What changed in this filing

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Item 1. Financial Statements

2023-11-14 compared with 2023-08-14 · 615 added, 467 removed, 613 unchanged (64% of the section changed)

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CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

Current Assets:

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Operating lease right-of-use asset

Liabilities and Stockholders’ Equity

Liabilities and Stockholders’ Equity (Deficit)

Current Liabilities:

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Accrued liabilities

Contract liability

Operating lease liabilities - current

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Operating lease liabilities - long-term

Notes payable - long-term, net of discount

Notes payable - long-term, net of discount (related party)

Total Liabilities

Commitments and Contingencies

Stockholders’ Equity:

Stockholders’ Equity (Deficit):

Common stock, $ 0.0001 par value;

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( 68,105,102 )

Total Stockholders’ Equity

Total Liabilities and Stockholders’ Equity

Total Stockholders’ Equity (Deficit)

( 2,676,314 )

Total Liabilities and Stockholders’ Equity (Deficit)

The accompanying notes are an integral part

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended

Nine months ended

September 30,

Service - related party

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Gain on sale of assets

Foreign currency transaction (gain)

Loss on repricing of warrants

Foreign currency transaction loss (gain)

Loss on exchange of warrants

Change in fair value of warrant liabilities

( 18,775,158 )

( 27,431,550 )

Interest expense, net

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$ ( 17,678,787 )

Net income (loss)

$ ( 13,176,497 )

$ ( 11,144,012 )

Basic income (loss) per share

Diluted income (loss) per share

Basic weighted average shares outstanding

Diluted weighted average shares outstanding

$ ( 20,037,455 )

Basic and diluted loss per share

Basic and diluted weighted average shares outstanding

The accompanying notes are an integral part

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES OF STOCKHOLDERS’ EQUITY (DEFICIT)

Preferred Stock

Series A Preferred

Series B Preferred

Additional Paid-in

Stockholders’

at December 31, 2021

Balance at December 31, 2021

$ ( 39,844,531 )

$ ( 6,611,457 )

Stock-based compensation

( 3,504,002 )

at March 31, 2022

Balance at March 31, 2022

( 43,348,533 )

( 9,915,302 )

Stock-based compensation

( 3,356,956 )

at June 30, 2022

Balance at June 30, 2022

$ ( 46,705,489 )

$ ( 13,083,601 )

at December 31, 2022

Cancellation and exchange of convertible note in connection with reverse capitalization

Conversion of Series A preferred stock in connection with reverse recapitalization

Conversion of Series B preferred stock in connection with reverse recapitalization

Reverse recapitalization with Cleantech Acquisition Corp, net

Earnout shares placed in escrow

Issuance of common stock for PIPE Investment

Equity issuance costs

( 12,582,000 )

of stock options

( 12,582,000 )

Stock-based compensation

( 13,176,497 )

at March 31, 2023

( 13,176,497 )

Balance at September 30, 2022

$ ( 59,881,986 )

of stock options

at June 30, 2023

Balance at December 31, 2022

$ ( 68,105,102 )

Stock-based compensation

Exercise of stock options

( 14,138,665 )

Balance at March 31, 2023

$ ( 82,243,767 )

$ ( 12,836,794 )

Stock-based compensation

Exercise of stock options

Exercise of warrants

Exercise of RSUs

Balance at June 30, 2023

$ ( 61,570,327 )

Stock-based compensation

Settlement of liquidated damages

Exercise of stock options

Exercise of RSUs

( 17,678,787 )

Balance at September 30, 2023

$ ( 79,249,114 )

$ ( 2,676,314 )

The accompanying notes are an integral part

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months ended

Nine months ended

September 30,

Cash flows from operating activities:

Net income (loss)

$ ( 11,144,012 )

Adjustments to reconcile net income (loss) to net cash from operating activities:

$ ( 20,037,455 )

Adjustments to reconcile net loss to net cash from operating activities:

Accretion of debt discount

Stock-based compensation

Loss on repricing of warrants

Loss on exchange of warrants

Change in fair value of warrant liabilities

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Noncash impact of lease accounting

Interest and legal expenses assumed into Bridge Note

Changes in operating assets and liabilities:

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( 4,817,187 )

( 1,360,086 )

Accounts payable and accrued liabilities

( 9,013,681 )

Contract liabilities

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Cash flows from financing activities:

Proceeds from notes payable

Proceeds from exercise of stock options

Payments of note payable

( 17,850,333 )

Proceeds from reverse recapitalization with CleanTech Acquisition Corp, net

Proceeds from exercise of warrants

Proceeds from issuance of common stock for Pipe Investment

Proceeds from issuance of debentures and SPA Warrants, net of discount

Payment of transaction costs on equity funding

( 12,582,000 )

Net cash from financing activities

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( 11,015,628 )

( 12,990,613 )

Cash and cash equivalents, beginning of period

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Cash paid for interest

Cash paid for taxes

Non-cash investing and financing activities:

Capital expenditures included in accounts payable

Right of use asset assumed through lease liability

Lease assumed through lease liability

Operating leases at inception

Settlement of liquidated damages with common stock

Conversion of convertible debt and interest expense to common stock

Conversion of Series A preferred stock in connection with reverse recapitalization

Conversion of Series B preferred stock in connection with reverse recapitalization

Private and Public Warrant Liabilities assumed in reverse recapitalization

The accompanying notes are an integral part

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Nauticus Robotics, Inc.

(“Nauticus,” the “Company,”

“our,” “us,” or “we”) is a developer of ocean robots, software, and services delivered in a modern

business model to the ocean industry.

the “Company,” “our,” “us,” or “we”) is a developer of ocean robots, software, and services

delivered in a modern business model to the ocean industry.

We were initially incorporated as CleanTech Acquisition Corp.

(“CLAQ”) under the laws

of the State of Delaware on June 18, 2020.

under the laws of the State of Delaware on June 18, 2020.

The Company’s principal corporate offices are located in Webster, Texas.

products and services are delivered to commercial and government-facing customers through a Robotics as a Service (“RaaS”)

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.

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The Earnout Shares will be released from escrow upon occurrence of the following (each, a “Triggering Event”):

one-half of the Earnout Shares will be released if, within

a 5-year period from Closing Date, the volume-weighted average price of our Common Stock equals or exceeds $15.00 per share over any

20 trading days within a 30-day trading period;

one-quarter of the Earnout Shares will be released if, within

a 5-year period from Closing Date, the volume-weighted average price of our Common Stock equals or exceeds $17.50 per share over any

20 trading days within a 30-day trading period;

one-quarter of the Earnout Shares will be released if, on

or after December 31, 2022, within a 5-year period from Closing Date, the volume-weighted average price of our Common Stock equals or

exceeds $20.00 per share over any 20 trading days within a 30-day trading period.

We received proceeds from a private investment in a public entity

(“PIPE Investment”), consisting of:

● immediately prior to the Closing, the issuance to certain investors

of 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

one-half of the Earnout Shares will be released if, within a 5-year period from Closing Date, the volume-weighted average price of our Common Stock equals or exceeds $15.00 per share over any 20 trading days within a 30-day trading period;

one-quarter of the Earnout Shares will be released if, within a 5-year period from Closing Date, the volume-weighted average price of our Common Stock equals or exceeds $17.50 per share over any 20 trading days within a 30-day trading period;

one-quarter of the Earnout Shares will be released if, on or after December 31, 2022, within a 5-year period from Closing Date, the volume-weighted average price of our Common Stock equals or exceeds $20.00 per share over any 20 trading days within a 30-day trading period.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

● substantially concurrent with the closing of the Business Combination,

the issuance to certain investors (the “SPA Parties”) pursuant to that certain securities purchase agreement, dated as of

December 16, 2021, as amended on January 31, 2022, and as further amended and restated on September 9, 2022 (the “Securities Purchase

Agreement”), of secured debentures (the “Debentures”) in an aggregate principal amount of $ 36,530,320 and associated

warrants (the “Original SPA Warrants”), for gross proceeds of $ 35,800,000 .

The fair value of the Original 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, which were issued with a 2 % original issue discount,

are convertible into 2,922,425 shares of Common Stock and the Original SPA Warrants, upon issuance, were exercisable for an additional

2,922,425 shares of Common Stock, with an exercise price equal to $ 20.00 per share, subject to adjustment.

As discussed in further detail

below, pursuant to the Letter Agreements (defined below), the exercise price of the Original SPA Warrants was lowered to a weighted average

of $ 3.28 per share, with multiple tranches priced between $ 2.04 and $ 4.64 per share (such Original SPA Warrants, upon and following the

entry to the Letter Agreements, the “Amended SPA Warrants”).

In connection with the exercise of 165,713 Amended SPA Warrants

by ATW Special Situations I LLC (“ATW”) in June 2023, 165,713 New SPA Warrants (defined below) were issued to ATW pursuant

to its Letter Agreement with the Company.

As used in this Form 10-Q, unless context otherwise requires, the term “SPA Warrants”

means (i) before the entry into the Letter Agreements, the Original SPA Warrants, and (ii) upon and following the entry into the Letter

Agreements, (a) the Amended SPA Warrants, and (b) the warrants that have been issued or are issuable pursuant to the Letter Agreements

(the “New SPA Warrants”).

We received proceeds from a private investment in a public entity (“PIPE

Investment”), consisting of:

● immediately prior to the Closing, the issuance to certain investors of 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”);

● substantially concurrent with the closing of the Business Combination, the issuance to certain investors (the “SPA Parties”) pursuant to that certain securities purchase agreement, dated as of December 16, 2021, as amended on January 31, 2022, and as further amended and restated on September 9, 2022 (the “Securities Purchase Agreement”), of secured debentures (the “Debentures”) in an aggregate principal amount of $ 36,530,320 and associated warrants (the “Original SPA Warrants”), for gross proceeds of $ 35,800,000 .

The fair value of the Original 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, which were issued with a 2 % original issue discount, are convertible into 2,922,425 shares of Common Stock and the Original SPA Warrants, upon issuance, were exercisable for an additional 2,922,425 shares of Common Stock, with an exercise price equal to $ 20.00 per share, subject to adjustment.

As discussed in further detail below, pursuant to the Letter Agreements (defined below), the exercise price of the Original SPA Warrants was lowered to a weighted average of $ 3.28 per share, with multiple tranches priced between $ 2.04 and $ 4.64 per share (such Original SPA Warrants, upon and following the entry to the Letter Agreements, the “Amended SPA Warrants”).

In connection with the exercise of 165,713 Amended SPA Warrants by ATW Special Situations I LLC (“ATW”) in June 2023, 165,713 New SPA Warrants (defined below) were issued to ATW pursuant to its Letter Agreement with the Company.

As used in this Form 10-Q, unless context otherwise requires, the term “SPA Warrants” means (i) before the entry into the Letter Agreements, the Original SPA Warrants, and (ii) upon and following the entry into the Letter Agreements, (a) the Amended SPA Warrants, and (b) the warrants that have been issued or are issuable pursuant to the Letter Agreements (the “New SPA Warrants”).

See Note 12 for additional information regarding the SPA Warrants.

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highly uncertain.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Liquidity – Total cash and cash equivalents on

hand as of June 30, 2023, was $ 4.4 million.

hand as of September 30, 2023, was $ 6.8 million.

The Company has incurred recurring losses each year since its inception.

The Company may seek

funding through additional debt or equity financing arrangements, implement incremental expense reduction measures or a combination thereof

to continue financing its operations.

may seek funding through additional debt or equity financing arrangements, implement incremental expense reduction measures, or a combination

thereof to continue financing its operations.

The Company implemented a workforce reduction of 22 % on September 29, 2023, which increased

costs by $ .4 million in the current quarter, which is attributable to severance paid to employees.

The cost savings that will be realized

over the next twelve months is expected to be $ 2.7 million.

During the third quarter of 2023, the Company received net proceeds of $ 10.4

million from the issuance of debt.

Utilizing cost control measures, cash on hand, revenue from operations, and potential future equity

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of this Form 10-Q.

See “Note 18 – Subsequent Events” for additional information on debt capital.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

See “Financial Statements – Note 7 – Notes Payable” for additional information on debt capital.

Summary of Significant Accounting Policies

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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.

The condensed consolidated results for the interim

periods are not necessarily indicative of results to be expected for the full year.

The 2022 year-end consolidated balance sheet was derived

from audited financial statements but does not include all disclosures required by GAAP.

These financial statements should be read in

conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Summary of Significant Accounting Policies –

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There have been no significant

changes to these policies which have had a material impact on the Company’s interim unaudited condensed consolidated financial

statements and related notes during the three and six months ended June 30, 2023.

changes to these policies which have had a material impact on the Company’s interim unaudited condensed consolidated financial statements

and related notes during the three and nine months ended September 30, 2023.

Use of Estimates – The preparation of financial

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experienced any losses in such accounts.

Restricted Certificate of Deposit — A restricted

certificate of deposit, which was held by a bank on our behalf as of June 30, 2023 and 2022, is used as a guarantee against corporate

credit cards.

Restricted Certificates of Deposit — The Company

has restricted certificate of deposit of $ 250,375 , which is held by a bank on our behalf as of September 30, 2023 and 2022 as a guarantee

against corporate credit cards.

The Company entered into an agreement in August of 2023 whereby a $ 150,000 restricted certificate of deposit

was required to collateralize a letter of credit.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Short-term Investments – Short-term investments

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was more than three months and any change in the investment is recognized in the condensed consolidated balance sheets.

2023, the Company received proceeds of $ 4,959,263 at maturity, which proceeds were recognized in the condensed consolidated statements

of cash flows under cash flows from investing activities.

On March 14, 2023,

the Company received proceeds of $ 4,959,263 at maturity, which were recognized in the condensed consolidated statements of cash flows

under cash flows from investing activities.

Revenue – Our primary sources of revenue

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Revenue is generated

pursuant to contractual arrangements to design and develop subsea robots and software and to provide related engineering, technical,

and other services according to the specifications of the customers.

These contracts can be service sales (cost plus fixed fee or firm

fixed price) or product sales and typically have terms of up to 18 months.

The Company had no product sales for the three and six months

ended June 30, 2023 and 2022, respectively, as its core products are still under development.

pursuant to contractual arrangements to design and develop subsea robots and software and to provide related engineering, technical, and

other services according to the specifications of the customers.

These contracts can be service sales (cost plus fixed fee or firm fixed

price) or product sales and typically have terms of up to 18 months.

The Company had no product sales for the three and nine months ended

September 30, 2023 and 2022, respectively.

A performance obligation is a promise in a contract to transfer distinct

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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

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.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Firm-fixed price contracts present the risk of unreimbursed cost overruns,

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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.

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

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the Aquanaut and Olympic Arm.

Raw materials consist of composite marine structures, commercial off-the-shelf or COTS, batteries, and

hardware and electrical components.

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.

are stated at the lower of cost or net realizable value.

Inventories are

stated at the lower of cost or net realizable value.

Cost is determined using the first-in, first-out method.

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reviews inventories for specifically identifiable items that are unusable or obsolete based on assumptions about future demand and market

Based on this evaluation, we make provisions for unusable and obsolete inventories in order to write inventories down to

their net realizable value.

Based on this evaluation, we make provisions for unusable and obsolete inventories in order to write inventories down to their

net realizable value.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Inventories consisted of the following:

September 30,

Raw material and supplies

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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 June 30, 2023, and December 31, 2022.

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 September 30, 2023, and December 31, 2022.

Foreign Currency Gains and Losses – Nauticus purchases

certain materials and equipment from foreign companies, and these transactions are generally denominated in the vendors’ local

The Company recorded a foreign currency gain of $ 17,709 and $ 27,593 for the three and six months ended June 30, 2023, respectively,

and a foreign currency gain of $ 0 and $ 9,848 for the three and six months ended June 30, 2022, respectively, which amounts are included

in other (income) expense.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

certain materials and equipment from foreign companies, and these transactions are generally denominated in the vendors’ local currency.

The Company recorded a foreign currency loss of $ 83,654 and $ 56,061 for the three and nine months ended September 30, 2023, respectively,

and a foreign currency gain of $ 206,617 and $ 207,146 for the three and nine months ended September 30, 2022, respectively, which amounts

are included in other (income) expense.

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.

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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.

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.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

We have determined that the private warrants sold in a private placement

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measurement date (a Level 1 measurement).

We have determined that the SPA Warrants should

be accounted for as liabilities.

The SPA Warrants were initially recorded at their estimated fair value on the Closing Date and are then

revalued at each reporting date thereafter, with changes in the fair value reported in the Company’s statements of operations.

Derivative warrant liabilities are classified in our balance sheets as current or non-current based on whether or not net-cash settlement

or conversion of the instrument could be required within 12 months of the balance sheet date.

At the Closing Date, the fair value of

the Original SPA Warrants upon issuance was estimated using a Monte Carlo valuation model (a Level 3 measurement).

We have determined that the SPA Warrants should be accounted for as

The SPA Warrants were initially recorded at their estimated fair value on the Closing Date and are then revalued at each

reporting date thereafter, with changes in the fair value reported in the Company’s statements of operations.

Derivative warrant

liabilities are classified in our balance sheets as current or non-current based on whether or not net-cash settlement or conversion of

the instrument could be required within 12 months of the balance sheet date.

At the Closing Date, the fair value of the Original SPA Warrants

upon issuance was estimated using a Monte Carlo valuation model (a Level 3 measurement).

Earnout Shares – Earnout Shares, issuable to former

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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 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.

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.

The Earnout Shares were classified in

stockholders’ equity, recognized at fair value upon the closing of the Business Combination, and will not be subsequently remeasured.

A Monte Carlo valuation model (a Level 3 measurement) determined their estimated fair value upon issuance.

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when the related completed project is delivered to the buyer.

During the six months ended June 30, 2023, the Company capitalized interest

totaling $ 536,077 , of which $ 219,531 and $ 316,546 related to inventory and property and equipment, respectively.

During the six months

ended June 30, 2022, the Company capitalized interest totaling $ 85,207 , of which $ 35,376 and $ 49,831 related to inventory and property

and equipment, respectively.

During the nine months ended September 30, 2023, the Company capitalized

interest totaling $ 873,816 , of which $ 354,162 and $ 519,654 related to inventory and property and equipment, respectively.

During the nine

months ended September 30, 2022, the Company capitalized interest totaling $ 615,507 , of which $ 265,650 and $ 350,857 related to inventory

and property and equipment, respectively.

Major Customer and Concentration of Credit Risk – We

have a limited number of customers.

During the three and six months ended June 30, 2023, sales to two customers accounted for 100 % and

99 % of total revenue, respectively.

The total balance due from these customers as of June 30, 2023, comprised 91 % of accounts receivable.

During the three and six months ended June 30, 2022, sales to two customers accounted for 90 % of total revenue, respectively.

balances due from these customers as of December 31, 2022, made up 82 % of accounts receivable.

No other customer represented more than

10 % of our revenue.

During the three and nine months ended September 30, 2023, sales to two customers accounted for 100 %

and 99 % of total revenue, respectively.

The total balance due from these customers as of September 30, 2023, comprised 99 % of accounts

During the three and nine months ended September 30, 2022, sales to two customers accounted for 99 % and 96 % of total revenue,

respectively.

The total balances due from these customers as of December 31, 2022, made up 96 % of accounts receivable.

No other customer

represented more than 10 % of our revenue.

Loss of these customers could have a material adverse impact on the Company.

Reclassifications – Financial statements presented

for prior periods include reclassifications that were made to conform to the current-period presentation.

Recent Accounting Pronouncements – In September

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We adopted this standard on January 1, 2023.

We do not utilize Supplier Finance Programs and therefore no

further disclosure is required.

We do not utilize Supplier Finance Programs and therefore no further

disclosure is required.

In June 2016, the FASB issued ASU No.

an amendment to ASC 326, Financial Instruments - Credit Losses , which changes the impairment model for certain financial assets

that have a contractual right to receive cash, including trade and loan receivables.

The new model requires recognition based upon an

estimation of expected credit losses rather than recognition of losses when it is probable that they have been incurred.

An entity will

apply the amendment through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in

which the guidance is effective.

The Company has adopted this standard as of January 1, 2023, and there was no impact on its financial

position, results of operations and cash flows upon adoption.

2016-13, an amendment to ASC

326, Financial Instruments - Credit Losses , which changes the impairment model for certain financial assets that have a contractual

right to receive cash, including trade and loan receivables.

The new model requires recognition based upon an estimation of expected credit

losses rather than recognition of losses when it is probable that they have been incurred.

An entity will apply the amendment through

a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

The Company has adopted this standard as of January 1, 2023, and there was no impact on its financial position, results of operations

and cash flows upon adoption.

NAUTICUS ROBOTICS, INC.

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In March 2022, the FASB issued ASU No.

an amendment to ASC 326, Financial Instruments-Credit Losses , which eliminates the accounting guidance for creditors in troubled

debt restructuring.

It also aligns conflicting disclosure requirement guidance in ASC 326 by requiring disclosure of current-period gross

write-offs by year of origination.

The amendment also adds new disclosures for creditors with loan refinancing and restructuring for

borrowers experiencing financial difficulty.

The Company has adopted this standard as of January 1, 2023, and there was no impact on

its financial position, results of operations and cash flows upon adoption.

2022-02, an amendment to ASC

326, Financial Instruments-Credit Losses , which eliminates the accounting guidance for creditors in troubled debt restructuring.

It also aligns conflicting disclosure requirement guidance in ASC 326 by requiring disclosure of current-period gross write-offs by year

of origination.

The amendment also adds new disclosures for creditors with loan refinancing and restructuring for borrowers experiencing

financial difficulty.

The Company has adopted this standard as of January 1, 2023, and there was no impact on its financial position,

results of operations and cash flows upon adoption.

There are no other new accounting pronouncements that are expected

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The following table presents the components of our revenue:

Three months ended

Nine months ended

September 30,

Cost plus fixed fee

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Firm fixed-price-vehicle lease

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.

Our performance obligations under service agreements are generally

satisfied over time as the service is provided and, therefore, all revenue above has been recognized over time.

Contract Balances – Accounts receivable, net as

of June 30, 2023, totaled $ 1,302,494 due from customers for contract billings and is

expected to be collected within the next three to six months.

of September 30, 2023, totaled $ 997,400 due from customers for contract billings and is expected to be collected within the next three

to nine months.

As of December 31, 2022, accounts receivable, net totaled $ 1,622,434 .

$ 1,622,434 .

The decrease in accounts receivable as of June 30, 2023, as compared with December 31, 2022, corresponds to the timing of

the collections between periods.

As of June 30, 2023, and December 31, 2022, allowances for doubtful accounts included in accounts receivable

totaled $ 9,963 .

Bad debt expense was $ 0 for the three and six months ended June 30, 2023.

Bad debt expense was $ 0 and $ 17,827 , respectively,

for the three and six months ended June 30, 2022.

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.

The decrease in accounts receivable as of September

30, 2023, as compared with December 31, 2022, corresponds to the timing of the collections between periods.

As of September 30, 2023,

and December 31, 2022, allowances for doubtful accounts included in accounts receivable totaled $ 9,963 .

Bad debt expense was $ 0 for the

three and nine months ended September 30, 2023.

Bad debt expense was $ 0 and $ 17,827 , respectively, for the three and nine months ended

September 30, 2022.

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

Contract assets are recorded at the net amount expected to be billed and collected.

Contract assets increased $ 37,341

in the first six months of 2023, primarily due to the timing of the billing for the recognition of revenue related to the satisfaction

or partial satisfaction of performance obligations.

The Company had $ 26,712 of contract assets

as of September 30, 2023 and $ 573,895 as of December 31, 2022.

Contract assets decreased $ 547,183 in the first nine months of 2023, 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 as of June 30, 2023, and December 31, 2022, respectively.

The Company had $ 152,000 of contract liabilities as of September 30, 2023, and $ 0 as of December

31, 2022, respectively.

Unfulfilled Performance Obligations – As

of June 30, 2023, we expect to recognize approximately $ 8.0 million of revenue in future periods from unfulfilled performance obligations

of September 30, 2023, we expect to recognize approximately $ 1.9 million of revenue in future periods from unfulfilled performance obligations

from existing contracts with customers.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the expected revenue from our unfilled

performance obligations as of June 30, 2023:

performance obligations as of September 30, 2023:

Expected Revenue from Unfulfilled Performance

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value of the unfulfilled performance obligations of such contracts would be reduced.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Prepaid Expenses

Prepaid expenses

consisted of the following :

Prepaid expenses consisted of the following:

September 30,

Prepaid material purchases

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Property and equipment consisted of the following:

September 30,

Leasehold improvements

6 unchanged sentences

Total property and equipment, net

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Accrued Liabilities

Accrued liabilities consisted of the following:

September 30,

Accrued compensation

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Accrued sales and property taxes

Accrued interest and penalties

Accrued royalties

Other accrued expenses

Total accrued expenses

In April 2023, the Company received correspondence from the State

of Texas assessing a sale and use tax liability of $ 1.2 million.

In April 2023, the Company received correspondence from the State of

Texas assessing a sale and use tax liability of $ 1.2 million.

The accrual is recorded under accrued liabilities of the condensed consolidated

balance sheet.

Further, a total of $ 4,320,690 associated with liquidated damages and

interest arising in connection with the RRA Amendment (defined below), is included as part of interest expense, net in the condensed consolidated

statements of operations for the period ended June 30, 2023.

Pursuant to the Company’s estimation as of March 31, 2023, $ 3,958,645

out of such total amount was previously recorded as an accrued liability and interest expense as part of interest expense, net in the

restated condensed consolidated statements of operations for the first quarter of 2023.

– Notes Payable” for additional information.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Notes Payable

Notes payable consisted of the following:

September 30,

Convertible secured debentures

Convertible senior secured term loan

debt discount, net

3 unchanged sentences

Total notes payable – long-term

Convertible Secured Debentures –

Upon closing of the Business Combination, we issued to the SPA Parties

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in the Debentures.

On September 18, 2023, the Company entered into a convertible senior secured term loan agreement convertible at $ 6.00

Based on the letter agreement, SPA warrants holders who exchange through March 1, 2024, the exercise price reset from $ 20.00

to $ 6.00 a warrant pursuant to the full-ratchet provision.

The exchange warrants were reset to $ 6.00 with a factor of 3.3333 , increasing

the number of warrants to 552,377 .

The remaining SPA warrant holders will reset from $ 20.00 to $ 6.00 a warrant subsequent from March 1,

2024, pursuant to the full-ratchet provision.

See Note 12 for more information regarding the SPA Warrants.

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term of the Debentures.

We recorded $ 970,511 and $ 1,878,376 of debt discount accretion for the three and six months ended June 30, 2023,

We recorded $ 1,037,971 and $ 2,916,347 of debt discount accretion for the three and nine months ended September

30, 2023, and is included as part of interest expense in the condensed consolidated statements of operations.

The Debentures effective interest

rate is approximately 25.2% .

The Debentures effective

interest rate is approximately 22.7% .

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RCB Equities #1, LLC –

On July 14, 2023, the Company issued a secured promissory note to RCB

Equities #1, LLC, a related party for $ 5,000,000 .

The promissory note included a 2.5 % original issue discount or $ 125,000 , bears interest

at 15 % per annum, and matures on September 9, 2026 .

The promissory note provides for an exit fee of $ 125,000 if paid off in full between

October 12, 2023, and the maturity date, with no other considerations triggered for premiums or penalties.

Further, the promissory note

provides for an automatic rollover into the structure of certain future debt-financing transactions.

On September 18, 2023, the RCB Equities

#1, LLC promissory note was rolled into the convertible senior secured term loan discussed below bearing interest at 12.5 % per annum including

the $ 125,000 exit fee.

Convertible Senior Secured Term Loan –

On September 18, 2023, the Company entered into

a convertible senior secured term loan agreement with ATW Special Situations II LLC as collateral agent (in such capacity, the “Collateral

Agent”) and lender, and Transocean Finance Limited, ATW Special Situations I LLC, Material Impact Fund II, L.P., and RCB Equities

#1, LLC, as lenders, are related parties.

The Convertible Senior Secured Term Loan Agreement

provides the Company with up to $ 20.0 million of secured term loans, of which $ 11.6 million has already been funded and deemed issued

under the Convertible Senior Secured Term Loan Agreement.

Any portion of the outstanding principal amount of the Loans is prepayable at

the Company’s option pro rata to each Lender upon at least five days’ prior written notice to each Lender.

The Convertible Senior Secured Term Loan Agreement

included a 2.5 % exit fee or $ 290,000 , bearing interest at 12.50 % per annum, payable quarterly in arrears on the first day of each calendar

quarter commencing April 1, 2024.

The loan agreement included a 2.5 % original issue discount or $ 125,000 from the RCB Equities #1, LLC

promissory note.

The loan includes assumed legal fees of $ 150,000 , deemed interest from convertible debentures of $ 378,116 , and $ 500,000

held in escrow, recorded under other current assets of the condensed consolidated balance sheet.

The escrow balance will be held for at

least thirty days or until the collateral agent determines no obligation of expense greater than $ 150,000 incurred by the lender.

Loans will mature on the earliest of (a) the third anniversary of the date of the Term Loan Agreement of September 17, 2026 ., (b) 91 days

prior to the maturity of the 5 % Original Issue Discount Senior Secured Convertible Debentures, dated as of September 9, 2022.

Subject to the terms and conditions of the Term

Loan Agreement, the Company may, upon at least two trading days’ written notice to the Lenders, elect to redeem some or all of the

then outstanding principal amount of the Loans.

In connection with any such election, which shall be irrevocable, the Company shall pay

each Lender, on a pro rata basis, an amount in cash equal to the greater of (x) the sum of (i) 100 % of the then outstanding principal

amount of the Loans, (ii) accrued but unpaid interest and (iii) all liquidated damages and other amounts due in respect of the Loans (including,

without limitation, the Exit Fee (as defined in the Term Loan Agreement)) (the “Optional Redemption Amount”) and (y) the product

of (i) the aggregate number of shares of the Company’s common stock, par value $ 0.0001 per share (“Common Stock”), then

issuable upon conversion of the applicable Optional Redemption Amount (without regard to any limitations on conversion set forth in the

Term Loan Agreement) multiplied by (ii) the highest closing sale price of the Common Stock on any trading day during the period commencing

on the date immediately preceding the date that the applicable notice of redemption is delivered to the Lenders and ending on the trading

day immediately prior to the date the Company makes the entire payment required to be made in connection with such redemption.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Loans are convertible, in whole or in part,

at the option of each Lender into shares of Common Stock until the date that the Loans are no longer outstanding, at a conversion rate

equal to the outstanding principal amount of the Loans to be converted divided by a conversion price of $ 6.00 per share of Common Stock

(the “Conversion Price”), subject to certain customary anti-dilution adjustments as described in the Term Loan Agreement.

The Company determines if an arrangement is a lease at inception based

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Right-of-use assets represent the Company’s right to use the

underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

Right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the

lease term, including payments at commencement that depend on an index or rate.

For leases in which the Company is the lessee do not have

a readily determinable implicit rate, an incremental borrowing rate, based on the information available at the lease commencement date,

is utilized to determine the present value of lease payments.

When a secured borrowing rate is not readily available, unsecured borrowing

rates are adjusted for the effects of collateral to determine the incremental borrowing rate.

The Company uses the implicit rate for agreements

in which it is a lessor.

underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from

Right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments

over the lease term, including payments at commencement that depend on an index or rate.

For leases in which the Company is the lessee

do not have a readily determinable implicit rate, an incremental borrowing rate, based on the information available at the lease commencement

date, is utilized to determine the present value of lease payments.

When a secured borrowing rate is not readily available, unsecured

borrowing rates are adjusted for the effects of collateral to determine the incremental borrowing rate.

The Company uses the implicit

rate for agreements in which it is a lessor.

The Company has not entered into any material agreements in which it is a lessor.

Lease expense and lease income

are recognized on a straight-line basis over the lease term for operating leases.

In April 2023, the Company entered into an operating lease for office

The lease has a term of 135 months beginning on the commencement date (the “Commencement Date”), being the earlier

of (i) the date on which the Company begins occupying the leased space, and (ii) December 7, 2023;

and the lease provides for an abatement

period of 15 months from the Commencement Date.

The Company’s secured borrowing rate of 15 % was used to determine the present value

of lease payments and establish the right-of-use asset and lease liability at lease inception for this lease.

Lease expense

and lease income are recognized on a straight-line basis over the lease term for operating leases.

In April of 2023, the Company entered into an operating lease for office

The lease has a 10-year lease term with an additional abatement period of 23 months.

The Company’s secured borrowing rate

of 15 % was used to determine the present value of lease payments and establish the right-of-use asset and lease liability at lease inception

for this lease.

In July of 2023, the Company entered into an operating lease for office

space in Scotland.

The lease has a term of 5 years with two options to extend.

Management is reasonably certain to exercise the first

option to extend the lease.

The Company’s secured borrowing rate of 15 % was used to determine the present value of the lease payments

and establish the right-of-use asset and lease liability at lease inception for this lease.

In August of 2023, the Company entered into an operating lease for

office space in Norway.

The lease has a term of 5 years.

The Company’s secured borrowing rate of 15 % was used to determine the present

value of the lease payments and establish the right-of-use asset and lease liability at lease inception for this lease.

The Company’s other operating leases include its current office

3 unchanged sentences

Three months ended

Six months ended

Nine months ended

September 30,

Fixed lease expense

1 unchanged sentence

Total operating lease expense

Cash paid for operating leases was $ 204,987 and $ 206,042 for the six

months ended June 30, 2023, and June 30, 2022, respectively.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Cash paid for operating leases was $ 357,985 and $ 241,819 for the nine

months ended September 30, 2023, and September 30, 2022, respectively.

The following table presents the balance and classifications of the

1 unchanged sentence

Balance Sheet Location

September 30,

Operating lease assets

2 unchanged sentences

Operating lease liabilities - current

Operating lease liabilities

Operating lease liabitlies

Operating lease liabilities - long-term

1 unchanged sentence

For operating lease assets and liabilities, the weighted average remaining

lease term was 11.2 years and 2.2 years as of June 30, 2023, and December 31, 2022, respectively.

The weighted average discount rate used

in the valuation over the remaining lease terms was 13.9 % as of June 30, 2023, and 7.9 % as of December 31, 2022.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

lease term was 10 .5years and 2.2 years as of September 30, 2023, and December 31, 2022, respectively.

The weighted average discount rate

used in the valuation over the remaining lease terms was 14.2 % as of September 30, 2023, and 7.9 % as of December 31, 2022.

The following table presents the Company’s maturities of lease

liabilities as of June 30, 2023:

liabilities as of September 30, 2023:

Total lease payments

10 unchanged sentences

specifically to interim periods.

No income tax expense was recognized for the six months ended June 30, 2023, or 2022.

The Company has

a full valuation allowance against its deferred tax assets as of June 30, 2023, and December 31, 2022, respectively.

No income tax expense was recognized for the nine months ended September 30, 2023, or 2022.

has a full valuation allowance against its deferred tax assets as of September 30, 2023, and December 31, 2022, respectively.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Common Stock – A total of 49,858,194 shares of

Common Stock were outstanding as of June 30, 2023.

Common Stock were outstanding as of September 30, 2023.

Earnout Shares - Following the closing of the Business

3 unchanged sentences

The Earnout Shares will be released from escrow upon the occurrence of certain Triggering

As of June 30, 2023, the earnout targets have not been achieved, and the Earnout Shares remain in escrow.

Public Warrants – We

assumed 8,624,991 Public Warrants in the Business Combination which remained outstanding as of June 30, 2023.

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.

period when we shall have failed to maintain an effective registration statement, warrant holders may exercise, subject to the terms

of the governing warrant agreement, Public Warrants on a cashless basis pursuant to an available exemption from registration 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”.

As of September 30, 2023, the earnout targets have not been achieved, and the Earnout Shares remain in escrow.

Public Warrants – We assumed

8,624,991 Public Warrants in the Business Combination which remained outstanding as of September 30, 2023.

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.

During any period when we shall have failed to maintain

an effective registration statement, warrant holders may exercise, subject to the terms of the governing warrant agreement, Public Warrants

on a cashless basis pursuant to an available exemption from registration 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

1 unchanged sentence

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.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The exercise price and

number of shares of Common Stock issuable on exercise of the Public Warrants may be adjusted in certain circumstances including in the

event of a share dividend, extraordinary dividend or our recapitalization, reorganization, merger or consolidation.

The Public Warrants,

which are accounted for as liabilities in our condensed consolidated balance sheets, were valued as of June 30, 2023, at $ 1,921,650 based

on their publicly-traded price.

The change in the value of the Public Warrants during the three and six months ended June 30, 2023, totaled

$ 35,241 and $( 354,488 ), respectively, and was reported with other (income) expense in our condensed consolidated statements of operations.

The exercise price and number of shares of

Common Stock issuable on exercise of the Public Warrants may be adjusted in certain circumstances including in the event of a share dividend,

extraordinary dividend or our recapitalization, reorganization, merger or consolidation.

The Public Warrants, which are accounted for

as liabilities in our condensed consolidated balance sheets, were valued as of September 30, 2023, at $ 1,897,500 based on their publicly-traded

The change in the value of the Public Warrants during the three and nine months ended September 30, 2023, totaled $( 24,150 ) and

$ 378,638 , respectively, and was reported with other (income) expense in our condensed consolidated statements of operations.

Private Warrants – We assumed 7,175,000 Private

Warrants in the Business Combination, which remained outstanding as of June 30, 2023.

Each whole Private Warrant is exercisable for one

share of Common Stock at an exercise price of $ 11.50 and is identical in all material respects to the Public Warrants except that the

Private Warrants are exercisable for cash (even if a registration statement covering the shares of Common Stock issuable upon exercise

Warrants in the Business Combination, which remained outstanding as of September 30, 2023.

Each whole Private Warrant is exercisable for

one share of Common Stock at an exercise price of $ 11.50 and is identical in all material respects to the Public Warrants except that

the 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

1 unchanged sentence

The Private Warrants purchased by CleanTech Investments, LLC 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 condensed consolidated balance sheets, were valued as of June 30, 2023, at $ 1,677,025 based

on their publicly-traded price.

The fair value of the Private Warrants was estimated using a Black-Scholes option pricing model using

the following assumptions:

not exercisable after July14, 2026, as long as Chardan Capital Markets, LLC or any of its related persons beneficially own these Private

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Private Warrants, which are accounted

for as liabilities in our condensed consolidated balance sheets, were valued as of September 30, 2023, at $ 1,636,052 based on their using

a Black-Scholes model.

The fair value of the Private Warrants was estimated using a Black-Scholes option pricing model using the following

stock price of $ 1.77 , no assumed dividends, a risk-free rate of 4.59 %, and implied volatility of 67.0 %.

change in the value of the Private Warrants during the three and six months ended June 30, 2023, totaled $(23,799) and $(257,563), respectively,

and was reported with other (income) expense in our condensed consolidated statements of operations.

The change in the

value of the Private Warrants during the three and nine months ended September 30, 2023, totaled $ 40,973 and $ 298,536 , respectively, and

was reported with other (income) expense in our condensed consolidated statements of operations.

– Substantially concurrent with the Closing and pursuant to the Securities Purchase Agreement, we issued an aggregate 2,922,425

15 unchanged sentences

first amendment to the RRA (the “RRA Amendment”), pursuant to which the Company agreed to deliver to the SPA Parties an aggregate

1,890,066 shares of Common Stock (the “RRA Amendment Shares”) in exchange for the waiver and release by the SPA Parties of

any and all claims, remedies, causes of action and any other Initial Effectiveness Date Claims (as defined in the RRA Amendment) under

any of the Transaction Documents (as defined in the RRA), including all past and future claims for liquidated damages under the RRA with

respect to, and any other amounts that may be payable by reason of or otherwise relating to, the Effectiveness Date (as defined in the

RRA) of the Initial Registration Statement.

See Note 6 for more information about the accounting impact associated with the RRA Amendment

Shares on our unaudited condensed consolidated financial statements.

1,890,066 shares of Common Stock at an agreed upon price of $ 2.286 (the “RRA Amendment Shares”) in exchange for the waiver

and release by the SPA Parties of any and all claims, remedies, causes of action and any other Initial Effectiveness Date Claims (as defined

in the RRA Amendment) under any of the Transaction Documents (as defined in the RRA), including all past and future claims for liquidated

damages under the RRA with respect to, and any other amounts that may be payable by reason of or otherwise relating to, the Effectiveness

Date (as defined in the RRA) of the Initial Registration Statement.

During the third quarter of 2023, the Company issued 1,890,066 shares

of Common Stock as payment for liquidated damages and interest of $ 4,320,690 , and the damages and interest are recorded under interest

expense in the condensed consolidated statements of operations.

The settlement date of the liquidated damages occurred August 3, 2023,

with a closing price of $ 1.95 , with the change in the agreed upon price of $ 2.286 to settlement resulting in a gain of $ 635,061 , which

is also included in interest expense in the condensed consolidated statements of operations.

Pursuant to the RRA Amendment, the Company

also agreed to file a registration statement on Form S-3 (or other appropriate form) for the registration and resale of the RRA Amendment

Shares by the SPA Parties and to cause such registration statement to become effective as soon as practicable thereafter in accordance

with the terms of the RRA, as amended by the RRA Amendment.

On June 22, 2023, we entered into the Letter

Agreements with the SPA Parties (the “Letter Agreements”), pursuant to which the SPA Parties (also being the holders of the

Original SPA Warrants) agreed to amend the exercise price of the Original SPA Warrants, which, since issuance, had been exercisable to

purchase an aggregate 2,922,425 shares of Common Stock, in exchange for the Company’s agreement to (i) lower the exercise price

of the Original SPA Warrants to a weighted average of $ 3.28 per share, with multiple tranches priced between $ 2.04 and $ 4.64 per share,

and (ii) upon the SPA Parties’ exercise of the Amended SPA Warrants, issue New SPA Warrants to the SPA Parties to purchase, in the

aggregate, up to 2,922,425 shares of Common Stock.

The Letter Agreements will terminate in accordance

with their terms on March 1, 2024 (the “Letter Agreement Termination Date”).

Upon the Letter Agreement Termination Date, any

Amended SPA Warrants then-outstanding will revert to having the terms associated with the Original SPA Warrants, as described herein.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Pursuant to the RRA Amendment, the Company also agreed to file a registration

statement on Form S-3 (or other appropriate form) for the registration and resale of the RRA Amendment Shares by the SPA Parties and to

cause such registration statement to become effective as soon as practicable thereafter in accordance with the terms of the RRA, as amended

by the RRA Amendment.

On June 22, 2023, we entered into the Letter Agreements with the SPA

Parties (the “Letter Agreements”), pursuant to which the SPA Parties (also being the holders of the Original SPA Warrants)

agreed to amend the exercise price of the Original SPA Warrants, which, since issuance, had been exercisable to purchase an aggregate

2,922,425 shares of Common Stock, in exchange for the Company’s agreement to (i) lower the exercise price of the Original SPA Warrants

to a weighted average of $ 3.28 per share, with multiple tranches priced between $ 2.04 and $ 4.64 per share, and (ii) upon the SPA Parties’

exercise of the Amended SPA Warrants, issue New SPA Warrants to the SPA Parties to purchase, in the aggregate, up to 2,922,425 shares

of Common Stock.

The Letter Agreements will terminate in accordance with their terms on March 1, 2024 (the “Letter Agreement Termination Date”).

Letter Agreement Termination Date, any Amended SPA Warrants then-outstanding will revert to having the terms associated with the Original

SPA Warrants, as described herein.

During any period when we shall have

failed to maintain an effective registration statement covering the shares of Common Stock issuable upon exercise of the Amended SPA

Warrants, the registered holder may exercise its Amended SPA Warrants on a cashless basis pursuant to an available exemption from

registration under the Securities Act.

During any period when we shall have failed

to maintain an effective registration statement covering the shares of Common Stock issuable upon exercise of the Amended SPA Warrants,

the registered holder may exercise its Amended SPA Warrants on a cashless basis pursuant to an available exemption from registration under

the Securities Act.

On June 23, 2023, pursuant to its Letter Agreement with the Company,

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to ATW by the Company in accordance with the terms of the Letter Agreement.

The Company received proceeds of $ 338,055 from the warrants

exercised by ATW.

On September 18, 2023, the Company entered into a convertible senior

secured term loan agreement convertible at $ 6.00 per share.

Based on the letter agreement, SPA warrants holders who exchange through March

2024, the exercise price was reset from $ 20.00 to $ 6.00 a warrant pursuant to the full-ratchet provision.

The exchange warrants were

reset to $ 6.00 with a factor of 3.3333 , increasing the number of warrants to 552,377 .

The New SPA Warrants will be (and, with respect

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exercisable upon issuance, and (iii) are exercisable until September 9, 2032.

If a registration statement covering the shares of Common Stock

issuable upon exercise of the New SPA Warrants is not effective 60 days after March 1, 2024 (or, in the event of a “full

review” by the SEC, 120 days after March 1, 2024), upon the registered holder’s election to exercise its New SPA

Warrants, the registered holder may, until such time as there is an effective registration statement and during any period when we

shall have failed to maintain an effective registration statement, exercise its New SPA Warrants on a cashless basis pursuant to an

available exemption from registration under the Securities Act.

If a registration statement covering the shares of Common Stock issuable

upon exercise of the New SPA Warrants is not effective 60 days after March 1, 2024 (or, in the event of a “full review” by

the SEC, 120 days after March 1, 2024), upon the registered holder’s election to exercise its New SPA Warrants, the registered holder

may, until such time as there is an effective registration statement and during any period when we shall have failed to maintain an effective

registration statement, exercise its New SPA Warrants on a cashless basis pursuant to an available exemption from registration under the

Securities Act.

As indicated in Note 1 above, unless context otherwise requires, the

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the entry into the Letter Agreements, (a) the Amended SPA Warrants, and (b) the New SPA Warrants.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The SPA Warrants, which are accounted for as liabilities in our

condensed consolidated balance sheets, were valued as of June 30, 2023, at $ 2,248,382 and were 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.

Management’s future assumptions to raise debt capital in the near term and become cash-flow positive

have eliminated reset events and have affected the valuation’s variability from the prior quarter.

The change in the value of

the SPA Warrants during the three and six months ended June 30, 2023, totaled $ 29,657,015 and $ 26,819,502 , respectively, and was

reported with other (income) expense in our condensed consolidated statements of operations.

Entry into the Letter Agreements, which

was treated as a warrant repricing for accounting purposes, resulted in a loss of $ 590,266 , which was reported with other (income)

The SPA Warrants, which are accounted for as liabilities in our condensed

consolidated balance sheets, were valued as of September 30, 2023, at $ 10,969,897 and were 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.

Management’s future assumptions to raise enough debt capital in the near term to become cash-flow positive have eliminated reset

events and have affected the valuation’s variability from the prior quarter.

The change in the value of the SPA Warrants during

the three and nine months ended September 30, 2023, totaled $( 8,721,515 ) and $ 18,097,987 , respectively, and was reported with other (income)

expense in our condensed consolidated statements of operations.

Proceeds from the exercise of SPA Warrants for the six months ended

June 30, 2023, were $ 338,039 .

Due to entering into the Letter Agreements, the warrants were accounted

for and treated as warrant repricing, resulting in a loss of $ 590,266 , which was reported with other (income) expense in our condensed

consolidated statements of operations.

Proceeds from the exercise of SPA Warrants for the nine months ended September 30, 2023, were $ 338,055 .

Stock-Based Compensation

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cash, Common Stock or a combination thereof.

As of June 30, 2023, 7,216,908 equity units were available for future issuance under the

Omnibus Incentive Plan.

As of September 30, 2023, 7,789,663 equity units were available for future issuance under

the Omnibus Incentive Plan.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

At the Closing Date of the Business Combination, Nauticus Robotics

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options are forfeited upon termination of employment.

As of June 30, 2023, 3,318,957 options (originally issued under the 2015 Plan) remained

available to purchase shares of our Common Stock.

As of September 30, 2023, 3,084,601 options (originally issued under the 2015 Plan)

remained available to purchase shares of our Common Stock.

Compensation expense for stock option grants is recognized based on

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Stock-based compensation expense, which relates to options originally

issued under the 2015 Plan, totaled $ 139,783 and $ 279,560 for the first three and six months of 2023, respectively, and was recorded in

general and administrative expense.

Stock-based compensation expense, which relates to options originally issued under the 2015 Plan,

totaled $ 188,657 and $ 388,814 for the first three and six months of 2022, respectively, and was recorded in general and administrative

As of June 30, 2023, $ 1,138,576 of total unrecognized compensation costs related to the options will be recognized as an expense

over a remaining weighted average period of 2.13 years.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

issued under the 2015 Plan, totaled $ 131,098 and $ 406,679 for the three and nine months of 2023, respectively, and was recorded in general

and administrative expense.

Stock-based compensation expense, which relates to options originally issued under the 2015 Plan, totaled

$ 235,593 and $ 624,407 for the three and nine months of 2022, respectively, and was recorded in general and administrative expense.

of September 30, 2023, $ 948,451 of total unrecognized compensation costs related to the options will be recognized as an expense over

a remaining weighted average period of 1.91 years.

The following table summarizes options outstanding, as well as activity

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Outstanding as of December 31, 2021

Outstanding as of June 30, 2022

Outstanding as of September 30, 2022

Outstanding as of December 31, 2022

Outstanding as of June 30, 2023

Outstanding as of September 30, 2023

The remaining weighted average contractual life of exercisable options

as of June 30, 2023, was 5.55 years.

The total intrinsic value of all options exercised during the six months

ended June 30, 2023 and 2022, was $ 91,947 and $ 0 , respectively.

The intrinsic value of all options outstanding as of June 30, 2023 and

2022, was $ 3,673,399 and $ 2,577,625 , respectively.

The intrinsic value of all exercisable options as of June 30, 2023 and 2022, was $ 2,752,450

and $ 1,794,894 , respectively.

as of September 30, 2023, was 5.71 years.

The total intrinsic value of all options exercised during the nine

months ended September 30, 2023 and 2022, was $ 104,985 and $ 0 , respectively.

The intrinsic value of all options outstanding as of September

30, 2023 and 2022, was $ 525,465 and $ 6,901,057 , respectively.

The intrinsic value of all exercisable options as of September 30, 2023

and 2022, was $ 507,471 and $ 4,458,862 , respectively.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Proceeds from exercises of options issued under the 2015 Plan for the

first six months ended June 30, 2023 and 2022, were $ 342,579 and $ 0 , respectively.

nine months ended September 30, 2023 and 2022, were $ 421,175 and $ 0 , respectively.

The tax benefit realized from stock-based compensation

was $ 182,234 and $ 0 for the first six months ended June 30, 2023 and 2022, respectively.

was $ 196,711 and $ 0 for the nine months ended September 30, 2023 and 2022, respectively.

Realization of this amount is dependent on the

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RSUs were issued to the following recipients and vest as follows:

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.

director RSU grants are time-based and vest fully on the earlier of the one-year anniversary of the grant date or the next Annual

Meeting of Stockholders of the Company if a grantee is not on the election ballot, conditional upon continued service as a director.

Executive RSU grants issued as

executive sign-on bonuses are time-based and vest 50 % on the one-year anniversary of the new hire date and 50 % on the two-year anniversary

of the new-hire date.

Employee RSU grants are time-based and vest equally

over a three-year period on December 31 of 2023, 2024, and 2025, conditional upon continued employment.

Non-employee director RSU grants are time-based and

vest fully on the earlier of the one-year anniversary of the grant date or the next Annual Meeting of Stockholders of the Company if a

grantee is not on the election ballot, conditional upon continued service as a director.

Executive RSU grants issued as executive sign-on

bonuses are time-based and vest 50 % on the one-year anniversary of the new hire date and 50 % on the two-year anniversary of the new-hire

In addition, during 2022, an aggregate target grant of 1,214,580 performance-based

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In March 2023, the Company’s board of directors determined that

51 % of the performance target was satisfied and an aggregate 619,438 PRSUs were settled to members of the senior executive

management team, and will vest in accordance with the terms of the applicable award agreements.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

51 % of the performance target was satisfied and an aggregate 619,438 PRSUs were settled to members of the senior executive management

team and will vest in accordance with the terms of the applicable award agreements.

The Compensation Committee has a policy that the Company will not provide

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The following is a summary of our RSU and PRSU activity for the first

six months of 2023:

nine months of 2023:

Outstanding as of December 31, 2022

Outstanding as of June 30, 2023

Outstanding as of September 30, 2023

The remaining weighted average contractual life of RSUs granted as

of June 30, 2023, was 1.63 years.

of September 30, 2023, was 1.37 years.

The RSUs and PSRUs granted in 2022 do not have voting rights or dividend

4 unchanged sentences

therefore, these grants were valued at the grant date fair market value using the closing price of our stock on the Nasdaq Stock

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock-based compensation expense attributable to PRSUs under the Omnibus

Incentive Plan for the three and six months ended of 2023 was $ 468,620 and $ 511,534 , respectively and recorded in general and administrative

Stock-based compensation expense attributable to RSUs under the Omnibus Incentive Plan for the three and six months ended of

Incentive Plan for the three and nine months ended of 2023 was $ 102,127 and $ 613,661 , respectively and recorded in general and administrative

Stock-based compensation expense attributable to RSUs under the Omnibus Incentive Plan for the three and nine months ended of

2023, respectively, was $ 725,879 and $ 2,974,680 and recorded in general and administrative expense.

As of June 30, 2023, we had $ 1,560,119

As of September 30, 2023, we had $ 855,793

of future expense related to PRSUs to be recognized and $ 4,037,399 of future expense related to RSUs over a weighted average remaining

life of 1.37 years.

Total stock-based compensation expense for the three and six months of 2023, including options, PRSUs, and RSUs, totaled

$ 1,883,833 and $ 3,077,027 , respectively.

Total stock-based compensation expense for the three and six months of 2022 for options totaled

$ 188,657 and $ 388,814 , respectively.

Total stock-based compensation expense for the three and nine months of 2023, including options, PRSUs, and RSUs,

totaled $ 959,104 and $ 3,995,020 , respectively.

Total stock-based compensation expense for the three and nine months of 2022 for options

totaled $ 235,593 and $ 624,407 , respectively.

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 $ 42,165 and $ 159,506

for the three and six months ended June 30, 2023, respectively.

The Company’s cost for the 401(k) plan was $ 84,121 and $ 162,311

for the three and six months ended June 30, 2022, respectively.

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 $ 103,446 and $ 262,952 for the three and nine months

ended September 30, 2023, respectively.

The Company’s cost for the 401(k) plan was $ 89,854 and $ 252,166 for the three and nine months

ended September 30, 2022, respectively.

Related Party Transactions

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.

(“Material Impact”) 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 and $29,591,600 from related party

ATW pursuant to the Securities Purchase Agreement.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ATW and Material Impact currently hold $ 29,591,600 and $ 5,102,000 ,

respectively, of the outstanding Debentures, which bear interest at a rate of 5 % per annum, payable quarterly, and mature September 9,

During the three and six months ended June 30, 2023, ATW and Material Impact received $ 419,214 and $ 1,407,018 , respectively, in

interest payments on the Debentures from the Company.

– Concurrent with the closing of the Business Combination, the Company received (i) $2,500,000 from related party Material Impact

Fund II, L.P.

(“Material Impact”) 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, (iv) $5,000,000 from related party RCB Equities #4, LLC, as their contribution to the PIPE Investment and (v)

$1,836,720 from related party SLS Family Irrevocable Trust, $29,591,600 from related party ATW and $5,102,000 from related party Material

Impact pursuant to the Securities Purchase Agreement.

ATW, Material Impact and SLS Family Irrevocable Trust currently hold

$ 29,591,600 , $ 5,102,000 and $ 1,836,720 respectively, of the outstanding Debentures, which bear interest at a rate of 5 % per annum, payable

quarterly, and mature on September 9, 2026.

During the three and nine months ended September 30, 2023, ATW Material Impact, and SLS Family

Irrevocable Trust received $ 88,661 and $ 1,006,993 , respectively, in interest payments on the Debentures from the Company.

Convertible Senior Secured Term Loan –

The Company entered into a convertible senior secured term loan agreement with ATW Special Situations II LLC as collateral agent (in such

capacity, the “Collateral Agent”) and lender, and Transocean Finance Limited, ATW Special Situations I LLC, Material Impact

Fund II, L.P., and RCB Equities #1, LLC, as lenders, are related parties.

See “Financial Statements – Note 7 Notes Payable

for additional information.

RRA Amendment – On June 22, 2023, the Company and

the SPA Parties entered into the RRA Amendment, pursuant to which, among other things, the Company agreed to issue 1,531,059 RRA Amendment

Shares and 263,976 RRA Amendment Shares to ATW and Material Impact, respectively, in exchange for their waiver and release of any and

all claims, remedies, causes of action and any other Initial Effectiveness Date Claims (as defined in the RRA Amendment) under any of

the Transaction Documents (as defined in the RRA), including all past and future claims for liquidated damages under the RRA with respect

to, and any other amounts that may be payable by reason of or otherwise relating to, the Effectiveness Date (as defined in the RRA) of

the Initial Registration Statement.

the SPA Parties entered into the RRA Amendment, pursuant to which, among other things, the Company agreed to issue 1,531,059, 263,976

and 95,031 RRA Amendment Shares to ATW , Material Impact and SLS Family Irrevocable Trust, respectively, in exchange for their waiver

and release of any and all claims, remedies, causes of action and any other Initial Effectiveness Date Claims (as defined in the RRA Amendment)

under any of the Transaction Documents (as defined in the RRA), including all past and future claims for liquidated damages under the

RRA with respect to, and any other amounts that may be payable by reason of or otherwise relating to, the Effectiveness Date (as defined

in the RRA) of the Initial Registration Statement.

See Note 12 for more information.

Letter Agreements – On June 22, 2023, the Company

entered into Letter Agreements with ATW and Material Impact, pursuant to which such, among other things, the Company agreed to (i) lower

the exercise price of the Original SPA Warrants from $ 20.00 per share to a weighted average of $ 3.28 per share, with multiple tranches

priced between $ 2.04 and $ 4.64 per share, and (ii) upon the exercise of Amended SPA Warrants, issue to the exercising party New SPA Warrants

to purchase up to a number of shares of Common Stock equal to the number of Original SPA Warrants initially issued to such party.

entered into Letter Agreements with ATW, Material Impact and SLS Family Irrevocable Trust, pursuant to which such, among other things,

the Company agreed to (i) lower the exercise price of the Original SPA Warrants from $ 20.00 per share to a weighted average of $ 3.28 per

share, with multiple tranches priced between $ 2.04 and $ 4.64 per share, and (ii) upon the exercise of Amended SPA Warrants, issue to the

exercising party New SPA Warrants to purchase up to a number of shares of Common Stock equal to the number of Original SPA Warrants initially

issued to such party.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On June 23, 2023, pursuant to its Letter Agreement with the Company,

1 unchanged sentence

to ATW by the Company in accordance with the terms of the Letter Agreement.

The Company received proceeds of $ 338,039 from the warrants

exercised by ATW.

On September 18, 2023, the Company entered into a convertible senior

secured term loan agreement convertible at $ 6.00 per share.

Based on the Letter Agreement, SPA warrants holders who exchange through March

2024, the exercise price was reset from $ 20.00 to $ 6.00 a warrant pursuant to the full-ratchet provision.

The exchange warrants were

reset to $ 6.00 with a factor of 3.3334 , increasing the number of warrants to 552,377 .

Revenue and Accounts Receivable – Revenue from

Transocean Ltd.

for contract services totaled $ 0 and $ 193,400 for the three months and six months ended June 30, 2022, respectively.

receivable included $ 0 and $ 21,000 outstanding from Transocean Ltd.

at June 30, 2023, and December 31, 2022, respectively.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for contract services totaled $ 17,000 and $ 210,400 for the three months and nine months ended September 30, 2022, respectively.

Accounts receivable included $ 0 and $ 21,000 outstanding from Transocean Ltd.

at September 30, 2023, and December 31, 2022, respectively.

Earnings (Loss) Per Share

1 unchanged sentence

Three months ended

Six months ended

Nine months ended

September 30,

Net earnings (loss)

$ ( 17,678,787 )

$ ( 13,176,497 )

$ ( 11,144,012 )

$ ( 20,037,455 )

deemed dividend for Earnout Shares

( 4,957,366 )

Net earnings (loss) attributable to common stockholders

1 unchanged sentence

$ ( 18,133,863 )

After tax effect of convertible secured debentures interest

Net earnings (loss) attributable for dilutive securities

$ ( 11,144,012 )

1 unchanged sentence

Weighted average shares used to compute basic EPS

Dilutive effect of:

Stock options

Restricted and performance stock units

Earnout shares

Convertible debt

Weighted average shares used to compute diluted EPS

Basic income (loss) per share

Diluted income (loss) per share

Basic and diluted earnings (loss) per share

Anti-dilutive securities excluded from shares outstanding:

3 unchanged sentences

Convertible debt

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Measurements

5 unchanged sentences

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

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.

Observable inputs such as quoted prices in active markets for identical assets or liabilities.

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.

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,

4 unchanged sentences

The estimated fair value of the Debentures approximates their carrying amount due to their recent issuance.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s non-financial assets measured at fair value on

4 unchanged sentences

basis and the related activity for the periods presented:

Fair Value as of June 30, 2023

Fair Value as of September 30, 2023

Carrying Value

Financial liabilities:

2 unchanged sentences

Warrant liability - SPA Warrants

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth a summary of the changes in fair value

1 unchanged sentence

Balance, December 31, 2022

Loss on repricing of warrants

Loss on exchange of warrants

Change in fair value of warrant liabilities

( 18,775,158 )

Balance, June 30, 2023

Balance, September 30, 2023

Subsequent Events

On July 14, 2023, the Company issued a secured promissory note to RCB

Equities #1, LLC for $ 5,000,000 .

The promissory note was issued with a 2.5 % original issue discount, bears interest at 15 % per annum and

matures on September 9, 2026 .

The promissory note provides an exit fee of $ 125,000 if the promissory note is paid off in full between

October 12, 2023, and the maturity date, with no other premiums or penalties.

Further, the promissory note provides for an automatic rollover

into the structure of certain future debt-financing transactions.

Merger Agreement with 3D at Depth

On October 2, 2023, Nauticus entered into an Agreement and Plan of

Merger (the “Merger Agreement”) with 3D Merger Sub, Inc., a Delaware corporation and a direct, wholly owned subsidiary of

Nauticus (“Merger Sub”), and 3D at Depth, Inc., a Delaware corporation (“3DAD”, and together with Nauticus and

Merger Sub, each a “Party” and collectively the “Parties”).

Pursuant to the Merger Agreement, and upon the terms

and subject to the conditions thereof, a merger between Nauticus and 3DAD will be effected through the merger of Merger Sub with and into

3DAD, with 3DAD surviving the merger as a wholly owned subsidiary of Nauticus (the “Merger”, and together with the other transactions

contemplated by the Merger Agreement and the other agreements contemplated thereby, the “Transactions”).

The board of directors

of Nauticus (the “Board”) has unanimously (i) approved the Merger Agreement and the Transactions and (ii) resolved to recommend

the approval and adoption of the Merger Agreement and the Transactions to the stockholders of Nauticus (“Nauticus Stockholders”).

The Base Equity Value for the 3DAD Merger is $ 34 M.

The consideration

of payment will be 100 % equity transaction of Nauticus common stock.

The “Per Share Equity Consideration” means, with respect

to any share of 3DAD Common Stock held by a 3DAD stockholder which is issued and outstanding immediately prior to the Effective Time,

a number of shares of Nauticus Common Stock equal to (a) the Per Share Equity Consideration Value (as defined below) divided by (b) the

20-day VWAP (as defined in the Merger Agreement) calculated pursuant to Annex II of the Merger Agreement, which is stipulated by the Parties

to be $ 2.04 .

The “Per Share Equity Consideration Value” means (a) the

Base Equity Value (as adjusted, if applicable, as set forth above) divided by (b) the total number of shares of 3DAD Common Stock issued

and outstanding as of immediately prior to the Effective Time.

Closing of the transaction contemplated by the Merger Agreement is

subject to the satisfaction or waiver of usual and customary conditions, including the effectiveness of a Registration Statement on Form

S-4 and the approval of the stockholders of both Nauticus and 3DAD.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements