Nauticus Robotics, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q. Explanatory Note On the Closing Date, we consummated the Business Combination with Merger Sub, and Nauticus Robotics Holdings, Inc. Pursuant to the terms of the Merger Agreement, a business combination between CLAQ and Nauticus Robotics Holdings was effected through the merger of Merger Sub with and into Nauticus Robotics Holdings, with Nauticus Robotics Holdings surviving the merger as a wholly owned subsidiary of CLAQ. On the Closing Date, CLAQ was renamed “Nauticus Robotics, Inc.” and the Nauticus Robotics Holdings’ predecessor was renamed “Nauticus Robotics Holdings, Inc.” The Business Combination was accounted for as a reverse recapitalization under generally accepted accounting principles in the United States (“GAAP”). Nauticus Robotics Holdings, Inc. was determined to be the accounting acquirer and CLAQ was treated as the acquired company for financial reporting purposes. Accordingly, the financial statements of Nauticus represent a continuation of the financial statements of Nauticus Robotics Holdings, Inc. Overview Nauticus Robotics, Inc. (the “Company,” “our,” “us,” or “we”) is a developer of ocean robots, cloud software, and services delivered 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 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, as well as to improve offshore health, safety, and environmental exposure. Our subsea robotic product, Aquanaut, is a vehicle that begins its mission in a hydrodynamically efficient configuration that enables efficient transit to the worksite (i.e., operating as an autonomous underwater vehicle, or “AUV”). During transit (operating in survey mode), Aquanaut’s sensor suite provides the capability to observe and inspect subsea assets or other subsea features. Once it arrives at the worksite, Aquanaut transforms its hull configuration to expose two work-class-capable electric manipulators that can perform dexterous tasks with (supervised) or without (autonomous) direct human involvement. In this intervention mode, the vehicle has capabilities similar to a conventional remotely operated vehicle (“ROV”). The ability to operate in both AUV and ROV modes is a quality unique to our subsea robot and is protected under a U.S. patent. To take advantage of these special configuration qualities, we have developed underwater acoustic communication technology called Wavelink, our over-the-horizon remote connectivity solution, which removes the need for long umbilicals to connect the robot with topside vessels. Eliminating these umbilicals and communicating with the robot through acoustic or other latent, laser, or RF methods reduces much of the system infrastructure currently required for ROV servicing operations and is core to our value proposition. The component technologies that comprise the Aquanaut are also marketable to the existing worldwide ROV fleet. Aquanaut’s perception and machine-learning software technologies, combined with its perception and electric manipulators, can be retrofitted on existing ROV platforms to improve their ability to perform subsea maintenance activities. The Argonaut, a derivative product of Aquanaut, is aligned to non-industrial government applications. This vehicle embodies nearly all of Aquanaut’s core technologies but varies in form and function necessary to perform specialized missions. Our key technologies are autonomous platforms, acoustic communications networks, electric manipulators, AI-based perception and control software, and high-definition workspace sensors. Implementation of these technologies enables operators to reduce costs relative to conventional methods. Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments, unless otherwise disclosed) necessary for a fair statement of the condensed consolidated results of operations, financial position, cash flows, and changes in stockholders’ equity (deficit) for each period presented. All intercompany balances and transactions have been eliminated in preparation of these condensed consolidated financial statements. The condensed consolidated results for the interim periods are not necessarily indicative of results to be expected for the full year. The 2022 year-end consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. 23 Impact of COVID-19 Pandemic on Business – The global spread of COVID-19 and its variants (e.g., the omicron variant) created significant market volatility, economic uncertainty, and disruption during 2021 and 2022 and continuing into 2023. The Company was adversely affected by the deterioration and increased uncertainty in the macroeconomic outlook as a result of the impact of COVID-19. We have experienced and may continue to experience disruptions in our supply chain, due in part to the global impact of the COVID-19 pandemic. Depending upon the duration , including the extent of any residual or further effects, of COVID-19 pandemic - related business interruptions, our customers, suppliers, manufacturers, and partners may suspend or delay their engagements with us, which could result in a material adverse effect on our financial condition and ability to meet current timelines. In addition, the COVID-19 pandemic has affected and may continue to affect our ability to recruit skilled employees to join our team. The conditions caused by the COVID-19 pandemic have adversely affected and may continue to adversely affect, among other things, demand for our products and the ability to test and assess our robotic systems with potential customers , any of which , in turn, could adversely affect our business, results of operations and financial condition. Any further or future impacts of COVID-19 or of another pandemic , epidemic or outbreak of an infectious disease cannot be accurately predicted at this time, and the ultimate direct and indirect impacts on our business, results of operations, and financial condition will depend on future developments that are highly uncertain. Liquidity – Total cash and cash equivalents on hand as of June 30, 2023, was $4.4 million. The Company has incurred recurring losses each year since its inception. The Company may seek funding through additional debt or equity financing arrangements, implement incremental expense reduction measures or a combination thereof to continue financing its operations. Utilizing cost control measures, cash on hand, revenue from operations, and potential future equity and debt funding, the Company anticipates having sufficient funds to meet its obligations for at least one year from the issuance date of this Form 10-Q. See “Financial Statements – Note 18 – Subsequent Events” for additional information on debt capital. Results of Operations Three and Six Months Ended June 30, 2023, Compared to Three and Six Months Ended June 30, 2022 The following table sets forth summarized condensed consolidated financial information: Three months ended Six months ended June 30, Change June 30, Change 2023 2022 $ % 2023 2022 $ % Revenue Service $ 1,128,115 $ 2,796,159 $ (1,668,044 ) -60 % $ 3,948,395 $ 5,032,124 $ (1,083,729 ) -22 % Service - related party - 193,400 (193,400 ) -100 % 500 193,400 (192,900 ) -100 % Total revenue 1,128,115 2,989,559 (1,861,444 ) -62 % 3,948,895 5,225,524 (1,276,629 ) -24 % Costs and Expenses Cost of revenue 1,900,602 2,540,062 (639,460 ) -25 % 4,832,869 4,439,223 393,646 9 % Depreciation 53,209 117,086 (63,877 ) -55 % 326,308 228,405 97,903 43 % Research and development 482,761 583,870 (101,109 ) -17 % 709,728 1,851,282 (1,141,554 ) -62 % General and administrative 5,560,565 2,271,138 3,289,427 145 % 10,773,209 3,917,179 6,856,030 175 % Total costs and expenses 7,997,137 5,512,156 2,484,981 45 % 16,642,114 10,436,089 6,206,025 59 % Operating loss (6,869,022 ) (2,522,597 ) (4,346,425 ) 172 % (12,693,219 ) (5,210,565 ) (7,482,654 ) 144 % Other (income) expense: Other (income) expense, net 746 (9,453 ) 10,199 -108 % 1,153,127 (5,241 ) 1,158,368 -22102 % (Gain) on sale of assets (3,908 ) - (3,908 ) -100 % (3,908 ) - (3,908 ) -100 % Foreign currency transaction loss (17,709 ) (9,848 ) (7,861 ) 80 % (27,593 ) - (27,593 ) -100 % Loss on repricing of warrants 590,266 - 590,266 100 % 590,266 - 590,266 100 % Change in fair value of warrant liabilities (29,668,454 ) - (29,668,454 ) -100 % (27,431,550 ) - (27,431,550 ) -100 % Interest expense, net 1,556,597 853,660 702,937 82 % 6,491,664 1,655,634 4,836,030 292 % Net income (loss) $ 20,673,440 $ (3,356,956 ) $ 24,030,396 -716 % $ 6,534,775 $ (6,860,958 ) $ 13,395,733 -195 % Revenue . For the three months ended June 30, 2023, total revenue decreased by $1.9 million, or 62%, to $1.1 million for 2023, as compared to $3.0 million for 2022. The decrease in total revenue is primarily attributable to delays in contract authorizations with government entities and delays due to supply chain disruptions. For the six months ended June 30, 2023, total revenue decreased by $1.3 million, or 24%, to $3.9 million for 2023, as compared to $5.2 million for 2022. The decrease in total revenue is primarily attributable to delays in contract authorizations with government entities and delays due to supply chain disruptions. 24 Cost of revenue . For the three months ended June 30, 2023, cost of revenue decreased by $0.6 million, or 25%, to $1.9 million for 2023, as compared to $2.5 million for 2022. The decrease in the cost of revenue is primarily attributable to decreased revenue as discussed above. For the six months ended June 30, 2023, cost of revenue increased by $0.4 million, or 9%, to $4.8 million for 2023, as compared to $4.4 million for 2022. The increase in the cost of revenue is primarily attributable to the cost escalation of several service contracts and increased operational headcount compared to the prior year. Also included in cost of revenue are retention bonuses of approximately $0.3 million for our continued successful development of our core product program. Depreciation . For the three months ended June 30, 2023, depreciation decreased by $64 thousand, or 55%, to $53 thousand for 2023, as compared to $117 thousand for 2022 primarily due to a correction of overstating depreciation in the prior quarter. For the six months ended June 30, 2023, depreciation increased by $98 thousand, or 43%, to $326 thousand for 2023, as compared to $228 thousand for 2022 primarily due to increased investment in operational assets. Research and development . For the three months ended June 30, 2023, total research and development expenses decreased by $0.1 million, or 17%, to $0.5 million for 2023, as compared to $0.6 million for 2022. The decrease was due primarily to the Company achieving technological feasibility in both hardware and software development and focusing on bringing its products to market. For the six months ended June 30, 2023, total research and development expenses decreased by $1.1 million, or 62%, to $0.7 million for 2023, as compared to $1.9 million for 2022. The decrease was due primarily to the Company achieving technological feasibility in both hardware and software development and focusing on bringing its products to market. General and administrative. For the three months ended June 30, 2023, total general and administrative expenses increased by $3.3 million, or 145%, to $5.6 million for 2023, as compared to $2.3 million for 2022. General and administrative expenses increased primarily due to an increase in stock-based compensation expense, an increase in company headcount, sales and marketing expenses, professional fees, and other costs to support the continued growth of the Company. For the six months ended June 30, 2023, total general and administrative expenses increased by $6.9 million, or 175%, to $10.8 million for 2023, as compared to $3.9 million for 2022. General and administrative expenses increased primarily due to an increase in stock–based compensation expense, an increase in company headcount, sales and marketing expenses, professional fees, and other costs to support the continued growth of the Company. Other expense, net . For the three months ended June 30, 2023, other expense, net was nominal for the quarter. For the six months ended June 30, 2023, other expense, net increased by $1.2 million to $1.2 million for 2023 as compared to $0, net in 2022. The increase was due primarily to a state sales tax assessment of $1.2 million that the Company plans to vigorously mitigate, by contesting the preliminary estimate from the governmental entity, Texas Comptroller of Public Accounts. Change in fair value of warrant liabilities. For the three months ended June 30, 2023, the change in the fair value of warrant liabilities decreased by $29.7 million to $29.7 million of other (income) expense in 2023 as compared to $0 as of June 30, 2022. This increase was due to no warrants being outstanding for the three months ended June 30, 2022. For the six months ended June 30, 2023, the change in the fair value of warrant liabilities decreased by $27.4 million to $27.4 million of other (income) expense in 2023 as compared to $0 as of June 30, 2022. This increase was due to no warrants being outstanding for the six months ended June 30, 2022. Interest expense, net . For the three months ended June 30, 2023, interest expense, net increased by $4.7 million to $5.5 million for 2023 as compared to $0.9 million in 2022. Interest expense, net increased due to the amortization of debt discount of $1.0 million associated with the Debentures and approximately $0.3 million associated with liquidated damages and interest arising out of the RRA. Please see Note 6 to the accompanying condensed consolidated financial statements included herein for additional information. For the three months ended June 30, 2023 and 2022, cash paid for interest was $0.4 million. For the six months ended June 30, 2023, interest expense, net increased by $4.8 million to $6.5 million for 2023 as compared to $1.7 million in 2022. Interest expense, net increased due to the amortization of debt discount of $1.9 million associated with the Debentures and approximately $4.3 million associated with liquidated damages and interest arising out of the RRA. Please see Note 6 to the accompanying condensed consolidated financial statements included herein for additional information. For the six months ended June 30, 2023, cash paid for interest increased by $0.1 million to $0.9 million for 2023 as compared to $0.8 million in 2022 due primarily to interest paid on the Debentures in 2023. 25 Liquidity and Capital Resources As of June 30, 2023, we had $4,353,179 of cash and cash equivalents. The cash equivalents consist of money market funds. Significant sources and uses of cash during the first six months of 2023. Sources of cash: ● We received net proceeds of $283 thousand from the exercise of stock options, representing the strike price of such options. The Company also received $338 thousand from the exercise of warrants. Uses of cash: ● Cash used in operating activities was $13.0 million, which included $1.9 million invested in working capital. ● Cash used in investing activities for capital expenditures was $6.1 million. Future sources and uses of cash . Our capital requirements will depend on many factors, including sales volumes, the timing and extent of spending to support research and development efforts, investments in technology, the expansion of sales and marketing activities, and market adoption of new and enhanced products and features. To date, our principal sources of liquidity have been proceeds received from the issuance of debt and equity funding and cash flows from our operations. We anticipate needing additional capital to continue expanding our business operations, which may include acquisitions and capital expenditures. Currently, the Company does not generate sufficient revenue to cover operating expenses, working capital, and capital expenditures. We have historically financed our operations through equity and debt financing. We do not have any commitments for equity funding at this time, and additional funding may not be available to us on favorable terms, if at all. We are considering reducing discretionary spending and other cost-cutting measures, which may be implemented in the near-term to the extent additional financing is not raised. The Company has not yet implemented material cost-cutting measures but will assess as needed to meet capital requirements for our business operations. There are no assurances that we can raise sufficient additional capital from external sources or implement material cost-cutting measures. The inability to successfully effectuate either measure could force us to curtail or discontinue our operations. However, utilizing cost control measures, cash on hand, revenue from operations, and potential future equity and debt funding, the Company anticipates having sufficient funds to meet its obligations for at least one year from the issuance date of this Form 10-Q. Indebtedness . The Company’s indebtedness as of June 30 , 2023, is presented in Item 1, “Financial Statements – Note 7 – Notes Payable” and our lease obligations are presented in Item 1, “Financial Statements – Note 8 – Leases.” Off-Balance Sheet Arrangements As of June 30, 2023, we had no material off-balance sheet arrangements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required for smaller reporting companies.