Summary of Significant Accounting Policies |
3 Months Ended |
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Mar. 31, 2026 | |
| Accounting Policies [Abstract] | |
| Summary of Significant Accounting Policies | Summary of Significant Accounting Policies
Basis of Presentation - The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), under the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). All intercompany balances and transactions have been eliminated in preparation of these consolidated financial statements.
Use of Estimates – The preparation of consolidated 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 consolidated 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, (iv) the valuation of conversion options, warrants and earnouts, (v) fair value of the November 2024 Debentures, (vi) the fair value of the SeaTrepid acquisition and (vii) fair value of Preferred Stock. 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 $250,000. Historically, the Company has not experienced any losses in such accounts.
Restricted Cash – The Company had restricted cash of $602,796 and $600,342, held by a bank on our behalf as of March 31, 2026 and December 31, 2025, respectively, relating to a custom bond guarantee.
Accounts Receivable, Unbilled Revenues, and Allowance for Credit Losses - With the adoption of the Accounting Standards Update ("ASU") 2016-13 Financial Instruments - Credit Losses (Topic 326), accounts receivable and contract assets are recorded at the invoiced amount and do not typically bear interest. The Company regularly monitors and assesses its risk of not collecting amounts owed by customers. At each consolidated balance sheet date, the Company recognizes an expected allowance for credit losses. In addition, at each reporting date, this estimate is updated to reflect any changes in credit risk since the receivable was initially recorded. This estimate is calculated on a pooled basis where similar risk characteristics exist. If applicable, accounts receivable and contract assets are evaluated individually when they do not share similar risk characteristics which could exist in circumstances where amounts are considered at risk or uncollectible.
The allowance estimate is derived from a review of the Company’s historical losses based on the aging of receivables. This estimate is adjusted for management’s assessment of current conditions, reasonable and supportable forecasts regarding future events, and any other factors deemed relevant by the Company. The Company believes historical loss information is a reasonable starting point in which to calculate the expected allowance for credit losses as the Company’s portfolio segments have remained constant since the Company’s inception.
The Company writes off receivables when there is information that indicates the debtor is facing significant financial difficulty and there is no possibility of recovery. If any recoveries are made from any accounts previously written off, they will be recognized in income in the year of recovery, in accordance with the entity’s accounting policy election. There was no allowance for credit losses as of March 31, 2026 and December 31, 2025.
Property and Equipment – Property and equipment is recorded at cost and depreciated using the straight-line method. Expenditures which extend the useful lives of existing property and equipment are capitalized. Those costs which do not extend the useful lives are expensed as incurred. Upon disposition, the cost and accumulated depreciation are removed and any gain or loss on the disposal is reflected in the condensed consolidated statements of operations.
Goodwill – Goodwill represents the excess of purchase price over the fair value of net assets acquired in business combinations. Pursuant to Accounting Standards Codification ("ASC") Topic 350, Intangibles-Goodwill and Other, the Company tests goodwill for impairment on an annual basis in the fourth quarter, or between annual tests, in certain circumstances. Under authoritative guidance, the Company first assessed qualitative factors to determine whether it was necessary to perform the quantitative goodwill impairment test. The assessment considers factors such as, but not limited
to, macroeconomic conditions, data showing other companies in the industry and our share price. An entity is not required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. Events or changes in circumstances which could trigger an impairment review include macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity specific events and sustained decrease in share price.
Intangible Assets - Intangible assets consist primarily of trade-names/trademarks, intellectual property and non-compete agreements acquired through the SeaTrepid acquisition. Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from 3 to 15 years.
Impairment of Long-Lived Assets - The Company reviews long-lived assets for potential impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In this assessment, future pre-tax cash flows (undiscounted) resulting from the use of the asset and its eventual disposal are estimated. If the undiscounted future cash flows are less than the carrying amount of the asset, an impairment loss is recognized for the difference between its carrying value and estimated fair value. For the three months ended March 31, 2026 and 2025 no property and equipment was impaired.
Segment Reporting - In November of 2023, the Financial Accounting Standards Board ("FASB") issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. Operating segments refer to components of a company that engage in activities for which separate financial information is available and reviewed regularly by the Chief Operating Decision Maker (CODM) in deciding how to allocate resources and assessing performance. The CODM reviews the consolidated balance sheets and consolidated statements of operations quarterly and reviews as a single reportable segment. The CODM is the Company's Chief Executive Officer. The Company manages its operations as a single segment because each revenue stream possesses similar production methods, distribution methods, and customer quality and consumption characteristics, resulting in similar long-term expected financial performance.
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. The Company had no product sales for the three months ended March 31, 2026 and 2025, 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. Our service arrangements generally represent a single performance obligation.
Our performance obligations under service agreements generally are satisfied over a short period of time as the service is provided. Revenue under these contracts is recognized using an input method based on costs incurred relative to total estimated costs. This requires management to make estimates and assumptions to estimate contract sales and costs associated with its contracts with customers. Changes in estimates are recognized in the period in which they become known. Where the estimated total costs to complete a contract exceed the expected consideration to be received, the full amount of the anticipated loss is recorded in the period the loss becomes evident.
Leases – The Company’s lease arrangements are operating leases which are capitalized on the consolidated balance sheets 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. Leases with an initial term of 12 months or less ("short-term leases") are not recorded on the consolidated balance sheets; and the lease expense on short-term 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 consolidated 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 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which a change in judgment occurs. The Company had no material uncertain income tax positions as of March 31, 2026 and December 31, 2025.
Fair Value Measurements - The Company categorizes financial assets and liabilities using a three-tier fair value hierarchy, based on the nature of the inputs used to determine fair value. Inputs refer broadly to assumptions that market participants would use to value an asset or liability and may be observable or unobservable. When determining the fair value of assets and liabilities, the Company uses the most reliable measurement available. See Note 22, “Fair Value Measurements.”
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.
We have determined that the private warrants sold in a private placement (the “Private Warrants”) and warrants sold to the public (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 issuance. They are then revalued at each reporting date thereafter, with changes in the fair value reported in the consolidated statements of operations. Derivative warrant liabilities are classified in the consolidated 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 consolidated 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 issuance and are then revalued at each reporting date thereafter, with changes in the fair value reported in the consolidated statements of operations. Derivative warrant liabilities are classified in our consolidated 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 consolidated balance sheet date.
Fair Value Election for November 2024 Debentures - The Company has elected to measure its 2% Original Issue Discount Senior Secured Convertible Debentures (the "November 2024 Debentures") at fair value under the fair value option in accordance with ASC 825-10, Financial Instruments – Fair Value Option. This election was made to provide greater transparency and to more accurately reflect the economic value of the November 2024 Debentures in the Company's condensed consolidated financial statements.
Under the fair value option, the November 2024 Debentures are recorded at their estimated fair value at each reporting date, with changes in fair value recognized in earnings within "Other (income) expense" in the Condensed Consolidated
Statements of Operations. The fair value of the November 2024 Debentures are determined using a Monte Carlo simulation model that uses inputs such as the Company’s stock price (KITT), stock price volatility, risk-free interest rate and conversion terms.
The fair value option eliminates the requirement to separately account for embedded conversion features that would otherwise be bifurcated under ASC 815-15, Derivatives and Hedging – Embedded Derivatives. Instead, all economic impacts of the November 2024 Debentures—including interest, conversion features, and market fluctuations—are captured in the fair value measurement.
The Company believes that the fair value measurement provides a more relevant representation of the liability’s impact on financial position and performance, as it reflects the November 2024 Debentures current economic value and reduces potential measurement inconsistencies.
Earnout Shares – Earnout Shares that may be issued to former holders of Nauticus Robotics Holdings, Inc.’s common stock are held in escrow and will only be issued upon the occurrence of specified Triggering Events within 5 years of September 9, 2022. As of the reporting date, the Earnout Shares have not been issued and therefore are not considered issued or outstanding shares of common stock. The Company evaluated the earnout arrangement under ASC 815 – Derivatives and Hedging and concluded that, upon issuance, the Earnout Shares would qualify for equity classification. Accordingly, the Earnout Shares will be recognized in stockholders’ equity at fair value on the issuance date and will not be subsequently remeasured. The fair value will be determined using a Monte Carlo simulation model, which represents a Level 3 fair value measurement under ASC 820 – Fair Value Measurement.
Earnings (Loss) per Share – Basic earnings per share is computed by dividing income attributable to common stockholders by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional shares of Common Stock that could have been outstanding assuming the exercise of stock options and warrants (determined using the treasury stock method) and conversion of convertible debt. The Earnout Shares, which are subject to forfeiture if the achievement of certain stock price thresholds is not met, are not considered participating securities and are not included in the weighted-average shares outstanding for purposes of calculating loss per share. The Company’s Convertible Preferred Stock is considered a non-participating security as it does not have the right to participate in dividends with common stockholders beyond its stated dividend or share in undistributed earnings. Accordingly, the Company does not apply the two-class method in computing earnings (loss) per share. Dividends on preferred stock are recorded as a reduction to net income (loss) attributable to common stockholders in the calculation of basic earnings (loss) per share.
Major Customer and Concentration of Credit Risk – We have a limited number of customers. During the three months ended March 31, 2026, sales to two customers accounted for 100% of total revenue. Sales to Customer A accounted for 51.43% of total revenue and sales to Customer B accounted for 48.57% of total revenue. The total balance due from these customers as of March 31, 2026, was zero. During the three months ended March 31, 2025, sales to two customers accounted for 100% of total revenue. Sales to Customer C accounted for 75% of total revenue and sales to Customer D accounted for 25% of total revenue. Total accounts receivable as of December 31, 2025 was made up of three customers. Loss of these customers could have a material adverse impact on the Company.
Reclassifications – Consolidated financial statements presented for prior periods include reclassifications that were made to conform to the current year presentation. For the three months ended March 31, 2025, we reclassified $50,000 of franchise tax expense from other expense to general and administrative expense in the consolidated statements of operations to conform to the current year presentation. For the year ended December 31, 2025 we reclassified $331,607 of accrued insurance from accrued liabilities to notes payable in the consolidated balance sheets to conform to current year presentation. The reclassifications did not affect net loss or cash flows as presented, and there were no other reclassifications that materially impacted the consolidated financial statements.
Distinguishing Liabilities from Equity – The Company evaluates financial instruments, including preferred stock, convertible debt, equity line of credit, and warrants to determine whether they should be classified as liabilities or equity in accordance with ASC 480 and ASC 815. For warrants, the Company assesses whether the instrument is indexed to its own stock and meets the equity classification conditions. Instruments that fail equity classification are recorded as liabilities and
measured at fair value, with changes recognized in earnings. This assessment is performed at issuance and reassessed each reporting period while outstanding.
Accounting for Business Combinations – The Company accounts for acquisitions in accordance with ASC 805, using the acquisition method. Under this method, the consideration transferred is allocated to the identifiable assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. Any excess of the purchase price over the fair value of net identifiable assets acquired is recorded as goodwill. Identifiable intangible assets, are recognized separately from goodwill if they meet the separability criteria and are amortized over the estimated useful lives. Provisional amounts are adjusted during the measurement period as new information becomes available about facts and circumstances that existed as of the acquisition date.
Accounting Standards issued but not adopted as of March 31, 2026 – In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses, an update that improves income statement expense disclosure requirements. Under ASU 2024-03 issuers will be required to incorporate new tabular disclosures disaggregating prescribed expense categories within relevant income statement captions in the notes to their financial statements. These categories include purchases of inventory, employee compensation, depreciation and intangible asset amortization. The amendments are effective for fiscal years beginning after December 15, 2026 and should be applied prospectively. The adoption of ASU 2024-03 will require us to provide additional disclosures related to certain income statement expenses, but otherwise will not materially impact our consolidated financial statements.
In December 2025, the FASB issued ASU 2025-10, Accounting for Government Grants (Topic 832), which establishes guidance on the recognition, measurement, presentation and disclosure of government grants received by business entities. The Company does not currently receive government grants within the scope of this guidance. The Company is evaluating the potential impact of the adoption of this standard on its consolidated financial statements and if arrangements in the future meet the definition of a government grant, such arrangements would be evaluated under this provision.
All other new accounting pronouncements that have been issued, but not yet effective are currently being evaluated and at this time are not expected to have a material impact on our consolidated financial statements.
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