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Castellum, Inc. – ‘DRSLTR’ from 8/11/22

On:  Thursday, 8/11/22, at 10:25am ET   ·   Delayed-Release:  Filing ¶  –  Release Delayed   ·   Accession #:  1575872-22-764

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 8/11/22  Castellum, Inc.                   DRSLTR¶    11/09/22    1:131K                                   DataTracks Svcs Ltd./FA

Document/Exhibit                   Description                      Pages   Size 

 1: DRSLTR      Comment-Response or Draft-Registration-Statement    HTML    130K 
                Letter to the SEC                                                

CASTELLUM, INC.
3 BETHESDA METRO CENTER, SUITE 700
BETHESDA, MD 20814

August 11, 2022

United States Securities and Exchange Commission

Division of Corporation Finance

Office of Trade & Services

100 F Street, N.E.

Washington, D.C. 20549

Dear Ms. Beech:

By letter dated July 26, 2022, the staff (the “Staff,” “you” or “your”) of the U.S. Securities and Exchange Commission (the “Commission”) provided Castellum, Inc. (the “Company,” “we,” “us,” or “our”) with its comments to the Company’s Registration Statement on Form S-1 filed on June 29, 2022. We are in receipt of your letter and set forth below are the Company’s responses to the Staff’s comments. For your convenience, the comments are listed below, followed by the Company’s responses, in bold.

Draft Registration Statement on Form S-1 Submitted June 29, 2022

Cover Page

Response: Amendment No. 1 to the draft registration statement on Form S-1 filed with the Commission today (the “Revised DRS”) has been revised to disclose the selling stockholders information required by Item 501(b)(3) of Regulation S-K.

Response: We have added additional disclosure in the Revised DRS on the cover page and prospectus summary that will, upon the filling in of the number of shares of common stock to be offered via the underwriters both by the Company and the selling stockholders will disclose the total voting power our officers and directors will control after the offering by the Company and the selling stockholders, including both common and preferred stock. The Revised DRS discloses on the cover page the super voting rights of our Series A preferred and Series C preferred stock. Additionally, we have updated our risk factors to include certain risks associated with the Series A preferred stock and Series C preferred stock.

Risk Factors, page 14

Response: We have added additional disclosure in the Revised DRS on the cover page and in the risk factors to disclose that we do not intend to utilize the controlled company exemptions to the NYSE American corporate governance listing standards.

U.S. Inflation is at a forty-year high which may adversely impact our business, page 23

Response: Given the long-term nature of the Company’s contracts, it is unable to take any current action to mitigate inflationary pressures and have added additional disclosure to the Revised DRS accordingly.

Customer systems failures could damage our reputation and adversely affect our operating results, page 25

Response: We have included additional disclosure in the Revised DRS to reflect the measures we have taken to mitigate these cybersecurity risks.

Anti-takeover provisions in our charter documents and Nevada law..., page 30

As a related matter, we note your disclosure here that "the Eighth Judicial District Court of Clark County, Nevada, shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933." However, we note your disclosure on page 91 that "the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended." Please revise to ensure consistency throughout the filing.

Response: We have revised the risk factor in the Revised DRS to include additional disclosure to address any risks or other impacts on shareholders as a result of the exclusive forum provision, including increased costs to bring a claim and that these provisions can discourage claims or limit shareholders’ ability to bring a claim in a judicial forum that they find favorable and have stated that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder, including the concurrent jurisdiction disclosure. Additionally, we have updated the Revised DRS to correct the inconsistency concerning the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended.

Capitalization, page 36

Response: See below.

Adj for Pro Forma column

Response: We have referenced the line items impacted by each transaction in the Revised DRS via the appropriate (a) through (j) references next to each line.

Dilution, page 38

Response: The dilution disclosure on page 39 of the Revised DRS has been updated to reflect a comparison of the public contribution under the proposed public offering and the effective cash contribution of officers, directors, promoters and affiliated persons.

Management’s Discussion and Analysis of Financial Condition and Results of Operations Components of Our Results of Operations

Cost of Revenues, page 46

Response: We have included the additional disclosure on page 47 of the Revised DRS to reflect the nature of the direct costs included in cost of revenues, adding that direct costs include “specifically labor, contracted labor, materials, and other direct costs, which includes rent, insurance, and software licenses”. Please note that related to contracts we serve, we do not incur technology and development costs, cloud hosting costs, or third party service fees (other than contracted labor). Also, while we do incur depreciation and amortization expense on company-owned assets and recognize those as operating expenses, such assets are not used in direct service to contracts.

Effects of Inflation, page 55

Response: The inflationary pressures have not been material to the Company’s operations. As a result, the Company has not made any modification to the disclosure on page 57 of the Revised DRS.

Business, page 57

Response: We have included additional disclosure in the Revised DRS to describe our service offerings in greater detail in this section.

Response: We have included additional disclosure in the Revised DRS to further describe and clarify the qualified business opportunity pipeline of over $400 million.

Response: We have modified our disclosure in the Revised DRS to reflect the top three revenue-producing contracts that accounted for 60 percent of our revenue and have described those agreements in this section. We have eliminated the reference to the fourth and fifth largest customers since they each represent less than eight percent (8%) of the Company’s revenue. The Company intends to file as exhibits the top three revenue-producing contracts and will seek confidential treatment of certain portions of those agreements.

Response: We have modified our disclosure in the Revised DRS to describe the general terms of our teaming partner arrangements.

Response: We have modified our disclosure in the Revised DRS to disclose the highest percentage of revenue by contract type for each period presented and clarified that multi-year contracts are not material to the Company’s business.

Executive Compensation, page 74

Response: We have included an additional footnote in the Summary Compensation Table in the Revised DRS to disclose how the bonus amounts were determined.

Principal Stockholders, page 81

Response: The table in the Revised DRS has been updated to include the number and percentage of shares of Series A preferred stock and Series C preferred stock that will remain outstanding after this offering.

Response: We have included the names of the natural person(s) that hold voting and/or dispositive power over the shares held by Crom Cortana Fund LLC in the Revised DRS.

Selling Stockholders, page 84

Response: We have expanded the disclosure concerning the selling shareholders in the Revised DRS.

Description of Securities, page 87

Response: We have included in the Revised DRS in the Description of Securities and the risk factor on page 31 additional disclosure concerning the anti-takeover provisions included in our charter and bylaws, including the advance notice provisions for stockholder proposals and that the board has the sole power to amend our bylaws. 

Castellum, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 15: Income Taxes, page F-52

Response to Comment 22:

A company is required to recognize a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion, or all, of deferred tax assets will not be realized (ASC 740-10-30-5(e)).  The evaluation regarding realizability is made on a gross basis versus net basis.  Realization depends on the existence of sufficient taxable income of the appropriate character in either the carry back or carryforward period under the tax law.  ASC 740-10-30-17 requires that all available evidence, both possible and negative, shall be considered to determine whether, based on the weight of the evidence, a valuation allowance is needed.

The four sources of taxable income considered from least to most subjective are:

The Company does not have any remaining taxable income in the carry back years. The next source of taxable income is the reversal of deferred tax liabilities, which over time would be available to offset each other.  In order to be a source of taxable income to support the realization of deferred tax assets, taxable temporary differences must reverse in a period which would result in the realization of deferred tax assets.  Taxable temporary differences relate to fixed assets with lives ranging from 3 – 15 years, cash to accrual with a life of 2 years, intangible assets with lives ranging from 2 – 15 years with the exception of customer relationships which are amortized based on future cash flows and debt discounts which are amortizable over 3 years.  The deferred tax assets are expected to reverse over 1 – 7 years.

Deferred Balances as 12/31/21:

Corvus, MFSI, Merrison, and SSI are in a net deferred tax liability positions while Castellum is in a net deferred tax asset position as of December 31, 2021, driven largely by the deferred tax assets for the stock options and warrants. The Company files a consolidated return for Federal tax purposes, combined returns are also filed in District of Columbia and New Jersey as a result of operations from Corvus, Merrison, and SSI.  Therefore, the state net deferred tax liabilities for these companies would be available to offset any net deferred tax assets generated by Castellum. In addition, Castellum charges an intercompany management fee so it can control the income of that entity so it can utilize any uncovered deferred tax assets.

Response to Comment 22 Continued:

The Company also relied upon future taxable income as the last remaining source of taxable income. Although this is the most subjective source of taxable income, the Company has shown that its core earnings are positive and much of the losses created are non-cash in nature (i.e., amortization, stock compensation, and deferred financing costs). The Company has projected core earnings of over $1.5 million each year for the next four years. The projection of future tax income is relied upon given the Company’s past performance of taxable income to support the remaining deferred tax asset remaining after taxable temporary differences. The projections are supported by the strong backlog as of May 1, 2022 as disclosed in the Revised DRS.

The following table summarizes the value of our contract backlog as of May 1,2022:

Based on the analysis above, the Company has determined that the net deferred tax assets are more likely than not realizable and thus no valuation allowance was recorded as of December 31, 2021.

Unaudited Pro Forma Combined Financial Statements, page F-54

Response: We have updated the Revised DRS to include SSI’s preacquisition stub period January 1, 2021 through August 12, 2021 in the pro forma statement of operations.

Response to Comment 24:

In Note 3, to the unaudited pro forma combined financial statements, management noted the following:

The pro forma adjustment to amortization expense represents the amortization expense associated with the estimated fair values of the Company’s acquired amortizable intangible assets using the estimated remaining useful lives. The acquired intangible assets include customer relationships (estimated at $3,102,000 and estimated 7-year life), a trademark (estimated at $367,000 and estimated 10-year life), non-compete agreements (estimated at $65,000 and estimated 5-year lives), and backlog (estimated at $50,000 and estimated 2-year life). The pro forma adjustment is estimated to be $94,047 for 2021.

In response to Comment 23, management revised the pro forma statement of operations to present SSI’s preacquisition stub period from the six months ended June 30, 2021, to the period from January 1, 2021, through August 12, 2021. The pro forma adjustment (a), intangible amortization expense was revised to $116,025. The foregoing documentation provides a detailed calculation of this revised adjustment (a).

Management applies ASC 350-30-35-6, which states that “a recognized intangible asset shall be amortized over its useful life to the reporting entity” and the “method of amortization shall reflect the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up.” Finite-lived intangible assets are amortized over useful lives based on the present value of future annual cash flows, allocated equally between annual quarters. For the purposes of the pro forma combined financial statements, which included an additional 224 days of SSI operations, management included 224 days of amortization of each intangible asset based on the 224 days subsequent to the initial amortization actually recognized in Castellum, Inc. post acquisition. Management assumed the same initial intangible asset valuations as of the actual acquisition date, the pattern of economic benefit, and the present values of future cash flows should not be altered for pro forma purposes, and that by including the subsequent 224 days of amortization, the appropriate patterns and amounts would be reflected.

Response to Comment 24 Continued:

Management notes that it has disclosed that the useful life of SSI’s customer relationships intangible asset is 7 years. In Note 5 to Castellum’s annual and Q1 financial statements, management also notes customer relationships intangible asset useful lives for all of Castellum range from 4.5-9 years. The useful life for SSI’s customer relationships intangible asset is, in fact, 15 years; the Company has revised the disclosures in the Revised DRS accordingly.

Exhibits

Response: The Company has updated the exhibit index to include the form of underwriting agreement, a legal opinion, power of attorney, the filing fee table, and requisite director nominee consents, and will file such exhibits in a subsequent filing.

General

Response: The Company has updated the Revised DRS to include separate prospectuses for each of the primary and resale offerings and has included the requested explanatory note.

Response: The Company has updated the Revised DRS to clarify that the “IPO Closing” refers to the primary offering and that the resale transaction will occur only if the Company’s common stock sold in its initial public offering begin trading on the NYSE American.

Response: The Company will include the warrants issued to our underwriters in connection with the offering in our fee table, which will be submitted as an exhibit to a subsequent filing.

Response: The Company has updated the Revised DRS to include the disclosure required by Item 201 of Regulation S-K.

Response: The Company does not expect to have any written communications as defined by Rule 405 under the Securities Act, however, to the extent there are any, we will provide you with copies of all written communications as defined by Rule 405.

Thank you for your assistance in reviewing this filing.

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Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘DRSLTR’ Filing		Date		Other Filings
		12/31/22
Filed on:		8/11/22		DRS/A
		7/26/22		UPLOAD
		6/29/22		DRS
		5/1/22
		3/31/22
		12/31/21
		8/12/21
		6/30/21
		1/1/21
				List all Filings

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Filing Submission 0001575872-22-000764   –   Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

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