Castellum, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited consolidated results. Castellum provides cybersecurity, IT, and related services, primarily to U.S. government customers. Comparisons are with the three months ended March 31, 2023, unless otherwise noted.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $11.34 million | $9.94 million | +14% |
| Gross profit | $4.52 million | $4.04 million | +12% |
| Gross margin | 39.8% | 40.6% | Down 0.8 percentage points |
| Operating expenses | $7.19 million | $8.71 million | Down 17% |
| Operating loss | $(2.67) million | $(4.67) million | Loss narrowed |
| Net loss attributable to common shareholders | $(4.14) million | $(4.35) million | Loss narrowed 5% |
| Basic and diluted loss per share | $(0.08) | $(0.10) | Improved |
| Net cash from (used in) operating activities | $0.02 million | $(2.43) million | Improved |
The filing reports net loss of $4.11 million before preferred dividends for Q1 2024; loss attributable to common shareholders was $4.14 million. Revenue growth was primarily from the GTMR acquisition, partly offset by negative organic growth. Cost of revenue grew faster than revenue, which reduced gross margin; management cited higher direct costs on lower-margin projects.
Cash, liquidity, and debt
- Cash was $2.25 million at March 31, 2024, versus $1.83 million at December 31, 2023. Net cash increased $0.42 million during the quarter.
- Current assets were $9.78 million and current liabilities were $8.25 million. The company also reported $2.47 million of unused capacity under its $4.0 million Live Oak revolving facility.
- Operating cash flow was nearly breakeven. Investing activities used no cash in Q1 2024; financing activities provided $0.40 million.
- Reported debt included $9.02 million of notes payable, $1.53 million drawn on the revolver, and a separate $0.40 million related-party note. These balances exclude lease liabilities.
- In February, Castellum replaced its prior $950,000 revolver with a $4.0 million facility maturing February 22, 2025. The company also amended and extended certain notes, including a $6.0 million note due August 2026 and a $2.4 million note due August 2026. The latter requires $100,000 monthly principal payments beginning September 2024.
Material changes and unusual items
- Q1 2024 revenue growth included GTMR, acquired in March 2023; management stated organic growth was negative.
- General and administrative expense fell 30%, primarily because Q1 2023 included executive stock-based compensation and warrant-related costs associated with GTMR. Q1 2024 still included $1.66 million of noncash stock-based compensation.
- Other expense included an $822,847 loss on extinguishment of debt related to debt amendments. Interest expense, net, was $530,194, compared with $830,281 a year earlier.
- Income tax expense was $133,859, versus a $1.23 million tax benefit in Q1 2023. The prior-year benefit primarily reflected a partial release of the valuation allowance following the GTMR acquisition; Castellum said it maintains a full valuation allowance against deferred tax assets.
- The January registered offering raised approximately $2.7 million gross through common shares and pre-funded warrants, with net proceeds reported in cash flows of $2.36 million. It issued 5.36 million common shares during the quarter. Regular warrants cover up to 8.44 million shares at $0.35 per share.
Outlook, risks, and contingencies
- Castellum reported $94.9 million of backlog: $14.6 million funded, $20.9 million unfunded, and $59.4 million in priced options. Including $46.4 million of awarded but unscheduled options, total backlog was $141.4 million. Management expects to recognize approximately 42% of remaining performance obligations within 12 months and 68% within 24 months; backlog conversion is not guaranteed.
- No specific revenue or earnings guidance was provided. Management said the effect of the continuing U.S. government spending resolution on the business through the end of 2024 was unknown.
- Key risks include government appropriations and contract funding delays, contract competition and cancellations, customer concentration, staffing and clearance requirements, acquisition integration, and the ability to raise capital and service debt. Three customers generated 54% of Q1 revenue; two customers represented 34% of accounts receivable at March 31.
- Variable-rate borrowing exposes the company to higher interest expense. Management said rate increases were not expected to materially affect liquidity, while also noting that government contracts do not allow financing-cost increases to be passed through. Inflation and wage pressure may weigh on margins.
- The company reported no legal proceedings it considered material and no defaults upon senior securities. Management concluded disclosure controls were effective as of March 31, 2024.
- After quarter-end, a resale registration for warrant shares became effective. Castellum will not receive proceeds from resales, but could receive up to approximately $2.95 million if the warrants are exercised for cash.
Important facts for investors to verify
- How much of revenue growth reflects GTMR rather than organic performance, and whether organic growth improves.
- Whether reported backlog is funded and converted to revenue on the expected schedule, particularly given continuing-resolution and appropriation risks.
- Near-term liquidity and cash generation relative to scheduled debt payments, seller obligations, and the February 2025 revolver maturity.
- The potential dilution from outstanding warrants, pre-funded warrants, options, and future equity financing; common shares outstanding were 53,029,915 at March 31, 2024.
- Customer concentration and the gross-margin effect of lower-margin contract work and labor-cost inflation.