Castellum Proposes Terms For $13 Million Uplisting To Nasdaq (ONOV)

A Quick Take On Castellum

Castellum (OTCPK:ONOV) (‘CTM’) has filed to raise $12.8 million in an IPO of its common stock, according to an S-1 registration statement.

The firm acquires and operates companies in the areas of cybersecurity, information warfare and related operations.

With rapidly increasing net losses in spite of revenue growth, I’m on Hold for CTM’s uplisting effort, although the low nominal price of the stock may attract day traders seeking volatility.

Castellum Overview

Bethesda, Maryland-based Castellum was founded to grow companies that provide government agencies and companies with cybersecurity and information warfare software and services.

Management is headed by President and CEO, Mark C. Fuller, who has been with the firm since June 2019 and was previously CEO at Techshot Lighting LLC and CEO of Chesapeake Government Technologies.

The company’s primary offerings include:

• Digital Solutions

• C4ISR, Cyber & Space

• Engineering Services

• Enterprise IT

• Mission Support

As of June 30, 2022, Castellum has booked a fair market value investment of $44.5 million in equity and notes payable as of June 30, 2022 from investors.

Castellum – Customer Acquisition

The firm seeks customers via contract bidding with the U.S. government or through contractors and other commercial entities.

The company has also supported clients internationally through its IW/IO operations segment and has provided services to international customers in Australia.

Castellum had a backlog of $92 million in performance obligations as of August 1, 2022 and expects to recognize 43% of these performance obligations over the next 12 months.

General & Administrative expenses as a percentage of total revenue have varied as revenues have increased, as the figures below indicate:

General & Administrative	Expenses vs. Revenue
Period	Percentage
Six Mos. Ended June 30, 2022	30.1%
2021	58.0%
2020	42.6%

Click to enlarge

(Source – SEC)

The General & Administrative efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of General & Administrative spend, rose to 2.0x in the most recent reporting period, as shown in the table below:

General & Administrative	Efficiency Rate
Period	Multiple
Six Mos. Ended June 30, 2022	2.0
2021	0.8

Click to enlarge

(Source – SEC)

Castellum’s Market & Competition

According to a recent market research report by MarketsandMarkets, the global market for C4 (command, control, communications and computer) technologies was an estimated $120 billion in 2021 and is forecast to reach $147 billion by 2026.

This represents a forecast CAGR of 4.2% from 2022 to 2026.

The main drivers for this expected growth are the need for space-based C4 infrastructure to provide uninterrupted capabilities in the sector.

Also, the high costs of the development of new technologies that integrate with existing systems will increase time to market for system development.

Major competitive or other industry participants include:

• Northrop Grumman

• Lockheed Martin

• CACI

• Peraton

• Booz Allen Hamilton

• Others

Castellum’s Financial Performance

The company’s recent financial results can be summarized as follows:

• Sharply growing topline revenue

• Increasing gross profit but decreasing gross margin

• Variable operating losses

• Increased cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Six Mos. Ended June 30, 2022	$21,045,392	156.4%
2021	$25,067,450	87.9%
2020	$13,338,667
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Six Mos. Ended June 30, 2022	$8,820,833	145.2%
2021	$11,074,552	79.3%
2020	$6,177,040
Gross Margin
Period	Gross Margin
Six Mos. Ended June 30, 2022	41.91%
2021	44.18%
2020	46.31%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Six Mos. Ended June 30, 2022	$(3,602,260)	-17.1%
2021	$(7,725,149)	-30.8%
2020	$(1,468,149)	-11.0%
Net Income (Loss)
Period	Net Income (Loss)	Net Margin
Six Mos. Ended June 30, 2022	$(6,160,890)	-29.3%
2021	$(7,558,720)	-35.9%
2020	$(2,707,493)	-12.9%
Cash Flow From Operations
Period	Cash Flow From Operations
Six Mos. Ended June 30, 2022	$(769,006)
2021	$(1,350,136)
2020	$1,006,091
(Glossary Of Terms)

Click to enlarge

As of June 30, 2022, Castellum had $2.1 million in cash and $14.3 million in total liabilities.

Free cash flow during the twelve months ended June 30, 2022 was negative ($1.5 million).

Castellum’s IPO Details

Castellum intends to raise $12.8 million in gross proceeds from an IPO of its common stock, offering 3.2 million shares at a proposed midpoint price of $4.00 per share.

No existing shareholders have indicated an interest to purchase shares at the IPO price, and certain shareholders are offering 520,000 of common stock as part of the IPO.

The company’s stock is currently quoted on the OTC under the symbol “ONOV”.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $112 million, excluding the effects of underwriter over-allotment options.

The float to outstanding shares ratio (excluding underwriter over-allotments) will be approximately 11.4%. A figure under 10% is generally considered a ‘low float’ stock, which can be subject to significant price volatility.

Management says it will use the net proceeds from the IPO as follows:

We anticipate paying approximately $2,750,000 for repayment of debt, $3,000,000 to fund additional acquisitions, and approximately $1,000,000 for working capital and general corporate purposes

(Source – SEC)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management says the firm is not a party to any legal proceeding that would ‘be material to our Company as a whole.’

The sole listed bookrunner of the IPO is EF Hutton.

Valuation Metrics For Castellum

Below is a table of relevant capitalization and valuation figures for the company:

Measure (TTM)	Amount
Market Capitalization at IPO	$111,952,528
Enterprise Value	$111,943,780
Price/Sales	2.95
EV/Revenue	2.95
EV/EBITDA	-10.91
Earnings Per Share	-$0.42
Operating Margin	-27.07%
Net Margin	-31.82%
Float To Outstanding Shares Ratio	11.43%
Proposed IPO Midpoint Price per Share	$4.00
Net Free Cash Flow	-$1,491,425
Free Cash Flow Yield Per Share	-1.33%
Debt/EBITDA Multiple	-0.91
CapEx Ratio	-15.43
Revenue Growth Rate	156.36%
(Glossary Of Terms)

Click to enlarge

(Source – SEC)

Commentary About Castellum’s IPO

CTM is seeking U.S. public capital market funding to pay down debt, for acquisitions and for general working capital needs.

The company’s financials have generated increasing topline revenue, growing gross profit but decreasing gross margin, fluctuating operating losses and growing cash used in operations.

Free cash flow for the twelve months ended June 30, 2022 was negative ($1.5 million).

General & Administrative expenses as a percentage of total revenue have dropped as revenue has increased; its General & Administrative efficiency multiple grew to 2.0x in the most recent reporting period.

The firm currently plans to pay no dividends and to use available funds to reinvest back into the business.

The market opportunity for providing C4 technologies to governments is large and expected to grow at a moderate rate over the coming years.

There are numerous large competitors in the space who operate as prime contractors, so the firm would likely need to operate as a subcontractor due to its comparatively small size.

EF Hutton is the sole underwriter, and IPOs led by the firm over the last 12-month period have generated an average return of negative (51.4%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

The primary risk to the company’s outlook is the uneven ‘lumpiness’ of government contract revenue.

As for valuation, management is asking investors to pay an EV/Revenue multiple of around 3x, which is slightly above a basket of publicly held firms in the Aerospace/Defense sector, as compiled by noted valuation expert Dr. Aswath Damodaran.

As the firm has been acquisitive, it is difficult to determine management’s ability to grow revenue organically.

With rapidly increasing net losses, I’m on Hold for CTM’s uplisting effort, although the low nominal price of the stock may attract day traders seeking volatility.

Expected IPO Pricing Date: To be announced.