Castellum, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023, compared with Q1 2022. Castellum acquires and grows technology services businesses, primarily serving U.S. government customers in IT, cybersecurity, intelligence, and related fields. The quarter included nine days of GTMR operations following its March acquisition.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $9.94 million | $9.99 million |
| Gross profit / margin | $4.04 million / 40.6% | $4.13 million / 41.4% |
| Operating expenses | $8.71 million | $4.99 million |
| Operating loss | $(4.67) million | $(0.86) million |
| Net loss | $(4.32) million | $(1.40) million |
| Net loss attributable to common shareholders | $(4.35) million | $(1.41) million |
| Basic and diluted loss per share | $(0.10) | $(0.07) |
| Operating cash flow | $(2.43) million | $0.08 million |
- Revenue declined 1%; management attributed the decrease primarily to lower headcount on continuing contracts and programs completed in 2022, partly offset by LSG and GTMR.
- Revenue mix shifted: time-and-materials revenue increased to $5.72 million from $4.88 million; firm-fixed-price revenue fell to $0.94 million from $1.77 million; cost-plus-fixed-fee revenue was $3.27 million versus $3.33 million.
- Gross profit declined 2%, with management citing lower margins on certain projects, higher labor costs, and increased contractor competition.
- Operating expenses rose 74%. General and administrative expense increased to $6.05 million from $2.84 million, primarily due to executive stock-based compensation, officer warrants, and GTMR-related legal and audit costs. Stock-based compensation was $3.72 million, versus $0.94 million a year earlier.
- Q1 included a $1.23 million income-tax benefit, primarily a discrete $1.24 million benefit from releasing a valuation allowance in connection with GTMR deferred tax liabilities. A $1.46 million valuation allowance remained at quarter-end.
Financial position, liquidity, and capital
- Cash was $2.27 million at March 31, down from $4.64 million at year-end 2022. Operating cash use was driven principally by a $2.10 million increase in accounts receivable, attributed to collection timing.
- Current assets were $11.42 million and current liabilities $9.39 million. Accounts receivable was $8.25 million, up from $5.19 million at year-end.
- Total liabilities were $17.09 million; stockholders’ equity was $22.89 million. Notes payable had a reported carrying value of $7.94 million, in addition to $1.30 million of related-party convertible notes, a $0.40 million related-party note, and $0.63 million drawn on the revolving facility.
- The company reported $0.32 million of unused capacity on its $0.95 million revolving credit facility. Management stated that cash, ongoing operations, and available credit should cover working capital, capital expenditures, and cash needs for the next 12 months and beyond.
- Notes payable principal payments were disclosed as approximately $1.05 million in 2023 and $7.80 million in 2024. Variable-rate bank debt exposes the company to higher interest expense if rates rise.
- Shares outstanding increased to 47.25 million from 41.70 million at December 31, 2022, primarily reflecting GTMR acquisition shares and shares issued in connection with the Crom note conversion. The filing reports 47.33 million shares outstanding as of May 10, 2023.
Acquisition, backlog, outlook, and risks
- Castellum acquired GTMR in March for $1.25 million in cash consideration and 4.87 million common shares. Preliminary purchase accounting recorded $1.82 million of goodwill and identifiable intangible assets; the purchase-price allocation remained subject to measurement-period changes. GTMR contributed only nine days of activity to reported results. Pro forma Q1 2023 results, assuming LSG and GTMR were owned from January 1, 2022, showed revenue of $12.58 million and a net loss of $6.53 million.
- Reported backlog was $168.57 million: $23.57 million funded, $23.98 million unfunded, and $121.03 million in priced options. The company expects to recognize approximately 34% of remaining performance obligations over 12 months and 55% over 24 months, but funding, options, program schedules, and other government decisions may delay or prevent conversion to revenue.
- No specific full-year revenue or earnings guidance was provided. Management said programs remained supported through the FY2023 budget process and cited the government budget, defense and IT spending, competition, staffing, and contract wins as factors affecting results.
- Risks highlighted include concentrated customers (three customers generated 60% of Q1 revenue), federal funding and continuing-resolution delays, contract and option uncertainty, inflation and labor costs, competition, and interest-rate exposure. Management noted that government contracts generally do not allow pass-through of financing-cost increases.
- The company reported no legal proceedings it considered material and stated disclosure controls were effective. It removed its COVID-19 pandemic risk factor; it reported no other material risk-factor changes.
Important facts for investors to verify
- Cash conversion and collections: receivables rose materially while operating cash flow turned negative.
- Whether margins and operating costs improve, particularly after elevated stock-based compensation and acquisition-related expenses.
- GTMR’s realized contribution, final purchase accounting, and the effect of acquisition financing and dilution.
- Backlog quality and conversion, especially the funded portion and dependence on future appropriations and option exercises.
- Debt maturities, interest costs, and liquidity against the company’s stated cash-needs outlook.
- The cash-flow statement reports a net cash decrease of $2.37 million, while the MD&A cash-flow table reports $2.33 million; the filing text does not reconcile this difference.