Castellum, Inc.CTM
Castellum, Inc. Fair Value Disclosure
Fair Value
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. GAAP sets forth a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels are as follows:
Level 1 – defined as observable inputs, such as quoted market prices in active markets.
Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable.
Level 3 – defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.
Our financial assets and liabilities subject to the three-level fair value hierarchy consist principally of cash and cash equivalents, accounts receivable, accounts payable, contingent consideration and derivative liabilities. The estimated fair value of cash and cash equivalents, accounts receivable, fixed interest debt and accounts payable approximates their carrying value.
On April 4, 2022, the Company issued common stock, a convertible note, and warrants in a securities purchase agreement (“SPA”), with Crom (“2022 Crom SPA”). The Company had evaluated the conversion option liability in the convertible note and the warrants to determine proper accounting treatment and determined them to be derivative liabilities (“Derivative Liabilities”).
On February 13, 2023, the 2022 Crom SPA was terminated through an induced conversion thereby extinguishing the conversion option liability associated with the 2022 Crom note; the warrants were not affected. Concurrent with the termination of the 2022 Crom SPA, the Company issued common stock, a convertible note, and warrants in the 2023 SPA. The Company evaluated the conversion option in this convertible note and these warrants to determine proper accounting treatment and determined them to be derivative liabilities (also “Derivative Liabilities”). The Derivative Liabilities had and have been accounted for utilizing ASC 815 “Derivatives and Hedging.” The warrants issued in connection with the 2023 SPA were exercised in December 2024.
On February 13, 2024, the Company paid the outstanding principal and accrued interest owed on the 2023 Note Payable to Crom, thereby extinguishing the conversion feature associated with this note; the warrants were not affected.
The Company recognized liabilities for the estimated fair values of the Derivative Liabilities. The estimated fair values of these liabilities were calculated using a binomial pricing model with key input variables by an independent third party, as of the date of issuance, with changes in fair value recorded as gains or losses on revaluation in other income (expense). As of December 31, 2025, the Company recorded the fair value of the 656,250 warrants issued on April 4, 2022 (“Derivative Liability”) at $262,000, all other derivative liabilities were extinguished or exercised.
In connection with the MFSI Divestiture, as discussed in Note 3, "Acquisition and Disposition", Management estimated the present value of future consideration to be received, using a probability-weighted analysis to determine the amount of the receivable and applying a discount rate that captures the risks associated with the duration of the consideration. The Company determined that the significant inputs used to value the Anticipated Receivable fall within Level 3 of the fair value hierarchy.
The Company determined that the significant inputs used to value the Derivative Liabilities fall within Level 3 of the fair value hierarchy. As a result, the Company has determined that the valuation of its Derivative Liabilities and contingent earnout are classified in Level 3 of the fair value hierarchy as shown in the table below:
| Fair Value Measurements at December 31, 2025 | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| $ | — | $ | — | $ | 135,466 | $ | 135,466 | |||||||||||||||||||
| $ | — | $ | — | $ | 262,000 | $ | 262,000 | |||||||||||||||||||
| Fair Value Measurements at December 31, 2024 | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| $ | — | $ | — | $ | 265,739 | $ | 265,739 | |||||||||||||||||||
| $ | — | $ | — | $ | 883,000 | $ | 883,000 | |||||||||||||||||||
The value at inception of the remaining Derivative Liability was $378,000. During the year ended December 31, 2025, 2024, and 2023 the Company recognized changes in the fair value of the Derivative Liabilities of $621,000, $(725,400), and $666,400 respectively.
Activity related to the Derivative Liability for the year ended December 31, 2025 is as follows:
| Beginning balance as of December 31, 2024 | $ | (883,000) | ||||||
| Issuance of Derivative Liabilities | — | |||||||
| 621,000 | ||||||||
| Ending balance as of December 31, 2025 | $ | (262,000) | ||||||
Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of the Derivative Liabilities is estimated using a binomial valuation model. The assumptions, inputs, and methodologies the Company uses in determining fair value result in inherent uncertainty. The following assumptions were used for the periods as follows:
| 2025 | 2024 | |||||||||||||
| Stock Price | $ | 0.90 | $ | 2.00 | ||||||||||
| Conversion option - convertible note | n/a | n/a | ||||||||||||
| Strike price - warrants | 1.84 | 1.38 - 1.84 | ||||||||||||
| Term | 1.26 years | 0.12 years - 4.10 years | ||||||||||||
| Volatility | 145.20 | % | 98.00% - 148.30% | |||||||||||
| Market yield - conversion option | n/a | n/a | ||||||||||||
| Risk-free rate | 3.48 | % | 3.90% - 5.60% | |||||||||||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Mar 9, 2026 | Showing above |
| 2024 | Mar 11, 2025 | |
| 2023 | Mar 21, 2024 | |
| 2022 | Mar 17, 2023 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.