout payment owed under the terms of the agreement and plan of merger dated August 12, 2021 between the Company, SSI, and the other parties named therein. With respect to the earnout payment, the parties agreed to settle the amount for a total of $720,000, with an initial payment of $180,000 to be made by the Company at signing of the agreement, plus monthly payments thereafter of $20,000 plus interest payable at 5% per annum for 27 months. As a result, $380,000 is reflected in current liabilities and $340,000 is reflected in non-current liabilities.
On February 22, 2024 the Company entered into a $4,000,000 revolving credit facility with Live Oak Banking Company that bears interest at prime plus 2% interest which matures on February 22, 2025 (the “New Live Oak Revolver). The New Live Oak Revolver replaces the $950,000 revolving credit facility dated April 4, 2022 with Live Oak Banking Company with a maturity date of March 28, 2029. The Company rolled over approximately $625,000 of the principal balance outstanding on the prior revolving credit facility and made payments totaling $1,209,617 to the holders of two notes payable referred to in the next two paragraphs.
On February 22, 2024 the Company entered into an agreement to extend the maturity date from September 30, 2024 to August 31, 2026 on the note payable dated November 21, 2019 in the principal amount of $5,600,000 and the note payable dated February 28, 2022 in the principal amount $400,000. Additionally, the per annum interest rate on the Eisiminger Notes was set at 7.5% through February 1, 2025, after which it increases to 8.0%. All other terms of the notes payable remain unchanged. The Company accessed funds available on the New Live Oak Revolver to pay the outstanding principal and interest in full on the note payable dated April 6, 2023 in the principal amount of $400,000.
The Company accessed funds available on the New Live Oak Revolver to pay $809,617 owed to The Buckhout Charitable Remainder Trust under the terms of the amended convertible promissory note payable in the principal amount of $3,209,617 which matures on September 30, 2024. Simultaneously therewith, the Company and The Buckhout Charitable Remainder Trust entered into a new note payable in the principal amount of $2,400,000 which matures on August 31, 2026, and accrues interest at a per annum rate of 5% through January 1, 2025, 8% per annum through January 1, 2026, and 12% per annum thereafter. The principal amount shall be amortized at the rate of $100,000 per month, commencing in September 2024. The terms of the new note payable to The Buckhout Charitable Remainder Trust do not permit the principal amount to be converted into common stock.
On March 12, 2024, the Board of Directors approved the extension of the term of the Two Officers employment agreements until June 30, 2024. The employment agreements are described in Note 14 Commitments.