Castellum Inc

Previous 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".

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 "Prior Revolving Credit Facility"). The Company rolled over approximately $625,000 of the principal balance outstanding on the Prior Revolving Credit Facility and was advanced an additional amount of $904,793, the majority of which was used to make a partial payment of $809,617 on the Buckhout Remainder Charitable Trust convertible promissory note. See Note 6, "Convertible Promissory Notes - Related Party".

Previous wording

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 wording

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

Previous wording

Cost of Revenues include direct costs incurred to provide goods and services related to contracts, specifically labor, contracted labor, materials, and other direct costs, which includes rent, insurance, and software licenses. Cost of Revenues related to contracts is recognized as expense when incurred or at the time a performance obligation is satisfied.

Current wording

Cost of Revenues include direct costs incurred to provide goods and services related to contracts, specifically labor, contracted labor, materials, and other direct costs, which includes rent, insurance, and software licenses. Cost of Revenues related to contracts is recognized as an expense when incurred or at the time a performance obligation is satisfied.

Previous wording

•General and administrative expenses consist primarily of corporate and administrative labor expenses, administrative bonuses, legal expenses, IT expenses, and insurance expenses.

Current wording

•General and administrative expenses consist primarily of corporate and administrative labor expenses, administrative bonuses, legal expenses, information technology ("IT") expenses, and insurance expenses.

Previous wording

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 wording

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

Previous 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.

Current wording

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

Previous wording

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 wording

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

Previous wording

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 wording

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

Previous wording

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 wording

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

Previous 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.

Current wording

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

Previous 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").

Current wording

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

Previous wording

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 wording

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

Previous 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.

Current wording

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

Previous 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.

Current wording

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

Previous 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.

Current wording

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

Previous 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.

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 September 30, 2024, the Company had $87,565,951 of funded, unfunded, and scheduled priced options. We expect to recognize approximately 38.0% of the remaining performance obligations over the next 12 months, and approximately 63.0% over the next 24 months. Including priced options that have been awarded but not yet scheduled of $28,474,144, our grand total backlog is $116,040,095. The remainder is expected to be recognized thereafter. As with all government contracts there is no guarantee the customer will have future funding or exercise their contract option in the out-years. Our backlog includes orders under contracts that in some cases extend for several years. Congress generally appropriates funds for our clients on a yearly basis, even though their contracts with us may call for performance that is expected to take a number of years to complete. As a result, contracts typically are only partially funded at any point during their term and all or some of the work to be performed under the contracts may remain unfunded unless and until the U.S. Congress makes subsequent appropriations and the procuring agency allocates funding to the contract.

Previous wording

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

Current wording

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

Previous 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.

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. On August 15, 2024, the Company modified the terms of the New Live Oak Revolver with Live Oak Bank under which the borrowing capacity is reduced from $4,000,000 to $2,000,000.

Previous wording

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

Current wording

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

Previous wording

•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 wording

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

Previous 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.

Current wording

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

Previous 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.

Current wording

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

Previous 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.

Current wording

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

Previous wording

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 wording

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

Previous 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.

Current wording

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

Previous wording

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.

Current wording

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 September 30, 2024, our self-insurance reserve estimate is $79,217.