Nauticus Robotics, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (Whitley Penn, LLP, PCAOB ID: 726 ) F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Changes in Stockholders’ Equity (Deficit) F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Nauticus Robotics Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Nauticus Robotics Inc. and subsidiary (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations changes in stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Whitley Penn LLP We have served as the Company’s auditor since 2021 Houston, Texas March 28, 2023 F- 2 NAUTICUS ROBOTICS, INC. CONSOLIDATED BALANCE SHEETS December 31, 2022 December 31, 2021 Assets Current Assets: Cash and cash equivalents $ 17,787,159 $ 20,952,867 Restricted certificate of deposit 250,375 251,236 Short-term investments 4,959,263 - Accounts receivable, net 1,622,434 794,136 Inventories 6,666,912 - Contract assets 573,895 893,375 Prepaid insurance 2,392,978 67,219 Other Current assets 2,710,031 210,225 Total Current assets 36,963,047 23,169,058 Property and equipment, net 15,167,367 1,437,311 Operating lease right-of-use asset 317,208 513,763 Other assets 155,490 47,240 Total assets $ 52,603,112 $ 25,167,372 Liabilities and Stockholders’ Equity (Deficit) Current Liabilities: Accounts payable $ 324,484 $ 1,402,424 Accrued liabilities 3,142,977 1,576,433 Operating lease liabilities - current 410,158 353,598 Notes payable - current - 10,250,000 Notes payable, related parties - current - 3,000,000 Total Current Liabilities 3,877,619 16,582,455 Warrant liabilities 32,688,342 - Operating lease liabilities - long-term 87,214 467,208 Notes payable - long-term, net of discount 15,922,118 14,708,333 Other liabilities - 20,833 Total Liabilities 52,575,293 31,778,829 Commitments and Contingencies Stockholders’ Equity (Deficit): Preferred stock, $ 0.0001 par value; 10,000,000 shares, authorized - - Series A preferred stock, $ 0.01 par value; 0 and 334,800 shares, respectively, issued, and outstanding - 3,348 Series B preferred stock, $ 0.01 par value; 0 and 725,426 shares, respectively, issued, and outstanding - 7,254 Common stock, $ 0.0001 par value; 625,000,000 shares authorized, 47,250,771 and 9,669,217 shares issued, respectively, and 47,250,771 and 9,669,217 shares outstanding, respectively 4,725 967 Additional paid-in capital 68,128,196 33,221,505 Accumulated deficit ( 68,105,102 ) ( 39,844,531 ) Total Stockholders’ Equity (Deficit) 27,819 ( 6,611,457 ) Total Liabilities and Stockholders’ Equity (Deficit) $ 52,603,112 $ 25,167,372 See accompanying notes to the consolidated financial statements. F- 3 NAUTICUS ROBOTICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the year ended December 31, 2022 2021 Revenue: Service $ 11,210,559 $ 7,854,068 Product - 242,637 Service - related party 224,400 332,767 Product - related party - 162,068 Total revenue 11,434,959 8,591,540 Costs and expenses: Cost of revenue (exclusive of items shown separately below) 11,863,862 6,850,248 Depreciation 516,949 365,097 Research and development 2,376,912 3,533,713 General and administrative 15,056,565 4,362,400 Total costs and expenses 29,814,288 15,111,458 Operating loss ( 18,379,329 ) ( 6,519,918 ) Other (income) expense: Other income, net ( 293,862 ) ( 1,601,568 ) Loss on extinguishment of debt - 9,484,113 Change in fair value of warrant liabilities 6,461,087 - Interest expense, net 3,714,017 725,166 Total other (income) expense, net 9,881,242 8,607,711 Net loss ( 28,260,571 ) $ ( 15,127,629 ) Basic and diluted earnings (loss) per share $ ( 1.75 ) $ ( 1.57 ) Basic and diluted weighted average shares outstanding 18,982,139 9,637,962 See accompanying notes to the consolidated financial statements. F- 4 NAUTICUS ROBOTICS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) 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, 2020 334,800 $ 3,348 725,426 $ 7,254 9,637,962 $ 964 $ 23,276,615 $ ( 24,716,902 ) $ ( 1,428,721 ) Stock-based compensation - - - - - - 107,794 - 107,794 Net loss - - - - - - - ( 1,519,682 ) ( 1,519,682 ) Balance at March 31, 2021 334,800 3,348 725,426 7,254 9,637,962 964 23,384,409 ( 26,236,584 ) ( 2,840,609 ) Stock-based compensation - - - - - - 100,570 - 100,570 Net loss - - - - - - - ( 1,074,911 ) ( 1,074,911 ) Balance at June 30, 2021 334,800 3,348 725,426 7,254 9,637,962 964 23,484,979 ( 27,311,495 ) ( 3,814,950 ) Stock-based compensation - - - - - - 117,571 - 117,571 Net loss - - - - - - - ( 1,298,122 ) ( 1,298,122 ) Balance at September 30, 2021 334,800 $ 3,348 725,426 $ 7,254 9,637,962 $ 964 $ 23,602,550 $ ( 28,609,617 ) $ ( 4,995,501 ) Stock-based compensation - - - - - - 99,645 - 99,645 Loss on extinguishment of debt - - - - - - 9,484,113 - 9,484,113 Excercise of stock options - - - - 31,255 $ 3 35,197 - 35,200 Net loss - - - - - - - $ ( 11,234,914 ) ( 11,234,914 ) Balance at December 31, 2021 334,800 $ 3,348 725,426 $ 7,254 9,669,217 $ 967 $ 33,221,505 $ ( 39,844,531 ) $ ( 6,611,457 ) Stock-based compensation - - - - - - 200,157 - 200,157 Net loss - - - - - - - ( 3,504,002 ) ( 3,504,002 ) Balance at March 31, 2022 334,800 3,348 725,426 7,254 9,669,217 967 33,421,662 ( 43,348,533 ) ( 9,915,302 ) Stock-based compensation - - - - - - 188,657 - 188,657 Net loss - - - - - - - ( 3,356,956 ) ( 3,356,956 ) Balance at June 30, 2022 334,800 3,348 725,426 7,254 9,669,217 967 33,610,319 ( 46,705,489 ) ( 13,083,601 ) Cancellation and exchange of convertible note in connection with reverse capitalization - - - - 5,299,546 530 14,548,384 - 14,548,914 Conversion of Series A preferred stock in connection with reverse recapitalization ( 334,800 ) ( 3,348 ) - - 4,756,470 476 2,872 - - Conversion of Series B preferred stock in connection with reverse recapitalization - - ( 725,426 ) ( 7,254 ) 10,306,055 1,030 6,224 - - Reverse recapitalization with Cleantech Acquisition Corp, net - - - - 6,619,490 662 ( 669,904 ) ( 669,242 ) Earnout shares placed in escrow - - - - 7,499,993 750 ( 750 ) - - Issuance of common stock for PIPE Investment - - - - 3,100,000 310 30,999,690 - 31,000,000 Equity issuance costs - - - - - - ( 12,582,000 ) ( 12,582,000 ) Stock-based compensation - - - - - - 235,593 - 235,593 Net loss - - - - - - - ( 13,176,497 ) ( 13,176,497 ) Balance at September 30, 2022 - - - - 47,250,771 4,725 66,150,428 ( 59,881,986 ) 6,273,167 Stock-based compensation - - - - - - 1,977,768 - 1,977,768 Net loss - - - - - - - ( 8,223,116 ) ( 8,223,116 ) Balance at December 31, 2022 - $ - - $ - 47,250,771 $ 4,725 $ 68,128,196 $ ( 68,105,102 ) $ 27,819 See accompanying notes to the consolidated financial statements. F- 5 NAUTICUS ROBOTICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended December 31, 2022 2021 Cash flows from operating activities: Net loss $ ( 28,260,571 ) $ ( 15,127,629 ) Adjustments to reconcile net loss to net cash from operating activities: Depreciation 516,949 365,097 Accretion of debt discount 1,342,062 29,166 Stock-based compensation 2,602,175 425,580 Loss on extinquishment of debt - 9,484,113 Change in fair value of warrant liabilities 6,461,087 - Noncash impact of lease accounting 196,555 205,966 Other income - Paycheck Protection Program Loan forgiveness - ( 1,578,500 ) Changes in operating assets and liabilities: Accounts receivable ( 828,298 ) ( 721,401 ) Inventories ( 6,666,912 ) - Contract assets 319,480 ( 831,489 ) Other assets ( 4,902,797 ) ( 275,759 ) Accounts payable and accrued liabilities ( 7,731,279 ) 2,287,134 Contract liabilities - ( 1,433,370 ) Operating lease liabilities ( 323,434 ) ( 330,598 ) Net cash from operating activities ( 37,274,983 ) ( 7,501,690 ) Cash flows from investing activities: Capital expenditures ( 14,247,005 ) ( 922,487 ) Purchase of short-term investments ( 4,959,263 ) - Net cash from investing activities ( 19,206,268 ) ( 922,487 ) Cash flows from financing activities: Proceeds from notes payable 2,000,000 24,950,000 Proceeds from Paycheck Protection Program Loan - 1,578,500 Proceeds from exercise of stock options - 35,200 Payments of note payable ( 17,850,333 ) ( 484,836 ) Proceeds from reverse recapitalization with CleanTech Acquisition Corp, net 14,947,876 - Proceeds from issuance of common stock for Pipe Investment 31,000,000 - Proceeds from issuance of debentures and SPA Warrants, net of discount 35,800,000 - Payment of transaction costs on equity funding ( 12,582,000 ) - Net cash from financing activities 53,315,543 26,078,864 Net change in cash and cash equivalents ( 3,165,708 ) 17,654,687 Cash and cash equivalents, beginning of year 20,952,867 3,298,180 Cash and cash equivalents, end of year $ 17,787,159 $ 20,952,867 Supplemental disclosure of cash flow information: Cash paid for interest $ 2,719,947 $ 25,909 Cash paid for taxes - - Non-cash investing and financing activities: Conversion of convertible debt and accrued interest expense to common stock 14,548,914 - Conversion of Series A preferred stock in connection with reverse recapitalization 3,348 - Conversion of Series B preferred stock in connection with reverse recapitalization 7,254 - Private and Public Warrant Liabilities assumed in reverse recapitalization 5,278,145 - Fair value of SPA warrants at issuance 20,949,110 - Loan commitment fee - ( 300,000 ) See accompanying notes to the consolidated financial statements. F- 6 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of the Business Nauticus Robotics, Inc. (the “Company”, “our”, 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 retrofit/upgrading legacy systems and other 3 rd 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, to improve offshore health, safety, and environmental exposure. Business Combination - On September 9, 2022 (the “Closing Date”), Nauticus Robotics, Inc. consummated its business combination pursuant to that certain Agreement and Plan of Merger (the “Merger Agreement,” and together with the other agreements and transactions contemplated by the Merger Agreement, the “Business Combination”) with CleanTech Merger Sub, Inc., a wholly owned subsidiary of CLAQ (“Merger Sub”), and Nauticus Robotics, Inc., a Texas corporation (prior to the Closing Date, “Nauticus Robotics Holdings, Inc.”). Pursuant to the terms of the Merger Agreement, a business combination between CLAQ and Nauticus Robotics Holdings, Inc. was affected through the merger of Merger Sub with and into Nauticus Robotics Holdings, Inc., with Nauticus Robotics Holdings, Inc. 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 $ 0.01 per share, that was issued and outstanding immediately prior to the closing converted into shares of Nauticus Common stock, par value $ 0.01 per share, (“Nauticus Preferred Stock Conversion”); (b) each of Nauticus Robotic Holdings, Inc.’s unsecured convertible note obligations outstanding was converted into shares of Nauticus Common Stock in accordance with the terms of each such Nauticus Convertible Note; and (c) each share of Nauticus Common Stock (including shares of Nauticus Common Stock outstanding as a result of the Nauticus Preferred Stock Conversion and Nauticus Convertible Notes Conversion) was converted into the right to receive (i) the per share merger consideration and (ii) Earnout Shares. Shares issued at closing is summarized as follows (i) an aggregate of 36,650,778 shares of Common Stock, par value $0.0001 (the “Common Stock” of CLAQ prior to the Closing, and the Common Stock of Nauticus following the Closing) shares were issued to holders of Nauticus Common Stock in the Business Combination (ii) the right to receive 7,499,993 additional shares of Common Stock held in escrow pursuant to the terms of the Merger Agreement and as further described below (such additional escrowed shares, the “Earnout Shares”) and (iii) the issuance of 3,100,000 shares of Common Stock for the Equity Financing (as described below). An aggregate of 47,250,771 shares of Common Stock (inclusive of the Earnout Shares) was issued after the Business Combination. Former holders of Nauticus Common Stock are entitled to receive their pro rata share of up to 7,499,993 additional shares of Common Stock (the “Earnout Shares”) held in escrow. The Earnout Shares will be released upon occurrence of the following (each, a “Triggering Event”): i. one-half of the Earnout Shares will be released if, within a 5-year period, the volume-weighted average price of our Common Stock equals or exceeds $15.00 per share over any 20 trading days within a 30-day trading period; ii. one-quarter of the Earnout Shares will be released if, within a 5-year period, 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, within a 5-year period, 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. At closing, we received proceeds from Private Investment in a Public Entity subscribers (“PIPE Investment”) consisting of: ● the issuance of 3,100,000 shares of Common Stock, for a purchase price of $ 10.00 per share and an aggregate purchase price of $ 31 million (the “Equity Financing”), and ● the issuance of secured Debentures with warrants having an aggregate principal amount of $ 36,530,320 (the “Debentures”) pursuant to a securities purchase agreement with certain investors providing net proceeds of $ 35,800,000 inclusive of a 2 % original issue discount. The fair value of the SPA Warrants was estimated to be $ 20,949,110 using a Monte Carlo valuation model incorporating future projections of the various potential outcomes and any exercise price adjustments based on future financing events. The Debentures are convertible into 2,922,425 shares of Common Stock and associated warrants for an additional 2,922,425 shares with an exercise price equal to $ 20 per share, subject to adjustment (“SPA Warrants”). F- 7 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $ 14,947,875 . The Company also assumed $ 30,157 in prepaids, $ 14,796,942 in accounts payable and accrued liabilities, $ 850,333 in notes payable and net equity of $( 669,243 ). CLAQ’s net cash at the Closing Date totaled $ 14,947,875 . This amount, together with proceeds of the PIPE Investment, were available to repay certain indebtedness, transaction costs and for general corporate purposes. The Company incurred $ 12,582,000 in direct and incremental costs associated with the Equity Financing, which primarily consisted of investment banking, legal, accounting, and other professional fees. Impact of COVID-19 Pandemic on Business – The global spread of COVID-19 has created significant market volatility and economic uncertainty and disruption during 2021 and continuing into 2022. 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 of the ongoing effects of the COVID-19 pandemic and the associated 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 adversely affects our business, results of operations, and financial condition. The duration and extent of the COVID-19 pandemic and its impacts 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 – The Company has had recurring losses and negative cash flows since inception. As such, the Company has been dependent on debt and equity funding to meet its development efforts. The Company continues to develop its principal products and conducts extensive research and development activities. 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. If additional financing is not raised, it would likely lead to the company reducing discretionary spending and other cost cutting measures. The Company has not considered cost-cutting measures at this time but will assess as needed to meet capital requirements for our business operations. The Company have sufficient cash and cash generated from operations along with access to debt funding as necessary to meet its obligations for at least one year from the issuance date of this report. F- 8 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On March 8, 2023, and subsequent to the filing of the Company’s Form 10-Q/A on such date, Triumph countersigned an agreement that amended the original agreement to accommodate staggered deposits and payments for each of the four contracted units, with deliveries taking place between 2024 and 2027. Triumph’s initial non-refundable deposit of $ 5,420,000 is due on October 31, 2023. Any failure by Triumph to make the initial deposit when due will be deemed breached by Triumph for failure to perform under the terms of the Agreement as amended. Management has carefully considered all facts surrounding the Triumph contract and its ability to secure financing for its capital projects, and as such, the Company has removed the contract from its internal projections and excluded all associated revenues and costs. Accordingly, we have excluded Triumph from the unfulfilled performance obligation table in Note 3. 2. Summary of Significant Accounting Policies Basis of Presentation – The accompanying audited consolidated financial statements have been prepared in accordance with GAAP, under the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) except the shares and corresponding equity amounts and loss per share related to Nauticus’ Common Stock prior to the Business Combination have been retroactively restated to reflect the post-combination Common Stock capital structure. Principles of Consolidations - These audited consolidated financial statements reflect the financial condition, results of operations, cash flows and changes in stockholders’ equity (deficit) of Nauticus Robotics Holdings Inc. for periods until September 9, 2022, the Closing Date of the Business Combination, and the consolidated results of operations, cash flows and changes in stockholders’ equity (deficit) of Nauticus Robotics, Inc. and its consolidated subsidiary, Nauticus Robotics Holdings Inc. for the period from September 10, 2022 through December 31, 2022. All significant intercompany transactions have been eliminated in consolidation. 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 $ 250,000 . Historically, the Company has not experienced any losses in such accounts. There were no cash equivalents at December 31, 2022 and 2021, respectively Restricted Certificate of Deposit — The restricted certificate of deposit on December 31, 2022 and 2021 is held with a bank and is used as a guarantee against corporate credit cards. Short-term Investments – Short-term investments on December 31, 2022 include an investment in a US Treasury Bill maturing March 14, 2023. The original maturity for this investment was more than 3 months and any change in the investment is recognized in the statement of operations. Accounts Receivable – Trade credit is generally extended on a short-term basis in the normal course of business. If necessary, the Company establishes an allowance for doubtful accounts to provide for the estimated amount of accounts receivable that will not be collected which is based on an analysis of specific customers, taking into consideration the age of past due accounts and an assessment of the customer’s ability to pay. Accounts receivable outstanding longer than contractual terms, generally up to 90 days, are considered past due. Accounts deemed uncollectible are applied against the allowance for doubtful accounts. Property and Equipment – p roperty 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 statements of operations. 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. There were no impairments for December 31, 2022 and 2021, respectively. Segment Reporting – Our operations represent 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. F- 9 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Revenue – Our primary sources of revenue are from providing technology and 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 has no product sales in 2022 as its core products are still under development. 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 process 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. Inventories consisted of the following: December 31, 2022 December 31, 2021 Raw material and supplies $ 1,499,030 $ - Work in progress 5,167,882 - Finished goods - - Total inventories $ 6,666,912 $ - Leases – The Company’s lease arrangements are operating leases which are capitalized on the balance sheet as right-of-use (“ROU”) assets and obligations. Right-of-use (“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. F- 10 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 tax positions as of December 31, 2022 or 2021. The Company is subject to the Texas margin tax and margin tax expense was $ 9,705 and $ 0 for the years ended December 31, 2022 and 2021, respectively. Foreign Currency Translation – Nauticus purchases certain materials and equipment from foreign companies and these transactions are generally denominated in the vendors’ local currency. The Company recorded $ 261,000 and $ 470 of foreign currency transaction gains for the years ended December 31, 2022 and 2021, respectively that are included in other income, net. 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 and 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 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 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 (defined below) 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 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. At the Closing Date, the SPA Warrants fair value 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 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. Their estimated fair value upon issuance is determined using a Monte Carlo valuation model (a Level 3 measurement). F- 11 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Convertible Instruments – In August 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity . ASU 2020-06 simplifies the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, which meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. The amendments in ASU 2020-06 further revise the guidance in ASC 260, Earnings Per Share , to require entities to calculate diluted earnings per share for convertible instruments using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted earnings per share when an instrument may be settled in cash or shares. The Company elected to early adopt ASU 2020-06 as of January 1, 2021 using the modified retrospective method. Adoption of this new guidance had no impact on prior year retained earnings as we have stated the convertible debt instruments at their face value in prior period financial statements without bifurcation. Adoption of this guidance had no impact on Company financial statements at the date of adoption but is applicable to newly issued instruments. Capitalized Interest – The Company capitalizes interest costs incurred to work in process 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 year ended December 31, 2022, the Company capitalized interest totaling $ 804,000 to work in process attributable to inventories and property and equipment. No amounts of interest were capitalized during the year ended December 31, 2021. Earnings (Loss) per Share – Basic earnings per share is computed by dividing income 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. Major Customer and Concentration of Credit Risk – We have a limited number of customers. During the year ended December 31, 2022, sales to two customers accounted for 95 % of total revenue. The total balance due from these customers as of December 31, 2022 comprised 82 % of accounts receivable. During the year ended December 31, 2021, sales to one customer accounted for 89 % of total revenue. The total balances due from this customer as of December 31, 2021, made up 82 % of accounts receivable. No other customer represented more than 10 % of our revenue. F- 12 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other Current assets consist of the following : December 31, 2022 December 31, 2021 Prepaid material purchases $ 2,454,298 $ 96,095 Other prepayments 199,323 110,326 Other 56,410 3,804 Total other current assets $ 2,710,031 $ 210,225 Accrued liabilities consist of the following : December 31, 2022 December 31, 2021 Accrued compensation $ 1,501,736 $ 349,255 Accrued professional fees 794,021 - Accrued insurance 590,936 61,752 Accrued interest - 703,544 Advance customer payments - 373,791 Other accrued expenses 256,284 88,091 Total accrued expenses $ 3,142,977 $ 1,576,433 Reclassifications – Financial statements presented for prior periods include reclassifications that were made to conform to the current-period presentation. There was no material impact to the consolidated financial statements for these changes. Recent Accounting Pronouncements – In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses , which replaces the existing incurred loss impairment model with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We adopted this standard on January 1, 2022. There was no impact from the adoption of this standard on our consolidated financial statements. There are no other new accounting pronouncements that are expected to have a material impact on our consolidated financial statements. F- 13 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Revenue The following table presents the components of our revenue: Year Ended December 31, 2022 2021 Cost plus fixed fee $ 6,898,450 $ 2,856,858 Firm fixed-price 3,023,176 4,978,015 Firm fixed-price-vehicle lease 1,513,333 756,667 Total $ 11,434,959 $ 8,591,540 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. In June 2021, we signed a Subcontractor Agreement with an unrelated third party to provide engineering, design, development, and other services which also includes a lease for an Aquanaut vehicle (“Vehicle Lease”). The Vehicle Lease is for a total of $ 2,270,000 , or $ 126,111 per month for 18 months. Service revenue for the Vehicle Lease totaled $ 1,513,333 and $ 756,667 , respectively, for the years ended December 31, 2022 and 2021. The Vehicle Lease was classified as an operating lease and revenue was recognized on a straight-line basis over the lease term until its completion in December 2022. Contract Balances – Accounts receivable, net at December 31, 2022 totaled $ 1,622,434 due from customers for contract billings and is expected to be collected within the next three to six months. At December 31, 2021, accounts receivable, net totaled $ 794,136 . The increase in accounts receivable at December 31, 2022 as compared with December 31, 2021 corresponds to the higher revenue recognized in 2022 from new customer contracts. At December 31, 2022 and December 31, 2021, allowances for doubtful accounts included in accounts receivable totaled $ 9,963 and $ 0 , respectively. Bad debt expense was $ 9,963 and $ 0 , respectively, for the years ended December 31, 2022 and 2021. 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. Contract assets decreased $ 319,480 during 2022, primarily due to the timing of the billing for the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations. Contract liabilities include billings in excess of revenue recognized and accrual of certain contract obligations. The Company had no contract liabilities at December 31, 2022. Contract liabilities at December 31, 2021 included $ 306,791 of billings in excess of revenue recognized and $ 67,000 for contract completion obligations associated with a customer contract for a modified Aquanaut vehicle and are included in “Accrued liabilities” in the December 31, 2021 consolidated balance sheet. These amounts were recognized in the consolidated statements of operations during 2022. Unfulfilled Performance Obligations – As of December 31, 2022, we expect to recognize approximately $ 11.1 million of revenue in future periods from unfulfilled performance obligations from existing contracts with customers. The following table summarizes the expected revenue from our unfilled performance obligations as of December 31, 2022: Expected Revenue from Unfulfilled Performance Obligations by Period ($ in millions) Total 2023 2024 Unfulfilled performance obligations: Performance obligations $ 11.1 $ 7.0 $ 4.1 Total unfulfilled performance obligations $ 11.1 $ 7.0 $ 4.1 If any of our contracts were to be modified or terminated, the expected value of the unfilled performance obligations of such contracts would be reduced. F- 14 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Property and Equipment Property and equipment consisted of the following: Useful Life (years) December 31, 2022 December 31, 2021 Leasehold improvements 5.1 $ 789,839 $ 789,839 Property & equipment 5 2,206,004 1,216,609 Technology hardware equipment 5 1,200,504 773,535 Total 4,196,347 2,779,983 Less accumulated depreciation ( 2,003,341 ) ( 1,492,892 ) Construction in progress 12,974,361 150,220 Total property and equipment, net $ 15,167,367 $ 1,437,311 5. Notes Payable Notes payable consisted of the following: December 31, 2022 December 31, 2021 Convertible secured debentures $ 36,530,320 $ - RCB Equities #1, LLC term loan credit agreement - 14,708,333 Contingently convertible promissory notes: Schlumberger Technology Corp. - 1,500,000 Transocean Inc. - 1,500,000 Goradia Capital LLC - 5,000,000 Material Impact Fund II, LP - 5,000,000 In-Q-Tel, Inc. - 250,000 Total 36,530,320 27,958,333 Less: debt discount, net ( 20,608,202 ) - Less: current portion - ( 13,250,000 ) Total notes payable – long-term $ 15,922,118 $ 14,708,333 Convertible Note Obligations – As of December 31, 2021, Nauticus Robotics Holdings, Inc. was obligated under five contingently convertible note obligations bearing interest at interest rates ranging from 4.25 % to 10 % per annum. Each of these contingently convertible note obligations were converted into shares of Nauticus Robotics Holdings, Inc. Common Stock in accordance with the terms of each such note upon closing of the Business Combination. Each share of Nauticus Robotics Holdings, Inc. Common Stock received was converted into (i) an aggregate of 5,299,546 shares of Common Stock and (ii) a pro-rata number of the total Earnout Shares in the Business Combination Upon closing of the Business Combination, we issued Debentures having an aggregate gross principal amount of $ 36,530,320 together with 2,922,425 SPA Warrants for proceeds of $ 35,800,000 inclusive of a 2 % original issue discount. The fair value of the SPA Warrants was estimated to be $ 20,949,110 using a Monte Carlo valuation model incorporating future projections of the various potential outcomes and any exercise price adjustments based on future financing events. This amount was recorded as a warrant liability and, together with the original issue discount, was recognized as a debt discount upon issuance totaling $ 21,679,716 . F- 15 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Debentures may be converted at the holders’ option at 120% of the principal amount at a conversion price of $15.00 or 2,922,425 shares of Common Stock. The conversion price may be adjusted downward for certain events including the issuance by the Company of dilutive instruments below the current conversion price. Interest accrues on the outstanding principal amount of the Debentures at 5% per annum, payable quarterly. The Debentures are secured by first priority interests, and liens on, all our assets, and mature on the fourth anniversary of the date of issuance, September 9, 2026. The SPA Warrants contain similar anti-dilution provisions and are exercisable initially at $ 20 per share over their ten-year term at the holders’ option (further terms of the SPA Warrants are discussed in Note 10). The debt discount is being accreted to interest expense over the four-year term of the Debentures. We recorded $ 1,071,228 of debt discount accretion for the period from September 9, 2022 through December 31, 2022, and is included as part of interest expense in the Consolidated Statement of Operations. The Debentures effective interest rate is approximately 25.2% . RCB Equities #1, LLC Term Loan Credit Agreement – On December 16, 2021, we entered into a Term Loan Credit Agreement with RCB Equities #1, LLC (“RCB”) in the amount of $15,000,000 to provide funds for the Company’s working capital and general corporate purposes. The note bore interest at 13% per annum and was payable in 18 monthly installments of interest only through its maturity date of June 16, 2023. A 2% commitment fee totaling $300,000 was paid upon loan inception and reported as a debt discount. There was also a 5% exit fee, accrued over the note term, totaling $750,000. On August 18, 2022, we signed an amendment to the note with RCB providing for an additional borrowing of $ 2,000,000 , with no interest and a maturity date of 60 days from the funding date. We paid a $33,000 origination fee with an additional $ 100,000 fee due upon repayment. The RCB note, as amended, was repaid in full including all accrued and unpaid interest and fees on September 12, 2022. 6. Leases The Company leases its office and manufacturing facility under a 64-month operating lease expiring April 30, 2024 . The lease includes rent escalations and chargebacks to the Company for build-out costs. The right-of-use asset and lease liability amounts were determined using an 8 % discount rate which was the interest rate related to the leasehold improvement obligation. The operating lease includes a leasehold improvement obligation which bears interest at 8 % and matures on April 30, 2024. The balance of this obligation was $ 56,634 and $ 96,375 as of December 31, 2022, and December 31, 2021, respectively, and is included in operating lease liabilities in the consolidated balance sheets. Total cash paid pursuant to this lease was $ 359,615 and $ 360,780 during the years ended December 31, 2022 and 2021, respectively. The weighted average remaining lease term is 16 months at December 31, 2022. The Company also leases certain office equipment under an operating lease beginning in August 2022 and expiring in 2025. The right-of-use asset and lease liability amounts were determined using a 7.75 % discount rate. Cash paid pursuant to this lease during the year ended December 31, 2022 was $ 3,475 and the weighted average remaining lese term is 31 months. The weighted average discount rate for all leases is approximately 8 % at December 31, 2022. F- 16 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Total operating lease expense, which is accounted for in cost of revenue, was as follows: Years ended December 31, 2022 2021 Fixed lease expense $ 275,763 $ 275,485 Variable lease expense $ 178,032 $ 180,818 Total operating lease expense $ 453,795 $ 456,303 Future minimum lease payments as of December 31, 2022 were as follows: Operating Years Ending December 31, Leases 2023 $ 409,347 2024 142,847 2025 4,865 Total minimum payments $ 557,059 7. 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 consolidated financial statements with respect to any matters. F- 17 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Income Taxes The income tax expense consisted of the following : Year Ended December 31, 2022 2021 Current income taxes: Federal $ - $ - State and local - - Total current tax - - Deferred income taxes: Federal - - State and local - - Total deferred tax - - Income tax expense $ - $ - The effective tax rates on continuing operations for the years ended December 31, 2021 and 2022 were 0 % respectively. The table below reconciles these effective tax rates with the U.S. federal statutory income tax rate as follows: Year Ended December 31, 2022 2021 Income (loss) before income taxes $ ( 28,260,571 ) $ ( 15,127,629 ) Tax at Federal Statutory Rate ( 5,934,720 ) ( 3,176,802 ) Federal Return to Accrual - - Non deductible expenses 193,421 1,754,071 Change in valuation allowance 5,741,299 1,422,731 Income tax expense - - 0.00 % 0.00 % F- 18 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company’s deferred tax position reflects the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting. Significant components of the deferred tax assets and liabilities are as follows: Year Ended December 31, 2022 2021 Deferred tax assets: Fixed Assets $ 113,135 $ 103,863 Stock Compensation 758,306 211,849 Warrant Liability Gain/Loss 1,356,828 - Net Operating Losses 9,666,591 6,262,113 Business Credit Carryforward 1,426,116 1,426,117 Capitalized R & D 449,626 - Other assets 109,616 13,634 Total deferred tax assets 13,880,218 8,017,576 Deferred tax liabilities: Unrealized F/X ( 54,729 ) - Other Liabilities ( 66,614 ) - Total deferred tax liabilities ( 121,343 ) - Valuation allowance ( 13,758,875 ) ( 8,017,576 ) Net deferred tax assets $ - $ - The Company has federal net operating loss carryforwards of approximately $ 46.3 million at December 31, 2022, of which about $ 646,000 begin to expire in 2035 and the remainder have no expiration. The Company has recorded a full valuation allowance against its net deferred tax assets due to recurring net losses. 9. Equity Common Stock – A total of 47,250,771 shares of Common Stock were outstanding at December 31, 2022. Former holders of CLAQ common stock hold a total of 6,619,490 shares of Common Stock as a result of the Business Combination. Series A and Series B Preferred Stock – The Company had 334,800 shares of Series A Preferred Stock and 725,426 shares of Series B Preferred Stock outstanding prior to the Business Combination. Nauticus Robotics Holdings, Inc. Common Stock was issued in connection with the Nauticus Preferred Stock Conversion . Each share of Nauticus Robotics Holdings, Inc. Common Stock was converted into (i) an aggregate of 15,062,525 shares of Common Stock and (ii) a pro-rata number of the total Earnout Shares in the Business Combination. Common Stock Repurchase Agreements – Prior to the Business Combination, Nauticus Robotics Holdings, Inc. had agreements with its stockholders and option holders for the repurchase of up to 950,000 shares of outstanding common stock at prices based upon agreed valuation formulas. These agreements were terminated at closing of the Business Combination. Common Stock Equity PIPE – At closing, we received proceeds from Private Investment in a Public Entity subscribers (“PIPE Investment”) consisting of the issuance of 3,100,000 shares of Common Stock, for a purchase price of $ 10.00 per share, for an aggregate of $ 31 million. Earnout Shares – Following the closing of the Business Combination, former holders of shares of Nauticus 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 7,499,993 additional shares of Nauticus Common Stock which are held in escrow. The Earnout Shares will be released upon occurrence of certain Triggering Events. At December 31, 2022, the earnout targets have not been achieved and the Earnout Shares remain in escrow. F- 19 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Earnout Shares were classified in stockholders’ equity and recognized at their fair value upon issuance totaling $ 4,957,366 . Their estimated fair value upon issuance was determined using a Monte Carlo valuation model which simulated our stock price and the timing of the lapse of the transfer restrictions. The issuance of the Earnout Shares was treated as a deemed dividend. Because the Company does not have retained earnings, the issuance was recorded within additional paid in capital. 10. Warrants Public Warrants – We assumed 8,625,000 Public Warrants in the Business Combination which remained outstanding as of December 31, 2022. Each whole Public Warrant entitles the holder to purchase one share of Common Stock at a price of $ 11.50 , subject to adjustment. However, no Public Warrants will be exercisable for cash unless we have an effective and current registration statement covering the shares of Common Stock issuable upon exercise of the Public Warrants and a current prospectus relating to such shares of Common Stock. Notwithstanding the foregoing, if a registration statement covering the shares of Common Stock issuable upon exercise of the Public Warrants is not effective within 120 days following the consummation of the Business Combination, warrant holders 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 Public Warrants on a cashless basis pursuant to an available exemption from exemption under the Securities Act. The Public Warrants expire on the fifth anniversary of our completion of the Business Combination, or earlier upon redemption or liquidation. Our Public Warrants are listed on Nasdaq under the symbol “KITTW”. We may redeem the outstanding Public Warrants, in whole and not in part, at a price of $ 0.01 per warrant: ● 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 $ 16.50 per share (subject to adjustment for splits, dividends, recapitalizations, and other similar events), for any 20 trading days within a 30-day trading period ending on the third business day prior to the notice of redemption to warrant holders, and ● 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 consolidated balance sheets, were valued as of December 31, 2022 at $ 2,276,136 based on their publicly-traded price. The change in value of the Public Warrants during year ended December 31, 2022 totaled $( 570,114 ) and was reported with other (income) expense in our consolidated statements of operations. Private Warrants – We assumed 7,175,000 Private Warrants in the Business Combination which remained outstanding as of December 31, 2022. The Private Warrants are exercisable for one share of Common Stock at an exercise price of $ 11.50 and are identical in all material respects to the Public Warrants except that such Private Warrants are exercisable for cash (even if a registration statement covering the shares of Common Stock issuable upon exercise of such warrants is not effective) or on a cashless basis, at the holder’s option, and will not be redeemable by us, in each case so long as they are still held by the initial purchasers or their affiliates. The Private Warrants purchased by CleanTech Investments are not exercisable after July 14, 2026, as long as Chardan Capital Markets, LLC or any of its related persons beneficially own these Private Warrants. The Private Warrants, which are accounted for as liabilities in our consolidated balance sheets, were valued as of December 31, 2022 at $ 1,934,588 . The fair value of the Private Warrants was estimated using a Black-Scholes option pricing model using the following assumptions: stock price of $3.74, no assumed dividends, a risk-free rate of 4.03% and implied volatility of 36.9%. The change in value of the Private Warrants during the year ended December 31, 2022 totaled $(497,307) and was reported with other (income) expense in our consolidated statements of operations. F- 20 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SPA Warrants – Concurrent with the Closing and pursuant to the Securities Purchase Agreement, we issued 2,922,425 SPA Warrants. The SPA Warrants are exercisable for one share of Common Stock at a price of $ 20.00 . If a registration statement covering the shares of Common Stock issuable upon exercise of the SPA Warrants is not effective upon the registered holder’s election to exercise, the 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 their SPA Warrants on a cashless basis pursuant to an available exemption from exemption under the Securities Act. The SPA Warrants expire ten years after their initial issuance date, or earlier upon redemption or liquidation. The SPA Warrants, which are accounted for as liabilities in our consolidated balance sheets, were valued as of December 31, 2022 at $ 28,477,618 and was estimated using a Monte Carlo valuation model incorporating future projections of the various potential outcomes and any exercise price adjustments based on future financing events. The change in value of the SPA Warrants during year ended December 31, 2022 totaled $ 7,528,508 and was reported with other (income) expense in our consolidated statements of operations. The exercise price of the SPA Warrants is subject to (i) customary anti-dilution adjustments; and (ii) in the case of a subsequent equity sale at a per share price below the exercise price, the exercise price of the associated warrant will be adjusted to such lower price, and the number of shares underlying the warrant will increase proportionately. In the event of a rights offering or dividend, the warrant holder will be treated as though the shares underlying the warrants, he/she holds were outstanding. These warrants can be exercised on a cashless basis. 11. 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, 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. At December 31, 2022, 4,589,977 equity units were available for future issuance under the Omnibus Incentive Plan. At the Closing Date of the Business Combination, Nauticus Robotics Holdings, Inc. had 279,464 options outstanding for the purchase of its common stock. The outstanding options were converted into 3,970,266 options to purchase shares of our Common Stock. Options vest assuming continuous service to the Company with 25 % of the options vesting one year after grant and the balance vesting in a series of 36 successive equal monthly installments measured from the first anniversary of grant. During the vesting period, the participants have voting rights, but the options may not be sold, assigned, transferred, pledged, or otherwise encumbered. Unvested shares are forfeited upon termination of employment and vested shares may be repurchased by the Company at its option. 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. F- 21 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following inputs were used to calculate the fair value of the options as of the date of each grant: Years ended December 31, 2022 2021 Expected volatility 36.7 - 36.9 % 52.5 - 52.9 % Expected term (years) 4.69 - 4.94 6.25 Risk-free interest rate 4.03 % - 4.06 % 1.08 % - 1.46 % Expected dividends 0.00 % 0.00 % The expected volatility for 2022 was calculated using the historical volatility of the Company’s publicly traded common stock. Since there was no public market for the Company’s common stock in 2021, the expected volatility for options for 2021 was determined based on a peer group of publicly traded companies. In evaluating similarity of this peer group, the Company considered factors such as stage of development, risk profile, enterprise value and position within the industry. The Company used the “simplified method” for estimating the expected term of options, which is the average of the weighted-average vesting period and contractual term of the option. The risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the stock options. The Company assumed the expected dividends to be zero as it has never paid dividends and at the grant date of the options had no plans to do so. Stock-based compensation expense, which relates to options granted under the Omnibus Incentive Plan, totaled $ 784,320 in 2022 and $ 425,580 in 2021 and was recorded in general and administrative expense. As of December 31, 2022, there was $ 1,422,492 of total unrecognized compensation cost related to options to be recognized over a remaining weighted average period of 2.56 years. The following table summarizes options outstanding, as well as activity for the periods presented (prior year amounts have been converted using the conversion ratio of 14.2069 applied in the Business Combination): Weighted Weighted Average Average Aggregate Grant Date Exercise Intrinsic Shares Fair Value Price Value Outstanding as of December 31, 2020 2,345,559 $ 0.77 $ 1.59 $ 779,457 Granted 1,726,488 $ 1.10 $ 1.94 Exercised ( 31,255 ) $ 0.47 $ 1.13 Cancelled ( 91,634 ) $ 0.78 $ 1.88 Outstanding as of December 31, 2021 3,949,158 $ 0.91 $ 1.74 $ 2,992,895 Granted 166,927 $ 1.31 $ 2.50 Cancelled ( 609,901 ) $ 0.83 $ 1.83 Outstanding as of December 31, 2022 3,506,184 $ 1.87 $ 1.87 $ 6,554,541 F- 22 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The total intrinsic value of all options exercised during the years ended December 31, 2022 and 2021 was $ 0 and $ 42,944 , respectively. The intrinsic value of all options outstanding at December 31, 2022 and 2021 was $ 6,554,541 and $ 2,992,895 , respectively. The intrinsic value of all exercisable options at December 31, 2022 and 2021 was $ 4,278,240 and $ 1,678,662 , respectively. Stock-based compensation expense attributable to options totaled $ 784,530 and $ 425,580 in 2022 and 2021, respectively. The option expense was recorded in general and administrative expense. Proceeds from option exercises under the stock option plan for the years ended December 31, 2022 and December 31, 2021 were $ 0 and $ 35,200 , respectively. The tax benefit realized from stock-based compensation was $ 0 and $ 16,410 for the years ended December 31, 2022 and December 31, 2021, respectively. Realization of this amount is dependent on the generation of future taxable income. The following tabulation summarizes certain information related to outstanding and exercisable options at December 31, 2022: Options Outstanding Options Exercisable Weighted Average Remaining Weighted Weighted As of Contractual Average As of Average December 31, Life In Exercise December 31, Exercise Range of Excercise Prices 2022 Years Price 2022 Price $ 0.63 $ 0.70 284,137 3.02 $ 0.65 284,137 $ 0.65 $ 1.13 $ 1.46 473,796 6.01 $ 1.29 370,618 $ 1.25 $ 1.94 $ 2.50 2,748,251 7.61 $ 2.10 1,444,609 $ 2.03 $ 0.63 $ 2.50 3,506,184 7.02 $ 1.87 2,099,364 $ 1.70 The remaining weighted average contractual life of exercisable options at December 31, 2022 was 7.0 years. Incentive Plans – during 2022, the Compensation Committee and Board of Directors granted restricted units of our common stock to certain of our key executives, employees, and non-employee directors. Each Restricted Stock Unit (“RSU”) is a notional amount that represents the right to receive one share of common stock of the Company if and when the RSUs vest. 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 Board of Directors Annual General Meeting 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 50 % on the one-year anniversary of the new hire date and 50 % on the two-year anniversary of the new-hire date. In addition, during 2022, the Compensation Committee and Board of Directors granted Performance-based Restricted Stock Units (“PRSUs”) to senior executives. Each PRSU is a notional amount that represents the right to receive one share of common stock if and when the PRSU vests. PRSU participants may earn between 0 % and 150 % of the PRSUs, subject to attainment of certain performance conditions which are based upon the Company’s 2022 revenues. Earned PRSUs will vest 50 % on December 31, 2023 and 50 % on December 31, 2024. The senior executive management team met a performance condition, so they received PRSUs that will vest at least 50 % of the target achieved according to the award agreements. The number of the PRSUs granted was 1,214,580 with 50 % vesting for a total amount of stock base compensation expense totaling $ 858,278 at December 31, 2022. The PRSUs expenses were recorded in general and administrative expense. 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. F- 23 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of our restricted and performance stock unit activity for 2022: Weighted Average Aggregate Grant Date Intrinsic Shares Fair Value Value Outstanding as of December 31, 2021 - $ 0.00 Awarded 3,149,800 $ 4.73 Forfeited ( 15,123 ) $ 4.73 Outstanding as of December 31, 2022 3,134,677 $ 4.73 $ 11,723,692 The remaining weighted average contractual life of restricted stock granted at December 31, 2022 was 1.6 years. The RSUs granted in 2022 do not have voting rights unless a RSU has vested and the share of common stock underlying it has been distributed to the participant. Each grantee of shares of restricted common stock is deemed to be the record owner of those shares during the restricted period, with the right to receive any dividends on those shares. The PRSUs granted in 2022 carry no dividend rights but have voting rights upon the vesting of a PRSU and the share of common stock underlying it has been distributed to the PRSU participant. Grants of restricted stock units are valued at their estimated fair values as of their respective grant dates. The 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. Stock-based compensation expense under the restricted stock plans for 2022 was $ 858,278 for PRSUs and $ 959,367 for RSUs and was recorded in general and administrative expense. As of December 31, 2022, we had $ 4,886,686 of future expense related to PRSUs to be recognized and $ 8,108,603 of future expense related to RSUs over a weighted average remaining life of 2.04 years. Total stock-based compensation expense for 2022 including options, PRSUs, and RSUs totaled $ 2,601,965 . 12. 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 3 % of employees’ gross salaries and such contributions vest immediately. The 401(k) plan provides several investment options, for which the employee has sole investment discretion. The Company’s cost for the 401(k) plan was $ 367,796 and $ 210,945 at December 31, 2022 and 2021, respectively. 13. Related Party Transactions Contingently Convertible Promissory Notes – As discussed in Note 5, upon consummation of the Business Combination outstanding contingently convertible promissory notes, including those held by related parties Schlumberger and Transocean Ltd., were converted into Common Stock. Series A and Series B Preferred Stock – As discussed in Note 9, upon consummation of the Business Combination outstanding Series A and Series B Preferred Stock held by related parties Schlumberger and Transocean Ltd. were converted into Common Stock. Revenue and Accounts Receivable – Revenue from Transocean Ltd. for contract services and products totaled $ 224,400 and $ 494,835 for the years ended December 31, 2022 and 2021, respectively. Accounts receivable included $ 21,000 and $ 39,225 outstanding from Transocean Ltd. at December 31, 2022 and 2021, respectively. F- 24 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PIPE Investment and Securities Purchase Agreement – Concurrent with the closing of the Business Combination, the Company received (i) $2,500,000 from related party Material Impact Fund II, L.P. as their contribution to the PIPE Investment, (ii) $7,500,000 from related party Schlumberger Technology Corporation as their contribution to the PIPE Investment, (iii) $7,500,000 from related party Transocean Ltd. as their contribution to the PIPE Investment, and (iv) $5,102,000 from related party Material Impact Fund II, L.P. pursuant to the Securities Purchase Agreement. Material Impact Fund II,L.P. currently holds $5,102,000 of the outstanding Debentures bearing 5% interest, payable quarterly, maturing September 9, 2026, as well as holding outstanding Common Stock of the Company. During the year ended December 31, 2022, Material Impact Fund II, L.P. received $ 80,073 in interest payments on the Debentures from the Company. 14. Earnings (Loss) Per Share Following is the computation of earnings (loss) per basic and diluted share: Year Ended December 31, 2022 2021 Numerator: Net loss $ ( 28,260,571 ) $ ( 15,127,629 ) Less: deemed dividend for Earnout Shares ( 4,957,366 ) - Net loss attributable to common stockholders $ ( 33,217,937 ) $ ( 15,127,629 ) Denominator: Weighted average shares used to compute basic and diluted EPS 18,982,139 9,637,962 Basic and diluted earnings (loss) per share $ ( 1.75 ) $ ( 1.57 ) Anti-dilutive securities excluded from shares outstanding: Stock options 3,506,184 3,949,158 Restricted and performance stock units 3,134,677 - Warrants 18,722,425 - Earnout shares 7,499,993 - Debentures 2,922,425 - Total 35,785,704 3,949,158 15. 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 and accrued expenses 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. F- 25 NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial liabilities that are required to be measured at fair value on a recurring basis and the related activity for periods presented: Fair Value as of December 31, 2022 Carrying Value Level 1 Level 2 Level 3 Financial liabilities: Warrant liability - Public Warrants $ 2,276,136 $ 2,276,136 $ - $ - Warrant liability - Private Warrants 1,934,588 - - 1,934,588 Warrant liability - SPA Warrants 28,477,618 - - 28,477,618 Total $ 32,688,342 $ 2,276,136 $ - $ 30,412,206 The following table sets forth a summary of the changes in fair value of the Company’s financial liabilities: Warrant Liability Balance, December 31, 2021 $ - Assumption of Public and Private Warrants in Business Combination 5,278,145 SPA Warrants from Convertible Note 20,949,110 Change in fair value of warrant liabilities 6,461,087 Balance, December 31, 2022 $ 32,688,342 16. Subsequent Events On March 8, 2023, and subsequent to the filing of the Company’s Form 10-Q/A on such date, Triumph countersigned an agreement that amended the original agreement to accommodate staggered deposits and payments for each of the four contracted units, with deliveries taking place between 2024 and 2027. Triumph’s initial non-refundable deposit of $ 5,420,000 is due on October 31, 2023 . Any failure by Triumph to make the initial deposit when due will be deemed breached by Triumph for failure to perform under the terms of the Agreement as amended. Management has carefully considered all facts surrounding the Triumph contract and its ability to secure financing for its capital projects, and as such, the Company has removed the contract from its internal projections and excluded all associated revenues and costs. Accordingly, we have excluded Triumph from the unfulfilled performance obligation table in Note 3. * * * * * F- 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.