ctm-20240630000187793912-312024Q2falseNV0.050.05http://fasb.org/us-gaap/2024#DerivativeLiabilitiesCurrenthttp://fasb.org/us-gaap/2024#DerivativeLiabilitiesCurrentxbrli:sharesiso4217:USDiso4217:USDxbrli:sharesxbrli:purectm:segmentctm:contractualArrangementType00018779392024-01-012024-06-3000018779392024-08-0800018779392024-06-3000018779392023-12-310001877939us-gaap:RelatedPartyMember2024-06-300001877939us-gaap:RelatedPartyMember2023-12-310001877939us-gaap:NonrelatedPartyMember2024-06-300001877939us-gaap:NonrelatedPartyMember2023-12-310001877939us-gaap:SeriesAPreferredStockMember2023-12-310001877939us-gaap:SeriesAPreferredStockMember2024-06-300001877939us-gaap:SeriesCPreferredStockMember2024-06-300001877939us-gaap:SeriesCPreferredStockMember2023-12-3100018779392024-04-012024-06-3000018779392023-04-012023-06-3000018779392023-01-012023-06-300001877939us-gaap:PreferredStockMemberus-gaap:SeriesAPreferredStockMember2022-12-310001877939us-gaap:PreferredStockMemberus-gaap:SeriesBPreferredStockMember2022-12-310001877939us-gaap:PreferredStockMemberus-gaap:SeriesCPreferredStockMember2022-12-310001877939us-gaap:CommonStockMember2022-12-310001877939us-gaap:AdditionalPaidInCapitalMember2022-12-310001877939us-gaap:RetainedEarningsMember2022-12-3100018779392022-12-310001877939us-gaap:AdditionalPaidInCapitalMember2023-01-012023-03-3100018779392023-01-012023-03-310001877939us-gaap:WarrantMemberus-gaap:AdditionalPaidInCapitalMember2023-01-012023-03-310001877939us-gaap:WarrantMember2023-01-012023-03-310001877939us-gaap:CommonStockMember2023-01-012023-03-310001877939ctm:GlobalTechnologyManagementResourcesMemberus-gaap:CommonStockMember2023-01-012023-03-310001877939ctm:GlobalTechnologyManagementResourcesMemberus-gaap:AdditionalPaidInCapitalMember2023-01-012023-03-310001877939ctm:GlobalTechnologyManagementResourcesMember2023-01-012023-03-310001877939ctm:SeriesCPreferredSubscriptionAgreementsMemberus-gaap:AdditionalPaidInCapitalMember2023-01-012023-03-310001877939ctm:SeriesCPreferredSubscriptionAgreementsMember2023-01-012023-03-310001877939us-gaap:RetainedEarningsMember2023-01-012023-03-310001877939us-gaap:PreferredStockMemberus-gaap:SeriesAPreferredStockMember2023-03-310001877939us-gaap:PreferredStockMemberus-gaap:SeriesBPreferredStockMember2023-03-310001877939us-gaap:PreferredStockMemberus-gaap:SeriesCPreferredStockMember2023-03-310001877939us-gaap:CommonStockMember2023-03-310001877939us-gaap:AdditionalPaidInCapitalMember2023-03-310001877939us-gaap:RetainedEarningsMember2023-03-3100018779392023-03-310001877939us-gaap:AdditionalPaidInCapitalMember2023-04-012023-06-300001877939us-gaap:CommonStockMember2023-04-012023-06-300001877939us-gaap:RetainedEarningsMember2023-04-012023-06-300001877939us-gaap:PreferredStockMemberus-gaap:SeriesAPreferredStockMember2023-06-300001877939us-gaap:PreferredStockMemberus-gaap:SeriesBPreferredStockMember2023-06-300001877939us-gaap:PreferredStockMemberus-gaap:SeriesCPreferredStockMember2023-06-300001877939us-gaap:CommonStockMember2023-06-300001877939us-gaap:AdditionalPaidInCapitalMember2023-06-300001877939us-gaap:RetainedEarningsMember2023-06-3000018779392023-06-300001877939us-gaap:PreferredStockMemberus-gaap:SeriesAPreferredStockMember2023-12-310001877939us-gaap:PreferredStockMemberus-gaap:SeriesBPreferredStockMember2023-12-310001877939us-gaap:PreferredStockMemberus-gaap:SeriesCPreferredStockMember2023-12-310001877939us-gaap:CommonStockMember2023-12-310001877939us-gaap:AdditionalPaidInCapitalMember2023-12-310001877939us-gaap:RetainedEarningsMember2023-12-310001877939us-gaap:AdditionalPaidInCapitalMember2024-01-012024-03-3100018779392024-01-012024-03-310001877939us-gaap:CommonStockMember2024-01-012024-03-310001877939ctm:PrivateWarrantsMemberus-gaap:AdditionalPaidInCapitalMember2024-01-012024-03-310001877939ctm:PrivateWarrantsMember2024-01-012024-03-310001877939ctm:PreFundedWarrantsMemberus-gaap:AdditionalPaidInCapitalMember2024-01-012024-03-310001877939ctm:PreFundedWarrantsMember2024-01-012024-03-310001877939us-gaap:RetainedEarningsMember2024-01-012024-03-310001877939us-gaap:PreferredStockMemberus-gaap:SeriesAPreferredStockMember2024-03-310001877939us-gaap:PreferredStockMemberus-gaap:SeriesBPreferredStockMember2024-03-310001877939us-gaap:PreferredStockMemberus-gaap:SeriesCPreferredStockMember2024-03-310001877939us-gaap:CommonStockMember2024-03-310001877939us-gaap:AdditionalPaidInCapitalMember2024-03-310001877939us-gaap:RetainedEarningsMember2024-03-3100018779392024-03-310001877939us-gaap:AdditionalPaidInCapitalMember2024-04-012024-06-300001877939us-gaap:RetainedEarningsMember2024-04-012024-06-300001877939us-gaap:PreferredStockMemberus-gaap:SeriesAPreferredStockMember2024-06-300001877939us-gaap:PreferredStockMemberus-gaap:SeriesBPreferredStockMember2024-06-300001877939us-gaap:PreferredStockMemberus-gaap:SeriesCPreferredStockMember2024-06-300001877939us-gaap:CommonStockMember2024-06-300001877939us-gaap:AdditionalPaidInCapitalMember2024-06-300001877939us-gaap:RetainedEarningsMember2024-06-300001877939ctm:RelatedPartiesMember2024-01-012024-06-300001877939ctm:RelatedPartiesMember2023-01-012023-06-300001877939ctm:NonrelatedPartiesMember2024-01-012024-06-300001877939ctm:NonrelatedPartiesMember2023-01-012023-06-300001877939exch:CISDus-gaap:IPOMember2022-10-172022-10-170001877939srt:MaximumMember2024-01-012024-06-300001877939ctm:TimeAndMaterialMember2024-01-012024-06-300001877939ctm:TimeAndMaterialMember2023-01-012023-06-300001877939ctm:FirmFixedPriceMember2024-01-012024-06-300001877939ctm:FirmFixedPriceMember2023-01-012023-06-300001877939ctm:CostPlusFixedFeeMember2024-01-012024-06-300001877939ctm:CostPlusFixedFeeMember2023-01-012023-06-300001877939ctm:GlobalTechnologyManagementResourcesMember2023-03-220001877939ctm:GlobalTechnologyManagementResourcesMember2024-01-012024-06-300001877939ctm:GlobalTechnologyManagementResourcesMember2023-03-310001877939ctm:GlobalTechnologyManagementResourcesMember2023-04-012024-03-220001877939ctm:GlobalTechnologyManagementResourcesMember2024-03-220001877939ctm:GlobalTechnologyManagementResourcesMemberus-gaap:CustomerRelationshipsMember2023-03-310001877939ctm:GlobalTechnologyManagementResourcesMemberus-gaap:CustomerRelationshipsMember2023-04-012024-03-220001877939ctm:GlobalTechnologyManagementResourcesMemberus-gaap:CustomerRelationshipsMember2024-03-220001877939ctm:GlobalTechnologyManagementResourcesMemberus-gaap:TrademarksAndTradeNamesMember2023-03-310001877939ctm:GlobalTechnologyManagementResourcesMemberus-gaap:TrademarksAndTradeNamesMember2023-04-012024-03-220001877939ctm:GlobalTechnologyManagementResourcesMemberus-gaap:TrademarksAndTradeNamesMember2024-03-220001877939ctm:GlobalTechnologyManagementResourcesMemberctm:BacklogMember2023-03-310001877939ctm:GlobalTechnologyManagementResourcesMemberctm:BacklogMember2023-04-012024-03-220001877939ctm:GlobalTechnologyManagementResourcesMemberctm:BacklogMember2024-03-220001877939ctm:GlobalTechnologyManagementResourcesMember2023-03-222023-03-2200018779392023-03-220001877939ctm:GlobalTechnologyManagementResourcesMemberctm:SellerPayableMember2024-06-300001877939ctm:EquipmentAndSoftwareMember2024-06-300001877939ctm:EquipmentAndSoftwareMember2023-12-310001877939us-gaap:FurnitureAndFixturesMember2024-06-300001877939us-gaap:FurnitureAndFixturesMember2023-12-310001877939us-gaap:AutomobilesMember2024-06-300001877939us-gaap:AutomobilesMember2023-12-310001877939us-gaap:LeaseholdImprovementsMember2024-06-300001877939us-gaap:LeaseholdImprovementsMember2023-12-310001877939us-gaap:CustomerRelationshipsMembersrt:MinimumMember2024-06-300001877939us-gaap:CustomerRelationshipsMembersrt:MaximumMember2024-06-300001877939us-gaap:CustomerRelationshipsMember2024-06-300001877939us-gaap:CustomerRelationshipsMember2023-12-310001877939us-gaap:TradeNamesMember2024-06-300001877939us-gaap:TradeNamesMember2023-12-310001877939us-gaap:TrademarksMembersrt:MinimumMember2024-06-300001877939us-gaap:TrademarksMembersrt:MaximumMember2024-06-300001877939us-gaap:TrademarksMember2024-06-300001877939us-gaap:TrademarksMember2023-12-310001877939ctm:BacklogMembersrt:MinimumMember2024-06-300001877939ctm:BacklogMembersrt:MaximumMember2024-06-300001877939ctm:BacklogMember2024-06-300001877939ctm:BacklogMember2023-12-310001877939us-gaap:NoncompeteAgreementsMembersrt:MinimumMember2024-06-300001877939us-gaap:NoncompeteAgreementsMembersrt:MaximumMember2024-06-300001877939us-gaap:NoncompeteAgreementsMember2024-06-300001877939us-gaap:NoncompeteAgreementsMember2023-12-310001877939ctm:CorvusMember2023-12-310001877939ctm:SSIAcquisitionMember2023-12-310001877939ctm:MFSIAcquisitionMember2023-12-310001877939ctm:CorvusMember2024-01-012024-06-300001877939ctm:SSIAcquisitionMember2024-01-012024-06-300001877939ctm:MFSIAcquisitionMember2024-01-012024-06-300001877939ctm:CorvusMember2024-06-300001877939ctm:SSIAcquisitionMember2024-06-300001877939ctm:MFSIAcquisitionMember2024-06-300001877939ctm:ConvertibleNotePayableToRelatedPartyMember2024-06-300001877939ctm:ConvertibleNotePayableToRelatedPartyMember2023-12-310001877939ctm:ConvertibleNotePayableToRelatedPartyMemberctm:ConvertibleDebtPursuantToDebtAmendmentRelatedPartyPayableWithATrustDeedToOneOfTheCompaniesDirectorsConversionPriceOfZeroPointTwoSixPerShareMember2024-04-012024-06-300001877939ctm:ConvertibleNotePayableToRelatedPartyMemberctm:ConvertibleDebtPursuantToDebtAmendmentRelatedPartyPayableWithATrustDeedToOneOfTheCompaniesDirectorsConversionPriceOfZeroPointTwoSixPerShareMember2024-01-012024-06-300001877939ctm:ConvertibleNotePayableToRelatedPartyMemberctm:ConvertibleDebtPursuantToDebtAmendmentRelatedPartyPayableWithATrustDeedToOneOfTheCompaniesDirectorsConversionPriceOfZeroPointTwoSixPerShareMember2023-04-012023-06-300001877939ctm:ConvertibleNotePayableToRelatedPartyMemberctm:ConvertibleDebtPursuantToDebtAmendmentRelatedPartyPayableWithATrustDeedToOneOfTheCompaniesDirectorsConversionPriceOfZeroPointTwoSixPerShareMember2023-01-012023-06-300001877939ctm:ConvertibleNotePayableToRelatedPartyMember2024-06-300001877939ctm:ConvertiblesMaturingFebruary132024Memberctm:PromissoryNoteMember2024-02-222024-02-220001877939ctm:ConvertiblesMaturingFebruary132024Memberctm:PromissoryNoteMember2024-02-220001877939ctm:NotePayableMaturingSeptember302024Memberus-gaap:NotesPayableOtherPayablesMember2024-06-300001877939ctm:NotePayableMaturingSeptember302024Memberus-gaap:NotesPayableOtherPayablesMember2023-12-310001877939ctm:NotePayableMaturingTheEarlierOfSeptember302024OrCompletionOfEquityOfferingMemberctm:PromissoryNoteMember2024-06-300001877939ctm:NotePayableMaturingTheEarlierOfSeptember302024OrCompletionOfEquityOfferingMemberctm:PromissoryNoteMember2023-12-310001877939ctm:NotePayableMaturingAugust312026Memberus-gaap:NotesPayableOtherPayablesMember2024-06-300001877939ctm:NotePayableMaturingAugust312026Memberus-gaap:NotesPayableOtherPayablesMember2023-12-310001877939ctm:NotePayableMaturingTheEarlierOfSeptember302024OrAccelerationOfObligationsMemberctm:PromissoryNoteMember2024-06-300001877939ctm:NotePayableMaturingTheEarlierOfSeptember302024OrAccelerationOfObligationsMemberctm:PromissoryNoteMember2023-12-310001877939ctm:ConvertiblesMaturingApril42023Memberus-gaap:ConvertibleNotesPayableMember2024-06-300001877939ctm:ConvertiblesMaturingApril42023Memberus-gaap:ConvertibleNotesPayableMember2023-12-310001877939ctm:ConvertiblesMaturingFebruary132024Memberctm:PromissoryNoteMember2024-06-300001877939ctm:ConvertiblesMaturingFebruary132024Memberctm:PromissoryNoteMember2023-12-310001877939ctm:TermNotePayableMember2024-01-012024-06-300001877939ctm:TermNotePayableMember2024-06-300001877939ctm:TermNotePayableMember2023-12-310001877939ctm:PromissoryNoteMember2022-02-280001877939ctm:NotePayableMaturingTheEarlierOfSeptember302024OrCompletionOfEquityOfferingMember2022-02-220001877939ctm:NotePayableMaturingAugust312026Memberus-gaap:NotesPayableOtherPayablesMember2024-02-220001877939ctm:NotePayableMaturingAugust312026Memberus-gaap:NotesPayableOtherPayablesMembersrt:ScenarioForecastMember2025-02-020001877939ctm:PromissoryNoteDatedApril62023Member2023-04-060001877939ctm:PromissoryNoteMember2023-04-060001877939us-gaap:ConvertibleNotesPayableMember2022-04-040001877939us-gaap:ConvertibleNotesPayableMember2023-12-132023-12-130001877939us-gaap:ConvertibleNotesPayableMember2023-12-130001877939ctm:ConvbertiblesMaturingFebruary132024Memberus-gaap:ConvertibleNotesPayableMemberctm:CromMember2023-12-130001877939ctm:ConvertibleNotesWarrantsMember2023-12-130001877939ctm:CromMemberus-gaap:ConvertibleNotesPayableMember2023-12-132023-12-130001877939ctm:ConvertiblesMaturingFebruary132024Memberctm:PromissoryNoteMembersrt:ScenarioForecastMember2026-01-010001877939ctm:ConvertiblesMaturingFebruary132024Memberctm:PromissoryNoteMembersrt:ScenarioForecastMember2026-01-020001877939ctm:ConvertiblesMaturingFebruary132024Memberctm:PromissoryNoteMembersrt:ScenarioForecastMember2024-09-012026-08-310001877939srt:ScenarioForecastMemberus-gaap:ConvertibleNotesPayableMember2024-01-012024-12-310001877939us-gaap:SubsequentEventMemberus-gaap:ConvertibleNotesPayableMember2024-07-012024-07-310001877939srt:ScenarioForecastMemberus-gaap:ConvertibleNotesPayableMember2025-01-012025-12-310001877939ctm:SSIMemberctm:NotePayableMember2024-06-300001877939ctm:SSIMemberctm:NotePayableMember2023-12-310001877939ctm:SSIMemberus-gaap:RelatedPartyMember2024-06-300001877939ctm:SSIMemberus-gaap:RelatedPartyMember2023-12-310001877939ctm:NotePayableMember2024-02-162024-02-160001877939us-gaap:RelatedPartyMember2024-04-012024-06-300001877939us-gaap:RelatedPartyMember2024-01-012024-06-300001877939us-gaap:RelatedPartyMember2023-04-012023-06-300001877939us-gaap:RelatedPartyMember2023-01-012023-06-300001877939ctm:LiveOakBankMemberus-gaap:RevolvingCreditFacilityMember2022-04-040001877939ctm:LiveOakBankMemberus-gaap:RevolvingCreditFacilityMember2022-04-042022-04-040001877939us-gaap:RevolvingCreditFacilityMember2023-12-310001877939us-gaap:RevolvingCreditFacilityMember2024-02-220001877939us-gaap:RevolvingCreditFacilityMember2024-02-222024-02-220001877939ctm:LiveOakBankMemberus-gaap:RevolvingCreditFacilityMember2024-02-222024-02-220001877939ctm:NotePayableMember2024-06-300001877939ctm:GlobalTechnologyManagementResourcesIncMemberus-gaap:RelatedPartyMember2023-12-310001877939ctm:GlobalTechnologyManagementResourcesMemberctm:SellerPayableMember2023-03-220001877939ctm:GlobalTechnologyManagementResourcesMemberctm:SellerPayableMember2024-01-012024-06-3000018779392024-02-152024-02-150001877939ctm:SPAAgreementMember2024-01-252024-01-2500018779392024-01-250001877939us-gaap:ConvertibleNotesPayableMember2024-01-252024-01-250001877939ctm:PreFundedWarrantsMember2024-01-250001877939us-gaap:ConvertibleNotesPayableMember2024-01-250001877939us-gaap:WarrantMember2024-06-300001877939us-gaap:SeriesAPreferredStockMember2024-01-012024-06-300001877939us-gaap:SeriesBPreferredStockMember2024-06-300001877939us-gaap:SeriesBPreferredStockMember2023-12-310001877939us-gaap:SeriesCPreferredStockMember2024-01-012024-06-300001877939us-gaap:RestrictedStockMember2024-01-012024-06-300001877939us-gaap:WarrantMember2023-12-310001877939us-gaap:WarrantMember2022-12-310001877939us-gaap:WarrantMember2024-01-012024-06-300001877939us-gaap:WarrantMember2023-01-012023-12-310001877939ctm:PreFundedWarrantMember2024-01-012024-06-300001877939ctm:PreFundedWarrantMember2023-01-012023-12-3100018779392023-01-012023-12-310001877939us-gaap:WarrantMember2024-06-300001877939us-gaap:WarrantMember2024-06-300001877939ctm:StockIncentivePlanMember2021-11-090001877939ctm:StockIncentivePlanMember2023-11-090001877939ctm:StockIncentivePlanMember2024-01-012024-06-300001877939us-gaap:EmployeeStockOptionMember2023-12-310001877939us-gaap:EmployeeStockOptionMember2023-01-012023-12-310001877939us-gaap:EmployeeStockOptionMember2024-01-012024-03-310001877939us-gaap:EmployeeStockOptionMember2024-03-310001877939us-gaap:EmployeeStockOptionMember2024-04-012024-06-300001877939us-gaap:EmployeeStockOptionMember2024-06-300001877939us-gaap:EmployeeStockOptionMember2024-01-012024-06-300001877939ctm:ServiceBasedStockOptionMember2024-01-012024-06-300001877939exch:CISDus-gaap:IPOMember2022-10-132022-10-130001877939us-gaap:FairValueInputsLevel1Member2024-06-300001877939us-gaap:FairValueInputsLevel2Member2024-06-300001877939us-gaap:FairValueInputsLevel3Member2024-06-300001877939us-gaap:FairValueInputsLevel1Member2023-12-310001877939us-gaap:FairValueInputsLevel2Member2023-12-310001877939us-gaap:FairValueInputsLevel3Member2023-12-310001877939ctm:ConvertiblesMaturingApril42023Memberctm:WarrantsMember2022-04-040001877939ctm:ConvertiblesMaturingApril42023Memberctm:WarrantsMember2024-06-300001877939ctm:ConvertiblesMaturingApril42023Memberctm:WarrantsMember2023-12-310001877939ctm:CromCortanaFundLLCMemberctm:ConvertibleNoteMember2024-06-300001877939ctm:CromCortanaFundLLCMemberctm:ConvertibleNoteMember2023-12-310001877939ctm:CromCortanaFundLLCMemberctm:ConvertibleNoteMember2022-04-040001877939ctm:ConvertiblesMaturingFebruary132024Memberctm:WarrantsMember2023-02-130001877939ctm:ConvertiblesMaturingFebruary132024Memberctm:WarrantsMember2024-06-300001877939ctm:ConvertiblesMaturingFebruary132024Memberctm:WarrantsMember2023-12-310001877939ctm:ConvertiblesMaturingFebruary132024Memberctm:WarrantsMember2022-04-0400018779392022-04-040001877939ctm:MeasurementInputExpectedTermWarrantsMembersrt:MinimumMember2024-06-300001877939ctm:MeasurementInputExpectedTermWarrantsMembersrt:MaximumMember2024-06-300001877939us-gaap:MeasurementInputSharePriceMember2024-06-300001877939us-gaap:MeasurementInputOptionVolatilityMembersrt:MinimumMember2024-06-300001877939us-gaap:MeasurementInputOptionVolatilityMembersrt:MaximumMember2024-06-300001877939ctm:MeasurementInputVolatilityHaircutMember2024-06-300001877939ctm:MeasurementInputVolatilityPostHaircutMembersrt:MinimumMember2024-06-300001877939ctm:MeasurementInputVolatilityPostHaircutMembersrt:MaximumMember2024-06-300001877939us-gaap:MeasurementInputRiskFreeInterestRateMembersrt:MinimumMember2024-06-300001877939us-gaap:MeasurementInputRiskFreeInterestRateMembersrt:MaximumMember2024-06-300001877939ctm:ThreeCustomersMemberus-gaap:RevenueFromRightsConcentrationRiskMemberus-gaap:SalesRevenueProductLineMember2024-01-012024-06-300001877939ctm:TwoCustomersMemberus-gaap:RevenueFromRightsConcentrationRiskMemberus-gaap:SalesRevenueProductLineMember2023-01-012023-06-300001877939ctm:ThreeCustomersMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:AccountsReceivableMember2024-01-012024-06-300001877939ctm:ThreeCustomersMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:AccountsReceivableMember2023-01-012023-12-310001877939srt:MaximumMember2023-01-242023-01-240001877939srt:MaximumMember2023-01-012023-03-310001877939srt:MinimumMember2023-01-012023-03-310001877939us-gaap:SubsequentEventMemberctm:IvesEmploymentAgreementMember2024-07-012024-07-010001877939us-gaap:SubsequentEventMemberctm:IvesEmploymentAgreementMembersrt:MaximumMember2024-07-012024-07-010001877939us-gaap:SubsequentEventMemberctm:IvesEmploymentAgreementMember2024-07-010001877939us-gaap:SubsequentEventMemberctm:WrightEmploymentAgreementMember2024-07-012024-07-010001877939ctm:GlobalTechnologyManagementResourcesMemberus-gaap:SubsequentEventMember2024-07-112024-07-110001877939ctm:PreFundedWarrantsMemberus-gaap:SubsequentEventMember2024-07-012024-07-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| | | | | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2024
Or
| | | | | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___ to ___
Commission File Number: 001-41526
CASTELLUM, INC.
(Exact Name of Registrant as Specified in Charter)
| | | | | |
NEVADA | 27-4079982 |
(STATE OF INCORPORATION) | (I.R.S Employer I.D.) |
1934 Old Gallows Road, Suite 350, Vienna, VA 22182
(703) 752-6157
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.0001 per share | CTM | NYSE American LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
| Large accelerated filer o | Accelerated filer o | |
| Non-accelerated filer x | Smaller reporting company x | |
| | Emerging growth company x | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | | | | |
Class | Outstanding as of August 8, 2024 |
Common Stock, par value $0.0001 per share | 56,109,928 |
CASTELLUM, INC.
FORM 10-Q
For the Quarter Ended June 30, 2024
INDEX
Explanatory Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the “Securities Act,” and Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act,” which statements involve substantial risk and uncertainties. These statements do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties and include statements regarding, among other things, our projected revenue growth and profitability, our growth strategies and opportunity, anticipated trends in our market and our anticipated needs for working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plans,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the negative of these words or other variations on these words or comparable terminology. In particular, these statements relate to future actions, prospective products and services, market acceptance, future performance or results of current and anticipated products and services, sales efforts, expenses, and the outcome of contingencies such as legal proceedings and financial results.
Examples of forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, our expectations regarding our business strategy, business prospects, operating results, operating expenses, working capital, liquidity, and capital expenditure requirements. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products and services, the cost, terms, and availability of components, pricing levels, the timing and cost of capital expenditures, competitive conditions, and general economic conditions. These statements are based on our management’s expectations, beliefs, and assumptions concerning future events affecting us, which in turn are based on currently available information. These assumptions could prove inaccurate. Although we believe that the estimates and projections reflected in the forward-looking statements are reasonable, our expectations may prove to be incorrect.
Important factors that could cause actual results to differ materially from the results and events anticipated or implied by such forward-looking statements include, but are not limited to:
•our limited operating history, ongoing net income losses, and growth trajectory;
•our ability to attract and retain senior management and other employees with suitable experience leading a public company;
•our ability to raise additional capital on acceptable terms and to service our ongoing debt obligations;
•changes in political, economic, or regulatory conditions generally and in the markets in which we operate including the 2024 elections and their aftermath;
•our ongoing relationships with government entities, agencies, and teaming partners;
•overall levels of government spending on defense spending and spending on IT services, including potential imposition of sequestration in the absence of an approved budget or continuing resolution;
•our ability to win new contracts amidst increased levels of competition in contract bidding process;
•delays due to the appropriation process, change in the procurement process, and audits or cost adjustments to our contracts;
•our inability to receive full amounts authorized, or ongoing lack of funding, for contracts in our backlog;
•potential systems failures, security breaches, or the inability of Company employees to obtain required clearances;
•our ability successfully to execute additional acquisitions and integrate those operations into our ongoing businesses; and
•the effect of ongoing financing efforts and volatility of our common stock share price.
We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all of those risks, nor can we assess the impact of all of those risks on our business or the extent to which any factor may cause actual results to differ materially from those contained in any forward-looking statement. The forward-looking statements in this Quarterly Report on Form 10-Q are based on assumptions management believes are reasonable. However, due to the uncertainties associated with forward-looking statements, you should not place undue reliance on any forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and unless required by law, we expressly disclaim any obligation or undertaking to publicly update any of them in light of new information, future events, or otherwise.
In this Quarterly Report on Form 10-Q, unless the context otherwise requires, all references to the “Company,” “our Company,” “we,” “our,” “us,” and “Castellum,” refer to Castellum, Inc., a Nevada corporation, and its wholly owned subsidiaries.
Part I
Item 1. Unaudited Consolidated Financial Statements
Castellum, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
| | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
| (unaudited) | | |
Assets | | | |
| | | |
Current Assets: | | | |
Cash | $ | 2,411,825 | | | $ | 1,830,841 | |
Accounts receivable | 6,365,657 | | | 6,883,566 | |
Contract asset | — | | | 160,649 | |
Prepaid income taxes | — | | | 216,909 | |
Prepaid expenses and other current assets | 587,174 | | | 404,228 | |
Total current assets | 9,364,656 | | | 9,496,193 | |
| | | |
Fixed assets, net | 229,083 | | | 310,170 | |
| | | |
Non-Current Assets: | | | |
Right of use asset - operating lease | 1,218,342 | | | 613,143 | |
Investment in captive insurance entity | 54,534 | | | — | |
Intangible assets, net | 7,884,922 | | | 8,970,864 | |
Goodwill | 10,716,907 | | | 10,716,907 | |
Total non-current assets | 20,103,788 | | | 20,611,084 | |
| | | |
Total Assets | $ | 29,468,444 | | | $ | 30,107,277 | |
| | | |
Liabilities and Stockholders' Equity | | | |
| | | |
Liabilities | | | |
| | | |
Current Liabilities | | | |
Accounts payable and accrued expenses | $ | 1,020,643 | | | $ | 784,965 | |
Accrued payroll and payroll related expenses | 3,474,730 | | | 2,925,312 | |
Income tax payable | 34,772 | | | — | |
Contract liability | 77,012 | | | — | |
Due to seller | 290,000 | | | 350,000 | |
Obligation to issue common and preferred stock | 402,708 | | | 255,940 | |
Contingent earnout | — | | | 380,000 | |
Derivative liabilities | 55,000 | | | 157,600 | |
| | | | | | | | | | | |
Revolving credit facility | 1,529,818 | | | 625,025 | |
Current portion of convertible promissory notes - related parties, net of discount | — | | | 238,212 | |
Current portion of notes payable, net of discount | 1,252,678 | | | 2,074,775 | |
Current portion of lease liability - operating lease | 292,091 | | | 185,263 | |
Total current liabilities | 8,429,452 | | | 7,977,092 | |
| | | |
Non-Current Liabilities | | | |
Deferred tax liability | 6,292 | | | 6,292 | |
Lease liability - operating lease, net of current portion | 933,379 | | | 435,204 | |
Due to Seller, net of current portion | 220,000 | | | — | |
Contingent earnout, net of current portion | — | | | 340,000 | |
Convertible promissory notes - related parties, net of discount, net of current portion | — | | | 2,000,000 | |
Notes payable, net of current portion | 7,400,000 | | | 6,000,000 | |
Notes payable, related party, net of current portion | 400,000 | | | 400,000 | |
Total non-current liabilities | 8,959,671 | | | 9,181,496 | |
| | | |
Total Liabilities | $ | 17,389,123 | | | $ | 17,158,588 | |
| | | |
Stockholders' Equity | | | |
Preferred stock, 50,000,000 shares authorized | | | |
Series A Preferred stock, par value $0.0001; 10,000,000 shares authorized; 5,875,000 issued and outstanding as of June 30, 2024 and December 31, 2023, respectively | 588 | | | 588 | |
Series C Preferred stock, par value $0.0001; 10,000,000 shares authorized; 770,000 and 770,000 issued and outstanding as of June 30, 2024 and December 31, 2023, respectively | 77 | | | 77 | |
Common stock, par value, $0.0001, 3,000,000,000 shares authorized, 53,029,915 and 47,672,427 issued and outstanding as of June 30, 2024 and December 31, 2023, respectively | 5,303 | | | 4,767 | |
Additional paid in capital | 62,074,352 | | | 56,926,157 | |
Accumulated deficit | (50,000,999) | | | (43,982,900) | |
Total stockholders' equity | 12,079,321 | | | 12,948,689 | |
| | | |
Total Liabilities and Stockholders' Equity | $ | 29,468,444 | | | $ | 30,107,277 | |
See notes to unaudited consolidated financial statements.
Castellum, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Revenues | $ | 11,522,388 | | | $ | 12,475,802 | | | $ | 22,857,441 | | | $ | 22,412,815 | |
| | | | | | | |
Cost of Revenues | 6,849,180 | | | 7,263,984 | | | 13,668,812 | | | 13,163,215 | |
| | | | | | | |
Gross Profit | 4,673,208 | | | 5,211,818 | | | 9,188,629 | | | 9,249,600 | |
| | | | | | | |
Operating Expenses | | | | | | | |
Indirect costs | 2,211,640 | | | 2,241,460 | | | 4,702,330 | | | 4,452,339 | |
Overhead | 512,261 | | | 536,937 | | | 968,881 | | | 1,004,619 | |
General and administrative | 3,519,512 | | | 4,244,312 | | | 7,758,845 | | | 10,290,842 | |
| | | | | | | |
Gain from change in fair value of contingent earnout | — | | | 83,000 | | | — | | | 65,000 | |
Total operating expenses | 6,243,413 | | | 7,105,709 | | | 13,430,056 | | | 15,812,800 | |
| | | | | | | |
Loss From Operations Before Other Income (Expense) | (1,570,205) | | | (1,893,891) | | | (4,241,427) | | | (6,563,200) | |
| | | | | | | |
Other Income (Expense) | | | | | | | |
Loss on induced conversion | — | | | — | | | — | | | (300,000) | |
Loss on extinguishment of debt | — | | | — | | | (822,847) | | | — | |
Gain from change in fair value of derivative liability | 56,000 | | | 593,000 | | | 102,400 | | | 844,625 | |
Other income (expense), net | | | 2 | | | — | | | (1,073) | |
Interest expense, net of interest income | (211,999) | | | (810,837) | | | (742,192) | | | (1,641,115) | |
| | | | | | | |
| | | | | | | |
Total other income (expense) | (155,999) | | | (217,835) | | | (1,462,639) | | | (1,097,563) | |
| | | | | | | |
Loss From Operations Before Benefit For Income Taxes | (1,726,204) | | | (2,111,726) | | | (5,704,066) | | | (7,660,763) | |
| | | | | | | |
Income tax (expense) benefit | (120,531) | | | 13,280 | | | (254,390) | | | 1,238,929 | |
| | | | | | | |
Net Loss | (1,846,735) | | | (2,098,446) | | | (5,958,456) | | | (6,421,834) | |
Less: preferred stock dividends | 29,819 | | | 29,820 | | | 59,639 | | | 60,139 | |
Net Loss To Common Shareholders | $ | (1,876,554) | | | $ | (2,128,266) | | | $ | (6,018,095) | | | $ | (6,481,973) | |
| | | | | | | |
Net Loss Per Share - Basic And Diluted | $ | (0.03) | | | $ | (0.04) | | | $ | (0.11) | | | $ | (0.14) | |
| | | | | | | |
Weighted Average Shares Outstanding - Basic And Diluted | 57,190,645 | | 48,369,250 | | 54,456,453 | | 45,731,842 |
See notes to unaudited consolidated financial statements.
Castellum, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Series A Preferred | | Series B Preferred | | Series C Preferred | | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Total |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount |
Balance - December 31, 2022 | 5,875,000 | | | $ | 588 | | | — | | | $ | — | | | 770,000 | | | $ | 77 | | | 41,699,363 | | | $ | 4,170 | | | $ | 43,621,651 | | | $ | (26,094,570) | | | $ | 17,531,916 | |
| | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation - options | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,436,299 | | | — | | | 2,436,299 | |
Stock-based compensation - warrants | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,076,969 | | | — | | | 1,076,969 | |
Stock-based compensation - restricted stock and shares issued for services | — | | | — | | | — | | | — | | | — | | | — | | | 125,504 | | | 12 | | | 149,987 | | | — | | | 149,999 | |
Shares issued to acquire GTMR | — | | | — | | | — | | | — | | | — | | | — | | | 4,866,570 | | | 487 | | | 5,304,075 | | | — | | | 5,304,562 | |
Shares issued in induced conversion of Crom Note | — | | | — | | | — | | | — | | | — | | | — | | | 556,250 | | | 56 | | | 589,944 | | | — | | | 590,000 | |
Loss on induced conversion | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 300,000 | | | — | | | 300,000 | |
Extinguishment of debt discount - derivative liability | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (171,128) | | | — | | | (171,128) | |
Extinguishment of debt discount - debt issuance costs | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (8,034) | | | — | | | (8,034) | |
Extinguishment of derivative liability | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 33,375 | | | — | | | 33,375 | |
| | | | | | | | | | | | | | | | | | | | | |
Net loss for the period | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,353,710) | | | (4,353,710) | |
| | | | | | | | | | | | | | | | | | | | | |
Balance - March 31, 2023 | 5,875,000 | | | $ | 588 | | | — | | | $ | — | | | 770,000 | | | $ | 77 | | | 47,247,687 | | | $ | 4,725 | | | $ | 53,333,138 | | | $ | (30,448,280) | | | $ | 22,890,248 | |
| | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation - options | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,089,163 | | | — | | | 1,089,163 | |
Stock-based compensation - restricted stock and shares issued for services | — | | | — | | | — | | | — | | | — | | | — | | | 63,025 | | | 6 | | | 74,994 | | | — | | | 75,000 | |
Shares issued in private placement | — | | | — | | | — | | | — | | | — | | | — | | | 63,000 | | | 6 | | | 125,994 | | | — | | | 126,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Net loss for the period | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,128,266) | | | (2,128,266) | |
| | | | | | | | | | | | | | | | | | | | | |
Balance - June 30, 2023 | 5,875,000 | | | $ | 588 | | | — | | | $ | — | | | 770,000 | | | $ | 77 | | | 47,373,712 | | | $ | 4,737 | | | $ | 54,623,289 | | | $ | (32,576,546) | | | $ | 22,052,145 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Balance - December 31, 2023 | 5,875,000 | | | $ | 588 | | | — | | | $ | — | | | 770,000 | | | $ | 77 | | | 47,672,427 | | | $ | 4,767 | | | $ | 56,926,161 | | | $ | (43,982,904) | | | $ | 12,948,689 | |
| | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation - options | — | | — | | — | | — | | — | | — | | — | | — | | 1,657,822 | | — | | 1,657,822 | |
| | | | | | | | | | | | | | | | | | | | | |
Shares issued to institutional investor | — | | — | | — | | — | | — | | — | | 5,357,487 | | 536 | | 755,231 | | — | | 755,767 | |
Private warrants issued to institutional investor | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,081,471 | | — | | | 1,081,471 | |
Pre-funded warrants issued to institutional investor | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 525,905 | | | — | | | 525,905 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Net loss for the period | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,141,541) | | | (4,141,541) | |
| | | | | | | | | | | | | | | | | | | | | |
Balance - March 31, 2024 | 5,875,000 | | | $ | 588 | | | — | | | $ | — | | | 770,000 | | | $ | 77 | | | 53,029,914 | | | $ | 5,303 | | | $ | 60,946,590 | | | $ | (48,124,445) | | | $ | 12,828,113 | |
| | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation - options | | | | | | | | | | | | | | | | | 1,127,762 | | | | | 1,127,762 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Net loss for the period | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,876,554) | | | (1,876,554) | |
| | | | | | | | | | | | | | | | | | | | | |
Balance - June 30 2024 | 5,875,000 | | | 588 | | | — | | | — | | | 770,000 | | | 77 | | | 53,029,914 | | | 5,303 | | | 62,074,352 | | | (50,000,999) | | | 12,079,321 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
See notes to unaudited consolidated financial statements.
Castellum, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2024 and 2023
(Unaudited)
| | | | | | | | | | | |
| 2024 | | 2023 |
Cash Flow From Operating Activities | | | |
Net loss | $ | (5,958,456) | | | $ | (6,421,834) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 1,167,029 | | | 1,190,974 | |
Amortization of discounts, premium and deferred costs | 1,118,194 | | | 1,147,921 | |
Stock-based compensation | 2,932,356 | | | 4,938,021 | |
Deferred tax provision | — | | | (1,089,677) | |
Lease cost | 144,212 | | | 1,006 | |
Change in fair value of contingent earnout | — | | | 65,000 | |
Change in fair value of derivative liability | (102,400) | | | (844,625) | |
Gain on lease termination | (9,225) | | | — | |
Changes in assets and liabilities | | | |
Accounts receivable | 517,909 | | | (473,170) | |
Proceeds from factoring accounts receivable | — | | | 411,975 | |
Prepaid expenses and other current assets | 40,382 | | | (12,564) | |
Contract asset (liability) | 237,661 | | | (378,258) | |
Accounts payable and accrued expenses | 819,867 | | | (399,820) | |
Lease liability | (135,183) | | | — | |
Net cash provided by (used in) operating activities | 772,346 | | | (1,865,051) | |
| | | |
Cash Flows From Investing Activities | | | |
Acquisition of business, cash paid to seller | — | | | (470,233) | |
Cash paid to seller from factoring | — | | | (411,975) | |
Cash received in acquisition of GTMR | — | | | 475,000 | |
Purchases of fixed assets | — | | | (20,526) | |
Investment in captive insurance entity | (54,534) | | | — | |
Net cash used in investing activities | (54,534) | | | (427,734) | |
| | | |
Cash Flows From Financing Activities | | | |
Proceeds from revolving credit line | 904,793 | | | 325,000 | |
Payment of debt issuance costs | (6,422) | | | (15,000) | |
Proceeds from issuance of common stock, prefunded warrants and regular warrants, net of issuance costs | 2,363,143 | | | 126,000 | |
Proceeds from notes payable | — | | | 1,200,000 | |
Preferred stock dividend | (59,639) | | | (60,139) | |
| | | |
| | | |
Repayment of amounts due to seller | (560,000) | | | (280,000) | |
Loss on induced conversion | | | 300,000 | |
Repayment of convertible note payable - related party | (809,617) | | | — | |
| | | | | | | | | | | |
Repayment of note payable | (1,969,086) | | | (954,295) | |
Net cash provided by (used in) financing activities | (136,828) | | | 641,566 | |
| | | |
Net increase (decrease ) in cash | 580,984 | | | (1,651,219) | |
| | | |
Cash - Beginning of Period | 1,830,841 | | | 4,640,896 | |
| | | |
Cash - End of Period | $ | 2,411,825 | | | $ | 2,989,677 | |
| | | |
Supplemental Disclosures | | | |
Cash paid for interest expense | $ | (415,397) | | | $ | (490,875) | |
Cash refunded (paid) from income taxes | $ | (3,535) | | | $ | 4,751 | |
| | | |
Summary of Non-Cash Activities: | | | |
| | | |
Debt discount on note payable applied to obligation to issue common stock | $ | — | | | $ | 28,000 | |
Derivative liability incurred for note payable | $ | — | | | $ | 421,000 | |
Extinguishment of debt discount - derivative liability | $ | — | | | $ | 171,128 | |
Extinguishment of debt discount - debt issuance costs | $ | — | | | $ | 8,034 | |
Extinguishment of derivative liability on Crom note | $ | — | | | $ | 33,375 | |
Derecognition of lease liability | $ | 396,388 | | | $ | — | |
Derecognition of right of use asset | $ | 387,164 | | | $ | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
For the non-cash activities related to the Company's debt transactions see Note 6, "Convertible Promissory Notes - Related Party" and Note 7, "Notes Payable". See notes to unaudited consolidated financial statements.
Castellum, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2024 and 2023
Note 1: Nature of Operations
Castellum, Inc. (the “Company”) is focused on building a large, successful technology company in the areas of cybersecurity, information technology, electronic warfare, information warfare, and information operations with businesses in the defense, federal, civilian, and commercial markets (the "Markets"). Services 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"). These services, which largely focus on securing data and establishing related policies, are applicable to customers in the United States ("U.S.") government, financial services, healthcare, and other users of large data applications. The services can be delivered to legacy, customer owned networks, or customers who rely upon cloud-based infrastructures. The Company works with multiple business brokers and contacts within its business network to identify potential acquisitions.
Since November 2019, the Company has made the following acquisitions that specialize in the areas noted above:
•Corvus Consulting, LLC (“Corvus”),
•Mainnerve Federal Services, Inc. dba MFSI Government Group (“MFSI"),
•Merrison Technologies, LLC ("Merrison"),
•Specialty Systems, Inc. (“SSI”),
•the business assets of Pax River from The Albers Group (“Pax River”),
•Lexington Solutions Group, LLC (“LSG”), and
•Global Technology and Management Resources, Inc. ("GTMR").
With the exception of Pax River, all of these acquisitions were considered business combinations under Topic 805 Business Combinations of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). See Note 3, “Acquisitions” for greater detail on the GTMR acquisition. Note 2: Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements, including the notes, include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). All intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation for Interim Periods
Certain information and footnote disclosures normally included for the annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted for the interim periods presented. We believe that the unaudited interim financial statements include all adjustments (which are normal and recurring in nature) necessary to present fairly our financial position and the results of operations and cash flows for the periods presented.
The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for the year or future periods. The financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2023 included in our Annual Report on Form 10-K for the year then ended. We have continued to follow the accounting policies set forth in those financial statements.
Business Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) and in deciding how to allocate resources and in assessing performance. The Company’s CODM, the Chief Executive Officer, conducts a review of the consolidated results of operations to make decisions. The Company maintains one operating and reportable segment, which is the delivery of products and services in the Markets.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. These estimates include, but are not limited to, management’s estimate of provisions required for uncollectible accounts receivable, the acquired value of the intangible assets and goodwill, impaired value of intangible assets, self-insurance expense and accruals, liabilities to accrue, cost incurred in the satisfaction of performance obligations, fair value for consideration elements of business combinations, permanent and temporary differences related to income taxes, and determination of the fair value of stock awards. Actual results could differ from these estimates.
Revenue Recognition
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers.
The Company accounts for a contract with a customer that is within the scope of this Topic only when the five steps of revenue recognition under ASC 606 are met.
The five core principles will be evaluated for each service provided by the Company and is further supported by applicable guidance in ASC 606 to support the Company’s recognition of revenue.
Revenue is derived primarily from services provided to the Federal government. The Company enters into agreements with customers that create enforceable rights and obligations and for which it is probable that the Company will collect the consideration to which it will be entitled as services and solutions are transferred to the customer. The Company also evaluates whether two or more agreements should be accounted for as one single contract.
When determining the total transaction price, the Company identifies both fixed and variable consideration elements within the contract. The Company estimates variable consideration as the most likely amount to which the Company expects to be entitled, limited to the extent that it is probable that a significant reversal will not occur in a subsequent period.
At contract inception, the Company determines whether the goods or services to be provided are to be accounted for as a single performance obligation or as multiple performance obligations. For most contracts, the customers require the Company to perform several tasks in providing an integrated output and, hence, each of these contracts are deemed as having only one performance obligation. When contracts are separated into multiple performance obligations, the Company allocates the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised services underlying each performance obligation.
This evaluation requires professional judgment, and it may impact the timing and pattern of revenue recognition. If multiple performance obligations are identified, the Company generally uses the cost plus a margin approach to determine the relative standalone selling price of each performance obligation. The Company does not assess whether a contract contains a significant financing component if the Company
expects, at contract inception, that the period between when payment by the client and the transfer of promised services to the client occur will be less than one year.
The Company currently generates its revenue from three different types of contractual arrangements: cost plus fixed fee (“CPFF”), firm-fixed-price contracts (“FFP”), and time-and-materials (“T&M”) contracts. The Company generally recognizes revenue over time as control is transferred to the customer, based on the extent of progress towards satisfaction of the performance obligation. The selection of the method used to measure progress requires judgment and is dependent on the contract type and the nature of the goods or services to be provided.
For CPFF contracts, the Company uses input progress measures to derive revenue based on hours worked on contract performance as follows: direct costs plus Defense Contract Audit Agency (“DCAA”) approved provisional burdens plus a fee. The provisional indirect rates are adjusted and billed at actual at year end. Revenue from FFP contracts is generally recognized ratably over the contract term, using a time-based measure of progress, even if billing is based on other metrics or milestones, including specific deliverables. For T&M contracts, the Company uses input progress measures to estimate revenue earned based on hours worked on contract performance at negotiated billing rates, plus direct costs and indirect cost burdens associated with materials and the direct expenses incurred in performance of the contract.
These arrangements generally qualify for the “right-to-invoice” practical expedient where revenue is recognized in proportion to billable consideration. FFP Level-Of-Effort contracts are substantially similar to T&M contracts except that the Company is required to deliver a specified level-of-effort over a stated period. For these contracts, the Company estimates revenue earned using contract hours worked at negotiated bill rates as the Company delivers the contractually required manpower.
Revenue generated by contract support service contracts is recognized over time as services are provided, based on the transfer of control. Revenue generated by FFP contracts is recognized over time as performance obligations are satisfied. Most contracts do not contain variable consideration and contract modifications are generally minimal. For these reasons, there is not a significant impact of electing these transition practical expedients.
Revenue generated from contracts with Federal, state, and local governments is recorded over time, rather than at a point in time. Under the contract support services contracts, the Company performs software design work as it is assigned by the customer, and bills the customer, generally semi-monthly, on either a CPFF or T&M basis, as labor hours are expended. Certain other government contracts for software development have specific deliverables and are structured as FFP contracts, which are generally billed as the performance obligations under the contract are met. Revenue recognition under FFP contracts requires judgment to allocate the transaction price to the performance obligations. Contracts may have terms of up to five years.
Contract accounting requires judgment relative to assessing risks and estimating contract revenue, as well as costs and assumptions for schedule and technical issues. Due to the size and nature of contracts, estimates of revenue and costs are subject to a number of variables. For contract change orders, claims, or similar items, judgment is required for estimating the amounts, assessing the potential for realization and determining whether realization is probable. Estimates of total contract revenue and costs are continuously monitored during the term of the contract and are subject to revision as the contract progresses. From time to time, facts develop that require revisions of revenue recognized or cost estimates. To the extent that a revised estimate affects the current or an earlier period, the cumulative effect of the revision is recognized in the period in which the facts requiring the revision become known.
The Company accounts for contract costs in accordance with ASC Topic 340-40, Contracts with Customers. The Company recognizes the cost of sales of a contract as an expense when incurred or at the time a performance obligation is satisfied. The Company recognizes an asset from the costs to fulfill a contract only if the costs relate directly to a contract, the costs generate or enhance resources that will be used in satisfying a performance obligation in the future, and the costs are expected to be recovered. The incremental costs of
obtaining a contract are capitalized unless the costs would have been incurred regardless of whether the contract was obtained.
The following table disaggregates the Company’s revenue by contract type for the six months ended June 30:
| | | | | | | | | | | |
| 2024 | | 2023 |
Revenue: | | | |
Time and material | $ | 12,691,564 | | | $ | 12,934,662 | |
Firm fixed price | 1,512,416 | | | 1,641,322 | |
Cost plus fixed fee | 8,653,461 | | | 7,836,831 | |
| | | |
Total | $ | 22,857,441 | | | $ | 22,412,815 | |
Accounting for Income Taxes
Income taxes are accounted for under the asset and liability method. We estimate our income taxes in each of the jurisdictions where the Company operates. This process involves estimating our current tax expense or benefit together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When assessing the realizability of deferred tax assets, we consider if it is more likely than not that some or all of the deferred tax assets will not be realized. In making this assessment, we consider the availability of loss carryforwards, projected reversals of deferred tax liabilities, projected future taxable income, and ongoing prudent and feasible tax planning strategies.
We are subject to income taxes in the federal and state tax jurisdictions based upon our business operations in those jurisdictions. Significant judgment is required in evaluating uncertain tax positions. We record uncertain tax positions in accordance with ASC 740-10 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position, and (2) with respect to those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50% likely to be realized up on ultimate settlement with the related tax authority. Management evaluates its tax positions on a quarterly basis.
The Company files income tax returns in the U.S. Federal tax jurisdiction and various state tax jurisdictions. The federal and state income tax returns of the Company are subject to examination by the Internal Revenue Service (“IRS”) and state taxing authorities, generally for three years after they were filed.
Recent Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This update requires disaggregated information about a reporting entity’s effective tax rate reconciliations as well as information on income taxes paid. This update is effective for annual periods beginning in our fiscal year ending December 31, 2025. Early adoption is permitted. We are currently evaluating the impact that this update will have on our financial statement disclosures.
Reclassification Adjustment
The Company has reclassified certain amounts in the 2023 financial statements to comply with the 2024 presentation. These principally relate to classification of “Gain on Disposal of Fixed Assets” to “Other” on our consolidated statements of operations. The reclassifications had no impact on total net loss or net cash flows for the six months ended June 30, 2024 and 2023.
Note 3: Acquisition
Since January 1, 2023, the Company has completed the following acquisition to achieve its business purposes as discussed in Note 1. GTMR
On March 22, 2023, the Company entered into an agreement and plan of merger with GTMR (the "GTMR Acquisition"). The GTMR Acquisition was accounted for as a business combination whereby GTMR became a 100% owned subsidiary of the Company. The Company acquired GTMR to expand its capabilities, increase market share, gain access to new contracts, and achieve cost efficiencies through synergies and economies of scale.
The following represents the assets and liabilities acquired in this acquisition:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | March 31, 2023 | | Adjustments | | March 22, 2024 |
Cash | | $ | 475,000 | | | $ | — | | | $ | 475,000 | |
Accounts receivable and other receivables | | 1,380,203 | | | (9,384) | | | 1,370,819 | |
Income tax receivable | | 155,449 | | | (127,992) | | | 27,457 | |
Prepaid expenses | | 116,892 | | | (30,856) | | | 86,036 | |
Other asset | | 17,182 | | | — | | | 17,182 | |
Furniture and equipment | | 163,301 | | | 103,760 | | | 267,061 | |
Right of use asset – operating lease | | — | | | 641,392 | | | 641,392 | |
Customer relationships | | 2,426,000 | | | — | | | 2,426,000 | |
Right of use asset - finance lease | | — | | | 17,456 | | | 17,456 | |
Tradename | | 517,000 | | | — | | | 517,000 | |
Backlog | | 1,774,000 | | | — | | | 1,774,000 | |
Goodwill | | 1,822,466 | | | 279,571 | | | 2,102,037 | |
Deferred tax liability | | (1,244,368) | | | (242,093) | | | (1,486,461) | |
Lease liability – operating lease | | (17,608) | | | (603,799) | | | (621,407) | |
Lease liability – finance lease | | — | | | (12,549) | | | (12,549) | |
Accounts payable and accrued expenses | | $ | (1,030,957) | | | $ | 141,341 | | | $ | (889,616) | |
Net assets acquired | | $ | 6,554,560 | | | $ | 156,847 | | | $ | 6,711,407 | |
The consideration paid for GTMR was as follows:
| | | | | |
Cash | $ | 470,233 | |
Due to Seller | 350,000 | |
Other consideration | 17,791 | |
Cash from factoring | 411,975 | |
Common stock | 5,304,561 | |
Accounts receivable note | 156,847 | |
Total consideration paid | $ | 6,711,407 | |
The GTMR Acquisition has been accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the total acquisition consideration price was allocated to the assets acquired and liabilities assumed based on their preliminary estimated fair values. The fair value measurements utilize
estimates based on key assumptions of the GTMR Acquisition, and historical and current market data. The excess of the purchase price over the total of the estimated fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed is recognized as goodwill. To determine the fair values of tangible and intangible assets acquired and liabilities assumed for GTMR, we engaged a third-party independent valuation specialist. Intangible assets, which are primarily comprised of customer relationships and backlog, were valued using the excess earnings discounted cash flow method. On the date of the GTMR Acquisition, the Company simultaneously factored $411,975 of the accounts receivable from GTMR to finance the GTMR Acquisition.
The Company paid $185,896 in transaction costs of GTMR, which was excluded from the purchase price, issued an accounts receivable note (the “Accounts Receivable Note”), and held back $350,000, the details of which have been discussed in amounts Due to Seller in Note 10, "Due to Seller and Contingent Earnout." As of June 30, 2024, the remaining balance under this note is $50,000. During the measurement period (which is the period required to obtain all necessary information that existed at the acquisition date, or to conclude that such information is unavailable, not to exceed one year), additional assets or liabilities may be recognized, or there could be changes to the amounts of assets or liabilities previously recognized on a preliminary basis, if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of these assets or liabilities as of that date. The measurement period for the GTMR Acquisition closed as of March 22, 2024.
During the measurement period, the Company recorded several adjustments to goodwill as a result of GTMR's adoption of ASC 842, tax adjustments, and an update to the fair value of acquired furniture and equipment. These measurement period adjustments were subsequently identified as a result of the completion of third party accounting evaluation.
The Company also recorded a measurement period adjustment to goodwill as a result of finalizing the transaction price. The Company entered into the Accounts Receivable Note due to the sellers four months after the closing date of the transaction, subject to the adjustment of any net working capital deficiencies. This amount was determined to be $156,847.
The following table shows unaudited pro-forma results for the six months ended June 30, 2023, as if the acquisition of GTMR had occurred on January 1, 2023. These unaudited pro forma results of operations are based on the historical financial statements of each of the companies.
| | | | | |
For the six months ended June 30, 2023 | |
Revenues | $ | 25,379,875 | |
Net loss | $ | (6,293,003) | |
Net loss per share - basic | $ | (0.15) | |
Note 4: Fixed Assets
Fixed assets consisted of the following as of June 30, 2024 and December 31, 2023:
| | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
Equipment and software | $ | 258,091 | | | $ | 258,091 | |
Furniture | 43,119 | | | 43,119 | |
Automobile | 43,928 | | | 43,928 | |
Leasehold improvements | 192,959 | | | 192,959 | |
Total fixed assets | 538,097 | | | 538,097 | |
Accumulated depreciation | (309,014) | | | (227,927) | |
Fixed assets, net | $ | 229,083 | | | $ | 310,170 | |
Depreciation expense for the three and six months ended June 30, 2024, was $39,826 and $81,087, and depreciation expense for the three and six months ended June 30, 2023, was $46,364 and $66,299, respectively.
Note 5: Intangible Assets and Goodwill
Intangible assets consisted of the following as of June 30, 2024 and December 31, 2023:
| | | | | | | | | | | | | | | | | |
| | | June 30, 2024 | | December 31, 2023 |
Customer relationships | 4.5– 15 years | | $ | 11,961,000 | | | $ | 11,961,000 | |
Tradename | 4.5 years | | 783,000 | | | 783,000 | |
Trademark | 10-15 years | | 533,863 | | | 533,864 | |
Backlog | 2-5 years | | 3,210,000 | | | 3,210,000 | |
Non-compete agreement | 3-5 years | | 684,000 | | | 684,000 | |
| | | 17,171,863 | | | 17,171,864 | |
Accumulated amortization | | | (9,286,941) | | | (8,201,000) | |
Intangible assets, net | | | $ | 7,884,922 | | | $ | 8,970,864 | |
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 and six months ended June 30, 2024 was $529,218 and $1,085,942, respectively, and amortization expense for the three and six months ended June 30, 2023 was $634,044 and $1,124,675, respectively. 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 June 30 are as follows:
| | | | | |
Remainder of the year ending December 31, 2024 | $ | 988,744 | |
Year ending 2025 | 1,453,000 | |
Year ending 2026 | 1,242,863 | |
Year ending 2027 | 1,034,302 | |
Year ending 2028 | 543,592 | |
Year ending 2029 and thereafter | 2,622,421 | |
Total | $ | 7,884,922 | |
The activity of goodwill for the six months ended June 30, 2024, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Corvus | | SSI | | MFSI | | Total |
December 31, 2023 | $ | 1,958,741 | | | $ | 8,718,093 | | | $ | 40,073 | | | $ | 10,716,907 | |
Goodwill acquired through acquisitions | — | | | — | | | — | | | — | |
| | | | | | | |
June 30, 2024 | $ | 1,958,741 | | | $ | 8,718,093 | | | $ | 40,073 | | | $ | 10,716,907 | |
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 were no additions of goodwill for the six months ended June 30, 2024. The Company has not disposed of any entities, nor has the Company recognized impairment on goodwill for the periods presented.
Note 6: Convertible Promissory Note - Related Party
We had the following promissory note as of June 30, 2024 and December 31, 2023:
| | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
Convertible note payable with a trust related to one of the Company’s directors, convertible at $0.26 per share, at 5% interest (amended April 4, 2022, maturity date September 30, 2024) | — | | | 3,209,617 | |
| | | |
Less: Beneficial conversion feature discount | — | | | (971,405) | |
| $ | — | | | $ | 2,238,212 | |
Interest expense which includes amortization of discount for the three and six months ended June 30, 2024, was $0 and $245,438, respectively, and interest expense which includes amortization of discount for the three and six months ended June 30, 2023 was $336,202 and $676,322, respectively. There was no accrued interest on the note payable as of June 30, 2024. The amount of the beneficial conversion feature ("BCF") discount recorded was evaluated for characteristics of liability or equity and was determined to be equity under ASC 470 and ASC 480. The Company recognized this as additional paid in capital, and the discount was being amortized over the life of the note.
On February 22, 2024, the Company entered into an agreement to amend the related party convertible promissory note with the Buckhout Charitable Remainder Trust, resulting in the elimination of the BCF discount feature, change in the interest rate, extension of the term, and change in the payoff schedule. As part of this amendment, a partial payment of $809,617 was made on the date of the agreement, resulting in an outstanding balance of $2,400,000 as of that date. The change in terms of the note were evaluated for characteristics of modification or extinguishment, and it was determined that under ASC 470, the debt amendment was considered to be an extinguishment, thus the amended note is considered a new note. As of February 22, 2024, the remaining unamortized carrying value of the BCF was $761,783, which was treated as a loss on debt extinguishment on the income statement. Concurrent with this amendment, we determined that the trustee of the Buckhout Charitable Remainder Trust (who resigned as an officer of the Company) is no longer a related party to the Company. See Note 7, "Notes Payable" for more information about the terms of the new note.
Note 7: Notes Payable
Our notes payable consists of the following as of June 30, 2024 and December 31, 2023:
| | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
Note payable at 7% originally due November 2023, maturing September 30, 2024 (a) | $ | — | | | $ | 5,600,000 | |
Note payable at 10% interest dated February 28, 2022 and matures the earlier of (i) September 30, 2024 or (ii) the acceleration of the obligations as contemplated under the promissory note including the successful completion of an equity offering of at least $15,000,000 (b) | — | | | 400,000 | |
Note payable at 7.5% dated February 22, 2024, maturing August 31, 2026 (c) | 6,000,000 | | | - | |
Note payable at 12% interest dated April 6, 2023 and matures the earlier of (i) September 30, 2024 or (ii) the acceleration of the obligations as contemplated under the promissory note (d) | — | | | 400,000 | |
Convertible note payable, convertible at $1.60 per share, at 7%, maturing April 4, 2023 (e) | — | | | 840,000 | |
Promissory note payable (f) | 2,400,000 | | | — | |
Term note payable, at prime plus 3% interest, applied on a deferred basis (11.50% at June 30, 2024 and 6.25% at December 31, 2023) maturing August 11, 2024 (g) | 252,678 | | | 981,764 | |
| | | |
Total Notes Payable | 8,652,678 | | | 8,221,764 | |
Less: Debt Discount | — | | | (146,989) | |
| $ | 8,652,678 | | | $ | 8,074,775 | |
(a)On August 12, 2021, the note payable was amended to extend the maturity date to September 30, 2024 (the "Eisiminger Note 1"). It was determined that under ASC 470, the debt amendment was considered a modification. The amount of the debt discount recorded related to the warrants granted to the note holder was evaluated for characteristics of liability or equity and was determined to be equity under ASC 470 and ASC 480 and the entire balance was fully amortized as of December 31, 2023. On February 22, 2024, the Company entered into an agreement to amend the Eisiminger Note 1, resulting in a change to the interest rate and an extension of the maturity date. The amended note was evaluated for characteristics of debt modification or extinguishment and it was determined that under ASC 470, the debt amendment was considered an extinguishment. As a result of the amendment, the Eisiminger Note 1 was combined with Eisiminger Note 2 as defined and described in (b) below, resulting in a new note, (the "2024 Eisiminger Note"). See (c) below.
(b)On February 28, 2022, the Company was obligated to issue 125,000 shares of common stock as further consideration for making this loan to the Company (the "Eisiminger Note 2"). The shares were issued in April 2022. On February 22, 2024, the Company entered into an agreement to amend the Eisiminger Note 2 resulting in a change to the interest rate and an extension of the maturity date. The Eisiminger Note 2 was evaluated for characteristics of debt modification or extinguishment and it was determined that under ASC 470, the debt amendment was considered an extinguishment. Therefore, the remaining unamortized debt discount balance of $61,263 was recorded as a loss in the income statement. As a result of the amendment, the principal balances of the Eisiminger Note 2 was combined with the Eisminger Note 1 as described in (a) above, resulting in the 2024 Eisiminger Note. See (c) below.
(c)On February 22, 2024, as a result of amending the Eisiminger Note 1 and the Eisiminger Note 2, the Company entered into 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.
(d)On April 6, 2023, the Company entered into a promissory note with a principal balance of $400,000 bearing interest at 12% per annum (the "Eisiminger Note 3"). On February 22, 2024, the Company paid the outstanding principal and accrued interest owed on the Eisiminger Note 3.
(e)On February 13, 2023, the Company entered into a series of transactions with Crom Cortana Fund LLC (“Crom”), the primary purpose of which is related to the GTMR Acquisition entered into on March 22, 2023. In connection therewith, the Company and Crom entered into an agreement to pay off the amount owed to Crom under the terms of the convertible promissory note in the original principal amount of $1,050,000 due April 4, 2023 ("Prior Crom Note"). In consideration of a $300,000 cash payment and 556,250 shares of common stock representing conversion of the remaining principal balance thereunder, the Company’s obligations under the Prior Crom Note are deemed satisfied reducing the balance to zero; we induced conversion of the debt, which effectively extinguished the debt. Simultaneously therewith, the parties entered into the Securities Purchase Agreement (the “2023 SPA”) pursuant to which Crom purchased (a) a convertible promissory note in the principal amount of $840,000 (the “2023 Note Payable”), which matures February 13, 2024 and bears interest at a per annum rate equal to 10% to be paid monthly, and (b) a warrant pursuant to which Crom has the right to purchase up to 700,000 shares of the Company’s common stock (the “2023 Warrant”) at an exercise price of $1.38 which expires 60 months from the date of issuance. The proceeds of the 2023 Note Payable were used primarily to fund the GTMR Acquisition, as well as fund the aforementioned debt repayment. On January 25, 2024, the Company paid the outstanding principal and accrued interest owed on the 2023 Note Payable to Crom.
(f)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 new note payable to the Buckhout Charitable Remainder Trust do not permit the principal amount to be converted into common stock. Refer to Note 6, "Convertible Promissory Notes - Related Party" for relevant information regarding the previous note with the Buckhout Charitable Remainder Trust. (g)Refer to Note 16, "Subsequent Events" for information about early payoff of this note. Interest expense which includes amortization of discount for the three and six months ended June 30, 2024 was $150,456 and $383,966, respectively, and $809,663 and $1,634,783 for the three and six months ended June 30, 2023, respectively. Accrued interest on the notes payable as of June 30, 2024 was $0.
Future principal payments are scheduled to be $652,678 (out of which $252,679 was paid in July 2024, refer to Note 16, "Subsequent Events" for additional information regarding the payoff) in 2024, $1,200,000 in 2025, with the remainder being paid off in 2026.
Note 8: Note Payable – Related Party
The Company entered into a note payable with a related party in August 2021 with balances as of June 30, 2024 (unaudited) and December 31, 2023, as follows:
| | | | | | | | | | | |
| June 30, 2024 (unaudited) | | December 31, 2023 |
Note payable at 5%, amended to ultimately mature in March 31, 2026 | $ | 400,000 | | | $ | 400,000 | |
On February 16, 2024, the Company entered into a letter agreement to (i) extend the maturity date from December 31, 2024 to August 1, 2025 and (ii) require subsequent monthly principal payments of $50,000 for
eight 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, the balance is reflected in non-current liabilities.
Interest expense for the three and six months ended June 30, 2024, was $4,973 and $9,945, respectively, and $4,984 and $9,912 for the three and six months ended June 30, 2023, respectively.
Note 9: 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 replaces 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, the majority of which was used to make the partial payment on the convertible promissory note with the Buckhout Charitable Remainder Trust. See Note 6, "Convertible Promissory Notes - Related Party". As of June 30, 2024, the total amount outstanding on the New Live Oak Revolver was $1,529,818. The Company incurred $68,541 in interest in the six months ended June 30, 2024, none of which is accrued as of June 30, 2024.
Note 10: Due to Seller and Contingent Earnout
As part of the GTMR Acquisition, the Company was obligated to pay $1,250,000 which included $350,000 held back to satisfy any net working capital deficiencies. This balance was originally scheduled to be paid six months following the closing date, however, payment had been postponed and the unpaid balance of $350,000 will accrue interest at an annual rate equal to the rate of interest announced publicly by Citibank N.A. in New York, plus 2% until it is paid in full in July of 2024. As of June 30, 2024, the remaining unpaid balance of $50,000, is recorded as Due to Seller in current liabilities on the Company's Consolidated Balance Sheets. Refer to Note 16, "Subsequent Events" for information of full repayment of this liability in July 2024.
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 in August 12, 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 $220,000 is reflected in non-current liabilities as of June 30, 2024. Prior to the February 15, 2024 agreement, this earnout was recorded as Contingent Earnout on the Consolidated Balance Sheets.
Note 11: Stockholders’ Equity
January 2024 Registered Offering
On January 25, 2024 the Company entered into a securities purchase agreement (the “SPA”) with an institutional investor, pursuant to which the Company agreed to sell and issue, in a registered direct offering, an aggregate of (i) 5,243,967 shares of the Company’s common stock, at a purchase price of $0.32 per share and (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 are exercisable to purchase an aggregate of 8,437,501 shares of common stock.
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 June 30, 2024 and December 31, 2023, 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 six months ended June 30, 2024, the Company recognized $36,539 in Series A dividends, all of which have been paid as of June 30, 2024.
Series B Preferred Stock
The Company has designated 10,000,000 shares of Series B Preferred Stock, par value of $0.0001. As of June 30, 2024 and December 31, 2023, 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 June 30, 2024 and December 31, 2023, the Company has 770,000 shares of Series C Preferred Stock issued and outstanding, which is convertible into 481,250 shares of the Company's common stock.
For the six months ended June 30, 2024, the Company recognized $23,100 in Series C dividends, all of which have been paid as of June 30, 2024.
Common Stock
The Company has 3,000,000,000 shares of common stock, par value $0.0001 authorized. The Company has 53,029,915 and 47,672,427 shares issued and outstanding as of June 30, 2024, and December 31, 2023, respectively.
During the six months ended June 30, 2024, 5,357,488 shares of common stock were issued, all in connection with the SPA.
During the six months ended June 30, 2024, the Company recorded an obligation to issue 515,464 restricted shares of common stock, that vest ratably over a period of one year, to its Board of Directors 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 June 30, 2024. Once issued, any unvested restricted shares of common stock are forfeited upon termination of the Board members position on the Board of Directors prior to the end of 2024.
Warrants
The following table represents a summary of warrants for the six months ended June 30, 2024 and the year ended December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2024 | | Year Ended December 31, 2023 |
| Number | | Weighted Average Exercise Price | | Number | | Weighted Average Exercise Price |
Beginning balance | 7,444,698 | | $ | 1.68 | | | 5,678,836 | | $ | 1.84 | |
| | | | | | | |
Warrants | 8,437,501 | | 0.25 | | | 1,765,862 | | 1.17 | |
Pre-funded Warrants | 3,193,534 | | 0.09 | | | — | | | — | |
Total Granted | 11,631,035 | | 0.34 | | | 1,765,862 | | 1.17 | |
| | | | | | | |
Warrants | — | | | — | | | — | | | — | |
Pre-funded Warrants | (113,521) | | | 0.32 | | | — | | | — | |
Total Exercised | (113,521) | | | 0.32 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Ending balance | 18,962,212 | | $ | 0.87 | | | 7,444,698 | | $ | 1.68 | |
| | | | | | | |
Warrants exercisable | 18,962,212 | | | | 7,444,698 | | |
Intrinsic value of warrants | $ | 202,872 | | | | | $ | 327,214 | | | |
Weighted Average Remaining Contractual Life (Years) | 4.52 | | | | 4.70 | | |
The Pre-funded Warrants that the Company sold related to the Registered Offering were immediately exercisable and do 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, of which 113,521 were exercised on February 6, 2024. See Note 16, "Subsequent Events" for additional information regarding exercise of the remaining Pre-funded warrants in July 2024. The Regular Warrants related to the Registered Offering became exercisable on March 20, 2024, upon effectiveness of shareholder approval which was obtained on February 12, 2024. The Regular Warrants expire on March 20, 2029, and have an exercise price of $0.35 per share.
The Warrants and the Pre-funded Warrants do not require a cash settlement for the warrants. Based on the terms of the agreements, both the warrants and the Pre-funded warrants were freestanding, equity-linked instruments that represented separate units of account. The Company allocated the value of the net proceeds from the offering to the ordinary shares and warrants and Pre-funded warrants based on relative fair value. The value allocated to the warrants and Pre-funded warrants was recorded in Additional Paid-In Capital in the consolidated balance sheets.
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 June, 30, 2024, 2,132,500 stock options have been granted under the Amended Plan. See Note 16, "Subsequent Events" for additional information regarding options granted to board members and officers in July 2024. The following represents a summary of options for the six months ended June 30, 2024 and the year ended December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number | | Weighted Average Exercise Price | | Weighted-Average Remaining Contractual Term (in Years) | | Weighted Average Fair Value |
Outstanding, December 31, 2023 | 8,243,437 | | $ | 2.41 | | | 4.98 | | $ | 3.58 | |
Granted | 150,000 | | 0.35 | | | 6.92 | | 0.31 | |
Exercised | — | | — | | — | | — |
Forfeited | (65,938) | | | 1.72 | | | — | | — |
Outstanding. March 31, 2024 | 8,327,499 | | $ | 2.38 | | | 4.76 | | $ | 3.55 | |
Granted | — | | — | | — | | — |
Exercised | — | | — | | — | | — |
Forfeited | (150,000) | | | 0.35 | | | — | | — |
Outstanding, June 30, 2024 | 8,177,499 | | | $ | 2.42 | | | 4.47 | | $ | 3.61 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
As of June 30, 2024 | | | | | | | |
Vested and exercisable | 5,196,972 | | $ | 2.44 | | | 4.28 | | $ | 3.14 | |
| | | | | | | |
During the six months ended June 30, 2024, the Company recognized $1,127,760 of noncash stock based compensation related to the vesting of service-based stock options. No options were exercised during the six months ended June 30, 2024.
The fair value of each option and warrant 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:
| | | | | | | | | | | |
| Six Months Ended June 30, 2024 | | Year Ended December 31, 2023 |
Expected term | 7 years | | 7 years |
Expected volatility | 120.97% – 166.14% | | 161.61% – 166.14% |
Expected dividend yield | — | | | — | |
Risk-free interest rate | 3.48% – 4.08% | | 3.48% - 3.89% |
Note 12: 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 (“2022 Crom SPA”). The Company had evaluated the conversion option liability in the convertible note and the warrants to determine proper accounting treatment and determined them to be derivative liabilities ("Derivative Liabilities").
On February 13, 2023, the 2022 Crom SPA was terminated through an induced conversion thereby extinguishing the conversion option liability associated with the 2022 Crom note; the warrants were not affected. Concurrent with the termination of the 2022 Crom SPA, the Company issued common stock, the 2023 Note Payable, and warrants in the 2023 SPA with Crom. The Company evaluated the conversion option in the 2023 Note Payable and these warrants to determine proper accounting treatment and determined them to be derivative liabilities (also “Derivative Liabilities”). The Derivative Liabilities had and have been accounted for utilizing ASC 815 “Derivatives and Hedging.”
On February 13, 2024, the Company paid the outstanding principal and accrued interest owed on the 2023 Note Payable to Crom, thereby extinguishing the conversion feature associated with this note; the warrants were not affected.
The Company recognized liabilities for the estimated fair values of the Derivative Liabilities. The estimated fair values of these liabilities were calculated using a binomial pricing model with key input variables by an independent third party, as of the date of issuance, with changes in fair value recorded as gains or losses on revaluation in other income (expense).
The Company determined that the significant inputs used to value the Derivative Liabilities fall within Level 3 of the fair value hierarchy. As a result, the Company has determined that the valuation of its Derivative Liabilities are classified in Level 3 of the fair value hierarchy as shown in the table below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at June 30, 2024 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Derivative Liabilities | $ | — | | | $ | — | | | $ | 55,000 | | | $ | 55,000 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2023 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Derivative Liabilities | $ | - | | | $ | - | | | $ | 157,600 | | | $ | 157,600 | |
| | | | | | | |
| | | | | | | |
The Company’s derivative liabilities as of June 30, 2024 and December 31, 2023 associated with the Derivative Liabilities are as follows.
| | | | | | | | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 | | Inception |
| | | | | |
Fair value of 656,250 warrants issued on April 4, 2022 | $ | 20,000 | | | $ | 66,000 | | | $ | 378,000 | |
Fair value of conversion option of Crom convertible note | — | | | 200 | | | 162,000 | |
Fair value of 700,000 warrants issued on February 13, 2023 | 35,000 | | | 91,400 | | | 259,000 | |
| $ | 55,000 | | | $ | 157,600 | | | |
Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each Derivative Instrument is estimated using a binomial valuation model. The following assumptions were used for the period as follows:
| | | | | |
| June 30, 2024 |
Expected term - warrants | 2.76 years - 3.60 years |
Stock price as of measurement date | $ | 0.19 | |
Volatility (observed) | 120.40% - 125.92% |
Incremental discount | 5.0 | % |
Selected volatility – post haircut | 93.7% - 98.4% |
Risk-free interest rate | 4.41% - 4.51% |
| |
| |
Note 13: 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 six months ended June 30, 2024, the Company had three customers representing 55% of revenue earned, and for the six months ended June 30, 2023, the Company had two customers representing 44% of revenue earned. Any customer that represents 10% or greater of total revenue represents a risk. The Company also has three customers that represent 48% and three customers that represent 54% of the total accounts receivable as of June 30, 2024, and December 31, 2023, respectively.
Note 14: 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 (7.00)% and (0.70)% for the three months ended June 30, 2024, and 2023, respectively. The increase in the effective tax for the three months ended June 30, 2024, was primarily due 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. The effective income tax rate was (4.50)% and 16.40% for the six months ended June 30, 2024, and 2023,
respectively. The decrease in the effective tax rate was primarily due to the partial release of the valuation allowance in 2023 due to the increase in deferred tax liabilities that related to the GTMR acquisition resulting in a $1.2 million net income tax benefit.
Note 15: Factoring of Accounts Receivable
On January 24, 2023, GTMR (acquired by the Company on March 22, 2023 and discussed in Note 3, "Acquisitions" entered into a factoring agreement (the “Factoring Agreement”) with Republic Capital Access LLC (“RCA”) wherein GTMR agreed to sell certain of its accounts receivable, up to a limit of $1,000,000 without recourse.
During the six-months ended June 30, 2023, total receivables sold under the Factoring Agreement was $1,335,813. Without recourse indicates that the Company assigns and transfers its rights, title, and interest in and to the accounts receivable to RCA, meaning that the Company will not be liable to repay all or any portion of the advance amount if any portion of the accounts receivable is not paid by the Company’s customer(s). Information on accounts receivable identified for factoring are provided and verified by RCA prior to being accepted for factoring. Pursuant to the Factoring Agreement, the Company received an initial payment of 90% or 85% on prime contracts or subcontracts, respectively. The remaining balance of the receivable is paid upon receipt of payment by RCA, less RCA factoring fees.
The Company pays factoring fees associated with the sale of receivables based on the dollar value of the receivables sold. Factoring fees paid under this arrangement were $8,257 for the six months ended June 30, 2023.
The Company did not factor any receivables under the Factoring Agreement for the three- and six-months ended June 30, 2024. The Company terminated this agreement in February 2024.
Note 16: Subsequent Events
On July 1, 2024 the Company entered into a one-year employment agreement with Glen R. Ives (the "Ives Employment Agreement") to serve as President and Chief Executive Officer of the Company, at which time Mark Fuller resigned from those positions. Mr. Fuller will remain a member of the board of directors of the Company. Pursuant to the Ives Employment Agreement, Mr. Ives will be entitled to an annual base salary of $300,000, and will be eligible for a maximum annual cash incentive and discretionary bonus equal to up to 100% of his annual base salary. To be eligible to receive the annual cash incentive bonus amount, which is up to 50% of his annual base salary, the Company must achieve certain performance thresholds. The discretionary bonus, which is also equal to up to 50% of his base salary, is at the sole discretion of the Company's Compensation, Culture, and People Committee (the "Compensation Committee"). Additionally, Mr. Ives will be granted stock options under the Amended Plan to purchase 750,000 shares of the Company's restricted common stock at an exercise price of $0.212. The stock options vest ratably over the one-year employment period and expire on June 30, 2031. Upon a change of control, as defined in the Amended Plan, all unvested options issued to Mr. Ives shall become fully vested upon such change of control.
On July 1, 2024 the Company also entered into a nine-month employment agreement with Jay O. Wright (the "Wright Employment Agreement"), who serves as the Company's General Counsel and Executive Vice President-Strategy, pursuant to which Mr. Wright will be entitled to an annual base salary of $270,000, a monthly health insurance stipend of $4,000, and an annual discretionary bonus at the sole discretion of the Company's Compensation Committee.
If Messrs. Ives and Wright terminate their employment with the Company without good reason or their employment is terminated (i) as a result of their death, (ii) by the Company after a determination of a disability, or (iii) by the Company for cause, the Company will pay or provide Messrs. Ives and Wright (a) those benefits as required by law, (b) for any earned but unpaid base salary, (c) for the reimbursement of unreimbursed
business expenses, and (d) for the payment of unpaid performance bonus for any fiscal year ended prior to the termination date. In addition, if Messrs. Ives’s or Wright's employment is terminated by the Company without cause or by him for good reason, then Messrs. Ives and Wright shall be entitled to receive the executives' base salary for a period equal to the earlier of (x) twelve (12) months following the termination date and (y) the date on which the employment period would have expired had the employment period not been terminated earlier by the Company without cause or by Messrs. Ives or Wright without good reason (the “Executives' Severance Payments”). In order to qualify for the Executives' Severance Payments the executive must execute and not revoke a mutual release agreement in a form reasonably acceptable to the Company. The Ives Employment Agreement and the Wright Employment Agreement each contain customary confidentiality restrictions, non-disparagement covenants, and non-solicitation covenants with respect to our employees, consultants, and customers and permit Mr. Ives and Mr. Wright to participate in those benefit plans generally available to all employees of the Company.
The term note payable with a balance of $252,678 as of June 30, 2024, at 3% maturing August 11, 2024, as discussed under Note 7, "Notes Payable", was repaid in full on July 8, 2024, to Live Oak Bank. As of July 11, 2024, the remaining balance of $50,000 due to the seller of GTMR as discussed under Note 10, "Due to Seller and Contingent Earnout", was repaid in full. As of July 2024, the remaining 3,080,013 Pre-funded Warrants discussed under Note 11, "Stockholders' Equity" issued in connection with the January 2024 Registered Offering were exercised for $3,080.01.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
Business Overview
Castellum, Inc. is focused on building a large, successful technology company in the areas of cybersecurity, information technology, electronic warfare, information warfare, and information operations with businesses in the defense, federal, civilian, and commercial markets. Our services 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"). Our primary customers are agencies and departments of the U.S. Government ("USG"), financial services, healthcare, and other users of large data applications. Our expertise and technology support national security missions and government modernization for intelligence, defense, and federal civilian customers.
Recent Developments
On January 25, 2024 the Company entered into a securities purchase agreement (the “SPA”) with an institutional investor, pursuant to which the Company agreed to sell and issue, in a registered direct offering, an aggregate of (i) 5,243,967 shares of the Company’s common stock, at a purchase price of $0.32 per share and (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. 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 are exercisable to purchase an aggregate of 8,437,501 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”).
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". 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.
Business Operations and Trends
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:
•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;
•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;
•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;
•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;
•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;
•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;
•increased inflationary pressure that could impact the cost of doing business and/or reduce customer buying power;
•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;
•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;
•efforts by the USG to address organizational conflicts of interest and related issues and the impact of those efforts on us and our competitors;
•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;
•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;
•USG agencies awarding contracts on a technically acceptable/lowest cost basis, which could have a negative impact on our ability to win certain contracts;
•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;
•impact of pre-requisite certifications such as cyber maturity model certification, capability maturity model integration and international organization for standards on certain contract opportunities;
•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
•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.
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.
Budgetary Environment
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.
Basis of presentation
We have presented results of operations, including the related discussion and analysis, for the following periods:
•the three months ended June 30, 2024 compared to the three months ended June 30, 2023;
•the six months ended June 30, 2024 compared to the six months ended June 30, 2023.
Key Components of Revenue and Expenses
Revenues
Our revenues are primarily derived from services provided to the U.S. federal, state, and local governments. We currently generate our revenue from three different types of contractual arrangements: Cost Plus Fixed Fee (“CPFF”), Fixed Firm Price (“FFP”), and Time and Materials (“T&M”) contracts. For CPFF contracts, we use input progress measures to derive revenue based on hours worked on contract performance as follows: direct costs plus Defense Contract Audit Agency approved provisional burdens plus fee. The provisional indirect rates are adjusted and billed at actual at year end. Revenue from FFP contracts is generally recognized ratably over the contract term, using a time-based measure of progress, even if billing is based on other metrics or milestones, including specific deliverables. For T&M contracts, we use input progress measures to estimate
revenue earned based on hours worked on contract performance at negotiated billing rates, plus direct costs and indirect cost burdens associated with materials and the direct expenses incurred in performance of the contract.
Cost of Revenues
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.
Gross Profit and Gross Profit Margin
Our gross profit comprises our revenues less our cost of revenues. Gross profit margin is our gross profit divided by our revenues.
Operating Expenses
Our operating expenses include indirect costs, overhead, and general and administrative expenses.
•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.
•Overhead consists of expenses associated with the support of operations or production, including labor for management of contracts, operations, training, supplies, and certain facilities to perform customer work.
•General and administrative expenses consist primarily of corporate and administrative labor expenses, administrative bonuses, legal expenses, IT expenses, and insurance expenses.
Results of operations
The period to period comparisons of our results of operations have been prepared using the historical periods included in our unaudited consolidated financial statements. The following discussion should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Change |
| 2024 | | 2023 | | Amount | | % |
Revenues | $ | 11,522,388 | | | $ | 12,475,802 | | | $ | (953,414) | | | (8) | % |
Cost of revenues | 6,849,180 | | | 7,263,984 | | | (414,804) | | | (6) | % |
Gross Profit | 4,673,208 | | | 5,211,818 | | | (538,610) | | | (10) | % |
Operating expenses: | | | | | | | |
Indirect costs | 2,211,640 | | | 2,241,460 | | | (29,820) | | | (1) | % |
Overhead | 512,261 | | | 536,937 | | | (24,676) | | | (5) | % |
General and administrative expenses | 3,519,512 | | | 4,244,312 | | | (724,800) | | | (17) | % |
| | | | | | | |
Change in fair value of contingent earnout | — | | | 83,000 | | | (83,000) | | | NM |
Total operating expenses | 6,243,413 | | | 7,105,709 | | | (862,296) | | | (12) | % |
Loss from operations: | (1,570,205) | | | (1,893,891) | | | 323,686 | | | (17) | % |
| | | | | | | |
Other (expense), net | (155,999) | | | (217,835) | | | 61,836 | | | (28) | % |
| | | | | | | |
Loss before income taxes and preferred stock dividends | (1,726,204) | | | (2,111,726) | | | 385,522 | | | (18) | % |
| | | | | | | |
Income tax benefit (expense) | (120,531) | | | 13,280 | | | (133,811) | | | (1008) | % |
Preferred stock dividend | 29,819 | | | 29,820 | | | (1) | | | — | % |
Net loss | $ | (1,876,554) | | | $ | (2,128,266) | | | $ | 251,712 | | | (12) | % |
| | | | | | | |
NM - Not Meaningful | | | | | | | |
Revenue
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.
Cost of revenues
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.
Gross Profit
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.
Operating expenses
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.
Other income (expense)
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,
Income tax (expense) benefit
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.
Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Change |
| 2024 | | 2023 | | Amount | | % |
Revenues | $ | 22,857,441 | | | $ | 22,412,815 | | | $ | 444,626 | | | 2 | % |
Cost of revenues | 13,668,812 | | | 13,163,215 | | | 505,597 | | | 4 | % |
Gross Profit | 9,188,629 | | | 9,249,600 | | | (60,971) | | | (1) | % |
Operating expenses: | | | | | | | |
Indirect costs | 4,702,330 | | | 4,452,339 | | | 249,991 | | | 6 | % |
Overhead | 968,881 | | | 1,004,619 | | | (35,738) | | | (4) | % |
General and administrative expenses | 7,758,845 | | | 10,290,842 | | | (2,531,997) | | | (25) | % |
| | | | | | | |
Change in fair value of contingent earnout | — | | | 65,000 | | | (65,000) | | | NM |
Total operating expenses | 13,430,056 | | | 15,812,800 | | | (2,382,744) | | | (15) | % |
Loss from operations: | (4,241,427) | | | (6,563,200) | | | 2,321,773 | | | (35) | % |
| | | | | | | |
Other (expense), net | (1,462,639) | | | (1,097,563) | | | (365,076) | | | 33 | % |
| | | | | | | |
Loss before income taxes and preferred stock dividends | (5,704,066) | | | (7,660,763) | | | 1,956,697 | | | (26) | % |
| | | | | | | |
Income tax benefit (expense) | (254,390) | | | 1,238,929 | | | (1,493,319) | | | (121) | % |
Preferred stock dividend | 59,639 | | | 60,139 | | | (500) | | | (1) | % |
Net loss | $ | (6,018,095) | | | $ | (6,481,973) | | | $ | 463,878 | | | (7) | % |
| | | | | | | |
NM - Not Meaningful | | | | | | | |
Revenue
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").
Cost of revenues
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.
Gross Profit
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.
Operating expenses
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.
Other expense
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.
Income tax (expense) benefit
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.
Contract backlog
We define backlog to include the following three components:
•Funded Backlog - Funded backlog represents the revenue value of orders for services under existing contracts for which funding is appropriated or otherwise authorized less revenue previously recognized on these contracts.
•Unfunded Backlog - Unfunded backlog represents the revenue value of orders (including optional orders) for services under existing contracts for which funding has not been appropriated or otherwise authorized.
•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.
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.
Contract Backlog
| | | | | |
Funded | $ | 13,822,036 | |
Unfunded | 19,916,784 | |
Priced Options | 52,638,471 | |
Total Scheduled Backlog | $ | 86,377,291 | |
Total backlog
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.
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.
In addition, contract backlog includes orders under contracts for which the period of performance has expired, and we may not recognize revenue on the funded backlog that includes such orders due to, among other reasons, the tardy submission of invoices by our subcontractors and the expiration of the relevant appropriated funding in accordance with a predetermined expiration date such as the end of the USG's fiscal year.
We expect to recognize revenue from a substantial portion of funded backlog within the next 24 months. However, given the uncertainties discussed above, we can give no assurance that we will be able to convert our backlog into revenue in any particular period, if at all.
Liquidity and capital resources
Sources
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 LLC ("NYSE American"). In January and February of 2024, we undertook the following significant equity and debt transactions that enhance our liquidity and sources of funds:
•In January 2024, after filing a universal shelf registration statement on Form S-3 with the SEC in December of 2023 allowing us to issue additional equity (“Security Offering”), we raised net proceeds of approximately $2,200,000.
•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.
•In February 2024, we agreed with Emil Kaunitz to extend the maturity date of a $400,000 note payable from December 31, 2024, to August 1, 2025, after which we will make monthly principal payments of $50,000 per month for eight months.
•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.
•In February 2024, we agreed with Robert Eisiminger to extend the maturity dates of two notes payable for $5,600,000 and $400,000 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 paid off a third note totaling $400,000.
•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.
•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.
•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.
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.
Uses
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. 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.
Cash flows
The following tables present a summary of cash flows from operating, investing, and financing activities for the following comparative periods.
Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2024 | | Change |
| 2024 | | 2023 | | Amount | | % |
Net cash provided by (used in) operating activities | $ | 772,346 | | | $ | (1,865,051) | | | $ | 2,637,397 | | | -141 | % |
Net cash used in investing activities | (54,534) | | | (427,734) | | | $ | 373,200 | | | -87 | % |
Net cash provided by (used in) financing activities | (136,828) | | | 641,566 | | | $ | (778,394) | | | -121 | % |
Change in cash | $ | 580,984 | | | $ | (1,651,219) | | | $ | 2,232,203 | | | -135 | % |
NM - not meaningful | | | | | | | |
Operating activities
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.
Investing activities
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.
Financing activities
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.
Critical Accounting Policies and Estimates
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.
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.
Principles of Consolidation
Refer to 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 our principles of consolidation disclosed in our Annual Report on Form 10-K for the year-ended December 31, 2023.
Recently Issued Accounting Standards
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This update requires disaggregated information about a reporting entity’s effective tax rate reconciliations as well as information on income taxes paid. This update is effective for annual periods beginning in our fiscal year ending December 31, 2025. Early adoption is permitted. We are currently evaluating the impact that this update will have on our financial statement disclosures.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. These risks include the following:
Interest rate and market risk
The Company maintains a revolving promissory note and a term loan note with Live Oak Bank, referred to as the “New Live Oak Revolver” and the “Live Oak Term Loan Note”, respectively. The New Live Oak Revolver is a variable rate instrument with a per annum interest rate equal to the prime rate as quoted in the Wall Street Journal (the “Prime Rate”), plus two percentage points (2%). Additionally, the Live Oak Term Loan Note has a per annum interest rate equal to the Prime Rate, plus three percentage points (3%). The Company paid in full the Live Oak Term Loan Note in July 2024. Rising interest rates would increase our interest expense in the future; lower rates would reduce our interest expense. Such additional cost would need to be funded out of existing cash or additional financing. Future increase in interest rates are not expected to materially impact our Company’s liquidity. The Company has no other debt obligations tied to the Prime Rate or the Secured Overnight Financing Rate.
Effects of inflation
U.S. inflation has been near a 40-year high. Because costs rise faster than revenues during the early phase of inflation, we may need to give higher than normal raises to employees, start new employees at higher wages and/or have increased cost of employee benefits, but not be able to pass the higher costs through to the government due to competition and government pressures. Therefore, we may be adversely affected (i) with lower gross profit margins; (ii) by losing contracts which are lowest price technically acceptable where another bidder underbids the real rates and then has difficulty staffing the project; and (iii) by having difficulty maintaining our staff at current salaries. Given the long-term nature of the Company’s contracts, we may be unable to take sufficient action to mitigate inflationary pressures.
Sustained inflation also can cause the Federal Reserve Board and its Open Market Committee (“Fed”) to raise the target for the federal funds rate which normally translates into an increase in most banks’ Prime Rate. Because our notes with Live Oak Banking Company are both variable interest rate instruments tied to the prime rate, actions by the Fed to increase the federal funds rate will increase our cost of debt and our interest expense thereby increasing our pre-tax loss and net loss. Our borrowing costs have recently increased and are expected
to increase with future Fed interest rate increases, although the impacts have been and are expected to continue to be immaterial. Our contracts with U.S. federal, state, and local government customers do not permit us to pass along our increased financing costs. The increases to our borrowing costs have not impacted (and are not expected to impact) our ability to make timely payments.
Item 4. Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our CEO and CFO carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2024. Based upon their evaluation, our CEO and CFO concluded that our disclosure controls and procedures (as defined in Rules 13a- 15 (e) and 15d-15 (e) under the Exchange Act) were effective as of June 30, 2024.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the six months ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II
Item 1. Legal Proceedings
As a commercial enterprise and employer, the Company and our subsidiaries are subject to threatened litigation and other legal actions in the ordinary course of business, including employee-related matters, inquiries, and administrative proceedings regarding our employment practices or other matters. Neither our Company nor any of our subsidiaries is a party to any legal proceeding that, individually or in the aggregate, we believe to be uncovered by insurance or otherwise material to our Company as a whole.
Item 1A. Risk Factors
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 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. Certain statements in “Risk Factors” are forward-looking statements. See “Explanatory Note Regarding Forward-Looking Statements.”
We have added the following risk factor to those disclosed in Part I, Item 1A., Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2023:
Risks Related to our Business, Industry and Operations
Our self-insurance program may expose us to significant and unexpected costs and losses.
To help control our overall long-term costs associated with employee health benefits, we began maintaining our employee medical insurance benefits on a self-insured basis effective June 1, 2024. To limit our exposure, we have third party stop-loss insurance coverage which sets a limit on our liability for both individual and aggregate claim costs. We record a liability for our estimated cost of claims incurred but unpaid as of each balance sheets date. Our estimated liability is based on assumptions we believe to be reasonable under the current circumstances and will be adjusted as warranted based on changing circumstances. It is possible, however, that our actual liabilities may exceed our estimates of losses. We may also experience an unexpectedly large number of claims that result in costs or liabilities in excess of our projections, which could cause us to record additional expenses. Our self-insurance reserves could prove to be inadequate, resulting in liabilities in excess of our available insurance and self-insurance. If a successful claim is made against us and is not covered by our insurance or exceeds our policy limits, our business may be negatively and materially impacted. These fluctuations could have a material adverse effect on our business, operating results, and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)Recent Sales of Unregistered Securities.
The Company had no recent sales of unregistered securities.
(b)Use of Proceeds from the Public Offering.
On January 25, 2024 the Company entered into the SPA with an institutional investor, pursuant to which the Company agreed to sell and issue, in a registered direct offering, an aggregate of (i) 5,243,967 shares of the Company’s common stock, at a purchase price of $0.32 per share and (ii) 3,193,534 Pre-funded Warrants to purchase up to an aggregate of 3,193,534 shares of common stock. 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.
Pursuant to the terms of the SPA, in a concurrent private placement (the “Private Placement” and together with the Registered Offering, the “Offering”), the Company agreed to issue to the same institutional investor, for each ordinary share and Pre-funded Warrant purchased in the Offering, an additional Regular Warrant. The
Regular Warrants have an exercise price of $0.35 and are exercisable to purchase an aggregate of 8,437,501 shares of common stock, for aggregate gross proceeds to the Company of approximately $2.7 million in the Registered Offering.
The Warrants will become exercisable upon receipt of shareholder approval, expire five years from such approval, and have an exercise price of $0.35 per share. The shares, the Pre-Funded Warrants, and the Pre-Funded Warrant Shares are being offered pursuant to a shelf registration statement on Form S-3 (File No. 333-275840), which was declared effective by the SEC on December 12, 2023, and a related prospectus supplement dated January 25, 2024, related to the Registered Offering. The Offering closed on January 29, 2024.
Pursuant to a placement agency agreement dated as of January 25, 2024 (the “Placement Agency Agreement”), the Company engaged Maxim Group LLC (“Maxim”) to act as the lead placement agent in connection with the Offering. At closing, the Company paid Maxim (i) a cash fee equal to 7.0% of the aggregate gross proceeds of the Offering and (ii) reimbursed Maxim for all reasonable and documented out-of-pocket expenses of $60,000, which included the reasonable fees, costs, and disbursements of its legal counsel.
There has been no material change in the planned use of proceeds from our Registered Offering as described in our final prospectus dated January 25, 2024 and filed with the SEC on January 29, 2024 pursuant to Rule 424(b)(4) of the Securities Act. As of the date of this Quarterly Report on Form 10-Q, we cannot predict with certainty all of the particular uses for the net proceeds, or the amounts that we will actually spend on the uses set forth in the prospectus.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The documents listed in this Exhibit Index of this Quarterly Report on Form 10-Q are incorporated by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference |
Exhibit Number | | | | Form | | File Number | | Exhibit | | Filing Date |
| | | | | | | | | | |
2.1 | | | | S-1 | | 333-267249 | | 2.1 | | September 2, 2022 |
| | | | | | | | | | |
2.2 | | | | S-1 | | 333-267249 | | 2.2 | | September 2, 2022 |
| | | | | | | | | | |
2.3 | | | | S-1 | | 333-267249 | | 2.3 | | September 2, 2022 |
| | | | | | | | | | |
2.4 | | | | S-1 | | 333-267249 | | 2.4 | | September 2, 2022 |
| | | | | | | | | | |
2.5 | | | | S-1 | | 333-267249 | | 2.5 | | September 2, 2022 |
| | | | | | | | | | |
2.6 | | | | 8-K | | 001-41526 | | 2.1 | | March 28, 2023 |
| | | | | | | | | | |
3.1 | | | | S-1 | | 333-267249 | | 3.1 | | September 2, 2022 |
| | | | | | | | | | |
3.2 | | | | S-1/A | | 333-267249 | | 3.2 | | October 4, 2022 |
| | | | | | | | | | |
3.3 | | | | 8-K | | 001-41526 | | 3.1 | | October 18, 2022 |
| | | | | | | | | | |
3.4 | | | | 8-K | | 001-41526 | | 3.1 | | April 6, 2023 |
| | | | | | | | | | |
4.1 | | | | S-1 | | 333-267249 | | 4.1 | | September 2, 2022 |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
4.2 | | | | S-1 | | 333-267249 | | 4.2 | | September 2, 2022 |
| | | | | | | | | | |
4.3 | | | | S-1 | | 333-267249 | | 4.3 | | September 2, 2022 |
| | | | | | | | | | |
4.4 | | | | S-1 | | 333-267249 | | 4.4 | | September 2, 2022 |
4.5 | | | | 8-K | | 001-41526 | | 4.1 | | February 16, 2023 |
| | | | | | | | | | |
4.6 | | | | S-3 | | 333-275840 | | 4.2 | | December 1, 2023 |
| | | | | | | | | | |
10.1 | | | | S-1 | | 333-267249 | | 10.1 | | September 2, 2022 |
| | | | | | | | | | |
10.2 | | Term Loan Promissory Note issued on August 11, 2021 by and between Registrant, Specialty Systems, Inc., Corvus Consulting, LLC, Mainnerve Federal Services, Inc., Merrison Technologies, LLC, and Live Oak Banking Company | | S-1 | | 333-267249 | | 10.2 | | September 2, 2022 |
| | | | | | | | | | |
10.3 | | Term Loan and Security Agreement dated August 11, 2021, by and between Registrant, Specialty Systems, Inc., Corvus Consulting, LLC, Mainnerve Federal Services, Inc., Merrison Technologies, LLC and Live Oak Banking Company | | S-1 | | 333-267249 | | 10.3 | | September 2, 2022 |
| | | | | | | | | | |
10.4 | | | | S-1 | | 333-267249 | | 10.4 | | September 2, 2022 |
| | | | | | | | | | |
10.5 | | | | S-1 | | 333-267249 | | 10.5 | | September 2, 2022 |
| | | | | | | | | | |
10.6 | | | | S-1 | | 333-267249 | | 10.6 | | September 2, 2022 |
| | | | | | | | | | |
10.7 | | Loan and Security Agreement dated March 28, 2022, by and between Registrant, Specialty Systems, Inc., Corvus Consulting, LLC, Mainnerve Federal Services, Inc., Merrison Technologies, LLC and Live Oak Banking Company | | S-1 | | 333-267249 | | 10.7 | | September 2, 2022 |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
10.8 | | | | S-1 | | 333-267249 | | 10.8 | | September 2, 2022 |
| | | | | | | | | | |
10.9+ | | | | S-1 | | 333-267249 | | 10.9 | | September 2, 2022 |
| | | | | | | | | | |
10.10+ | | | | S-1 | | 333-267249 | | 10.10 | | September 2, 2022 |
| | | | | | | | | | |
10.11+ | | | | S-1 | | 333-267249 | | 10.11 | | September 2, 2022 |
| | | | | | | | | | |
10.12+ | | | | S-1 | | 333-267249 | | 10.12 | | September 2, 2022 |
| | | | | | | | | | |
10.13+ | | | | S-1 | | 333-267249 | | 10.13 | | September 2, 2022 |
| | | | | | | | | | |
10.14+ | | | | S-1 | | 333-267249 | | 10.14 | | September 2, 2022 |
| | | | | | | | | | |
10.15+ | | | | 10-Q | | 001-41526 | | 10.23 | | November 14, 2022 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
10.16 | | | | S-1 | | 333-267249 | | 10.15 | | September 2, 2022 |
| | | | | | | | | | |
10.17 | | | | S-1 | | 333-267249 | | 10.16 | | September 2, 2022 |
| | | | | | | | | | |
10.18++ | | | | S-1 | | 333-267249 | | 10.17 | | September 2, 2022 |
| | | | | | | | | | |
10.19++ | | | | S-1 | | 333-267249 | | 10.18 | | September 2, 2022 |
| | | | | | | | | | |
10.20++ | | | | S-1 | | 333-267249 | | 10.19 | | September 2, 2022 |
| | | | | | | | | | |
10.21++ | | | | S-1 | | 333-267249 | | 10.20 | | September 2, 2022 |
| | | | | | | | | | |
10.22++ | | | | S-1 | | 333-267249 | | 10.21 | | September 2, 2022 |
| | | | | | | | | | |
10.23++ | | | | S-1 | | 333-267249 | | 10.22 | | September 2, 2022 |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
10.24 | | | | 8-K | | 001-41526 | | 10.2 | | February 16, 2023 |
| | | | | | | | | | |
10.25+ | | | | 8-K | | 001-41526 | | 10.1 | | March 28, 2023 |
| | | | | | | | | | |
10.26+ | | | | 8-K | | 001-41526 | | 10.2 | | March 28, 2023 |
| | | | | | | | | | |
10.27 | | Loan and Security Agreement issued on February 22, 2024 by Registrant, Specialty Systems, Inc., Corvus Consulting, LLC, Mainnerve Federal Services, Inc., Global Technology and Management Resources, Inc., and Live Oak Banking Company | | 8-K | | 001-41526 | | 10.2 | | February 22, 2024 |
| | | | | | | | | | |
10.28 | | | | 8-K | | 001-41526 | | 10.3 | | February 22, 2024 |
| | | | | | | | | | |
10.29 | | | | 8-K | | 001-41526 | | 10.4 | | February 22, 2024 |
| | | | | | | | | | |
10.30 | | | | 8-K | | 001-41526 | | 10.5 | | February 22, 2024 |
| | | | | | | | | | |
10.31 | | | | 8-K | | 001-41526 | | 10.6 | | February 22, 2024 |
| | | | | | | | | | |
10.32 | | | | 8-K | | 001-41526 | | 10.7 | | February 22, 2024 |
| | | | | | | | | | |
10.33 | | | | 8-K | | 001-41526 | | 10.8 | | February 22, 2024 |
| | | | | | | | | | |
10.34 | | | | 8-K | | 001-41526 | | 10.9 | | February 22, 2024 |
| | | | | | | | | | |
31.1* | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
31.2* | | | | | | | | | | |
| | | | | | | | | | |
32.1** | | | | | | | | | | |
| | | | | | | | | | |
32.2** | | | | | | | | | | |
| | | | | | | | | | |
101 | | The following financial information from Castellum, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2023 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, and (v) Notes to the Consolidated Financial Statements. | | | | | | | | |
| | | | | | | | | | |
104 | | Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | | | |
_______________________
* Filed herewith.
** The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the SEC and not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Exchange Act whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.
+ Management contract or compensatory plan.
++ Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K because such information is (i) not material and (ii) the type of information the Company treats as confidential. The Company will furnish supplementally an unredacted copy of such exhibit to the SEC or its staff upon its request.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | |
Date: August 9, 2024 | CASTELLUM, INC. |
| |
| /s/ Glen R. Ives |
| Glen R. Ives |
| Chief Executive Officer (Principal Executive Officer) |
| |
| /s/ David T. Bell |
| David T. Bell |
| Chief Financial Officer (Principal Financial Officer) |