Castellum, Inc.

Note 3: Disposition

Since January 1, 2024, the Company has completed the following disposition to achieve its business purposes as discussed in Note 1.

MFSI

On September 11, 2024, the Company entered into a stock purchase agreement with Lead-Risk Millenia, LLC (the "Buyer") for the sale of one of its subsidiaries, MFSI (the "MFSI Divestiture"). The stock purchase agreement, approved by the Board of Directors on September 13, 2024, was for the purchase and sale of 100% of the issued and outstanding stock of MFSI, which became effective on September 16, 2024. The stock purchase agreement required an initial cash payment of $15,000. Additionally, the Company will receive future consideration equal to 6% of all revenue generated by MFSI until September 30, 2029, or until total payments reach $705,000, whichever comes first. As part of the MFSI Divestiture, the Company retained all of MFSI's cash deposits and accounts receivable in excess of $150,000.

Management estimated the present value of future consideration to be received, recognizing short and long term components of a receivable, which we will accrete over time and reassess periodically. An 8.5% discount rate was applied to calculate the present value of the receivable, totaling $223,249 ("Anticipated Receivable"). The Anticipated Receivable is revalued each quarter. The Company recorded a gain of $39,234 from the MFSI Divestiture. The balance of the Anticipated Receivable, accounts receivable in excess of $150,000, and any payments made by the Company on behalf of the Buyer, are reflected in Due from Buyer on the Consolidated Balance Sheets.

After considering qualitative and quantitative aspects of MFSI and its sale relative to the guidance of ASC 205-20, Presentation of Financial Statements - Discontinued Operations, Management concluded MFSI should not be reported or disclosed as a discontinued operation. Further, since MFSI represented less than 5% of the total revenue for the Company, it was deemed immaterial to the Company's financial statements, and as such, pro forma financial statements are not required.

Note 4: Fixed Assets

Fixed assets consisted of the following as of March 31, 2025 and December 31, 2024:

Depreciation expense for the three months ended March 31, 2025 and March 31, 2024, was $22,650 and $41,261, respectively.

Note 5: Intangible Assets and Goodwill

Intangible assets consisted of the following as of March 31, 2025 and December 31, 2024:

The intangible assets with the exception of the trademarks were recorded as part of the acquisitions of Corvus, MFSI, Merrison, SSI, LSG, and GTMR. Amortization expense for the three months ended March 31, 2025 and March 31, 2024 was $355,537 and $556,724, respectively. Upon the MFSI Divestiture as disclosed in Note 3, “Disposition”, the intangible assets of MFSI were removed. 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 March 31 are as follows:

The activity of goodwill for the three months ended March 31, 2025, is as follows:

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. There wereno additions of goodwill for the three months ended March 31, 2025.

Note 6: Notes Payable

Our notes payable consists of the following as of March 31, 2025 and December 31, 2024:

(a)On February 22, 2024, as a result of amending the previous notes, as detailed Part II, Item 8 “Financial Statements and Supplementary Data”, Note 7 "Notes Payable", of our Annual Report on Form 10-K for the year-ended December 31, 2024, the Company entered into a new note (the "2024 Eisiminger Note"), with a principal balance of $6,000,000, maturing on August 31, 2026, and bearing interest at 7.5% per annum until February 1, 2025, after which the interest rate will increase to 8% per annum.

(b)On February 22, 2024, the Company and the Buckhout Charitable Remainder Trust entered into a new note payable in the principal amount of $2,400,000 (the "Buckhout February 2024 Note") 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 will be amortized at the rate of $100,000 per month, commencing in September 2024 until the final payment is made in August 2026. The terms of the Buckhout February 2024 Note do not permit the principal amount to be converted into common stock.

Interest expense for the three months ended March 31, 2025 and March 31, 2024 was $153,808 and $233,510, respectively. Accrued interest on the notes payable as of March 31, 2025 and March 31, 2024 was $0.

Future principal payments are scheduled to be $900,000 in 2025, with the remainder being paid off in 2026. Refer to Note 14, "Subsequent Events" for additional information regarding changes to the 2024 Eisiminger Note and the pay off of the Buckhout February 2024 Note.

Note 7: Note Payable – Related Party

The Company entered into a note payable with a related party in August 2021 with balances as of March 31, 2025 and December 31, 2024, as follows:

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 and (ii) require subsequent monthly principal payments of $50,000 foreight months commencing on the maturity date, with the final payment by March 31, 2026. All other terms of the note payable remain unchanged. As a result, $400,000 is reflected in current liabilities.

Interest expense for the three months ended March 31, 2025 and 2024, was $4,932 and $4,973, respectively.

Note 8: Revolving Credit Facility

On April 4, 2022, the Company secured a $950,000 revolving credit facility with Live Oak Banking Company ("Live Oak Bank" and the “Revolving Credit Facility”). The Revolving Credit Facility was to mature 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. As of December 31, 2023, the Company had $625,025 outstanding on the Revolving Credit Facility.

On February 22, 2024 the Company entered into a $4,000,000 revolving credit facility with Live Oak Bank that bears interest at prime plus 2% interest and matures on February 22, 2025 (the “New Live Oak Revolver"). The New Live Oak Revolver replaced the Revolving Credit Facility. The Company rolled over the principal balance outstanding of approximately $625,000 on the Revolving Credit Facility and was advanced an additional amount of $904,793. As of December 31, 2024, the total amount outstanding on the New Live Oak Revolver was $1,999,944.

Effective August 15, 2024, the Company modified the terms of the New Live Oak Revolver with Live Oak Bank. Under the terms of the modified agreement, the Company is required to (i) establish a collateral account with a balance of not less than $250,000 until such time as the senior debt service covenant is replaced by a total debt service covenant of 1.15:1.00 at which time funds shall be released at lender's sole discretion, (ii) modified the frequency of the reporting of the borrowing base certificate from once a month to twice a month, and (iii) reduced the borrowing capacity from $4,000,000 to $2,000,000.

On February 13, 2025, the Company fully repaid the New Live Oak Revolver with Live Oak Bank in the amount of $1,989,986 Following this payment, the line of credit was closed and the restricted cash was released to the Company’s checking account. The Company has no remaining obligations under the New Live Oak Revolver.

Interest expense for the three months ended March 31, 2025 and 2024, was $28,658 and $14,402, respectively.

Note 9: Due to Seller

As part of the acquisition of SSI (the "SSI Acquisition"), the Company was obligated to pay an earnout contingent on the results of operations of SSI through August 2023. On February 15, 2024, the Company entered into an agreement with the former shareholders of SSI concerning the amount and timing of the contingent earnout included in total consideration for the SSI Acquisition which closed in August 2021. The parties agreed to settle the amount for a total of $720,000, with an initial payment of $180,000 that was made by the Company at signing of the agreement, plus starting in March 2024, monthly payments of $20,000 plus interest payable at 5% per annum for 27 months. As a result, $240,000 is recorded as Due to Seller in current liabilities and $40,000 is reflected in non-current liabilities as of March 31, 2025. Prior to the February 15, 2024 agreement, this earnout was recorded as Contingent Earnout on the Consolidated Balance Sheets.

Note 10: Stockholders’ Equity

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 a Series C Preferred Stock.

Series A Preferred Stock

The Company has designated 10,000,000 shares of Series A Preferred Stock, par value of $0.0001. As of March 31, 2025 and December 31, 2024, the Company has 5,875,000 shares of Series A Preferred Stock issued and outstanding, which is convertible into 587,500 shares of the Company's common stock.

For the three months ended March 31, 2025 and 2024, the Company recognized $18,269 and 18,269, respectively, in Series A dividends, all of which have been paid as of March 31, 2025.

Series B Preferred Stock

The Company has designated 10,000,000 shares of Series B Preferred Stock, par value of $0.0001. As of March 31, 2025 and December 31, 2024, the Company has 0 shares of Series B Preferred Stock issued and outstanding.

Series C Preferred Stock

The Company has designated 10,000,000 shares of Series C Preferred Stock, par value of $0.0001. As of March 31, 2025, the Company has 570,000 shares of Series C Preferred Stock issued and outstanding, which is convertible into 356,250 shares of the Company's common stock. As of December 31, 2024, the Company had 770,000 shares of Series C Preferred Stock issued and outstanding.

For the three months ended March 31, 2025, the Company recognized $8,715 in Series C dividends, all of which have been paid as of March 31, 2025.

Common Stock

The Company has 3,000,000,000 shares of common stock, par value $0.0001 authorized. The Company has 86,036,874 and 77,076,129 shares issued and outstanding as of March 31, 2025, and December 31, 2024, respectively.

On January 25, 2024, the Company entered into a securities purchase agreement 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 (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 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”). The Pre-funded Warrants were sold at an offering price of $0.319 per Pre-funded Warrant and are exercisable at a price of $0.001 per share.

In a concurrent private placement, the Company agreed to issue to the same institutional investor, for each ordinary share and Pre-funded Warrant purchased in the offering, an additional ordinary share purchase warrant (“Regular Warrants”). The Regular Warrants have an exercise price of $0.35 and were exercisable to purchase an aggregate of 8,437,501 shares of common stock. The Regular Warrants are exercisable forfive years. All Pre-funded and Regular Warrants have been exercised as of March 31, 2025.

On January 3, 2025, a member of the Company’s Board of Directors, exercised stock options at $0.212 per share for 110,028 shares of common stock.

In January 2025, two holders of the Company’s Series C Preferred Stock, converted 200,000 shares of Series C Preferred Stock into 125,000 shares of common stock at a conversion rate of 0.625 shares of Common Stock per share of Series C Preferred Stock.

On February 12, 2025, an investor exercised an aggregate of 1,080,717 warrants to purchase 1,080,717 shares of the Company’s common stock which resulted in proceeds to the Company of $1. Prior to this exercise, the treatment of these warrants was evaluated under ASC 260-10, Earnings Per Share — Overall. Under this guidance, shares issuable for little or no cash consideration are considered outstanding common shares and are included in the computation of basic earnings per share from the date they are granted. Accordingly, the exercise of these warrants does not impact the Company's earnings per share calculation.

On January 10, 2025, the Company filed a universal shelf registration on Form S-3 (File No. 333-284205), which was declared effective by the SEC on January 24, 2025, pursuant to which the Company may offer and sell up to $100,000,000 of equity and debt securities.

On March 19, 2025, the Company closed on the public offering (the "Public Offering") of 4,500,000 units ("Unit(s)") at a public offering price of $1.00 per Unit. Each Unit consisted of one share of common stock and one warrant to purchase one share of common stock (the "2025 Warrants"). The 2025 Warrants are immediately exercisable at $1.08 per share and will expire 60 days from the date of issuance. The shares of common stock and 2025 Warrants are immediately separable and were issued separately. Gross proceeds from the Public Offering were approximately $4.5 million before deducting placement agent fees and offering expenses. Castellum intends to use the net proceeds of the offering for working capital and general corporate purposes.

As of March 31, 2025,1,145,000 of the 2025 Warrants issued above were exercised at $1.08 per share, for gross proceeds of $1.2 million before deducing placement agent fees.

During the three months ended March 31, 2025, the Company recorded an obligation to issue 515,464 restricted shares of common stock, that vest ratably over a period ofone year, to its Board of Directors (the "Board") for their service on the Board from January 1, 2024, through June 30, 2024. The total expense booked to record this obligation was $146,768. The shares were not issued as of March 31, 2025.

During the three months ended March 31, 2025,8,960,745 shares of common stock were issued.

Warrants

The Pre-funded Warrants were immediately exercisable and did not have an expiration date. As noted above, the Company sold Pre-funded Warrants to purchase up to an aggregate of 3,193,534 shares of common stock at an offering price of $0.319 per Pre-funded Warrant, which are exercisable at a price of $0.001 per share. As previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2024, all Pre-funded Warrants have been exercised.

The Regular Warrants became exercisable on March 20, 2024, upon effectiveness of shareholder approval which was obtained on February 12, 2024. The Regular Warrants would have expired on March 20, 2029, and had an exercise price of $0.35 per share.6,437,501 of the Regular Warrants were exercised in 2024. The remaining 2,000,000 warrants were exercised in February of 2025 to purchase 2,000,000 shares of the Company’s common stock which resulted in aggregate proceeds to the Company of $700,000. All warrants held by this investor have now been fully exercised.

On February 12, 2025, an investor exercised an aggregate of 1,080,717 warrants to purchase 1,080,717 shares of the Company’s common stock which resulted in proceeds to the Company of $1. The treatment of these warrants was accessed under ASC 260-10, Earnings Per Share—Overall, where shares issuable for little or no cash consideration shall be considered outstanding common shares and are included in the computation of basic earnings per share since they were originally granted.

Of the 4,500,000 2025 Warrants issued during the public offering in March 2025,1,145,000 warrants were exercised at $1.08 per share prior to March 31, 2025. The remaining 3,355,000 warrants will expire on May 19, 2025, if not exercised prior to that time.

The following table represents a summary of warrants for the three months ended March 31, 2025 and the year ended December 31, 2024:

Options

The Company on November 9, 2021, approved the 2021 Stock Incentive Plan (the "Plan"), that authorized the Company to issue up to 2,500,000 shares of the Company's common stock in the form of restricted stock, stock options, and other stock awards as set forth in the Plan. On November 9, 2023 the Board of Directors approved an amendment to the 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. As of March, 31, 2025,5,887,500 stock options have been granted under the Amended Plan.

On March 11, 2025, the Board approved an amendment to the Amended Plan to further increase the aggregate number of shares available for issuance from 6,000,000 to 9,000,000 (the "Second Plan Amendment"). The Second Plan Amendment is subject to the approval of the Company's shareholders at the Company's 2025 annual meeting of shareholders to be held on May 28, 2025.

The following represents a summary of options for the Amended Plan and additional options granted outside of the Amended Plan, for the three months ended March 31, 2025 and the year ended December 31, 2024:

During the three months ended March 31, 2025, the Company recognized $1,179,209 of noncash stock based compensation related to the vesting of service-based stock options.125,000 options were exercised during the three months ended March 31, 2025.

The fair value of each option is estimated using the Black-Scholes valuation model. Changes to these inputs could produce a significantly higher or lower fair value measurement. The following assumptions were used for the periods as follows:

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. U.S. 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, and accounts payable approximates their carrying value.

On April 4, 2022, the Company issued common stock, a convertible note, and warrants in a SPA with Crom (respectively, the "2022 Crom Note", the "2022 Crom Warrants, and the “2022 Crom SPA”). The Company had evaluated the conversion option liability in the 2022 Crom Note and the 2022 Crom Warrant 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 2022 Crom Warrants were not affected. Concurrent with the termination of the 2022 Crom SPA, the Company issued common stock, a note payable with Crom ("2023 Note Payable"), and 2023 Crom Warrants in the 2023 Crom SPA ("2023 Crom Warrants"). The Company evaluated the conversion option in the 2023 Note Payable and the 2022 Crom 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. In 2024, the 2023 Note Payable was paid in full, thereby extinguishing the conversion feature, and the 2023 Crom Warrants were exercised. The Derivative Liabilities in the tables below include only the 2022 Crom Warrants. Refer to Note 10, “Stockholders’ Equity”, for more detail.

The Company recognized a liability for the estimated fair value of the 2022 Crom Warrants. The estimated fair value of the liability was 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 Company determined that the significant inputs used to value the 2022 Crom Warrants fall within Level 3 of the fair value hierarchy.

In connection with the MFSI Divestiture, as discussed in Note 3, "Disposition", Management estimated the present value of future consideration to be received, using a probability-weighted analysis to determine the amount of the receivable and applying a discount rate that captures the risks associated with the duration of the consideration. The Company determined that the significant inputs used to value the Anticipated Receivable fall within Level 3 of the fair value hierarchy.

The following tables present the Company's financial instruments that are measured at fair value on a recurring basis:

Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of the 2022 Crom Warrants is estimated using a binomial valuation model. The following assumptions were used for the period as follows:

Note 12: Concentrations

Concentration of Credit Risk. 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 allowance for credit losses based upon factors surrounding the credit risk of customers, historical trends, and other information.

For the three months ended March 31, 2025 and 2024, the Company had three customers representing 63% and 54% 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 63% and four customers that represent 65% of the total accounts receivable as of March 31, 2025, and December 31, 2024, respectively.

Note 13: Income Taxes

The Company's quarterly provision for income taxes is measured using an estimated annual effective tax rate adjusted for discrete items that occur within the quarter. The effective income tax rate was (6.80)% and (3.40)% for the three months ended March 31, 2025, and 2024, respectively. The decrease in the effective tax for the three months ended March 31, 2025, versus the effective tax rate for the three months ended March 31, 2024 was primarily due to the nondeductible compensation, state taxes and change in valuation allowance.

Note 14: Subsequent Events

On April 17, 2025, the Company entered into an amendment to the letter agreement dated February 24, 2024 with Robert Eisiminger (the "Amended Letter Agreement") pursuant to which Mr. Eisiminger agreed to accept a $2 million principal payment (the "Principal Payment") from the Company ontwo notes payable. As a result of the Principal Payment, the principal balance on the note payable with a principal balance of $400,000 dated February 28, 2022 was reduced tozero, and the principal balance on the 2024 Eisiminger Note was reduced to $4.0 million. The parties also agreed to extend the maturity date from August 31, 2026 to December 15, 2027 on the 2024 Eisiminger Note, and increase the per annum interest rate from 8.0% to 10.0%. All other terms of the 2024 Eisiminger Note remain unchanged.