Castellum, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Financial statements are unaudited. Castellum provides IT, electronic warfare, information warfare, and cybersecurity services, primarily to government customers, and pursues growth through acquisitions. Share and per-share figures reflect the 1-for-20 reverse split effected October 13, 2022.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $11.12 million | $7.38 million | $32.17 million | $15.59 million |
| Gross profit | $4.65 million | $3.07 million | $13.47 million | $6.67 million |
| Gross margin | 41.8% | 41.6% | 41.9% | 42.8% |
| Operating loss | $2.05 million | $4.60 million | $5.66 million | $5.67 million |
| Net loss | $3.11 million | $4.92 million | $9.23 million | $6.58 million |
| Net loss per share, basic and diluted | $0.12 | $0.26 | $0.39 | $0.38 |
Q3 revenue increased 51%; nine-month revenue increased 106%, primarily reflecting contributions from acquisitions, including SSI, Merrison, and LSG. Nine-month gross margin softened despite higher gross profit. Operating expenses rose 55% for the nine-month period, including higher indirect costs and a $864,000 contingent-earnout fair-value charge. Interest expense also increased, contributing to the larger year-to-date net loss.
Cash, liquidity, and debt
- At September 30, cash was $1.85 million, compared with $2.02 million at December 31, 2021. Accounts receivable rose to $8.47 million from $5.41 million.
- Current assets were $10.63 million and current liabilities $8.77 million, implying working capital of approximately $1.86 million and a current ratio of approximately 1.21.
- Nine-month operating cash flow was negative $555,000; investing cash flow was negative $342,000; financing cash flow was positive $733,000. Cash decreased $165,000. Management attributed weaker operating cash flow mainly to increased receivables.
- Reported debt carrying value was approximately $9.87 million, including related-party debt; the filing says most debt matures in 2024. The $950,000 revolving facility had $300,025 drawn and approximately $650,000 of unused capacity. Variable-rate borrowing exposes the company to higher interest costs.
- Management stated that cash, ongoing operations, and available credit were expected to be sufficient for working capital and other cash needs for the next 12 months and beyond.
Material developments, outlook, and risks
- Backlog at September 30 was $88.15 million: $15.69 million funded, $10.37 million unfunded, and $62.09 million in priced options. Management expected to recognize approximately 45% within 12 months and 72% within 24 months, while cautioning that funding and option exercise are not assured.
- After quarter-end, Castellum completed a public offering and NYSE American listing. The offering comprised 1.35 million newly issued shares and 150,000 shares sold by an existing holder at $2 per share. The company received $2.7 million gross and approximately $1.89 million net; it received no proceeds from the selling stockholder’s shares. All Series B preferred stock converted in connection with the offering.
- After quarter-end, the company made a $500,000 principal payment on the Buckhout related-party note and payments related to the LSG acquisition; it also made a $100,000 advance payment on the Eisiminger note in November. In November, it announced a non-binding letter of intent to acquire an East Coast government contractor.
- Management said it expected a net loss for 2022; the filing gives no specific revenue or earnings guidance. It cited a qualified acquisition pipeline exceeding $400 million.
- Key risks include reliance on government contracts and appropriations, contract competition and recompetes, customer concentration (three customers generated 57% of nine-month revenue), receivable collection, acquisition integration, inflation and variable interest rates, and potential dilution. Goodwill was $15.53 million, with no impairment recorded.
- A material weakness in controls over review of complex accounting transactions remained under remediation. Management nevertheless concluded disclosure controls were effective as of September 30, 2022. The company reported no legal proceedings it believed material and uncovered by insurance or otherwise.
Investor verification priorities
- Reconcile the MD&A and financial statements: the MD&A gives Q3 pretax loss as $2,955,499, while the statement of operations reports $2,995,499.
- Verify the accumulated-deficit figures: the balance sheet reports $20.39 million, while the risk-factor discussion cites $20.12 million.
- Assess receivable aging, collection timing, customer concentration, and the conversion of backlog—particularly unfunded backlog and priced options—into funded work and revenue.
- Review debt maturities, related-party note repayment terms, variable-rate exposure, and the cash impact of the company’s acquisition commitments.
- Track remediation of the complex-accounting material weakness, dilution from options, warrants and convertible instruments, and progress and financing terms for any announced acquisition.