Castellum, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. Castellum acquires and operates technology and government-services businesses focused on cybersecurity, IT, electronic warfare, and information warfare. Its customers are primarily U.S. government agencies. The March 2023 acquisition of GTMR contributed to reported revenue growth.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $11.74 million | $11.12 million | $34.15 million | $32.17 million |
| Gross profit | $4.84 million | $4.65 million | $14.09 million | $13.47 million |
| Gross margin | 41.2% | 41.8% | 41.3% | 41.9% |
| Operating loss | $8.57 million | $2.05 million | $15.14 million | $5.66 million |
| Net loss attributable to common shareholders | $9.22 million | $3.14 million | $15.70 million | $9.31 million |
| Basic and diluted loss per share | $0.19 | $0.12 | $0.34 | $0.39 |
- Q3 revenue rose 6%; management attributed the increase mainly to GTMR, partly offset by negative organic growth. Nine-month revenue also increased 6%, with contributions from GTMR and LSG, partly offset by negative organic growth.
- Gross profit increased, but gross margin declined year over year in both periods. Management cited higher direct costs on certain projects.
- Q3 operating expenses included a $6.92 million non-cash goodwill impairment charge. For the nine months, general and administrative expense rose 46%, primarily reflecting stock-based compensation, higher salaries and headcount, and GTMR-related legal and audit costs.
- Nine-month operating cash flow was negative $3.14 million, compared with negative $0.55 million in 2022. Investing cash flow was negative $0.44 million; financing cash flow was positive $0.27 million. Cash fell by $3.30 million to $1.34 million.
Financial position and liquidity
- At September 30, 2023, current assets were $10.09 million and current liabilities were $16.76 million; the resulting working-capital deficit was approximately $6.67 million. Accounts receivable was $7.81 million.
- Current debt balances included $8.22 million of notes payable, $1.92 million of related-party convertible notes, and $0.63 million drawn on the revolving facility. The balance sheet also showed a $0.40 million non-current related-party note. These figures are net of applicable discounts where stated.
- The company reported $12.59 million of principal and interest payments due within 12 months. Management stated that available cash and expected operating cash flows would not be sufficient to meet all maturities as scheduled.
- Management is negotiating with creditors to extend or restructure maturities, may seek to convert convertible debt into equity, and is pursuing additional funding. It could not conclude these plans were probable of alleviating the substantial doubt about continuing as a going concern through November 2024.
- Unused capacity on the revolving credit line was $0.32 million. The company had an accumulated deficit of $41.77 million.
Material changes, outlook, and risks
- The company recorded goodwill impairment across its Corvus, SSI, and MFSI reporting units after a decline in market capitalization triggered testing. It warned that further declines in estimated cash flows or market capitalization could lead to additional impairment.
- Backlog was $180.19 million: $19.43 million funded, $30.38 million unfunded, and $130.38 million in priced options. Castellum expected to recognize about 25.9% over the next 12 months and 36.5% over 24 months. Funding appropriations, option exercise, contract changes, and staffing affect conversion; backlog is not assured revenue.
- Congress had passed a continuing resolution funding the government through November 17, 2023; the filing said subsequent funding action or a shutdown was uncertain. Government budget delays or reduced spending could delay or reduce contract funding.
- Other risks include concentrated customers (three customers generated 52% of nine-month revenue), inflation and wage pressure, variable-rate borrowing costs, competition, and the ability to win or replace government contracts. The stock had closed below $1 for more than 30 consecutive trading days; the filing noted potential delisting risk if the exchange were to require action and the company failed to comply.
- No specific revenue or earnings guidance was provided. Management expected negative operating cash flow to continue until operating businesses generate sufficient cash to fund operations and debt service. The filing reported disclosure controls as effective and no material legal proceedings known to the company.
Key facts investors should verify
- Whether creditors agree to restructure or extend the $12.59 million of payments due within 12 months, and whether additional financing or debt-to-equity conversion is completed.
- Cash burn, collections on accounts receivable, and the timing of government contract payments and funding.
- Organic revenue trends and project-level margins, separate from acquisition-driven growth.
- Backlog funding and option exercise, especially the conversion of unfunded backlog and priced options into revenue.
- Potential further goodwill impairment, share dilution, and NYSE American continued-listing status.