Castellum Inc
For the period ended Jun 30, 2024. Filed Aug 9, 2024.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Jun 30, 2024 · Filed Aug 9, 2024
CTM$0.38-19.9%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-03-31; filed 2024-05-15.
0001877939-24-000036
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-06-30; filed 2024-08-09.
0001877939-24-000060
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 79 previous paragraphs and 117 current paragraphs.
56 unchanged; 21 reworded; 40 added; 1 removed; 1 previous and 0 current paragraphs rearranged.
Tables are not compared: 3 previous and 4 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (40)
Current report
On November 9, 2023 the Board of Directors approved an amendment to the Company's 2021 Stock Incentive Plan to increase the aggregate number of shares available for issuance from 2,500,000 to 6,000,000 (the "Amended Plan"), which was approved by the Company's shareholders at its annual meeting on May 29, 2024.
Current report
Business Operations and Trends
Current report
Given the recent shifts in the U.S. Presidential and Congressional elections, we believe that the following trends and developments in the USG services industry and our markets may influence our future results of operations:
Current report
•budget deficits and the growing United States ("U.S.") national debt increasing pressure on the USG to reduce federal spending across all federal agencies together with associated uncertainty about the size and timing of those reductions;
Current report
•cost-cutting and efficiency initiatives, current and future budget restrictions, continued implementation of Congressionally mandated automatic spending cuts, and other efforts to reduce USG spending could cause clients to reduce or delay funding for orders for services or invest appropriated funds on a less consistent or rapid basis or not at all, particularly when considering long-term initiatives and in light of current uncertainty around Congressional efforts to craft a long-term agreement on the USG's ability to incur indebtedness in excess of its current limits, and generally in the current political environment, there is a risk that it will not issue task orders in sufficient volume to reach current contract ceilings, alter historical patterns of contract awards, including the typical increase in the award of task orders or completion of other contract actions by the USG in the period before the end of the USG's fiscal year on September 30, delay requests for new proposals and contract awards, rely on short-term extensions and funding of current contracts, or reduce staffing levels and hours of operation;
Current report
•government customers consolidation of smaller contract vehicles into larger contract vehicles could result in a lack of opportunity to re-compete for the existing business if the larger contract vehicle is not held by the Company;
Current report
•delays in the completion of USG’s budget processes for FY 2025, which has in the past and could in the future delay procurement of the products, services, and solutions we provide;
Current report
•changes in the relative mix of overall USG spending and areas of spending growth, with lower spending on homeland security, intelligence, defense-related programs as certain overseas operations end, and continued increased spending on cybersecurity, command, control, communications, computers, intelligence, surveillance, and reconnaissance, advanced analytics, technology integration, and healthcare, including as a result of the presidential and administration transition;
Current report
•consolidation of acquisition authority in areas directly related to the core business of the Company could limit limit access to new business and re-competing for existing business;
Current report
•increased inflationary pressure that could impact the cost of doing business and/or reduce customer buying power;
Current report
•risks related to a possible recession and volatility or instability of the global financial system, including bank failures and the resulting impact on counterparties and business conditions generally;
Current report
•legislative and regulatory changes, or shifts in regulatory priorities as a result of U.S. administration transitions, including limitations on the amount of allowable executive compensation permitted under flexibly priced contracts following implementation of interim rules adopted by federal agencies pursuant to the Bipartisan Budget Act of 2013, which substantially further reduce the amount of allowable executive compensation under these contracts and extend these limitations to a larger segment of our executives and our entire contract base;
Current report
•efforts by the USG to address organizational conflicts of interest and related issues and the impact of those efforts on us and our competitors;
Current report
•increased audit, review, and general scrutiny by USG agencies of government contractors' performance under USG contracts and compliance with the terms of those contracts and applicable laws;
Current report
•the inability of the government to make timely awards on contracts for which the Company has submitted proposals could affect the rate of revenue growth;
Current report
•USG agencies awarding contracts on a technically acceptable/lowest cost basis, which could have a negative impact on our ability to win certain contracts;
Current report
•increased competition from other government contractors and market entrants seeking to take advantage of certain of the trends identified above, and an industry trend towards consolidation, which may result in the emergence of companies that are better able to compete against us;
Current report
•impact of pre-requisite certifications such as cyber maturity model certification, capability maturity model integrationand international organization for standards on certain contract opportunities;
Current report
•restrictions by the USG on the ability of federal agencies to use lead system integrators, in response to cost, schedule, and performance problems with large defense acquisition programs where contractors were performing the lead system integrator role; and
Current report
•increasingly complex requirements and enforcement and reporting landscapes of the Department of Defense including cybersecurity, managing federal health care cost growth, competition, and focus on reforming existing government regulation of various sectors of the economy, such as financial regulation and healthcare.
Current report
In the course of conducting our business operations, we are exposed to a variety of risks. Any of the risk factors we described in Part II, Item 1A, of this Annual Report on Form 10-Q, and Part I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2023 filed on March 21, 2024 have affected or could materially adversely affect our business, prospects, operating results, and financial condition.
Current report
•the six months ended June 30, 2024 compared to the six months ended June 30, 2023.
Current report
Total revenue was $11,522,388 for the three months ended June 30, 2024 as compared to total revenue of $12,475,802 for the three months ended June 30, 2023. The decrease of $(953,414) or (8)%, was driven primarily by lost positions on certain legacy contracts due to reduction in funding.
Current report
Total gross profit was $4,673,208 for the three months ended June 30, 2024 as compared to total gross profit of $5,211,818 for the three months ended June 30, 2023. The decrease of $(538,610), or (10)%, was driven primarily by the decrease in revenues due to lost positions on certain legacy contracts due to reduction in funding and managing labor costs on certain projects.
Current report
Total operating expenses were $6,243,413 for the three months ended June 30, 2024 as compared to total operating expense of $7,105,709 for the three months ended June 30, 2023. The decrease of $862,296, or 12%, was primarily driven by lower salaries and lower audit and tax related fees in 2024 as compared to the same period in the prior year.
Current report
Total other income (expense) was $(155,999) for the three months ended June 30, 2024 as compared to total other (expense) of $(217,835) for the three months ended June 30, 2023. The decrease in (expense) of $61,836 or 28%, was primarily driven by the decrease in the amortization on debt discount on our notes payable, offset by change in expense due to the reduction in the fair value of derivative liability,
Current report
Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023
Current report
Revenue
Current report
Cost of revenues
Current report
Total cost of revenues was $13,668,812 for the six months ended June 30, 2024 as compared to total cost of revenues of $13,163,215 for the six months ended June 30, 2023. The increase of $505,597, or 4%, is in line with the minimal change in revenue noted above due to the acquisitions and higher costs of certain projects.
Current report
Gross Profit
Current report
Operating expenses
Current report
Other expense
Current report
Income tax (expense) benefit
Current report
Income tax expense was $(254,390) for the six months ended June 30, 2024, as compared to a benefit of $1,238,929 for the six months ended June 30, 2023. The increase in expense of $(1,493,319) or (121)% was primarily driven by an increase in the effective tax rate due to the release of a valuation allowance due to the increase in deferred tax liabilities that related to the GTMR Acquisition in the first quarter of 2023.
Current report
•In May 2024, the Company entered in to a program to self-insure some of our health risk up to a certain limit, with the use of a stop loss policy. In June 2024, we made an equity investment in a captive insurance company for $54,533. To mitigate risks, the Company created a reserve as of June 30, 2024, of $66,620 based on one month of claims data. Additionally, the Company has engaged with a third-party actuarial firm to assist in providing reports related to claims incurred but not reported. Losses will be accrued based on the Company's historical claims experience and reports provided by the actuaries.
Current report
•On July 8, 2024, we repaid the balance owed on the Old Live Oak Revolver of $252,678, that was due to mature on August 11, 2024. This payment retired the Old Live Oak Revolver.
Current report
Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023
Current report
Net cash used in investing activities was $(54,534) for the six months ended June 30, 2024, compared to $(427,734) for the six months ended June 30, 2023. The decrease in net cash used in investing activities was primarily due to the investment in a captive insurance company during the six months ended June 30, 2024, compared to investing activities related to the GTMR Acquisition for the six months ended June 30, 2023.
Current report
We currently self-insure for certain losses relating to employee health-care claims. We use captive insurance as a risk-reduction strategy to minimize catastrophic losses. We record a self-insurance liability using an estimate of claims incurred but not yet reported or paid, up to our stop-loss policy, based on historical claims experience and actuarial methods. The assumptions made by management in estimating our self-insurance reserves include consideration of historical cost experience and judgments about the present and expected levels of cost per claim. As we obtain additional information and refine our methods regarding the assumptions and estimates we use to recognize liabilities incurred, we will adjust our reserves accordingly. As of June 30, 2024, our self-insurance reserve estimate is $66,620.
Removed paragraphs (1)
Previous report
There were no new investing activities for the three months ended March 31, 2024, compared to investing activities related to the GTMR acquisition in the three months ended March 31, 2023.
Reworded paragraphs (21)
Previous wording
The following discussion and analysis of our financial condition and results of operations is provided to enhance the understanding of, and should be read together with, our financial statements and related notes included in our Annual Report on Form 10-K for fiscal year 2023 filed with the Securities and Exchange Commission on March 21, 2024 and elsewhere in this Quarterly Report on Form 10-Q, as applicable.
Current wording
The following discussion and analysis of our financial condition and results of operations is provided to enhance the understanding of, and should be read together with, our financial statements and related notes included in our Annual Report on Form 10-K for fiscal year 2023 filed with the Securities and Exchange Commission ("SEC") on March 21, 2024 and elsewhere in this Quarterly Report on Form 10-Q, as applicable.
Previous wording
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 Revolving Credit Facility and was advanced an additional amount of $904,793, the majority of which was used to make a partial payment of $809,617on the Convertible Promissory Note - Related Party (see Note 6).
Current wording
On February 22, 2024 the Company entered into a $4,000,000 revolving credit facility with Live Oak Banking Company ("Live Oak Bank") that bears interest at prime plus 2% interest which matures on February 22, 2025 (the “New Live Oak Revolver). The New Live Oak Revolver replaces the $950,000 revolving credit facility dated April 4, 2022 with Live Oak Bank with a maturity date of March 28, 2029. The Company rolled over approximately $625,000 of the principal balance outstanding on the Revolving Credit Facility and was advanced an additional amount of $904,793, the majority of which was used to make a partial payment of $809,617 on the Buckhout Remainder Charitable Trust convertible promissory note. See Note 6, "Convertible Promissory Notes - Related Party".
Previous wording
On March 8, 2024, the Senate cleared by a 75-22 vote a “minibus” continuous spending resolution for the balance of the U.S. Government fiscal year 2024. This continuing resolution (CR) for spending is the fourth in this fiscal year and enables work to continue on existing contracts. The overall impact on the business through the end of calendar year 2024 is unknown at this point.
Current wording
On March 8, 2024, the Senate cleared by a 75-22 vote an “omnibus” continuous spending resolution for the balance of the USG fiscal year 2024. This continuing resolution ("CR") for spending is the fourth in this fiscal year and enables work to continue on existing contracts. The overall impact on the business through the end of calendar year 2024 is unknown at this point.
Previous wording
•Indirect costs consist of expenses generally associated with bonuses and fringe benefits, including employee health and medical insurance, 401k matching contributions, and payroll taxes.
Current wording
•Indirect costs consist of expenses generally associated with bonuses and fringe benefits, including employee health and medical insurance, 401(k) matching contributions, and payroll taxes.
Previous wording
Total cost of revenues was $6,819,632 for the three months ended March 31, 2024 as compared to total cost of revenues of $5,899,231 for the three months ended March 31, 2023. The increase of $920,401, or 16%, is in line with the change in revenue noted above due to the GTMR acquisition and higher direct costs on lower margin projects.
Current wording
Total cost of revenues was $6,849,180 for the three months ended June 30, 2024 as compared to total cost of revenues of $7,263,984 for the three months ended June 30, 2023. The decrease of $(414,804), or (6)%, is in line with the change in revenue noted above and higher direct costs on lower margin projects.
Previous wording
Income tax (expense) was $(133,859) for the three months ended March 31, 2024 as compared to a benefit $1,225,649 for the three months ended March 31, 2023. The increase in expense of $(1,359,508) or 111% was primarily related to the discrete tax benefit for the decrease of valuation allowance in March 31, 2023, due to the GTMR acquisition.
Current wording
Income tax expense was $(120,531) for the three months ended June 30, 2024, as compared to a benefit $13,280 for the three months ended June 30, 2023. The increase in expense of $(133,811) or 1008% was primarily related to the decrease in permanent adjustments offset by increased profitability during the year as the Company maintains a full valuation allowance against its' deferred tax assets.
Previous wording
Total revenue was $11,335,053 for the three months ended March 31, 2024 as compared to total revenue of $9,937,013 for the three months ended March 31, 2023. The increase of $1,398,040 or 14%, was driven primarily by contributions from the inorganic revenues derived from the GTMR acquisition that occurred late in Q1 2023, partially offset by negative organic growth.
Current wording
Total revenue was $22,857,441 for the six months ended June 30, 2024 as compared to total revenue of $22,412,815 for the six months ended June 30, 2023. The increase of $444,626 or 2%, was driven primarily by organic contributions from the acquisition of GTMR (the "GTMR Acquisition").
Previous wording
Total gross profit was $4,515,421 for the three months ended March 31, 2024 as compared to total gross profit of $4,037,782 for the three months ended March 31, 2023. The increase of $477,639, or 12%, was driven primarily by the increase in revenues due to inorganic growth, from the acquisition of GTMR, and managing labor costs on certain projects.
Current wording
Total gross profit was $9,188,629 for the six months ended June 30, 2024 as compared to total gross profit of $9,249,600 for the six months ended June 30, 2023. The decrease of $(60,971), or (1)%, was driven primarily by the higher margins of certain projects due to managing costs on certain projects and organic contributions from the acquisition of GTMR.
Previous wording
Total operating expenses were $7,186,643 for the three months ended March 31, 2024 as compared to total operating expense of $8,707,091 for the three months ended March 31, 2023. The decrease of $1,520,448, or 17%, was primarily driven by stock based compensation in 2023 paid to executives and expenses related to warrants issued to two officers in connection with the acquisition of GTMR, offset by a slight increase in indirect costs in the first quarter of 2024 compared to the same period in the prior year.
Current wording
Total operating expenses were $13,430,056 for the six months ended June 30, 2024 as compared to total operating expense of $15,812,800 for the six months ended June 30, 2023. The decrease of $(2,382,744), or (15)%, was primarily driven by the decrease in general and administrative expenses caused largely by noncash stock based compensation in 2023 paid to executives and expenses related to warrants issued to two officers in connection with the GTMR Acquisition.
Previous wording
Total other income (expense) was $(1,306,641) for the three months ended March 31, 2024 as compared to total other (expense) of $(879,731) for the three months ended March 31, 2023. The increase in (expense) of $(426,910) or 49%, was primarily driven by an increase in loss on extinguishment of debt of $(822,847), offset by decreases in loss on induced debt conversion of $(300,000) from the prior year, gain from change in fair value of derivative liabilities, and interest expense net of income.
Current wording
Total other expense was $(1,462,639) for the six months ended June 30, 2024 as compared to total other expense of $(1,097,563) for the six months ended June 30, 2023. The increase of $(365,076) or 33%, was primarily driven by an increase in loss on extinguishment of debt of $(822,847), offset by decreases in loss on induced debt conversion of $(300,000) from the prior year, gain from change in fair value of derivative liabilities, and interest expense net of income.
Previous wording
•Priced Options - 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.
Current wording
•Priced Options - Priced contract options represent 100% of the potential revenue value of all scheduled future contract option periods or orders under existing contracts that may be exercised at our clients’ option and for which funding has not been appropriated or otherwise authorized.
Previous wording
Our backlog does not include contracts that have been awarded but are currently under protest and also does not include any task orders under Indefinite Delivery Indefinite Quantity ("IDIQ") contracts, except to the extent that task orders have been awarded to us under those contracts.
Current wording
Our backlog does not include contracts that have been awarded but are currently under protest and also does not include any task orders under Indefinite Delivery Indefinite Quantity contracts, except to the extent that task orders have been awarded to us under those contracts.
Previous wording
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 or unscheduled optional orders. Excluding unscheduled options orders, as of March 31, 2024 the Company had $95 million of funded, unfunded and scheduled priced options. We expect to recognize approximately 42.0% of the remaining performance obligations over the next 12 months, and approximately 68.0% over the next 24 months. Including priced options that have been awarded but not yet scheduled of $46,431,225, our grand total backlog is $141,354,328. 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. Our backlog includes orders under contracts that in some cases extend for several years. Congress generally appropriates funds for our clients on a yearly basis, even though their contracts with us may call for performance that is expected to take a number of years to complete. As a result, contracts typically are only partially funded at any point during their term and all or some of the work to be performed under the contracts may remain unfunded unless and until the U.S. Congress makes subsequent appropriations and the procuring agency allocates funding to the contract.
Current wording
Our total scheduled backlog consists of remaining performance obligations, certain orders under contracts for which the original period of performance has expired, unexercised option periods and other unexercised or optional orders. Excluding unscheduled options orders, as of June 30, 2024, the Company had $86,377,291 of funded, unfunded and scheduled priced options. We expect to recognize approximately 45.0% of the remaining performance obligations over the next 12 months, and approximately 72.0% over the next 24 months. Including priced options that have been awarded but not yet scheduled of $46,431,225, our grand total backlog is $132,808,516. 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. Our backlog includes orders under contracts that in some cases extend for several years. Congress generally appropriates funds for our clients on a yearly basis, even though their contracts with us may call for performance that is expected to take a number of years to complete. As a result, contracts typically are only partially funded at any point during their term and all or some of the work to be performed under the contracts may remain unfunded unless and until the U.S. Congress makes subsequent appropriations and the procuring agency allocates funding to the contract.
Previous wording
•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.
Current wording
•In February 2024, we paid the outstanding principal and accrued interest owed on a note payable to Crom Cortana Fund LLC ("Crom") in the amount of $847,000.
Previous wording
•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”). The New Live Oak Revolver replaces the $950,000 revolving credit facility noted above (“Old Live Oak Revolver”), and we rolled over the $625,025 outstanding principal balance outstanding on the Old Live Oak Revolver and drew an additional amount of $904,793. We also made payments of $1,209,617 to the holders of two notes payable noted below.
Current wording
•In February 2024, we entered into a new $4,000,000 revolving credit facility with Live Oak Bank which matures on February 22, 2025 (the “New Live Oak Revolver”). The New Live Oak Revolver replaces the $950,000 revolving credit facility noted above (“Old Live Oak Revolver”), and we rolled over the $625,025 outstanding principal balance outstanding on the Old Live Oak Revolver and drew an additional amount of $904,793. We also made payments of $1,209,617 to the holders of two notes payable noted below.
Previous wording
As of March 31, 2024, we had $2,250,262 of cash on hand and unused borrowing capacity of $2,470,182 from our New Live Oak Revolver.
Current wording
As of June 30, 2024, we had $2,411,825 of cash on hand and unused borrowing capacity of $2,470,182 from our New Live Oak Revolver.
Previous wording
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 10 in this quarterly report on Form 10-Q.
Current wording
Our material cash requirements from known contractual and other obligations primarily relate to payments on our credit facilities. For information related to these cash requirements, refer to Note 6, "Convertible Promissory Notes - Related Party", Note 7, "Notes Payable", Note 8, "Note Payable - Related Party", Note 9, "Revolving Credit Facility", and Note 10, "Due to Seller and Contingent Earnout" in this Quarterly Report on Form 10-Q.
Previous wording
Shares of our common stock included in our public float as of May 13, 2024 was 23,246,280 which excludes 30,000 restricted shares and 29,753,635 shares held by officers, directors, and affiliates.
Current wording
Shares of our common stock included in our public float as of August 8, 2024 was 30,949,980 which excludes 25,159,948 shares held by officers, directors, and affiliates.
Previous wording
Net cash provided by operating activities was $23,728 for the three months ended March 31, 2024, compared to $(2,427,865) used in operating activities for the three months ended March 31, 2023. This increase in net cash provided by operating activities was primarily due to decreases in our accounts receivable, decrease in stock based compensation and decrease in net loss, offset by an increase in accounts payable for the three months ended March 31, 2024.
Current wording
Net cash provided by operating activities was $772,346 for the six months ended June 30, 2024, compared to $(1,865,051) for the six months ended June 30, 2023. This increase in net cash provided by operating activities was primarily driven by a decrease in stock based compensation, collections of accounts receivable, and decrease in net loss, offset by an increase in accounts payable for the six months ended June 30, 2024.
Previous wording
Net cash provided by financing activities was $395,693, for the three months ended March 31, 2024, versus $485,690 provided by financing activities for the three months ended March 31, 2023. The decrease in net cash provided by financing activities was primarily due to payments on notes payable and payments to sellers from our acquisition of GTMR and SSI, offset by the proceeds from the SPA and an additional draw on the line of credit.
Current wording
Net cash used in financing activities was $(136,828), for the six months ended June 30, 2024, compared to $641,566 provided by financing activities for the six months ended June 30, 2023. The increase in net cash used in financing activities was primarily due to payments on notes payable and payments to sellers from the GTMR Acquisition and the acquisition of Specialty Systems, Inc. ("SSI" and the "SSI Acquisition"), offset by the proceeds from the SPA and an additional draw on the line of credit.
Previous wording
A summary of our critical accounting estimates is included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year-ended December 31, 2023. There have been no material changes to the critical accounting estimates disclosed in our Annual Report on Form 10-K for the year-ended December 31, 2023.
Current wording
A summary of our critical accounting estimates is included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year-ended December 31, 2023. There have been no material changes to the critical accounting estimates disclosed in our Annual Report on Form 10-K for the year-ended December 31, 2023, with the exception of the following.
Rearranged previous paragraphs (1)
Previous report — wording carried elsewhere
Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023