UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from __________ to __________
Commission File Number:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation) | (IRS Employer Identification No.) |
(Address of principal executive offices and zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
| The | ||||
| The |
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant
to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No
As of November 14, 2023, the registrant had
TABLE OF CONTENTS
| Cautionary Note Regarding Forward-Looking Statements | ii | |
| Part I — Financial Information | ||
| Item 1. | Financial Statements | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 30 |
| Item 4. | Controls and Procedures | 31 |
| Part II — Other Information | ||
| Item 1. | Legal Proceedings | 32 |
| Item 1A. | Risk Factors | 32 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 32 |
| Item 3. | Defaults upon Senior Securities | 32 |
| Item 4. | Mine Safety Disclosures | 32 |
| Item 5. | Other Information | 32 |
| Item 6. | Exhibits | 33 |
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Form 10-Q”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements appear in a number of places in this Form 10-Q including, without limitation, in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Forward-looking statements are typically identified by words such as “plan,” “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project,” “continue,” “could,” “may,” “might,” “possible,” “potential,” “predict,” “should,” “would” and other similar words and expressions, but the absence of these words does not mean that a statement is not forward-looking.
The forward-looking statements are based on the current expectations of our management and are inherently subject to uncertainties and changes in circumstances and their potential effects and speak only as of the date such statements are made. These forward-looking statements involve a number of risks, uncertainties or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those described in “Item 1A. Risk Factors” and other sections in the Annual Report on Form 10-K filed by us on March 28, 2023, and Amendment No. 1 to the Quarterly Report on Form 10-Q/A filed by us on August 10, 2023.
These and other factors could cause actual results to differ from those implied by the forward-looking statements. Forward-looking statements are not guarantees of performance and speak only as of the date hereof. There can be no assurance that future developments will be those that have been anticipated or that we will achieve or realize these plans, intentions, or expectations.
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
In addition, statements of belief and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date they are made, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, and you are cautioned not to unduly rely upon these statements.
ii
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NAUTICUS ROBOTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted certificate of deposit | ||||||||
| Short-term investments | ||||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Contract assets | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use asset | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Contract liability | ||||||||
| Operating lease liabilities - current | ||||||||
| Total Current Liabilities | ||||||||
| Warrant liabilities | ||||||||
| Operating lease liabilities - long-term | ||||||||
| Notes payable - long-term, net of discount (related party) | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity (Deficit): | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity (Deficit) | ( | ) | ||||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
NAUTICUS ROBOTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue: | ||||||||||||||||
| Service | $ | $ | $ | $ | ||||||||||||
| Service - related party | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Costs and expenses: | ||||||||||||||||
| Cost of revenue (exclusive of items shown separately below) | ||||||||||||||||
| Depreciation | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (income) expense: | ||||||||||||||||
| Other (income) expense, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Gain on sale of assets | ( | ) | ||||||||||||||
| Foreign currency transaction loss (gain) | ( | ) | ( | ) | ||||||||||||
| Loss on exchange of warrants | ||||||||||||||||
| Change in fair value of warrant liabilities | ( | ) | ||||||||||||||
| Interest expense, net | ||||||||||||||||
| Total other (income) expense, net | ( | ) | ||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
NAUTICUS ROBOTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES OF STOCKHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)
| Series A Preferred Stock | Series B Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance at March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||
| Cancellation and exchange of convertible note in connection with reverse capitalization | ||||||||||||||||||||||||||||||||||||
| Conversion of Series A preferred stock in connection with reverse recapitalization | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Conversion of Series B preferred stock in connection with reverse recapitalization | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Reverse recapitalization with Cleantech Acquisition Corp, net | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Earnout shares placed in escrow | ( | ) | ||||||||||||||||||||||||||||||||||
| Issuance of common stock for PIPE Investment | ||||||||||||||||||||||||||||||||||||
| Equity issuance costs | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||||||
| Exercise of RSUs | ( | ) | ||||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | |||||||||||||||||||||||||||||||||
| Settlement of liquidated damages | ||||||||||||||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||||||||||||||
| Exercise of RSUs | ( | ) | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
NAUTICUS ROBOTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine months ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash from operating activities: | ||||||||
| Depreciation | ||||||||
| Accretion of debt discount | ||||||||
| Stock-based compensation | ||||||||
| Loss on exchange of warrants | ||||||||
| Change in fair value of warrant liabilities | ( | ) | ||||||
| Noncash impact of lease accounting | ||||||||
| Interest and legal expenses assumed into Bridge Note | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Contract assets | ||||||||
| Other assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Contract liabilities | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Net cash from operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Proceeds from sale of short-term investments | ||||||||
| Net cash from investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from notes payable | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Payments of note payable | ( | ) | ||||||
| Proceeds from reverse recapitalization with CleanTech Acquisition Corp, net | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds from issuance of common stock for Pipe Investment | ||||||||
| Proceeds from issuance of debentures and SPA Warrants, net of discount | ||||||||
| Payment of transaction costs on equity funding | ( | ) | ||||||
| Net cash from financing activities | ||||||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Capital expenditures included in accounts payable | $ | $ | ||||||
| Operating leases at inception | $ | $ | ||||||
| Settlement of liquidated damages with common stock | $ | $ | ||||||
| Conversion of convertible debt and interest expense to common stock | $ | $ | ||||||
| Conversion of Series A preferred stock in connection with reverse recapitalization | $ | $ | ||||||
| Conversion of Series B preferred stock in connection with reverse recapitalization | $ | $ | ||||||
| Private and Public Warrant Liabilities assumed in reverse recapitalization | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Description of the Business
Nauticus Robotics, Inc. (“Nauticus,” the “Company,” “our,” “us,” or “we”) is a developer of ocean robots, software, and services delivered in a modern business model to the ocean industry. We were initially incorporated as CleanTech Acquisition Corp. (“CLAQ”) under the laws of the State of Delaware on June 18, 2020. The Company’s principal corporate offices are located in Webster, Texas. Our robotics products and services are delivered to commercial and government-facing customers through a Robotics as a Service (“RaaS”) business model and direct product sales for both hardware platforms and software licenses. Besides a standalone service offering and forward-facing products, our approach to ocean robotics has also resulted in the development of a range of technology products for retrofitting/upgrading legacy systems and other 3rd party vehicle platforms. Our services provide customers with the necessary data collection, analytics, and subsea manipulation capabilities to support and maintain assets while reducing their operational footprint, operating cost, and greenhouse gas emissions, and to improve offshore health, safety, and environmental exposure.
Business Combination – On September 9, 2022 (the “Closing Date”), the Company (prior to the Closing Date, CLAQ) consummated its initial business combination (the “Closing”) pursuant to that certain Agreement and Plan of Merger, dated as of December 16, 2021 (as amended, the “Merger Agreement,” and together with any other agreements and transactions contemplated by the Merger Agreement, the “Business Combination”), with CleanTech Merger Sub, Inc., a Texas corporation and wholly owned subsidiary of CLAQ (“Merger Sub”), and Nauticus Robotics Holdings, Inc. (prior to the Closing Date, “Nauticus Robotics, Inc.”), a Texas corporation (“Nauticus Robotics Holdings”). Pursuant to the terms of the Merger Agreement, a business combination between CLAQ and Nauticus Robotics Holdings was affected through the merger of Merger Sub with and into Nauticus Robotics Holdings, with Nauticus Robotics Holdings surviving the merger as a wholly owned subsidiary of CLAQ. On the Closing Date, CLAQ was renamed “Nauticus Robotics, Inc.” and the previous Nauticus Robotics, Inc. was renamed “Nauticus Robotics Holdings, Inc.”
At the Closing, among other things, (a) each share of Nauticus Preferred
Stock, par value $
Shares issued at Closing are summarized as follows (i) an aggregate
of
Former holders of Nauticus Robotics Holdings, Inc. Common Stock are
entitled to receive their pro rata share of up to
| ii. | one-quarter of the Earnout Shares will be released if, within a 5-year period from Closing Date, the volume-weighted average price of our Common Stock equals or exceeds $17.50 per share over any 20 trading days within a 30-day trading period; and |
| iii. | one-quarter of the Earnout Shares will be released if, on or after December 31, 2022, within a 5-year period from Closing Date, the volume-weighted average price of our Common Stock equals or exceeds $20.00 per share over any 20 trading days within a 30-day trading period. |
5
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We received proceeds from a private investment in a public entity (“PIPE Investment”), consisting of:
| ● | immediately prior to the Closing, the issuance to certain investors of |
| ● | substantially concurrent with the closing of the Business Combination, the issuance to certain investors (the “SPA Parties”) pursuant to that certain securities purchase agreement, dated as of December 16, 2021, as amended on January 31, 2022, and as further amended and restated on September 9, 2022 (the “Securities Purchase Agreement”), of secured debentures (the “Debentures”) in an aggregate principal amount of $ |
The Business Combination was accounted for as a reverse recapitalization under generally accepted accounting principles in the United States (“GAAP”). Nauticus Robotics Holdings, Inc. was determined to be the accounting acquirer and CLAQ was treated as the acquired company for financial reporting purposes. Accordingly, the financial statements of the combined company represent a continuation of the financial statements of Nauticus Robotics Holdings, Inc.
On September 9, 2022, the Company received from the Business Combination
with CLAQ net cash of $
CLAQ’s net cash at the Closing Date totaled $
The Company incurred $
Impact of COVID-19 Pandemic on Business – The global spread of COVID-19 and its variants (e.g., the omicron variant) created significant market volatility, economic uncertainty, and disruption during 2021 and 2022 and continuing into 2023. The Company was adversely affected by the deterioration and increased uncertainty in the macroeconomic outlook as a result of the impact of COVID-19. We have experienced and may continue to experience disruptions in our supply chain, due in part to the global impact of the COVID-19 pandemic. Depending upon the duration, including the extent of any residual or further effects, of COVID-19 pandemic-related business interruptions, our customers, suppliers, manufacturers, and partners may suspend or delay their engagements with us, which could result in a material adverse effect on our financial condition and ability to meet current timelines. In addition, the COVID-19 pandemic has affected and may continue to affect our ability to recruit skilled employees to join our team. The conditions caused by the COVID-19 pandemic have adversely affected and may continue to adversely affect, among other things, demand for our products and the ability to test and assess our robotic systems with potential customers, any of which, in turn, could adversely affect our business, results of operations and financial condition. Any further or future impacts of COVID-19 or of another pandemic, epidemic or outbreak of an infectious disease cannot be accurately predicted at this time, and the ultimate direct and indirect impacts on our business, results of operations, and financial condition will depend on future developments that are highly uncertain.
6
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Liquidity – Total cash and cash equivalents on
hand as of September 30, 2023, was $
2. Summary of Significant Accounting Policies
Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments, unless otherwise disclosed) necessary for a fair statement of the condensed consolidated results of operations, financial position, cash flows and changes in stockholders’ equity (deficit) for each period presented. All intercompany balances and transactions have been eliminated in preparation of these condensed consolidated financial statements. The condensed consolidated results for the interim periods are not necessarily indicative of results to be expected for the full year. The 2022 year-end consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Summary of Significant Accounting Policies – The Company’s significant accounting policies are discussed in Note 1 to Nauticus Robotics, Inc.’s consolidated financial statements included in its Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2022. There have been no significant changes to these policies which have had a material impact on the Company’s interim unaudited condensed consolidated financial statements and related notes during the three and nine months ended September 30, 2023.
Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the (i) estimates of future costs to complete customer contracts recognized over time, (ii) valuation allowances for deferred income tax assets, (iii) valuation of stock-based compensation awards and (iv) the valuation of conversion options, warrants and earnouts. Actual results could differ from those estimates.
Cash and Cash Equivalents – The Company classifies
all highly-liquid instruments with an original maturity of three months or less as cash equivalents. The Company maintains cash and cash
equivalents in bank deposit accounts, which at times may exceed federally insured limits of $
Restricted Certificates of Deposit — The Company
has restricted certificate of deposit of $
7
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Short-term Investments – Short-term investments
on December 31, 2022, include an investment in a US Treasury Bill that matured on March 14, 2023. The original maturity for this investment
was more than three months and any change in the investment is recognized in the condensed consolidated balance sheets. On March 14, 2023,
the Company received proceeds of $
Revenue – Our primary sources of revenue are from providing technology, engineering services and products to the offshore industry and governmental entities. Revenue is generated pursuant to contractual arrangements to design and develop subsea robots and software and to provide related engineering, technical, and other services according to the specifications of the customers. These contracts can be service sales (cost plus fixed fee or firm fixed price) or product sales and typically have terms of up to 18 months. The Company had no product sales for the three and nine months ended September 30, 2023 and 2022, respectively.
A performance obligation is a promise in a contract to transfer distinct goods or services to a customer. For all contracts, we assess if there are multiple promises that should be accounted for as separate performance obligations or combined into a single performance obligation. We generally separate multiple promises in a contract as separate performance obligations if those promises are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or require significant integration or customization within a group, they are combined and accounted for as a single performance obligation.
Our performance obligations under service agreements generally are satisfied over time as the service is provided. Revenue under these contracts is recognized over time using an input measure of progress (typically costs incurred to date relative to total estimated costs at completion). This requires management to make significant estimates and assumptions to estimate contract sales and costs associated with its contracts with customers. At the outset of a long-term contract, the Company identifies risks to the achievement of the technical, schedule and cost aspects of the contract. Throughout the contract term, on at least a quarterly basis, we monitor and assess the effects of those risks on its estimates of sales and total costs to complete the contract. Changes in these estimates could have a material effect on our results of operations.
Firm-fixed price contracts present the risk of unreimbursed cost overruns, potentially resulting in lower-than-expected contract profits and margins. This risk is generally lower for cost plus fixed fee contracts which, as a result, generally have a lower margin.
Performance obligations for product sales are typically satisfied at a point in time. This occurs when control of the products is transferred to the customer, which generally is when title and risk of loss have passed to the customer.
Inventories – Inventories include raw materials and work in progress used in the construction and installation of a portfolio of ocean robotics systems technology products that include the Aquanaut and Olympic Arm. Raw materials consist of composite marine structures, commercial off-the-shelf or COTS, batteries, and hardware and electrical components. Work in progress inventories consist of raw materials and labor for construction of projects. Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. The Company periodically reviews inventories for specifically identifiable items that are unusable or obsolete based on assumptions about future demand and market conditions. Based on this evaluation, we make provisions for unusable and obsolete inventories in order to write inventories down to their net realizable value.
8
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| September 30, 2023 | December 31, 2022 | |||||||
| Raw material and supplies | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
Leases – The Company’s lease arrangements are operating leases which are capitalized on the balance sheet as right-of-use (“ROU”) assets and obligations. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. These are recognized at the lease commencement date based on the present value of payments over the lease term. If leases do not provide for an implicit rate, we use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term as the lease payments. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
Stock-Based Compensation – The Company accounts for employee stock-based compensation using the fair value method. Compensation cost for equity incentive awards is based on the fair value of the equity instrument generally on the date of grant and is recognized over the requisite service period. The Company’s policy is to issue new shares upon the exercise or conversion of options and recognize option forfeitures as they occur.
Income Taxes – Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax asset (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized.
The Company recognizes the effect of income tax positions only if those
positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater
than
Foreign Currency Gains and Losses – Nauticus purchases
certain materials and equipment from foreign companies, and these transactions are generally denominated in the vendors’ local currency.
The Company recorded a foreign currency loss of $
Common Stock Warrants – We account for common stock warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance. This assessment considers whether the warrants are freestanding financial instruments, meet the definition of a liability or requirements for equity classification, including whether the warrants are indexed to the Company’s Common Stock, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
9
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We have determined that the private warrants sold in a private placement to CLAQ’s co-sponsors in connection with CLAQ’s initial public offering (the “Private Warrants”) and warrants sold to the public in CLAQ’s initial public offering (the “Public Warrants”) should be accounted for as liabilities. The Private Warrants and Public Warrants were initially recorded at their estimated fair value on the Closing Date. They are then revalued at each reporting date thereafter, with changes in the fair value reported in the condensed consolidated statements of operations. Derivative warrant liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date. The fair value of the Private Warrants was estimated using a Black-Scholes option pricing model (a Level 3 measurement). The Public Warrants are valued using their publicly-traded price at each measurement date (a Level 1 measurement).
We have determined that the SPA Warrants should be accounted for as liabilities. The SPA Warrants were initially recorded at their estimated fair value on the Closing Date and are then revalued at each reporting date thereafter, with changes in the fair value reported in the Company’s statements of operations. Derivative warrant liabilities are classified in our balance sheets as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date. At the Closing Date, the fair value of the Original SPA Warrants upon issuance was estimated using a Monte Carlo valuation model (a Level 3 measurement).
Earnout Shares – Earnout Shares, issuable to former holders of Nauticus Robotics Holdings, Inc.’s Common Stock, are held in escrow. The Earnout Shares will be released upon the occurrence of a Triggering Event within five years of the Closing Date. The Earnout Shares are considered legally issued and outstanding shares of Common Stock subject to restrictions on transfer and potential forfeiture pending the achievement of the earnout targets. The Company evaluated the Earnout Shares and concluded that they meet the criteria for equity classification. The Earnout Shares were classified in stockholders’ equity, recognized at fair value upon the closing of the Business Combination, and will not be subsequently remeasured. A Monte Carlo valuation model (a Level 3 measurement) determined their estimated fair value upon issuance.
Capitalized Interest – The Company capitalizes
interest costs incurred to work in progress during the related construction periods. Capitalized interest is charged to cost of revenue
when the related completed project is delivered to the buyer. During the nine months ended September 30, 2023, the Company capitalized
interest totaling $
Major Customer and Concentration of Credit Risk – We
have a limited number of customers. During the three and nine months ended September 30, 2023, sales to two customers accounted for
Reclassifications – Financial statements presented for prior periods include reclassifications that were made to conform to the current-period presentation.
Recent Accounting Pronouncements – In September 2022, the FASB issued ASU 2022-04, Liabilities – Supplier Finance Programs (Subtopic 405-60): Disclosure of Supplier Finance Program Obligations, which requires companies to disclose the use and impact of such programs on a company’s working capital, liquidity, and cash flow. We adopted this standard on January 1, 2023. We do not utilize Supplier Finance Programs and therefore no further disclosure is required.
In June 2016, the FASB issued ASU No. 2016-13, an amendment to ASC 326, Financial Instruments - Credit Losses, which changes the impairment model for certain financial assets that have a contractual right to receive cash, including trade and loan receivables. The new model requires recognition based upon an estimation of expected credit losses rather than recognition of losses when it is probable that they have been incurred. An entity will apply the amendment through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company has adopted this standard as of January 1, 2023, and there was no impact on its financial position, results of operations and cash flows upon adoption.
10
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In March 2022, the FASB issued ASU No. 2022-02, an amendment to ASC 326, Financial Instruments-Credit Losses, which eliminates the accounting guidance for creditors in troubled debt restructuring. It also aligns conflicting disclosure requirement guidance in ASC 326 by requiring disclosure of current-period gross write-offs by year of origination. The amendment also adds new disclosures for creditors with loan refinancing and restructuring for borrowers experiencing financial difficulty. The Company has adopted this standard as of January 1, 2023, and there was no impact on its financial position, results of operations and cash flows upon adoption.
There are no other new accounting pronouncements that are expected to have a material impact on our condensed consolidated financial statements.
3. Revenue
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Cost plus fixed fee | $ | $ | $ | $ | ||||||||||||
| Firm fixed-price | ||||||||||||||||
| Firm fixed-price-vehicle lease | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Our performance obligations under service agreements are generally satisfied over time as the service is provided and, therefore, all revenue above has been recognized over time.
Contract Balances – Accounts receivable, net as
of September 30, 2023, totaled $
Contract assets include unbilled amounts typically resulting from sales
under contracts when the cost-to-cost method of revenue recognition is utilized, and revenue recognized exceeds the amount billed to the
customer. Contract assets are recorded at the net amount expected to be billed and collected. The Company had $
Contract liabilities include billings in excess of revenue recognized
and accrual of certain contract obligations. The Company had $
Unfulfilled Performance Obligations – As
of September 30, 2023, we expect to recognize approximately $
11
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Expected Revenue from Unfulfilled Performance Obligations by Period | ||||||||||||
| ($ in millions) | Total | 2023 | 2024 | |||||||||
| Unfulfilled performance obligations: | ||||||||||||
| Performance obligations | $ | $ | $ | |||||||||
| Total unfulfilled performance obligations | $ | $ | $ | |||||||||
If any of our contracts were to be modified or terminated, the expected value of the unfulfilled performance obligations of such contracts would be reduced.
4. Prepaid Expenses
| September 30, 2023 | December 31, 2022 | |||||||
| Prepaid material purchases | $ | $ | ||||||
| Prepaid insurance | ||||||||
| Other prepayments | ||||||||
| Total other current assets | $ | $ | ||||||
5. Property and Equipment
| Useful Life (years) | September 30, 2023 | December 31, 2022 | ||||||||||
| Leasehold improvements | $ | $ | ||||||||||
| Property & equipment | ||||||||||||
| Technology hardware equipment | ||||||||||||
| Total | ||||||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||||||
| Construction in progress | ||||||||||||
| Total property and equipment, net | $ | $ | ||||||||||
12
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Accrued Liabilities
| September 30, 2023 | December 31, 2022 | |||||||
| Accrued compensation | $ | $ | ||||||
| Accrued professional fees | ||||||||
| Accrued insurance | ||||||||
| Accrued sales and property taxes | ||||||||
| Accrued royalties | ||||||||
| Other accrued expenses | ||||||||
| Total accrued expenses | $ | $ | ||||||
In April 2023, the Company received correspondence from the State of
Texas assessing a sale and use tax liability of $
7. Notes Payable
| September 30, 2023 | December 31, 2022 | |||||||
| Convertible secured debentures | $ | $ | ||||||
| Convertible senior secured term loan | ||||||||
| Total | ||||||||
| Less: debt discount, net | ( | ) | ( | ) | ||||
| Less: current portion | ||||||||
| Total notes payable – long-term | $ | $ | ||||||
Convertible Secured Debentures –
Upon closing of the Business Combination, we issued to the SPA Parties
the Debentures, which featured a
The Original SPA Warrants, upon issuance, were initially exercisable,
at the holder’s option, at $
The debt discount is being accreted to interest expense over the four-year
term of the Debentures. We recorded $
13
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
RCB Equities #1, LLC –
On July 14, 2023, the Company issued a secured promissory note to RCB
Equities #1, LLC, a related party for $
Convertible Senior Secured Term Loan –
On September 18, 2023, the Company entered into a convertible senior secured term loan agreement with ATW Special Situations II LLC as collateral agent (in such capacity, the “Collateral Agent”) and lender, and Transocean Finance Limited, ATW Special Situations I LLC, Material Impact Fund II, L.P., and RCB Equities #1, LLC, as lenders, are related parties.
The Convertible Senior Secured Term Loan Agreement
provides the Company with up to $
The Convertible Senior Secured Term Loan Agreement
included a
Subject to the terms and conditions of the Term
Loan Agreement, the Company may, upon at least two trading days’ written notice to the Lenders, elect to redeem some or all of the
then outstanding principal amount of the Loans. In connection with any such election, which shall be irrevocable, the Company shall pay
each Lender, on a pro rata basis, an amount in cash equal to the greater of (x) the sum of (i)
14
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Loans are convertible, in whole or in part,
at the option of each Lender into shares of Common Stock until the date that the Loans are no longer outstanding, at a conversion rate
equal to the outstanding principal amount of the Loans to be converted divided by a conversion price of $
8. Leases
The Company determines if an arrangement is a lease at inception based on whether the Company has the right to control the use of an identified asset, the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset. After the criteria are satisfied, the Company accounts for these arrangements as leases in accordance with ASC 842, Leases. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term, including payments at commencement that depend on an index or rate. For leases in which the Company is the lessee do not have a readily determinable implicit rate, an incremental borrowing rate, based on the information available at the lease commencement date, is utilized to determine the present value of lease payments. When a secured borrowing rate is not readily available, unsecured borrowing rates are adjusted for the effects of collateral to determine the incremental borrowing rate. The Company uses the implicit rate for agreements in which it is a lessor. The Company has not entered into any material agreements in which it is a lessor. Lease expense and lease income are recognized on a straight-line basis over the lease term for operating leases.
In April of 2023, the Company entered into an operating lease for office
space. The lease has a 10-year lease term with an additional abatement period of 23 months. The Company’s secured borrowing rate
of
In July of 2023, the Company entered into an operating lease for office
space in Scotland. The lease has a term of 5 years with two options to extend. Management is reasonably certain to exercise the first
option to extend the lease. The Company’s secured borrowing rate of
In August of 2023, the Company entered into an operating lease for
office space in Norway. The lease has a term of 5 years. The Company’s secured borrowing rate of
The Company’s other operating leases include its current office and manufacturing facility and leases for certain office equipment.
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Fixed lease expense | $ | $ | $ | $ | ||||||||||||
| Variable lease expense | ||||||||||||||||
| Total operating lease expense | $ | $ | $ | $ | ||||||||||||
15
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Cash paid for operating leases was $
| Balance Sheet Location | September 30, 2023 | December 31, 2022 | ||||||||
| Assets | ||||||||||
| Noncurrent | ||||||||||
| Operating lease assets | Operating lease right-of-use asset | $ | $ | |||||||
| Liabilities | ||||||||||
| Current | ||||||||||
| Operating lease liabilities | Operating lease liabilities - current | |||||||||
| Noncurrent | ||||||||||
| Operating lease liabitlies | Operating lease liabilities - long-term | |||||||||
| Total lease liabilities | $ | $ | ||||||||
For operating lease assets and liabilities, the weighted average remaining
lease term was
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 onward | ||||
| Total lease payments | ||||
| Total present value discount | ( | ) | ||
| Operating lease liabilities | $ |
9. Commitments and Contingencies
Litigation – From time to time, we may be subject to litigation and other claims in the normal course of business. No amounts have been accrued in the condensed consolidated financial statements with respect to any matters.
10. Income Taxes
Income tax provisions for interim periods are generally based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent, or unusual items related specifically to interim periods. No income tax expense was recognized for the nine months ended September 30, 2023, or 2022. The Company has a full valuation allowance against its deferred tax assets as of September 30, 2023, and December 31, 2022, respectively.
16
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. Equity
Common Stock – A total of
Earnout Shares - Following the closing of the Business
Combination, former holders of shares of Nauticus Robotics Holdings’ Common Stock (including shares received as a result of the
Nauticus Preferred Stock Conversion and the Nauticus Convertible Notes Conversion) are entitled to receive their pro rata share of up
to
12. Warrants
Public Warrants – We assumed
We may redeem the outstanding
Public Warrants, in whole and not in part, at a price of $
| ● | at any time after the Public Warrants become exercisable, |
| ● | upon not less than 30 days’ prior written notice of redemption to each warrant holder, |
| ● | if, and only if, the reported last sale price of the shares of Common Stock equals or exceeds $ |
| ● | if, and only if, there is a current registration statement in effect with respect to the shares of Common Stock underlying such warrants at the time of redemption and for the entire 30-day trading period referred to above and continuing each day thereafter until the date of redemption. |
If we call the Public Warrants for redemption as described above, we have the option to require all holders that wish to exercise warrants to do so on a “cashless basis.”
The exercise price and number of shares of Common Stock issuable on exercise of the Public Warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or our recapitalization, reorganization, merger or consolidation.
The Public Warrants, which are accounted for
as liabilities in our condensed consolidated balance sheets, were valued as of September 30, 2023, at $
Private Warrants – We assumed
17
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Private Warrants, which are accounted
for as liabilities in our condensed consolidated balance sheets, were valued as of September 30, 2023, at $
SPA Warrants
– Substantially concurrent with the Closing and pursuant to the Securities Purchase Agreement, we issued an aggregate
In connection with the Securities Purchase Agreement, the Company and the SPA Parties entered into that certain Registration Rights Agreement, dated as of September 9, 2022 (the “RRA”), pursuant to which the Company and the SPA Parties agreed to certain requirements and conditions covering the resale by the SPA Parties of the shares of Common Stock underlying the Debentures and Original SPA Warrants. Under the terms of the RRA, the Company was required to (i) file a registration statement (the “Initial Registration Statement”) covering such underlying shares within 15 business days of the Closing and (ii) use its best efforts to cause the Initial Registration Statement to be declared effective as promptly as possible after the filing thereof, but in any event no later than the applicable Effectiveness Date (as defined in the RRA) (the “Registration Requirements”). The RRA additionally provided for liquidated damages if the Registration Requirements were not met.
On June 22, 2023, the Company and the SPA Parties entered into the
first amendment to the RRA (the “RRA Amendment”), pursuant to which the Company agreed to deliver to the SPA Parties an aggregate
During the third quarter of 2023, the Company issued
Pursuant to the RRA Amendment, the Company also agreed to file a registration statement on Form S-3 (or other appropriate form) for the registration and resale of the RRA Amendment Shares by the SPA Parties and to cause such registration statement to become effective as soon as practicable thereafter in accordance with the terms of the RRA, as amended by the RRA Amendment.
On June 22, 2023, we entered into the Letter
Agreements with the SPA Parties (the “Letter Agreements”), pursuant to which the SPA Parties (also being the holders of the
Original SPA Warrants) agreed to amend the exercise price of the Original SPA Warrants, which, since issuance, had been exercisable to
purchase an aggregate
The Letter Agreements will terminate in accordance with their terms on March 1, 2024 (the “Letter Agreement Termination Date”). Upon the Letter Agreement Termination Date, any Amended SPA Warrants then-outstanding will revert to having the terms associated with the Original SPA Warrants, as described herein.
18
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During any period when we shall have failed to maintain an effective registration statement covering the shares of Common Stock issuable upon exercise of the Amended SPA Warrants, the registered holder may exercise its Amended SPA Warrants on a cashless basis pursuant to an available exemption from registration under the Securities Act.
On June 23, 2023, pursuant to its Letter Agreement with the Company,
ATW exercised
On September 18, 2023, the Company entered into a convertible senior
secured term loan agreement convertible at $
The New SPA Warrants will be (and, with respect
to those already issued, are) substantially in the form of the Amended SPA Warrants as described above except that the New SPA Warrants
(i) have an exercise price of $
If a registration statement covering the shares of Common Stock issuable upon exercise of the New SPA Warrants is not effective 60 days after March 1, 2024 (or, in the event of a “full review” by the SEC, 120 days after March 1, 2024), upon the registered holder’s election to exercise its New SPA Warrants, the registered holder may, until such time as there is an effective registration statement and during any period when we shall have failed to maintain an effective registration statement, exercise its New SPA Warrants on a cashless basis pursuant to an available exemption from registration under the Securities Act.
As indicated in Note 1 above, unless context otherwise requires, the term “SPA Warrants” means (i) before the entry into the Letter Agreements, the Original SPA Warrants, and (ii) upon and following the entry into the Letter Agreements, (a) the Amended SPA Warrants, and (b) the New SPA Warrants.
The SPA Warrants, which are accounted for as liabilities in our condensed
consolidated balance sheets, were valued as of September 30, 2023, at $
13. Stock-Based Compensation
On September 6, 2022, shareholders approved our 2022 Omnibus Incentive
Plan (the “Omnibus Incentive Plan”) and on September 9, 2022, our board of directors ratified the Omnibus Incentive Plan.
The Omnibus Incentive Plan provides for the grant of options, stock appreciation rights, restricted stock units (“RSUs”),
restricted stock and other stock-based awards, any of which may be performance-based, and for incentive bonuses, which may be paid in
cash, Common Stock or a combination thereof. As of September 30, 2023,
19
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At the Closing Date of the Business Combination, Nauticus Robotics
Holdings, Inc. had
Compensation expense for stock option grants is recognized based on the fair value at the date of grant using the Black-Scholes option pricing model.
Stock-based compensation expense, which relates to options originally
issued under the 2015 Plan, totaled $
| Weighted | ||||||||||||
| Average | Aggregate | |||||||||||
| Exercise | Intrinsic | |||||||||||
| Options | Price | Value | ||||||||||
| Outstanding as of December 31, 2021 | $ | $ | ||||||||||
| Granted | $ | |||||||||||
| Forfeited | ( | ) | $ | |||||||||
| Cancelled | ( | ) | $ | |||||||||
| Outstanding as of September 30, 2022 | $ | $ | ||||||||||
| Outstanding as of December 31, 2022 | $ | $ | ||||||||||
| Exercised | ( | ) | $ | |||||||||
| Forfeited | ( | ) | $ | |||||||||
| Cancelled | ( | ) | $ | |||||||||
| Outstanding as of September 30, 2023 | $ | $ | ||||||||||
The remaining weighted average contractual life of exercisable options
as of September 30, 2023, was
The total intrinsic value of all options exercised during the nine
months ended September 30, 2023 and 2022, was $
20
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Proceeds from exercises of options issued under the 2015 Plan for the
nine months ended September 30, 2023 and 2022, were $
Incentive Plans – During 2022, RSUs were granted to certain of our key executives, employees, and non-employee directors. Each RSU is a notional amount that represents the right to receive one share of Common Stock of the Company if and when the RSU vests. RSUs were issued to the following recipients and vest as follows:
Employee RSU grants are time-based and vest equally over a three-year period on December 31 of 2023, 2024, and 2025, conditional upon continued employment.
Non-employee director RSU grants are time-based and vest fully on the earlier of the one-year anniversary of the grant date or the next Annual Meeting of Stockholders of the Company if a grantee is not on the election ballot, conditional upon continued service as a director.
Executive RSU grants issued as executive sign-on
bonuses are time-based and vest
In addition, during 2022, an aggregate target grant of
In March 2023, the Company’s board of directors determined that
The Compensation Committee has a policy that the Company will not provide U.S. federal income tax gross-up payments to any of its directors or executive officers in connection with future awards of restricted stock or stock units.
| Weighted | ||||||||||||
| Average | Aggregate | |||||||||||
| Grant Date | Intrinsic | |||||||||||
| Shares | Fair Value | Value | ||||||||||
| Outstanding as of December 31, 2022 | $ | |||||||||||
| Awarded | $ | |||||||||||
| Released | ( | ) | $ | |||||||||
| Forfeited | ( | ) | $ | |||||||||
| Outstanding as of September 30, 2023 | $ | $ | ||||||||||
The remaining weighted average contractual life of RSUs granted as
of September 30, 2023, was
The RSUs and PSRUs granted in 2022 do not have voting rights or dividend rights unless the subject RSU or PRSU has vested and the share of common stock underlying it has been distributed to the participant.
Grants of RSUs are valued at their estimated fair values as of their respective grant dates. The RSU grants in 2022 were subject only to vesting conditioned on continued employment or service as a nonemployee director; therefore, these grants were valued at the grant date fair market value using the closing price of our stock on the Nasdaq Stock Market.
21
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Stock-based compensation expense attributable to PRSUs under the Omnibus
Incentive Plan for the three and nine months ended of 2023 was $
14. Employee Benefit Plan
Nauticus offers a 401(k) plan which permits eligible employees to contribute
portions of their compensation to an investment trust. The Company makes contributions to the plan totaling
15. Related Party Transactions
PIPE Investment and Securities Purchase Agreement
– Concurrent with the closing of the Business Combination, the Company received
ATW, Material Impact and SLS Family Irrevocable Trust currently hold
$
Convertible Senior Secured Term Loan – The Company entered into a convertible senior secured term loan agreement with ATW Special Situations II LLC as collateral agent (in such capacity, the “Collateral Agent”) and lender, and Transocean Finance Limited, ATW Special Situations I LLC, Material Impact Fund II, L.P., and RCB Equities #1, LLC, as lenders, are related parties. See “Financial Statements – Note 7 Notes Payable for additional information.
RRA Amendment – On June 22, 2023,
Letter Agreements – On June 22, 2023, the Company
entered into Letter Agreements with ATW, Material Impact and SLS Family Irrevocable Trust, pursuant to which such, among other things,
the Company agreed to (i) lower the exercise price of the Original SPA Warrants from $
22
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On June 23, 2023, pursuant to its Letter Agreement with the Company,
ATW exercised
On September 18, 2023, the Company entered into a convertible senior
secured term loan agreement convertible at $
Revenue and Accounts Receivable – Revenue from
Transocean Ltd. for contract services totaled $
16. Earnings (Loss) Per Share
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net earnings (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Less: deemed dividend for Earnout Shares | ( | ) | ( | ) | ||||||||||||
| Net earnings (loss) attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Denominator: | ||||||||||||||||
| Weighted average shares used to compute basic EPS | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| Anti-dilutive securities excluded from shares outstanding: | ||||||||||||||||
| Stock options | ||||||||||||||||
| Restricted and performance stock units | ||||||||||||||||
| Warrants | ||||||||||||||||
| Earnout shares | ||||||||||||||||
| Convertible debt | ||||||||||||||||
| Total | ||||||||||||||||
23
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
17. Fair Value Measurements
The Company measures and reports certain financial and non-financial assets and liabilities on a fair value basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three levels related to fair value measurements are as follows:
| Level 1 – | Observable inputs such as quoted prices in active markets for identical assets or liabilities. |
| Level 2 – | Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data. |
| Level 3 – | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs. |
The estimated fair values of accounts receivable, contract assets, accounts payable, accrued expenses, and indebtedness with unrelated parties approximate their carrying amounts due to the relatively short maturity or time to maturity of these instruments. Notes payable with related parties may not be arms-length transactions and therefore may not reflect fair value. The estimated fair value of the Debentures approximates their carrying amount due to their recent issuance.
The Company’s non-financial assets measured at fair value on a recurring basis include SPA Warrants and Private Warrants. These are considered Level 3 measurements as they involve significant unobservable inputs.
| Fair Value as of September 30, 2023 | ||||||||||||||||
| Carrying Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| Financial liabilities: | ||||||||||||||||
| Warrant liability - Public Warrants | $ | $ | $ | $ | ||||||||||||
| Warrant liability - Private Warrants | ||||||||||||||||
| Warrant liability - SPA Warrants | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
24
NAUTICUS ROBOTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Warrant | ||||
| Liability | ||||
| Balance, December 31, 2022 | $ | |||
| Loss on exchange of warrants | ||||
| Change in fair value of warrant liabilities | ( | ) | ||
| Balance, September 30, 2023 | $ | |||
18. Subsequent Events
Merger Agreement with 3D at Depth
On October 2, 2023, Nauticus entered into an Agreement and Plan of Merger (the “Merger Agreement”) with 3D Merger Sub, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Nauticus (“Merger Sub”), and 3D at Depth, Inc., a Delaware corporation (“3DAD”, and together with Nauticus and Merger Sub, each a “Party” and collectively the “Parties”). Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, a merger between Nauticus and 3DAD will be effected through the merger of Merger Sub with and into 3DAD, with 3DAD surviving the merger as a wholly owned subsidiary of Nauticus (the “Merger”, and together with the other transactions contemplated by the Merger Agreement and the other agreements contemplated thereby, the “Transactions”). The board of directors of Nauticus (the “Board”) has unanimously (i) approved the Merger Agreement and the Transactions and (ii) resolved to recommend the approval and adoption of the Merger Agreement and the Transactions to the stockholders of Nauticus (“Nauticus Stockholders”).
The Base Equity Value for the 3DAD Merger is $
The “Per Share Equity Consideration Value” means (a) the Base Equity Value (as adjusted, if applicable, as set forth above) divided by (b) the total number of shares of 3DAD Common Stock issued and outstanding as of immediately prior to the Effective Time.
Closing of the transaction contemplated by the Merger Agreement is subject to the satisfaction or waiver of usual and customary conditions, including the effectiveness of a Registration Statement on Form S-4 and the approval of the stockholders of both Nauticus and 3DAD.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q.
Explanatory Note
On the Closing Date, we consummated the Business Combination with Merger Sub, and Nauticus Robotics Holdings, Inc. Pursuant to the terms of the Merger Agreement, a business combination between CLAQ and Nauticus Robotics Holdings was affected through the merger of Merger Sub with and into Nauticus Robotics Holdings, with Nauticus Robotics Holdings surviving the merger as a wholly owned subsidiary of CLAQ. On the Closing Date, CLAQ was renamed “Nauticus Robotics, Inc.” and the Nauticus Robotics Holdings’ predecessor was renamed “Nauticus Robotics Holdings, Inc.”
The Business Combination was accounted for as a reverse recapitalization under generally accepted accounting principles in the United States (“GAAP”). Nauticus Robotics Holdings, Inc. was determined to be the accounting acquirer and CLAQ was treated as the acquired company for financial reporting purposes. Accordingly, the financial statements of Nauticus represent a continuation of the financial statements of Nauticus Robotics Holdings, Inc.
Overview
Nauticus Robotics, Inc. (the “Company,” “our,” “us,” or “we”) is a developer of ocean vehicles and robots, autonomy software, intervention and data services delivered to the offshore industries. We were initially incorporated as CleanTech Acquisition Corp. (“CLAQ”) under the laws of the State of Delaware on June 18, 2020. The Company’s principal corporate offices are located in Webster, Texas. Our offshore services provide customers with the necessary inspection, intervention, data collection, and analytics, a to support and maintain assets while reducing their operational footprint, operating cost, and greenhouse gas emissions, as well as to improving offshore health, safety, and environmental exposure.
Nauticus’ mission is to be the most impactful ocean robotics company through the deployment of autonomous systems. To that end, Nauticus is a technology company, tooled accordingly. Our core staff were principals in the spaceflight robotics community from NASA. In addition, we have continued to augment our staff with data scientists, roboticists, and engineers to create and deploy intelligent machines into the ocean domain with significant self-sufficient and self-directed behaviors, to robustly handle the uncertainty of real-time events underwater.
The opportunity we saw was to remove the operational requirement for tethers and high-speed communication, central to how current undersea operations are performed using Remotely Operated Vehicles (ROVs). These lengthy and constraining tethers require large and expensive surface vessels to operate the ROVs, which in turn drive the cost of accessing the underwater environment. Nauticus has clean slate developed and deployed an ecosystem of autonomy software and novel vehicle architectures to render obsolete current operational paradigms that necessitate the usage of these tethers and therefore, our service could potentially reduce the subsequent operational costs.
The industries affected by this shift in offshore operations are numerous. These include oil & gas, offshore renewables like wind, and tidal, telecommunications, national security & defense, aquaculture, ports, and mining to name a few. To address these markets, Nauticus is commercializing the Nauticus Fleet, which is the cornerstone of our offshore offering. The Nauticus Fleet tandem pair is comprised of both an unmanned underwater vehicle (Aquanaut), and a small optionally crewed surface vessel (Hydronaut). Hydronaut, an 18-meter optionally crewed autonomous surface vessel (ASV) that supports the launch, recovery and real-time operations of Aquanaut, its undersea robotic counterpart. Hydronaut ferries Aquanaut to and from the worksite and supports battery recharges and the communications link from the local remote operations center for supervised autonomous operations.
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Aquanaut is a fully electric, free-swimming subsea robot, controlled through acoustic communication networking and can perform a wide range of data collection, inspection, and intervention tasks. Covered under US Patent, Aquanaut’s defining capability is operating in two distinct modes: actively transforming itself between the excursion and intervention configurations. Excursion mode involves the usage of data collection and perception sensors during transit, while intervention mode uses two electric work-class manipulators (Nauticus’ Olympic Arms) to perform work in the subsea environment.
Nauticus has spent several years developing the latest generation of Aquanaut and Hydronaut capabilities and we are now entering the commercialization phase. Much time and attention has been paid to the manufacturability of the designs and we anticipate we can potentially scale the business beyond the initial production run. This includes a data and drawing build package that can be bid out to vehicle manufactures to help drive down long-term production costs.
Commercializing offshore technology is a lengthy and expensive process. Extensive functional acceptance testing (FATs) has been performed, at the subsystem level, to catch any production quality issues during assembly. After the unit build is complete, in water commissioning exercises will be performed to ensure the system is functioning properly. Finally, initial production units must be qualified for offshore work in the energy sector. This work is currently ongoing to support our initial contracts with Shell, Petrobras, and Equinor.
We expect to have each Nauticus Fleet tandem pair utilized at 200 working days per year, with our service contract commercial ramp beginning in the first quarter of 2024.
Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments, unless otherwise disclosed) necessary for a fair statement of the condensed consolidated results of operations, financial position, cash flows, and changes in stockholders’ equity (deficit) for each period presented. All intercompany balances and transactions have been eliminated in preparation of these condensed consolidated financial statements. The condensed consolidated results for the interim periods are not necessarily indicative of results to be expected for the full year. The 2022 year-end consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Impact of COVID-19 Pandemic on Business – The global spread of COVID-19 and its variants (e.g., the omicron variant) created significant market volatility, economic uncertainty, and disruption during 2021 and 2022 and continuing into 2023. The Company was adversely affected by the deterioration and increased uncertainty in the macroeconomic outlook as a result of the impact of COVID-19. We have experienced and may continue to experience disruptions in our supply chain, due in part to the global impact of the COVID-19 pandemic. Depending upon the duration, including the extent of any residual or further effects, of COVID-19 pandemic-related business interruptions, our customers, suppliers, manufacturers, and partners may suspend or delay their engagements with us, which could result in a material adverse effect on our financial condition and ability to meet current timelines. In addition, the COVID-19 pandemic has affected and may continue to affect our ability to recruit skilled employees to join our team. The conditions caused by the COVID-19 pandemic have adversely affected and may continue to adversely affect, among other things, demand for our products and the ability to test and assess our robotic systems with potential customers, any of which, in turn, could adversely affect our business, results of operations and financial condition. Any further or future impacts of COVID-19 or of another pandemic, epidemic or outbreak of an infectious disease cannot be accurately predicted at this time, and the ultimate direct and indirect impacts on our business, results of operations, and financial condition will depend on future developments that are highly uncertain.
Liquidity – Total cash and cash equivalents on hand as of September 30, 2023, was $6.8 million. The Company has incurred recurring losses each year since its inception. The Company may seek funding through additional debt or equity financing arrangements, implement incremental expense reduction measures, or a combination thereof to continue financing its operations. The Company implemented a workforce reduction of 22% on September 29, 2023, which increased costs by $.4 million in the current quarter, which is attributable to severance paid to employees. The cost savings that will be realized over the next twelve months is expected to be $2.7 million. During the third quarter of 2023, the Company received net proceeds of $10.4 million from the issuance of debt. Utilizing cost control measures, cash on hand, revenue from operations, and potential future equity and debt funding, the Company anticipates having sufficient funds to meet its obligations for at least one year from the issuance date of this Form 10-Q. See “Financial Statements – Note 7– Notes Payable” for additional information on debt capital.
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Results of Operations
Three and Nine Months Ended September 30, 2023, Compared to Three and Nine Months Ended September 30, 2022
The following table sets forth summarized condensed consolidated financial information:
| Three months ended | Nine months ended | |||||||||||||||||||||||||||||||
| Change | Change | |||||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2023 | 2022 | $ | % | |||||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||||||||
| Service | $ | 1,593,854 | $ | 2,964,610 | $ | (1,370,756 | ) | -46 | % | $ | 5,542,249 | $ | 7,996,734 | $ | (2,454,485 | ) | -31 | % | ||||||||||||||
| Service - related party | - | 17,000 | (17,000 | ) | -100 | % | 500 | 210,400 | (209,900 | ) | -100 | % | ||||||||||||||||||||
| Total revenue | 1,593,854 | 2,981,610 | (1,387,756 | ) | -47 | % | 5,542,749 | 8,207,134 | (2,664,385 | ) | -32 | % | ||||||||||||||||||||
| Costs and Expenses | ||||||||||||||||||||||||||||||||
| Cost of revenue | 2,651,380 | 3,781,224 | (1,129,844 | ) | -30 | % | 7,484,249 | 8,220,447 | (736,198 | ) | -9 | % | ||||||||||||||||||||
| Depreciation | 160,744 | 141,901 | 18,843 | 13 | % | 487,052 | 370,306 | 116,746 | 32 | % | ||||||||||||||||||||||
| Research and development | 275,154 | 242,996 | 32,158 | 13 | % | 984,882 | 2,094,278 | (1,109,396 | ) | -53 | % | |||||||||||||||||||||
| General and administrative | 6,704,890 | 4,861,319 | 1,843,571 | 38 | % | 17,478,099 | 8,778,498 | 8,699,601 | 99 | % | ||||||||||||||||||||||
| Total costs and expenses | 9,792,168 | 9,027,440 | 764,728 | 8 | % | 26,434,282 | 19,463,529 | 6,970,753 | 36 | % | ||||||||||||||||||||||
| Operating loss | (8,198,314 | ) | (6,045,830 | ) | (2,152,484 | ) | 36 | % | (20,891,533 | ) | (11,256,395 | ) | (9,635,138 | ) | 86 | % | ||||||||||||||||
| Other (income) expense: | ||||||||||||||||||||||||||||||||
| Other (income) expense, net | (133,311 | ) | (27,980 | ) | (105,331 | ) | 376 | % | 1,019,816 | (32,692 | ) | 1,052,508 | -3219 | % | ||||||||||||||||||
| (Gain) on sale of assets | - | - | - | 0 | % | (3,908 | ) | - | (3,908 | ) | -100 | % | ||||||||||||||||||||
| Foreign currency transaction loss (gain) | 83,654 | (206,617 | ) | 290,271 | 100 | % | 56,061 | (207,146 | ) | 263,207 | 100 | % | ||||||||||||||||||||
| Loss on exchange of warrants | - | - | - | 0 | % | 590,266 | - | 590,266 | 100 | % | ||||||||||||||||||||||
| Change in fair value of warrant liabilities | 8,656,392 | 5,963,238 | 2,693,154 | 45 | % | (18,775,158 | ) | 5,963,238 | (24,738,396 | ) | -415 | % | ||||||||||||||||||||
| Interest expense, net | 873,738 | 1,402,026 | (528,288 | ) | -38 | % | 7,365,402 | 3,057,660 | 4,307,742 | 141 | % | |||||||||||||||||||||
| Net income (loss) | $ | (17,678,787 | ) | $ | (13,176,497 | ) | $ | (4,502,290 | ) | 34 | % | $ | (11,144,012 | ) | $ | (20,037,455 | ) | $ | 8,893,443 | -44 | % | |||||||||||
Revenue. For the three months ended September 30, 2023, total revenue decreased by $1.4 million, or 47%, to $1.6 million for 2023, as compared to $3.0 million for 2022. The decrease in total revenue is primarily attributable to delays in contract authorizations with government entities and completion of several contracts during the quarter.
For the nine months ended September 30, 2023, total revenue decreased by $2.7 million, or 32%, to $5.5 million for 2023, as compared to $8.2 million for 2022. The decrease in total revenue is primarily attributable to delays in contract authorizations with government entities and completion of several contracts during the quarter.
Cost of revenue. For the three months ended September 30, 2023, cost of revenue decreased by $1.1 million, or 30%, to $2.7 million for 2023, as compared to $3.8 million for 2022. The decrease in the cost of revenue is primarily attributable to decreased revenue as discussed above.
For the nine months ended September 30, 2023, cost of revenue decreased by $0.7 million, or 9%, to $7.5 million for 2023, as compared to $8.2 million for 2022. The decrease in the cost of revenue is primarily attributable to decreased revenue as discussed above.
Depreciation. For the three months ended September 30, 2023, depreciation increased by $19 thousand, or 13%, to $161 thousand for 2023, as compared to $142 thousand for 2022 primarily due to primarily due to increased investment in operational assets.
For the nine months ended September 30, 2023, depreciation increased by $117 thousand, or 32%, to $487 thousand for 2023, as compared to $370 thousand for 2022 primarily due to increased investment in operational assets.
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Research and development. For the three months ended September 30, 2023, total research and development expenses increased by $0.1 million, or 13%, to $0.3 million for 2023, as compared to $0.2 million for 2022. The nominal increase was due primarily to the Company achieving technological feasibility in both hardware and software development and focusing on bringing its products to market.
For the nine months ended September 30, 2023, total research and development expenses decreased by $1.1 million, or 53%, to $1.0 million for 2023, as compared to $2.1 million for 2022. The decrease was due primarily to the Company achieving technological feasibility in both hardware and software development and focusing on bringing its products to market.
General and administrative. For the three months ended September 30, 2023, total general and administrative expenses increased by $1.8 million, or 38%, to $6.7 million for 2023, as compared to $4.9 million for 2022. General and administrative expenses increased primarily due to sales and marketing expenses, professional fees, and other costs to support the Company’s continued growth. The Company also implemented a workforce reduction of 22% on September 30, 2023, which increased costs of $.4 million attributable to severance paid to employees.
For the nine months ended September 30, 2023, total general and administrative expenses increased by $8.7 million, or 99%, to $17.5 million for 2023, as compared to $8.8 million for 2022. General and administrative expenses increased primarily due to an increase in stock–based compensation expense, sales and marketing expenses, professional fees, and other costs to support the continued growth of the Company. The Company also implemented a workforce reduction of 22% on September 30, 2023, which increased costs of $.4 million attributable to severance paid to employees.
Other expense, net. For the three months ended September 30, 2023, other expense, net was nominal for the quarter.
For the nine months ended September 30, 2023, other expense, net increased by $1.3 million to $1.0 million for 2023 as compared to $(.3) million, net in 2022. The increase was due primarily to a state sales tax assessment of $1.2 million that the Company plans to vigorously mitigate, by contesting the preliminary estimate from the governmental entity, Texas Comptroller of Public Accounts.
Change in fair value of warrant liabilities. For the three months ended September 30, 2023, the change in the fair value of warrant liabilities increased by $2.7 million to $8.7 million of other (income) expense in 2023 as compared to $6.0 million as of September 30, 2022. This increase was due to the reset of the warrants price from $20.00 to $6.00 warrants from financing that occurred during the quarter.
For the nine months ended September 30, 2023, the change in the fair value of warrant liabilities decreased by $(24.7) million to $(18.8) million of other (income) expense in 2023 as compared to $6.0 as of September 30, 2022. This decrease was due to management’s expectation to raise debt capital that would limit the triggering of future reset events.
Interest expense, net. For the three months ended September 30, 2023, interest expense, net decreased by $0.5 million to $.9 million for 2023 as compared to $1.4 million in 2022. Interest expense, net decreased is primarily due to the gain on settlement of liquidated damages. For the three months ended September 30, 2023 and 2022, cash paid for interest was $0.1 million and 1.5 million, respectively.
For the nine months ended September 30, 2023, interest expense, net increased by $4.3 million to $7.4 million for 2023 as compared to $3.1 million in 2022. Interest expense, net increased due to the amortization of debt discount of $2.9 million associated with the Debentures and approximately net $3.7 million associated with liquidated damages and interest arising out of the RRA. Please see Note 6 to the accompanying condensed consolidated financial statements included herein for additional information. For the nine months ended September 30, 2023, cash paid for interest decreased by $1.1 million to $1.0 million for 2023 as compared to $2.1 million in 2022 due primarily to interest paid on settling prior year debt services in 2022.
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Liquidity and Capital Resources
As of September 30, 2023, we had $6,771,531 of cash and cash equivalents. The cash equivalents consist of money market funds.
Significant sources and uses of cash during the first nine months of 2023.
Sources of cash:
| ● | The Company received net proceeds of $10.4 million from the issuance of debt. We received net proceeds of $421 thousand from the exercise of stock options, representing the strike price of such options. The Company received $338 thousand from the exercise of warrants. |
Uses of cash:
| ● | Cash used in operating activities was $16.4 million, which included $4.6 million invested in working capital. |
| ● | Cash used in investing activities for capital expenditures was $10.7 million. |
Future sources and uses of cash. Our capital requirements will depend on many factors, including sales volumes, the timing and extent of spending to support research and development efforts, investments in technology, the expansion of sales and marketing activities, and market adoption of new and enhanced products and features. To date, our principal sources of liquidity have been proceeds received from the issuance of debt and equity funding and cash flows from our operations.
We anticipate needing additional capital to continue expanding our business operations, which may include acquisitions and capital expenditures. Currently, the Company does not generate sufficient revenue to cover operating expenses, working capital, and capital expenditures. We have historically financed our operations through equity and debt financing. We do not have any commitments for equity funding at this time, and additional funding may not be available to us on favorable terms, if at all. We are considering reducing discretionary spending and other cost-cutting measures, which may be implemented in the near-term to the extent additional financing is not raised. The Company implemented a workforce reduction of 22% on September 29, 2023, which increased costs by $.4 million in the current quarter, which is attributable to severance paid to employees. The cost savings that will be realized over the next twelve months is expected to be $2.7 million. During the third quarter of 2023, the Company received net proceeds of $10.4 million from the issuance of debt. There are no assurances that we can raise sufficient additional capital from external sources or implement material cost-cutting measures. The inability to successfully effectuate either measure could force us to curtail or discontinue our operations. However, utilizing cost control measures, cash on hand, revenue from operations, and potential future equity and debt funding, the Company anticipates having sufficient funds to meet its obligations for at least one year from the issuance date of this Form 10-Q.
Indebtedness. The Company’s indebtedness as of September 30, 2023, is presented in Item 1, “Financial Statements – Note 7 – Notes Payable” and our lease obligations are presented in Item 1, “Financial Statements – Note 8 – Leases.”
Critical Accounting Policies and Estimates
Please refer to “Critical Accounting Policies and Estimates” contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 for a complete discussion of our critical accounting estimates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Our disclosure controls and procedures are designed to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation and under the supervision of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, as a result of the continuation of the previously disclosed material weakness discussed below, our disclosure controls and procedures were not effective because of a material weakness in our internal control over financial reporting described below. . In light of this fact, our management, including our Chief Executive Officer and Chief Financial Officer, has performed additional analyses, reconciliations, and other post-closing procedures in order to conclude that, notwithstanding such material weakness, the unaudited condensed consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP as of the dates and for the periods presented in this Form 10-Q.
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, as amended. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Continuation of material weakness. We previously identified a material weakness in controls over the financial reporting and the accounting for complex warrant issuances and the classification of certain issued warrants. This material weakness resulted in the failure to prevent material errors in accounting for the warrants as equity classification when the warrants should have been classified as liabilities, and marked to market each reporting period, resulting in the restatement of our financial statements as of and for the nine months ended September 30, 2022.
Further, the continuation of the abovementioned material weakness, specifically in relation to the accounting for complex transactions and contracts of the Company, resulted in the untimely recognition of an accrued liability and expense arising out of the RRA, which resulted in the restatement of our financial statements as of and for the three months ended March 31, 2023.
Remediation Plan and Status
Management is working to remediate the material weakness described above and to enhance our overall control environment. Our remediation plan includes enhancing our contract review process, particularly in the context of complex agreements and transactions, as well as internal communications in connection therewith, in addition to continuing our engagement of third-party specialists to assist with accounting, valuation, and financial reporting functions in relation to significant contracts, agreements and complex transactions. Our ongoing remediation activities are subject to continued management review supported by ongoing design and evaluation of our internal control over financial reporting framework. The Audit Committee of our board of directors is monitoring, and receives regular reports on the progress of, management’s remediation efforts. Due to the nature of the remediation process and the need for sufficient time after implementation to evaluate and test the design and effectiveness of the controls, no assurance can be given as to the timing for completion of remediation We will not consider the material weakness remediated until our enhanced controls are operational for a sufficient period of time and evaluated, enabling management to conclude that the enhanced controls are operating effectively.
Changes in internal control over financial reporting. During the third quarter of 2023, except as described above in “Remediation Plan and Status,” there were no other changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company’s management has expended, and will continue to expend, a substantial amount of effort and resources in connection with the remediation of previously identified material weaknesses, including the material weakness discussed above, and the ongoing improvement of our internal control over financial reporting.
Inherent limitation on the effectiveness of internal control. The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, in designing and evaluating the disclosure controls and procedures, management recognizes that any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Although we may, from time to time, we may be subject to litigation and other claims in the normal course of business, we are currently not a party to any material legal proceeding. No amounts have been accrued in the condensed consolidated financial statements with respect to any matters.
ITEM 1A. RISK FACTORS
During the three months ended September 30, 2023, there have been no material changes in the “Risk Factors” as set forth in “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and Amendment No. 1 to the Quarterly Report on 10-Q/A for the period ended March 31, 2023, filed by the Company with the SEC. The risks described therein are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Convertible Senior Secured Term Loan –
On September 18, 2023, the Company entered into a convertible senior secured term loan agreement with ATW Special Situations II LLC as collateral agent (in such capacity, the “Collateral Agent”) and lender, and Transocean Finance Limited, ATW Special Situations I LLC, Material Impact Fund II, L.P., and RCB Equities #1, LLC, as lenders, are related parties.
The Convertible Senior Secured Term Loan Agreement provides the Company with up to $20.0 million of secured term loans, of which $11.6 million has already been funded and deemed issued under the Convertible Senior Secured Term Loan Agreement. Any portion of the outstanding principal amount of the Loans is prepayable at the Company’s option pro rata to each Lender upon at least five days’ prior written notice to each Lender.
The Convertible Senior Secured Term Loan Agreement included a 2.5% exit fee or $290,000, bearing interest at 12.50% per annum, payable quarterly in arrears on the first day of each calendar quarter commencing April 1, 2024. The loan agreement included a 2.5% original issue discount or $125,000 from the RCB Equities #1, LLC promissory note. The loan includes assumed legal fees of $150,000, deemed interest from convertible debentures of $378,116, and $500,000 held in escrow, recorded under other current assets of the condensed consolidated balance sheet. The escrow balance will be held for at least thirty days or until the collateral agent determines no obligation of expense greater than $150,000 incurred by the lender. The Loans will mature on the earliest of (a) the third anniversary of the date of the Term Loan Agreement of September 17, 2026., (b) 91 days prior to the maturity of the 5% Original Issue Discount Senior Secured Convertible Debentures, dated as of September 9, 2022.
Subject to the terms and conditions of the Term Loan Agreement, the Company may, upon at least two trading days’ written notice to the Lenders, elect to redeem some or all of the then outstanding principal amount of the Loans. In connection with any such election, which shall be irrevocable, the Company shall pay each Lender, on a pro rata basis, an amount in cash equal to the greater of (x) the sum of (i) 100% of the then outstanding principal amount of the Loans, (ii) accrued but unpaid interest and (iii) all liquidated damages and other amounts due in respect of the Loans (including, without limitation, the Exit Fee (as defined in the Term Loan Agreement)) (the “Optional Redemption Amount”) and (y) the product of (i) the aggregate number of shares of the Company’s common stock, par value $0.0001 per share (“Common Stock”), then issuable upon conversion of the applicable Optional Redemption Amount (without regard to any limitations on conversion set forth in the Term Loan Agreement) multiplied by (ii) the highest closing sale price of the Common Stock on any trading day during the period commencing on the date immediately preceding the date that the applicable notice of redemption is delivered to the Lenders and ending on the trading day immediately prior to the date the Company makes the entire payment required to be made in connection with such redemption.
The Loans are convertible, in whole or in part, at the option of each Lender into shares of Common Stock until the date that the Loans are no longer outstanding, at a conversion rate equal to the outstanding principal amount of the Loans to be converted divided by a conversion price of $6.00 per share of Common Stock (the “Conversion Price”), subject to certain customary anti-dilution adjustments as described in the Term Loan Agreement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
| * | Furnished herewith |
| † | Schedules and similar attachments to this Exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request. |
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NAUTICUS ROBOTICS, INC. | ||
| By: | /s/ Nicolaus Radford | |
| Nicolaus Radford | ||
| Chief Executive Officer | ||
| Date: | November 14, 2023 | |
| By: | /s/ Rangan Padmanabhan | |
| Rangan Padmanabhan | ||
| Chief Financial Officer | ||
| Date: | November 14, 2023 | |
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