Castellum Inc

Previous wording

The following discussion should be read in conjunction with the historical financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those expressed or contemplated in those forward-looking statements as a result of certain factors, including those set forth under the headings “Forward-Looking Statements” and “Risk Factors” elsewhere in this Annual Report on Form 10-K.

Current wording

The following discussion should be read in conjunction with the historical financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K (“Form 10-K”). The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those expressed or contemplated in those forward-looking statements as a result of certain factors, including those set forth under the headings “Forward-Looking Statements” and “Risk Factors” elsewhere in this Form 10-K.

Previous wording

We are a technology company focused on leveraging the power of information technology to help solve our nation’s most pressing national security challenges. We provide clients in the United States government (“USG”), financial services, healthcare, and other users of large data applications with services which include intelligence analysis, software development, software engineering, program management, strategic and mission planning, information assurance, cybersecurity and policy support, data analytics, and MBSE. In addition to constantly innovating and enhancing our organic capabilities, Castellum is executing strategic acquisitions of technology companies in the areas of cybersecurity, information technology (“IT”), electronic warfare, information warfare, and information operations with businesses in the defense, federal, civilian, and commercial markets that share our passionate commitment to U.S. national security and have a history of bringing exceptional value to their clients.

Current wording

We are a technology company focused on leveraging the power of information technology to help solve our nation’s most pressing national security challenges. We provide clients in the United States (“U.S.) government (“USG”), financial services, healthcare, and other users of large data applications with services which include intelligence analysis, software development, software engineering, program management, strategic and mission planning, information assurance, cybersecurity and policy support, data analytics, and model based systems engineering (“MBSE”). In addition to constantly innovating and enhancing our organic capabilities, Castellum is executing strategic acquisitions of technology companies in the areas of cybersecurity, information technology (“IT”), electronic warfare, information warfare, and information operations with businesses in the defense, federal, civilian, and commercial markets that share our passionate commitment to U.S. national security and have a history of bringing exceptional value to their clients.

Previous wording

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. The Company’s registration statement on Form S-1, as amended (File No. 333-267249) relating to the offering was declared effective by the U.S. Securities and Exchange Commission on October 12, 2022.

Current wording

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. The Company’s registration statement on Form S-1, as amended (File No. 333-267249) relating to the offering was declared effective by the U.S. Securities and Exchange Commission (“SEC”) on October 12, 2022.

Previous wording

Interest expense consists of interest paid to service our convertible promissory notes which include the Amended BCR Trust Note, the Term Loan Promissory Note payable and revolving line of credit to Live Oak Banking Company, two promissory notes payable to Robert Eisiminger, the note payable to Emil Kaunitz, and the note payable to Crom Cortana Fund LLC net of interest earned from investments.

Current wording

Interest expense consists of interest paid to service our convertible promissory notes which include the amended trust note with the Buckhout Charitable Remainder Trust (the “Amended BCR Trust Note”), the term loan promissory note payable and revolving line of credit to the Live Oak Banking Company ("Live Oak Bank") (the “Term Loan Promissory Note Payable” and “Revolving Line of Credit,” respectively), two promissory notes payable to Robert Eisiminger, the note payable to Emil Kaunitz, and the note payable to Crom Cortana Fund LLC (“Crom”) net of interest earned from investments. During 2024, the Amended BCR Trust Note was extinguished resulting in a new note, the note payable to Crom and the Term Loan Promissory Note Payable were paid off, and the two promissory notes payable to Robert Eisiminger were combined into one note payable.

Previous wording

We file 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 IRS and state taxing authorities, generally for three years after they were filed. We have filed our 2021 and 2022 federal and state tax returns.

Current wording

We file 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. We have filed our 2022 and 2023 federal and state tax returns.

Previous wording

Total revenues increased by $3,053,169 or 7.2% to $45,243,812 for the year ended December 31, 2023 from $42,190,643 for the year ended December 31, 2022. This increase in revenue was due to the acquisition of GTMR (“GTMR Acquisition”), partially offset by lost positions on ongoing contracts principally at SSI and Corvus reducing revenue.

Current wording

Total revenues increased by $3,053,169 or 7.2% to $45,243,812 for the year ended December 31, 2023 from $42,190,643 for the year ended December 31, 2022. This increase in revenue was due to the acquisition of GTMR (“GTMR Acquisition”), partially offset by a reduction in revenue from lost positions on ongoing contracts principally at SSI and Corvus.

Previous wording

Total operating expenses increased by $7,782,899 or 28.2% to $35,344,152 for the year ended December 31, 2023 from $27,561,253 for the year ended December 31, 2022. The decrease in indirect cost of $(2,924,288) was driven primarily by a reduction in acquisition based bonuses to certain executives from 2022, as well as cost savings implemented in 2023. The increase in overhead costs of $323,807 is related to increases in lease expense due to the GTMR Acquisition. The increase in general and administrative costs of $4,111,286 consist of increases in non cash stock based compensation granted to certain employees, as well as increases in general and administrative salary expense as we in-sourced certain functions such as accounting and business development. The recognition of goodwill impairment resulted from a loss recorded during the third quarter of 2023. The decrease in the loss from change in fair value of contingent earnout is due to adjustments as we finalized the amount after the earnout period ended in late 2023.

Current wording

Total operating expenses increased by $7,782,899 or 28.2% to $35,344,152 for the year ended December 31, 2023 from $27,561,253 for the year ended December 31, 2022. The decrease in indirect cost of $(2,924,288) was driven primarily by a reduction in acquisition based bonuses to certain executives from 2022, as well as cost savings implemented in 2023. The increase in overhead costs of $323,807 is related to increases in lease expense due to the GTMR Acquisition. The increase in general and administrative costs of $4,111,286 consist of increases in noncash stock based compensation granted to certain employees, as well as increases in general and administrative salary expense as we in-sourced certain functions such as accounting and business development. The recognition of goodwill impairment resulted from a loss recorded during the third quarter of 2023. The decrease in the loss from change in fair value of contingent earnout is due to adjustments as we finalized the amount after the earnout period ended in late 2023.

Previous wording

Other income (expense) decreased by $1,736,036 or (42.1)% to $(2,388,470) for the year ended December 31, 2023 from $(4,124,506) for the year ended December 31, 2022. This decrease was primarily driven by decreases in the fair value of the derivative liability offset by an increase in interest expense due to rate increases during 2023 on our variable rate debt under our agreement with Live Oak Bank.

Current wording

Other income (expense) decreased by $1,736,036 or (42.1)% to $(2,388,470) for the year ended December 31, 2023 from $(4,124,506) for the year ended December 31, 2022. This decrease was primarily driven by decreases in the fair value of the derivative liability offset by an increase in interest expense due to rate increases during 2023 on our variable rate debt under our agreements with Live Oak Bank.

Previous wording

Our total backlog consists of remaining performance obligations, certain orders under contracts for which the original period of performance has expired, unexercised option periods and other unexercised or unscheduled optional orders. Excluding unscheduled options orders, as of December 31, 2023, the Company had $108,014,640 of funded, unfunded and scheduled priced options. We expect to recognize approximately 34% of the remaining performance obligations over the next 12 months, and approximately 57% over the next 24 months. Including priced options that have been awarded but not yet scheduled of $46,431,225, our grand total backlog is $154,445,865. The remainder is expected to be recognized thereafter. As with all government contracts there is no guarantee the customer will have future funding or exercise their contract option in the out-years. Other budget risks are discussed in the Budget Environment. 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 backlog consists of remaining performance obligations, certain orders under contracts for which the original period of performance has expired, unexercised option periods, and other unexercised or unscheduled optional orders. Excluding unscheduled options orders, as of December 31, 2024, the Company had $100,481,693 of funded, unfunded, and scheduled priced options. We expect to recognize approximately 28% of the remaining performance obligations over the next 12 months, and approximately 49% over the next 24 months. Including priced options that have been awarded but not yet scheduled of $19,330,955, our grand total backlog is $119,812,648. 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 “Part I, Item1. U.S. Political, Budgetary, and Regulatory 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 (“Congress”) makes subsequent appropriations and the procuring agency allocates funding to the contract.

Previous wording

We have historically sourced our liquidity requirements with cash flows from operations, borrowings under our current credit facilities, and in October 2022, with an equity issuance through the listing of our common stock on the NYSE American. As of December 31, 2023, we had $1,830,841 of cash and cash equivalents on hand and unused borrowing capacity of $324,975 from our revolving line of credit. In January and February of 2024, we undertook the following significant equity and debt transactions that enhance our liquidity and sources of funds:

Current wording

We have historically sourced our liquidity requirements with cash flows from operations, borrowings under our current credit facilities, and in October 2022, with an equity issuance through the listing of our common stock on the NYSE American. As of December 31, 2024, we had $12,005,048 of cash and cash equivalents on hand and unused borrowing capacity of $0 from our revolving line of credit. During the fiscal year 2024, we undertook the following significant equity and debt transactions that enhanced our liquidity and sources of funds:

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 used cash on hand to pay the outstanding principal and accrued interest owed on a note payable to 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. We also made payments of $1,209,617 to the holders of two notes payable noted below. We have unused borrowing capacity of approximately $2,165,383 under the New Live Oak Revolver.

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 $2,000,000 Revolving Line of Credit , and we rolled over the $625,000 outstanding principal balance on the Revolving Line of Credit and was advanced 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

•In February 2024, we agreed with Robert Eisiminger to extend the maturity dates of two notes payable totaling $6,000,000 from September 30, 2024, to August 31, 2026. We also accessed the New Live Oak Revolver to pay off a third note totaling $400,000.

Current wording

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

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. Commencing in September 2024, we will 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. 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. Commencing in September 2024, we began making monthly principal payments of $100,000 for 24 months.

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 16 under Part II, Item 8, of this Annual Report on Form 10-K.

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, Note 7, Note 8, and Note 9, under Part II, Item 8., Financial Statements of this Form 10-K.

Previous wording

We used $(2,264,447) in operating activities for the year ended December 31, 2023, compared to $990,163 provided by operating activities for the year ended December 31, 2022. This decrease in net cash from operating activities was primarily driven by an increase in net loss, increases in accounts receivables (due to timing of collections), as well as noncash adjustments related to changes in the fair value of derivative liabilities and contingent earnout during the year ended December 31, 2023.

Current wording

Net cash provided by operating activities increased to $1,120,105 for the year ended December 31, 2024, compared to $(2,264,447) used in operating activities for the year ended December 31, 2023. This increase in net cash from operating activities was primarily driven by a decrease in net loss, decreases in accounts receivables (due to timing of collections), as well as noncash adjustments related to changes in the fair value of derivative liabilities during the year ended December 31, 2024, and goodwill impairment recognized during the year ended December 31, 2023.

Previous wording

Net cash used in investing activities increased to $(440,985), for the year ended December 31, 2023, from $(339,282), for the year ended December 31, 2022. The increase in net cash used in investing activities was primarily due to the cash paid in the acquisition of GTMR during 2023.

Current wording

Net cash provided by investing activities increased to $221,356, for the year ended December 31, 2024, from $(440,985), for the year ended December 31, 2023. The decrease in net cash used in investing activities was primarily due to the cash paid in the acquisition of GTMR during 2023.

Previous wording

During the year ended December 31, 2023, we used $(104,623) in financing activities, primarily due to reduction in proceeds from issuance of preferred and common stock, the reduction in proceeds from notes payable, and an increase in payments on notes payable, compared to net cash provided by financing activities of $1,972,100, for the year ended December 31, 2022.

Current wording

During the year ended December 31, 2024, $9,082,746 net cash was provided by financing activities, primarily due to the proceeds from the issuance of common stock, pre-funded warrants, and the exercise of regular warrants, offset by an increase in repayment of notes payable, notes payable - related party, and repayments of amounts due to seller, compared to net cash provided used in financing activities of $(104,623), for the year ended December 31, 2023.

Previous wording

The following is not intended to be a comprehensive list of our accounting policies or estimates. Our significant accounting policies are more fully described in Note 2 —Summary of Significant Accounting Policies to our annual audited consolidated financial statements, included elsewhere in the document. In preparing our financial statements and accounting for the underlying transactions and balances, we apply our accounting policies and estimates as disclosed in the Notes. We consider the policies and estimates discussed below as critical to an understanding of our financial statements because their application places the most significant demands on our judgment, with financial reporting results dependent on estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Specific risks for these critical accounting estimates are described in the following paragraphs. Preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.

Current wording

The following is not intended to be a comprehensive list of our accounting policies or estimates. Our significant accounting policies are more fully described in Part II, Item 8. Financial Statements, Note 2 —Summary of Significant Accounting Policies to our annual audited consolidated financial statements, included elsewhere in the document. In preparing our financial statements and accounting for the underlying transactions and balances, we apply our accounting policies and estimates as disclosed in the Notes. We consider the policies and estimates discussed below as critical to an understanding of our financial statements because their application places the most significant demands on our judgment, with financial reporting results dependent on estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Specific risks for these critical accounting estimates are described in the following paragraphs. Preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.

Previous wording

Our revenue recognition policies are consistent with this five-step framework. Understanding the complex terms of agreements and determining the appropriate time, amount, and method to recognize revenue for each transaction requires judgment. These significant judgments include: (1) determining what point in time or what measure of progress depicts the transfer of control to the customer; (2) estimating contract revenue and costs and assumptions for schedule and technical issues; (3) selecting the appropriate method to measure progress; and (4) estimating how and when contingencies, or other forms of variable consideration, will impact the timing and amount of recognition of revenue. The timing and revenue recognition in a period could vary if different judgments were made.

Current wording

Our revenue recognition policies are consistent with this five-step framework. Understanding the complex terms of agreements and determining the appropriate time, amount, and method to recognize revenue for each transaction requires judgment. These significant judgments include: (1) determining what point in time or what measure of progress depicts the transfer of control to the customer; (2) estimating contract revenue, costs, and assumptions for schedule and technical issues; (3) selecting the appropriate method to measure progress; and (4) estimating how and when contingencies, or other forms of variable consideration, will impact the timing and amount of recognition of revenue. The timing and revenue recognition in a period could vary if different judgments were made.

Previous wording

During the third quarter of 2023, due to decline in stock price, Management determined that a triggering event occurred representing an indicator of goodwill impairment, resulting in a non-cash charge of $6,919,094.

Current wording

During the third quarter of 2023, due to decline in stock price, management determined that a triggering event occurred representing an indicator of goodwill impairment, resulting in a noncash charge of $6,919,094. During 2024, no triggering events were noted.

Previous wording

In determining the grant date fair value of share-based awards, we must estimate the expected volatility, forfeitures, and performance attributes. Since share-based compensation expense can be material to our financial condition, different assumptions and estimates could have a material adverse effect on our financial statements.

Current wording

In determining the grant date fair value of share-based awards, we must estimate the performance attributes. Since share-based compensation expense can be material to our financial condition, different assumptions and estimates could have a material adverse effect on our financial statements.

Previous wording

Refer to Note 1 of the notes to our audited consolidated financial statements included in Part II, Item 8 within this Annual Report on Form 10-K for a discussion of principles of consolidation.

Current wording

Refer to Note 1 of the notes to our audited consolidated financial statements included in Part II, Item 8., Financial Statements within this Form 10-K for a discussion of principles of consolidation.

Previous wording

Refer to Note 1 of the notes to our audited consolidated financial statements included in Part II, Item 8 within this Annual Report on Form 10-K for our assessment of recently issued and adopted accounting standards.

Current wording

Refer to Note 1 of the notes to our audited consolidated financial statements included in Part II, Item 8., Financial Statements within this Form 10-K for our assessment of recently issued and adopted accounting standards.