Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with the unaudited condensed consolidated financial statements and the
notes thereto included in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q.
Explanatory Note
On the Closing Date, we consummated the Business
Combination with Merger Sub, and Nauticus Robotics Holdings, Inc. Pursuant to the terms of the Merger Agreement, a business combination
between CLAQ and Nauticus Robotics Holdings was affected through the merger of Merger Sub with and into Nauticus Robotics Holdings, with
Nauticus Robotics Holdings surviving the merger as a wholly owned subsidiary of CLAQ. On the Closing Date, CLAQ was renamed “Nauticus
Robotics, Inc.” and the Nauticus Robotics Holdings’ predecessor was renamed “Nauticus Robotics Holdings, Inc.”
The Business Combination was accounted for as a reverse recapitalization
under generally accepted accounting principles in the United States (“GAAP”). Nauticus Robotics Holdings, Inc. was determined
to be the accounting acquirer and CLAQ was treated as the acquired company for financial reporting purposes. Accordingly, the financial
statements of Nauticus represent a continuation of the financial statements of Nauticus Robotics Holdings, Inc.
Overview
Nauticus Robotics, Inc. (the “Company,”
“our,” “us,” or “we”) is a developer of ocean vehicles and robots, autonomy software, intervention
and data services delivered to the offshore industries. We were initially incorporated as CleanTech Acquisition Corp. (“CLAQ”)
under the laws of the State of Delaware on June 18, 2020. The Company’s principal corporate offices are located in Webster, Texas.
Our offshore services provide customers with the necessary inspection, intervention, data collection, and analytics, a
to support and maintain assets while reducing their operational footprint, operating cost, and greenhouse gas emissions, as well as
to improving offshore health, safety, and environmental exposure.
Nauticus’ mission is to be the most
impactful ocean robotics company through the deployment of autonomous systems. To that end, Nauticus is a technology company, tooled accordingly.
Our core staff were principals in the spaceflight robotics community from NASA. In addition, we have continued to augment our staff with
data scientists, roboticists, and engineers to create and deploy intelligent machines into the ocean domain with significant self-sufficient
and self-directed behaviors, to robustly handle the uncertainty of real-time events underwater.
The opportunity we saw was to remove the operational
requirement for tethers and high-speed communication, central to how current undersea operations are performed using Remotely Operated
Vehicles (ROVs). These lengthy and constraining tethers require large and expensive surface vessels to operate the ROVs, which in turn
drive the cost of accessing the underwater environment. Nauticus has clean slate developed and deployed an ecosystem of autonomy software
and novel vehicle architectures to render obsolete current operational paradigms that necessitate the usage of these tethers and therefore,
our service could potentially reduce the subsequent operational costs.
The industries affected by this shift in offshore
operations are numerous. These include oil & gas, offshore renewables like wind, and tidal, telecommunications, national security
& defense, aquaculture, ports, and mining to name a few. To address these markets, Nauticus is commercializing the Nauticus Fleet ,
which is the cornerstone of our offshore offering. The Nauticus Fleet tandem pair is comprised of both an unmanned underwater vehicle
(Aquanaut), and a small optionally crewed surface vessel (Hydronaut). Hydronaut, an 18-meter optionally crewed autonomous surface vessel
(ASV) that supports the launch, recovery and real-time operations of Aquanaut, its undersea robotic counterpart. Hydronaut ferries Aquanaut
to and from the worksite and supports battery recharges and the communications link from the local remote operations center for supervised
autonomous operations.
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Aquanaut is a fully electric, free-swimming subsea
robot, controlled through acoustic communication networking and can perform a wide range of data collection, inspection, and intervention
tasks. Covered under US Patent, Aquanaut’s defining capability is operating in two distinct modes: actively transforming itself
between the excursion and intervention configurations. Excursion mode involves the usage of data collection and perception sensors during
transit, while intervention mode uses two electric work-class manipulators (Nauticus’ Olympic Arms) to perform work in the subsea
environment.
Nauticus has spent several years developing
the latest generation of Aquanaut and Hydronaut capabilities and we are now entering the commercialization phase. Much time and attention
has been paid to the manufacturability of the designs and we anticipate we can potentially scale the business beyond the initial production
run. This includes a data and drawing build package that can be bid out to vehicle manufactures to help drive down long-term production
costs.
Commercializing offshore technology is a lengthy
and expensive process. Extensive functional acceptance testing (FATs) has been performed, at the subsystem level, to catch any production
quality issues during assembly. After the unit build is complete, in water commissioning exercises will be performed to ensure the system
is functioning properly. Finally, initial production units must be qualified for offshore work in the energy sector. This work is currently
ongoing to support our initial contracts with Shell, Petrobras, and Equinor.
We expect to have each Nauticus Fleet
tandem pair utilized at 200 working days per year, with our service contract commercial ramp beginning in the first quarter of 2024.
Basis of Presentation –
The accompanying condensed consolidated financial statements have been prepared by the Company without audit pursuant to the rules and
regulations of the U.S. Securities and Exchange Commission (the “SEC”) and, in the opinion of management, include all adjustments
(consisting of normal, recurring adjustments, unless otherwise disclosed) necessary for a fair statement of the condensed consolidated
results of operations, financial position, cash flows, and changes in stockholders’ equity (deficit) for each period presented.
All intercompany balances and transactions have been eliminated in preparation of these condensed consolidated financial statements. The
condensed consolidated results for the interim periods are not necessarily indicative of results to be expected for the full year. The
2022 year-end consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by
GAAP. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended
December 31, 2022.
Impact of COVID-19 Pandemic on Business
– The global spread of COVID-19 and its variants (e.g., the omicron variant) created significant market volatility, economic
uncertainty, and disruption during 2021 and 2022 and continuing into 2023. The Company was adversely affected by the deterioration and
increased uncertainty in the macroeconomic outlook as a result of the impact of COVID-19. We have
experienced and may continue to experience disruptions in our supply chain, due in part to the global impact of the COVID-19 pandemic.
Depending upon the duration , including the extent of any residual or further effects,
of COVID-19 pandemic - related business interruptions,
our customers, suppliers, manufacturers, and partners may suspend or delay their engagements with us, which could result in a material
adverse effect on our financial condition and ability to meet current timelines. In addition, the COVID-19 pandemic has affected and may
continue to affect our ability to recruit skilled employees to join our team. The conditions caused by the COVID-19 pandemic have adversely
affected and may continue to adversely affect, among other things, demand for our products and the ability to test and assess our robotic
systems with potential customers , any of which , in turn, could adversely
affect our business, results of operations and financial condition. Any further or
future impacts of COVID-19 or of another pandemic ,
epidemic or outbreak of an infectious disease cannot be accurately predicted at this time, and the
ultimate direct and indirect impacts on our business, results of operations, and financial condition will depend on future developments
that are highly uncertain.
Liquidity – Total cash and cash equivalents on
hand as of September 30, 2023, was $6.8 million. The Company has incurred recurring losses each year since its inception. The Company
may seek funding through additional debt or equity financing arrangements, implement incremental expense reduction measures, or a combination
thereof to continue financing its operations. The Company implemented a workforce reduction of 22% on September 29, 2023, which increased
costs by $.4 million in the current quarter, which is attributable to severance paid to employees. The cost savings that will be realized
over the next twelve months is expected to be $2.7 million. During the third quarter of 2023, the Company received net proceeds of $10.4
million from the issuance of debt. Utilizing cost control measures, cash on hand, revenue from operations, and potential future equity
and debt funding, the Company anticipates having sufficient funds to meet its obligations for at least one year from the issuance date
of this Form 10-Q. See “Financial Statements – Note 7– Notes Payable” for additional information on debt capital.
27
Results of Operations
Three and Nine Months Ended September 30, 2023, Compared to Three
and Nine Months Ended September 30, 2022
The following table sets forth summarized condensed consolidated financial
information:
Three months ended
Nine months ended
Change
Change
2023
2022
$
%
2023
2022
$
%
Revenue
Service
$
1,593,854
$
2,964,610
$
(1,370,756
)
-46
%
$
5,542,249
$
7,996,734
$
(2,454,485
)
-31
%
Service - related party
-
17,000
(17,000
)
-100
%
500
210,400
(209,900
)
-100
%
Total revenue
1,593,854
2,981,610
(1,387,756
)
-47
%
5,542,749
8,207,134
(2,664,385
)
-32
%
Costs and Expenses
Cost of revenue
2,651,380
3,781,224
(1,129,844
)
-30
%
7,484,249
8,220,447
(736,198
)
-9
%
Depreciation
160,744
141,901
18,843
13
%
487,052
370,306
116,746
32
%
Research and development
275,154
242,996
32,158
13
%
984,882
2,094,278
(1,109,396
)
-53
%
General and administrative
6,704,890
4,861,319
1,843,571
38
%
17,478,099
8,778,498
8,699,601
99
%
Total costs and expenses
9,792,168
9,027,440
764,728
8
%
26,434,282
19,463,529
6,970,753
36
%
Operating loss
(8,198,314
)
(6,045,830
)
(2,152,484
)
36
%
(20,891,533
)
(11,256,395
)
(9,635,138
)
86
%
Other (income) expense:
Other (income) expense, net
(133,311
)
(27,980
)
(105,331
)
376
%
1,019,816
(32,692
)
1,052,508
-3219
%
(Gain) on sale of assets
-
-
-
0
%
(3,908
)
-
(3,908
)
-100
%
Foreign currency transaction loss (gain)
83,654
(206,617
)
290,271
100
%
56,061
(207,146
)
263,207
100
%
Loss on exchange of warrants
-
-
-
0
%
590,266
-
590,266
100
%
Change in fair value of warrant liabilities
8,656,392
5,963,238
2,693,154
45
%
(18,775,158
)
5,963,238
(24,738,396
)
-415
%
Interest expense, net
873,738
1,402,026
(528,288
)
-38
%
7,365,402
3,057,660
4,307,742
141
%
Net income (loss)
$
(17,678,787
)
$
(13,176,497
)
$
(4,502,290
)
34
%
$
(11,144,012
)
$
(20,037,455
)
$
8,893,443
-44
%
Revenue . For the three
months ended September 30, 2023, total revenue decreased by $1.4 million, or 47%, to $1.6 million for 2023, as compared to $3.0 million
for 2022. The decrease in total revenue is primarily attributable to delays in contract authorizations with government entities and completion
of several contracts during the quarter.
For the nine months ended September 30, 2023,
total revenue decreased by $2.7 million, or 32%, to $5.5 million for 2023, as compared to $8.2 million for 2022. The decrease in total
revenue is primarily attributable to delays in contract authorizations with government entities and completion of several contracts during
the quarter.
Cost of revenue . For
the three months ended September 30, 2023, cost of revenue decreased by $1.1 million, or 30%, to $2.7 million for 2023, as compared to
$3.8 million for 2022. The decrease in the cost of revenue is primarily attributable to decreased revenue as discussed above.
For the nine months ended September 30, 2023,
cost of revenue decreased by $0.7 million, or 9%, to $7.5 million for 2023, as compared to $8.2 million for 2022. The decrease in the
cost of revenue is primarily attributable to decreased revenue as discussed above.
Depreciation . For the three months ended September
30, 2023, depreciation increased by $19 thousand, or 13%, to $161 thousand for 2023, as compared to $142 thousand for 2022 primarily due
to primarily due to increased investment in operational assets.
For the nine months ended September 30, 2023, depreciation increased
by $117 thousand, or 32%, to $487 thousand for 2023, as compared to $370 thousand for 2022 primarily due to increased investment in operational
assets.
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Research and development .
For the three months ended September 30, 2023, total research and development expenses increased by $0.1 million, or 13%, to $0.3 million
for 2023, as compared to $0.2 million for 2022. The nominal increase was due primarily to the Company achieving technological feasibility
in both hardware and software development and focusing on bringing its products to market.
For the nine months ended September 30, 2023,
total research and development expenses decreased by $1.1 million, or 53%, to $1.0 million for 2023, as compared to $2.1 million for 2022.
The decrease was due primarily to the Company achieving technological feasibility in both hardware and software development and focusing
on bringing its products to market.
General and administrative.
For the three months ended September 30, 2023, total general and administrative expenses increased by $1.8 million, or 38%, to $6.7 million
for 2023, as compared to $4.9 million for 2022. General and administrative expenses increased primarily due to sales and marketing expenses,
professional fees, and other costs to support the Company’s continued growth. The Company also implemented a workforce reduction
of 22% on September 30, 2023, which increased costs of $.4 million attributable to severance paid to employees.
For the nine months ended September 30, 2023,
total general and administrative expenses increased by $8.7 million, or 99%, to $17.5 million for 2023, as compared to $8.8 million for
2022. General and administrative expenses increased primarily due to an increase in stock–based compensation expense, sales and
marketing expenses, professional fees, and other costs to support the continued growth of the Company. The Company also implemented a
workforce reduction of 22% on September 30, 2023, which increased costs of $.4 million attributable to severance paid to employees.
Other expense, net . For
the three months ended September 30, 2023, other expense, net was nominal for the quarter.
For the nine months ended September 30, 2023,
other expense, net increased by $1.3 million to $1.0 million for 2023 as compared to $(.3) million, net in 2022. The increase was due
primarily to a state sales tax assessment of $1.2 million that the Company plans to vigorously mitigate, by contesting the preliminary
estimate from the governmental entity, Texas Comptroller of Public Accounts.
Change in fair value of warrant liabilities. For the
three months ended September 30, 2023, the change in the fair value of warrant liabilities increased by $2.7 million to $8.7 million of
other (income) expense in 2023 as compared to $6.0 million as of September 30, 2022. This increase was due to the reset of the warrants
price from $20.00 to $6.00 warrants from financing that occurred during the quarter.
For the nine months ended September 30, 2023,
the change in the fair value of warrant liabilities decreased by $(24.7) million to $(18.8) million of other (income) expense in 2023
as compared to $6.0 as of September 30, 2022. This decrease was due to management’s expectation to raise debt capital that would
limit the triggering of future reset events.
Interest expense, net .
For the three months ended September 30, 2023, interest expense, net decreased by $0.5 million to $.9 million for 2023 as compared to
$1.4 million in 2022. Interest expense, net decreased is primarily due to the gain on settlement of liquidated damages. For the three
months ended September 30, 2023 and 2022, cash paid for interest was $0.1 million and 1.5 million, respectively.
For the nine months ended September 30, 2023,
interest expense, net increased by $4.3 million to $7.4 million for 2023 as compared to $3.1 million in 2022. Interest expense, net increased
due to the amortization of debt discount of $2.9 million associated with the Debentures and approximately net $3.7 million associated
with liquidated damages and interest arising out of the RRA. Please see Note 6 to the accompanying condensed consolidated financial statements
included herein for additional information. For the nine months ended September 30, 2023, cash paid for interest decreased by $1.1 million
to $1.0 million for 2023 as compared to $2.1 million in 2022 due primarily to interest paid on settling prior year debt services in 2022.
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Liquidity and Capital Resources
As of September 30, 2023, we had $6,771,531
of cash and cash equivalents. The cash equivalents consist of money market funds.
Significant
sources and uses of cash during the first nine months of 2023.
Sources of cash:
● The
Company received net proceeds of $10.4 million from the issuance of debt. We received net proceeds of $421 thousand from the exercise
of stock options, representing the strike price of such options. The Company received $338 thousand from the exercise of warrants.
Uses of cash:
●
Cash used in operating activities was $16.4 million, which included $4.6 million invested in working capital.
●
Cash used in investing activities for capital expenditures was $10.7 million.
Future sources and uses of cash .
Our capital requirements will depend on many factors, including sales volumes, the timing and extent of spending to support research
and development efforts, investments in technology, the expansion of sales and marketing activities, and market adoption of new and enhanced
products and features. To date, our principal sources of liquidity have been proceeds received from the issuance of debt and equity funding
and cash flows from our operations.
We anticipate needing additional capital to
continue expanding our business operations, which may include acquisitions and capital expenditures. Currently, the Company does not generate
sufficient revenue to cover operating expenses, working capital, and capital expenditures. We have historically financed our operations
through equity and debt financing. We do not have any commitments for equity funding at this time, and additional funding may not be available
to us on favorable terms, if at all. We are considering reducing discretionary spending and other cost-cutting measures, which may be
implemented in the near-term to the extent additional financing is not raised. The Company implemented a workforce reduction of 22% on
September 29, 2023, which increased costs by $.4 million in the current quarter, which is attributable to severance paid to employees.
The cost savings that will be realized over the next twelve months is expected to be $2.7 million. During the third quarter of 2023, the
Company received net proceeds of $10.4 million from the issuance of debt. There are no assurances that we can raise sufficient additional
capital from external sources or implement material cost-cutting measures. The inability to successfully effectuate either measure could
force us to curtail or discontinue our operations. However, utilizing cost control measures, cash on hand, revenue from operations, and
potential future equity and debt funding, the Company anticipates having sufficient funds to meet its obligations for at least one year
from the issuance date of this Form 10-Q.
Indebtedness .
The Company’s indebtedness as of September 30 , 2023, is presented in Item 1, “Financial
Statements – Note 7 – Notes Payable” and our lease obligations are presented in Item 1, “Financial Statements
– Note 8 – Leases.”
Critical Accounting Policies and Estimates
Please refer to “Critical Accounting Policies and Estimates”
contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 for a complete discussion of our critical
accounting estimates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
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