Nauticus Robotics, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (Whitley Penn, LLP, PCAOB ID: 726 ) F- 2 Consolidated Balance Sheets F- 3 Consolidated Statements of Operations F- 4 Consolidated Statements of Changes in Stockholders’ Equity (Deficit) F- 5 Consolidated Statements of Cash Flows F- 6 Notes to Consolidated Financial Statements F- 8 F-1 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Nauticus Robotics Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Nauticus Robotics Inc. and subsidiary (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company's auditor since 2021. /s/ Whitley Penn LLP Houston, Texas April 9, 2024 F-2 Table of Contents NAUTICUS ROBOTICS, INC. CONSOLIDATED BALANCE SHEETS December 31, 2023 December 31, 2022 Assets Current Assets: Cash and cash equivalents $ 753,398 $ 17,787,159 Restricted certificate of deposit 201,822 250,375 Short-term investments - 4,959,263 Accounts receivable, net 212,428 1,622,434 Inventories 2,198,797 6,666,912 Contract assets - 573,895 Prepaid expenses 1,889,218 5,046,599 Other current assets 1,025,214 56,410 Assets held for sale 2,940,254 - Total Current assets 9,221,131 36,963,047 Property and equipment, net 15,904,845 15,167,367 Operating lease right-of-use asset 834,972 317,208 Other assets 187,527 155,490 Total Assets $ 26,148,475 $ 52,603,112 Liabilities and Stockholders’ Equity (Deficit) Current Liabilities: Accounts payable $ 7,035,450 $ 324,484 Accrued liabilities 7,339,099 3,142,977 Contract liability 2,767,913 - Operating lease liabilities - current 244,774 410,158 Total Current Liabilities 17,387,236 3,877,619 Warrant liabilities 18,376,180 32,688,342 Operating lease liabilities - long-term 574,260 87,214 Notes payable - long-term, net of discount (related party) 31,597,649 15,922,118 Total Liabilities $ 67,935,325 $ 52,575,293 Commitments and Contingencies Stockholders’ Equity (Deficit): Common stock, $ 0.0001 par value; 625,000,000 shares authorized, 50,035,824 and 47,250,771 shares issued, respectively, and 50,035,824 and 47,250,771 shares outstanding, respectively. $ 5,004 $ 4,725 Additional paid-in capital 76,999,849 68,128,196 Accumulated deficit ( 118,791,703 ) ( 68,105,102 ) Total Stockholders’ Equity (Deficit) ( 41,786,850 ) 27,819 Total Liabilities and Stockholders’ Equity (Deficit) $ 26,148,475 $ 52,603,112 See accompanying notes to the consolidated financial statements. F-3 Table of Contents NAUTICUS ROBOTICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the year ended December 31, 2023 2022 Revenue: Service $ 6,605,852 $ 11,210,559 Service - related party 500 224,400 Total revenue 6,606,352 11,434,959 Costs and expenses: Cost of revenue (exclusive of items shown separately below) 11,928,931 11,863,862 Depreciation 729,412 516,949 Research and development 1,399,560 2,376,912 General and administrative 18,271,832 15,040,603 Severance 1,476,636 15,962 Impairment of property and equipment 25,354,791 - Loss on contract 2,542,913 - Total costs and expenses 61,704,075 29,814,288 Operating loss ( 55,097,723 ) ( 18,379,329 ) Other (income) expense: Other expense (income), net 627,580 ( 33,247 ) Loss on lease termination 453,162 - Foreign currency transaction loss (gain) 44,020 ( 260,615 ) Loss on exchange of warrants 590,266 - Change in fair value of warrant liabilities ( 14,902,427 ) 6,461,087 Interest expense, net 8,776,277 3,714,017 Total other (income) expense, net ( 4,411,122 ) 9,881,242 Net loss $ ( 50,686,601 ) $ ( 28,260,571 ) Basic and diluted earnings (loss) per share $ ( 1.24 ) $ ( 1.75 ) Basic and diluted weighted average shares outstanding 40,943,444 18,982,139 See accompanying notes to the consolidated financial statements. F-4 Table of Contents NAUTICUS ROBOTICS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) Series A Preferred Stock Series B Preferred Stock Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount Shares Amount Balance at December 31, 2022 - $ - - $ - 47,250,771 $ 4,725 $ 68,128,196 $ ( 68,105,102 ) $ 27,819 Stock-based compensation - - - - - - 4,427,073 - 4,427,073 Exercise of stock options - - - - 227,837 23 421,152 - 421,175 Exercise of warrants - - - - 165,713 16 338,039 - 338,055 Vesting of RSUs - - - - 501,437 51 ( 51 ) - - Settlement of liquidated damages - - - - 1,890,066 189 3,685,440 - 3,685,629 Net loss - - - - - - - ( 50,686,601 ) ( 50,686,601 ) Balance at December 31, 2023 - $ - - $ - 50,035,824 $ 5,004 $ 76,999,849 $ ( 118,791,703 ) $ ( 41,786,850 ) Balance at December 31, 2021 334,800 $ 3,348 725,426 $ 7,254 9,669,217 $ 967 $ 33,221,505 $ ( 39,844,531 ) $ ( 6,611,457 ) Stock-based compensation - - - - - - 2,602,175 - 2,602,175 Cancellation and exchange of convertible note in connection with reverse capitalization - - - - 5,299,546 530 14,548,384 - 14,548,914 Conversion of Series A preferred stock in connection with reverse recapitalization ( 334,800 ) ( 3,348 ) - - 4,756,470 476 2,872 - - Conversion of Series B preferred stock in connection with reverse recapitalization - - ( 725,426 ) ( 7,254 ) 10,306,055 1,030 6,224 - - Reverse recapitalization with Cleantech Acquisition Corp, net - - - - 6,619,490 662 ( 669,904 ) - ( 669,242 ) Earnout shares placed in escrow - - - - 7,499,993 750 ( 750 ) - - Issuance of common stock for PIPE Investment - - - - 3,100,000 310 30,999,690 - 31,000,000 Equity issuance costs - - - - - - ( 12,582,000 ) - ( 12,582,000 ) Net loss - - - - - - - ( 28,260,571 ) ( 28,260,571 ) Balance at December 31, 2022 - $ - - $ - 47,250,771 $ 4,725 $ 68,128,196 $( 68,105,102 ) $ 27,819 See accompanying notes to the consolidated financial statements. F-5 Table of Contents NAUTICUS ROBOTICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended December 31, 2023 2022 Cash flows used in operating activities: Net loss $ ( 50,686,601 ) $ ( 28,260,571 ) Adjustments to reconcile net loss to net cash from operating activities: Depreciation 729,412 516,949 Accretion of debt discount 4,033,330 1,342,062 Amortization of debt issuance cost 52,092 - Accretion of RCB Equities #1, LLC exit fee 27,608 - Stock-based compensation 4,427,073 2,602,175 Loss on exchange of warrants 590,266 - Change in fair value of warrant liabilities ( 14,902,427 ) 6,461,087 Non-cash impact of lease accounting 346,714 196,555 Interest expense assumed into Convertible Senior Secured Term Loan 378,118 - Impairment of property and equipment 25,354,791 - Settlement of liquidated damages with common stock 3,685,629 - Loss on disposal of assets 82,604 - Loss on lease termination 453,162 - Gain on short-term investments ( 40,737 ) - Changes in operating assets and liabilities: Accounts receivable 1,410,006 ( 828,298 ) Inventories ( 11,581,138 ) ( 6,666,912 ) Contract assets 573,895 319,480 Prepaid expenses and other assets 2,707,815 ( 4,902,797 ) Accounts payable and accrued liabilities 8,241,528 ( 7,731,279 ) Contract liabilities 2,767,913 - Operating lease liabilities ( 338,979 ) ( 323,434 ) Net cash used in operating activities ( 21,687,926 ) ( 37,274,983 ) Cash flows used in investing activities: Capital expenditures ( 11,633,153 ) ( 14,247,005 ) Proceeds from sale of property and equipment 38,704 - Proceeds from sale of short-term investments 5,000,000 - Purchase of short-term investments - ( 4,959,263 ) Net cash used in investing activities ( 6,594,449 ) ( 19,206,268 ) Cash flows from financing activities: Proceeds from notes payable 11,096,884 2,000,000 Payment of debt issuance costs on notes payable ( 607,500 ) - Proceeds from exercise of warrants 338,055 - Proceeds from exercise of stock options 421,175 - Payments of note payable - ( 17,850,333 ) Proceeds from reverse recapitalization with CleanTech Acquisition Corp, net - 14,947,876 F-6 Table of Contents Proceeds from issuance of common stock for PIPE Investment - 31,000,000 Proceeds from issuance of debentures and SPA Warrants, net of discount - 35,800,000 Payment of transaction costs on equity funding - ( 12,582,000 ) Net cash from financing activities 11,248,614 53,315,543 Net change in cash and cash equivalents ( 17,033,761 ) ( 3,165,708 ) Cash and cash equivalents, beginning of year 17,787,159 20,952,867 Cash and cash equivalents, end of year $ 753,398 $ 17,787,159 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,006,993 $ 2,719,947 Cash paid for taxes $ - $ - Non-cash investing and financing activities: Capital expenditures included in accounts payable $ 849,951 $ 241,679 Operating leases at inception $ 2,016,931 $ - Transfer from inventories to property and equipment $ 15,904,411 $ - Transfer from property and equipment to assets held for sale $ 2,940,524 $ - Receivable portion of convertible senior secured note payable $ 695,000 $ - Conversion of convertible debt and accrued interest expense to common stock $ - $ 14,548,914 Conversion of Series A preferred stock in connection with reverse recapitalization $ - $ 3,348 Conversion of Series B preferred stock in connection with reverse recapitalization $ - $ 7,254 Private and Public Warrant Liabilities assumed in reverse recapitalization $ - $ 5,278,145 Fair value of SPA warrants at issuance $ - $ 20,949,110 See accompanying notes to the consolidated financial statements. F-7 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of the Business Nauticus Robotics, Inc. (the “Company”, “our”, "us" or “we”) develops autonomous robots for the ocean 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. Nauticus’ robotic systems and services are designed to address both commercial and government-facing customers. Nauticus Robotics, Inc. develops autonomous robots for the ocean industries. Autonomy requires the extensive use of sensors, artificial intelligence, and effective algorithms for perception and decision allowing the robot to adapt to changing environments. The company’s business model includes using robotic systems for service, selling vehicles and components, and licensing of related software to both the commercial and defense business sectors. Nauticus has designed and is currently testing and certifying a new generation of vehicles to reduce operational cost and gather data to maintain and operate a wide variety of subsea infrastructure. Besides a standalone service offering and forward-facing products, Nauticus’ approach to ocean robotics has also resulted in the development of a range of technology products for retrofit/upgrading legacy systems and other third-party vehicle platforms. Nauticus’ services provide customers with the necessary data collection, analytics, and subsea manipulation capabilities to support and maintain assets while reducing their operational footprint, operating cost, and greenhouse gas emissions, to improve offshore health, safety, and environmental exposure. Business Combination - On September 9, 2022 (the “Closing Date”), Nauticus Robotics, Inc. consummated its business combination pursuant to that certain Agreement and Plan of Merger (the “Merger Agreement,” and together with the other agreements and transactions contemplated by the Merger Agreement, the “Business Combination”) with CleanTech Merger Sub, Inc., a wholly owned subsidiary of CLAQ (“Merger Sub”), and Nauticus Robotics, Inc., a Texas corporation (prior to the Closing Date, “Nauticus Robotics Holdings, Inc.”). Pursuant to the terms of the Merger Agreement, a business combination between CLAQ and Nauticus Robotics Holdings, Inc. was affected through the merger of Merger Sub with and into Nauticus Robotics Holdings, Inc., with Nauticus Robotics Holdings, Inc. surviving the merger as a wholly owned subsidiary of CLAQ. On the Closing Date, CLAQ was renamed “Nauticus Robotics, Inc.” and the previous Nauticus Robotics, Inc. was renamed “Nauticus Robotics Holdings, Inc.”. At the closing, among other things, (a) each share of Nauticus Preferred Stock, par value $ 0.01 per share, that was issued and outstanding immediately prior to the closing converted into shares of Nauticus Common stock, par value $ 0.01 per share, (“Nauticus Preferred Stock Conversion”); (b) each of Nauticus Robotic Holdings, Inc.’s unsecured convertible note obligations outstanding was converted into shares of Nauticus Common Stock in accordance with the terms of each such Nauticus Convertible Note; and (c) each share of Nauticus Common Stock (including shares of Nauticus Common Stock outstanding as a result of the Nauticus Preferred Stock Conversion and Nauticus Convertible Notes Conversion) was converted into the right to receive (i) the per share merger consideration and (ii) Earnout Shares. Shares issued at closing is summarized as follows (i) an aggregate of 36,650,778 shares of Common Stock, par value $ 0.0001 (the “Common Stock” of CLAQ prior to the Closing, and the Common Stock of Nauticus following the Closing) shares were issued to holders of Nauticus Common Stock in the Business Combination (ii) the right to receive 7,499,993 additional shares of Common Stock held in escrow pursuant to the terms of the Merger Agreement and as further described below (such additional escrowed shares, the “Earnout Shares”) and (iii) the issuance of 3,100,000 shares of Common Stock for the Equity Financing (as described below). An aggregate of 47,250,771 shares of Common Stock (inclusive of the Earnout Shares) was issued after the Business Combination. Former holders of Nauticus Common Stock are entitled to receive their pro rata share of up to 7,499,993 additional shares of Common Stock (the “Earnout Shares”) held in escrow. The Earnout Shares will be released upon occurrence of the following (each, a “Triggering Event”): i. one-half of the Earnout Shares will be released if, within a 5-year period, the volume-weighted average price of our Common Stock equals or exceeds $ 15.00 per share over any 20 trading days within a 30 -day trading period; ii. one-quarter of the Earnout Shares will be released if, within a 5-year period, the volume-weighted average price of our Common Stock equals or exceeds $ 17.50 per share over any 20 trading days within a 30 -day trading period; and iii. one-quarter of the Earnout Shares will be released if, within a 5-year period, the volume-weighted average price of our Common Stock equals or exceeds $ 20.00 per share over any 20 trading days within a 30 -day trading period. F-8 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At closing, we received proceeds from Private Investment in a Public Entity subscribers (“PIPE Investment”) consisting of: • the issuance of 3,100,000 shares of Common Stock, for a purchase price of $ 10.00 per share and an aggregate purchase price of $ 31 million (the “Equity Financing”), and • the issuance of secured Debentures with warrants having an aggregate principal amount of $ 36,530,320 (the “Debentures”) pursuant to a securities purchase agreement with certain investors providing net proceeds of $ 35,800,000 inclusive of a 2 % original issue discount. The fair value of the SPA Warrants was estimated to be $ 20,949,110 using a Monte Carlo valuation model incorporating future projections of the various potential outcomes and any exercise price adjustments based on future financing events. The Debentures are convertible into 2,922,425 shares of Common Stock and associated warrants for an additional 2,922,425 shares with an exercise price equal to $ 20 per share, subject to adjustment (“SPA Warrants”). The Business Combination was accounted for as a reverse recapitalization under generally accepted accounting principles in the United States (“GAAP”). Nauticus Robotics Holdings Inc. was determined to be the accounting acquirer and CLAQ was treated as the acquired company for financial reporting purposes. Accordingly, the financial statements of the combined company represent a continuation of the financial statements of Nauticus Robotics Holdings Inc. On September 9, 2022, the Company received from the Business Combination with CLAQ net cash of $ 14,947,875 . The Company also assumed $ 30,157 in prepaids, $ 14,796,942 in accounts payable and accrued liabilities, $ 850,333 in notes payable and net equity of $( 669,243 ). CLAQ’s net cash at the Closing Date totaled $ 14,947,875 . This amount, together with proceeds of the PIPE Investment, were available to repay certain indebtedness, transaction costs and for general corporate purposes. The Company incurred $ 12,582,000 in direct and incremental costs associated with the Equity Financing, which primarily consisted of investment banking, legal, accounting, and other professional fees. On December 31, 2023, the Company and ATW Special Situations I LLC, as the purchaser, entered into a Securities Purchase Agreement (the “PIPE SPA”), pursuant to which the purchaser agreed to purchase up to an aggregate of $ 5,000 of the shares of common stock of the Company, par value $ 0.0001 per share (the “Common Stock”), at a $ 2 per share purchase price. The sale of these shares of Common Stock was subject to the terms and conditions set forth in the PIPE SPA and pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 promulgated thereunder as a transaction by an issuer not involving a public offering. As a result of the sale of shares under the PIPE SPA, the conversion prices under the warrants and debentures issued pursuant to the Securities Purchase Agreement (as defined below) were reset to $ 2 pursuant to their terms, removing future dilutive effects pursuant to the “ratchet” provisions of such warrants and debentures. Liquidity – The Company has incurred recurring losses each year since its inception. The Company continues to develop its principal products and conduct research and development activities. Supply chain disruptions instigated production delays and have continued to impact the Company’s ability to deploy its products and realize rental or product sale revenues. Currently, the Company does not generate sufficient revenue to cover operating expenses, working capital and capital expenditures. The Company has embarked on cost-cutting measures to continue to preserve cash. The Company may require additional liquidity to continue its operations over the next twelve months to sufficiently alleviate or mitigate the conditions and events noted above, which a current investor has committed to the Company. The Company believes with this investor support that there will be sufficient resources to continue as a going concern for at least one year from the date that the consolidated financial statements contained in this Form 10-K are issued. 2. Summary of Significant Accounting Policies Basis of Presentation – The accompanying audited consolidated financial statements have been prepared in accordance with GAAP, under the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) except the F-9 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS shares and corresponding equity amounts and loss per share related to Nauticus’ Common Stock prior to the Business Combination have been retroactively restated to reflect the post-combination Common Stock capital structure. Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the (i) estimates of future costs to complete customer contracts recognized over time, (ii) valuation allowances for deferred income tax assets, (iii) valuation of stock-based compensation awards and (iv) the valuation of conversion options, warrants and earnouts. Actual results could differ from those estimates. Cash and Cash Equivalents – The Company classifies all highly-liquid instruments with an original maturity of three months or less as cash equivalents. The Company maintains cash and cash equivalents in bank deposit accounts, which at times may exceed federally insured limits of $250,000. Historically, the Company has not experienced any losses in such accounts. There were no cash equivalents at December 31, 2023 and 2022, respectively. Restricted Certificate of Deposit — The Company has a restricted certificate of deposit, held by a bank on our behalf, of $ 201,822 and $ 250,375 , as of December 31, 2023 and 2022, respectively. The Company entered into an agreement in August 2023 whereby a $ 150,000 restricted certificate of deposit was required to collateralize a letter of credit. The remainder relates to a guarantee against corporate credit cards. The balance at December 31, 2022 relates to a guarantee against corporate credit cards. Short-term Investments – Short-term investments on December 31, 2022 of $ 4,959,263 , include an investment in a US Treasury Bill that matured on March 14, 2023. On March 14, 2023, the Company received proceeds of $ 5,000,000 at maturity, the gain on the investment of $40,737 is included in other expense (income) on the consolidated income statements. Accounts Receivable, Unbilled Revenues, and Allowance for Credit Losses - In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU” or “standard”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Subsequently, the FASB issued several clarifying standard updates to clarify and improve the ASU. These ASUs significantly change how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The most significant change in this standard is a shift from the incurred loss model to the expected loss model that will be based on an estimate of current expected credit loss (“CECL”). Under the standard, disclosures are required to provide users of the financial statements with useful information in analyzing an entity’s exposure to credit risk and the measurement of credit losses. Financial assets held by the Company that are subject to the guidance in Topic 326 were trade accounts receivable and unbilled revenues. The Company adopted the standard effective January 1, 2023. The impact of the adoption was not considered material to the financial statements and primarily resulted in new and enhanced disclosures only. With the adoption of ASU 2016-13, accounts receivable and contract assets are recorded at the invoiced amount and do not typically bear interest. The Company regularly monitors and assesses its risk of not collecting amounts owed by customers. The Company operates in the midstream space of the oil and natural gas industry and its accounts receivables and contract assets are primarily derived from providing gathering and transportation of natural gas and natural gas liquids for its customers. At each balance sheet date, the Company recognizes an expected allowance for credit losses. In addition, at each reporting date, this estimate is updated to reflect any changes in credit risk since the receivable was initially recorded. This estimate is calculated on a pooled basis where similar risk characteristics exist. If applicable, accounts receivable and contract assets are evaluated individually when they do not share similar risk characteristics which could exist in circumstances where amounts are considered at risk or uncollectible. The allowance estimate is derived from a review of the Company’s historical losses based on the aging of receivables. This estimate is adjusted for management’s assessment of current conditions, reasonable and supportable forecasts regarding future events, and any other factors deemed relevant by the Company. The Company believes historical loss information is a reasonable starting point in which to calculate the expected allowance for credit losses as the Company’s portfolio segments have remained constant since the Company’s inception. F-10 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company writes off receivables when there is information that indicates the debtor is facing significant financial difficulty and there is no possibility of recovery. If any recoveries are made from any accounts previously written off, they will be recognized in income in the year of recovery, in accordance with the entity’s accounting policy election. The total amount of write-offs and expected credit losses were $ 2,040 and $ 9,963 for the years ending December 31, 2023 and 2022, respectively. The allowance for current expected credit losses for the year ending December 31, 2023 and 2022 was $ 0 and $ 9,963 , respectively. Assets Held For Sales - Long-lived assets identified as assets held for sale are categorized on the balance sheet as current assets and are measured at the lower of carrying value or fair value less any costs to sell. Any liabilities associated with the assets being sold are categorized on the balance sheet as current liabilities. Assets held for sale are no longer depreciated or amortized. Property and Equipment – Property and equipment is recorded at cost and depreciated using the straight-line method. Expenditures which extend the useful lives of existing property and equipment are capitalized. Those costs which do not extend the useful lives are expensed as incurred. Upon disposition, the cost and accumulated depreciation are removed and any gain or loss on the disposal is reflected in the statements of operations. Impairment of Long-Lived Assets – The Company reviews long-lived assets for potential impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In this assessment, future pre-tax cash flows (undiscounted) resulting from the use of the asset and its eventual disposal are estimated. If the undiscounted future cash flows are less than the carrying amount of the asset, an impairment loss is recognized for the difference between its carrying value and estimated fair value. For the year ended December 31, 2023 $ 25,354,791 of property and equipment was impaired. There were no impairments for December 31, 2022. Segment Reporting – Our operations represent a single segment because each revenue stream possesses similar production methods, distribution methods, and customer quality and consumption characteristics, resulting in similar long-term expected financial performance. Revenue – Our primary sources of revenue are from providing technology engineering services and products to the offshore industry and governmental entities. Revenue is generated pursuant to contractual arrangements to design and develop subsea robots and software and to provide related engineering, technical, and other services according to the specifications of the customers. These contracts can be service sales (cost plus fixed fee or firm fixed price) or product sales and typically have terms of up to 18 months. The Company had no product sales in 2023 and 2022, respectively. A performance obligation is a promise in a contract to transfer distinct goods or services to a customer. For all contracts, we assess if there are multiple promises that should be accounted for as separate performance obligations or combined into a single performance obligation. We generally separate multiple promises in a contract as separate performance obligations if those promises are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or require significant integration or customization within a group, they are combined and accounted for as a single performance obligation. Our performance obligations under service agreements generally are satisfied over time as the service is provided. Revenue under these contracts is recognized over time using an input measure of progress (typically costs incurred to date relative to total estimated costs at completion). This requires management to make significant estimates and assumptions to estimate contract sales and costs associated with its contracts with customers. At the outset of a long-term contract, the Company identifies risks to the achievement of the technical, schedule and cost aspects of the contract. Throughout the contract term, on at least a quarterly basis, we monitor and assess the effects of those risks on its estimates of sales and total costs to complete the contract. Changes in these estimates could have a material effect on our results of operations. Where the current estimate of total costs at completion for contracts exceeds the total consideration we expect to receive we recognize the entire expected loss in the period that becomes evident. Estimated contract costs include costs that relate directly to the contract including direct labor, direct materials, and allocations of certain overhead costs. Firm-fixed price contracts present the risk of unreimbursed cost overruns, potentially resulting in lower-than-expected contract profits and margins. This risk is generally lower for cost plus fixed fee contracts which, as a result, generally have a lower margin. F-11 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Inventories – Inventories consist of raw materials, work in progress and finished goods where applicable for the Olympic Arm business and are stated at the lower of cost or net realizable value. Work in progress and finished goods inventories include raw materials, direct labor and production overhead. The Company periodically reviews inventories on hand and current market conditions to determine if the cost of raw materials, work in progress and finished goods inventories exceed current market prices and impairs the cost basis of the inventory accordingly. The associated impairment is charged as a standalone expense on the Statement of operation. Obsolete inventory or inventory in excess of management’s estimated usage requirement is written down to its net realizable value if those amounts are determined to be less than cost. The associated write-downs or write-offs of inventory are charged to cost of sales. Inventories consisted of the following: December 31, 2023 December 31, 2022 Raw material and supplies $ 898,335 $ 1,499,030 Work in progress 1,300,462 5,167,882 Total inventories $ 2,198,797 $ 6,666,912 Leases – The Company’s lease arrangements are operating leases which are capitalized on the balance sheet as right-of-use (“ROU”) assets and obligations. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. These are recognized at the lease commencement date based on the present value of payments over the lease term. If leases do not provide for an implicit rate, we use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term as the lease payments. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less ("short term leases") are not recorded on the balance sheet; and the lease expense on short-term leases is recognized on a straight-line basis over the lease term. Stock-Based Compensation – The Company accounts for employee stock-based compensation using the fair value method. Compensation cost for equity incentive awards is based on the fair value of the equity instrument generally on the date of grant and is recognized over the requisite service period. The Company’s policy is to issue new shares upon the exercise or conversion of options and recognize option forfeitures as they occur. Income Taxes – Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax asset (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which a change in judgment occurs. The Company had no material uncertain tax positions as of December 31, 2023 or 2022. Foreign Currency Gains and Losses – The Company purchases certain materials and equipment from foreign companies and these transactions are generally denominated in the vendors’ local currency. The Company recorded $ 44,020 of foreign currency transaction losses and $ 260,615 of foreign currency transaction gains for the years ended December 31, 2023 and 2022, respectively that are included in other income, net. Common Stock Warrants – We account for common stock warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance. This assessment considers whether the warrants are freestanding financial instruments, meet the definition of a liability or requirements for F-12 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS equity classification, including whether the warrants are indexed to the Company’s Common Stock, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. We have determined that the private warrants sold in a private placement to CLAQ’s co-sponsors in connection with CLAQ’s initial public offering (the “Private Warrants”) and warrants sold to the public in CLAQ’s initial public offering (the “Public Warrants”) should be accounted for as liabilities. The Private Warrants and Public Warrants were initially recorded at their estimated fair value on the Closing Date. They are then revalued at each reporting date thereafter, with changes in the fair value reported in the consolidated statements of operations. Derivative warrant liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date. The fair value of the Private Warrants was estimated using a Black-Scholes option pricing model (a Level 3 measurement). The Public Warrants are valued using their publicly-traded price at each measurement date (a Level 1 measurement). We have determined that the SPA Warrants should be accounted for as liabilities. The SPA Warrants were initially recorded at their estimated fair value on the Closing Date and are then revalued at each reporting date thereafter, with changes in the fair value reported in the consolidated 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 holders of Nauticus Robotics Holdings, Inc.’s Common Stock, are held in escrow. The Earnout Shares will be released upon the occurrence of a Triggering Event within 5 years of the Closing Date. The Earnout Shares are considered legally issued and outstanding shares of Common Stock subject to restrictions on transfer and potential forfeiture pending the achievement of the earnout targets. The Company evaluated the Earnout Shares and concluded that they meet the criteria for equity classification. The Earnout Shares were classified in stockholders’ equity, recognized at fair value upon the closing of the Business Combination and will not be subsequently remeasured. A Monte Carlo valuation model (a Level 3 measurement) determined their estimated fair value upon issuance. Capitalized Interest – The Company capitalizes interest costs incurred to work in progress during the related construction periods. Capitalized interest is charged to cost of revenue when the related completed project is delivered to the buyer. During the year ended December 31, 2023, the Company capitalized interest totaling $ 1,515,446 per capitalized interest, of which $ 354,162 and $ 1,161,284 related to inventory and property and equipment, respectively. During the year ended December 31, 2022, the Company capitalized interest totaling $ 804,000 related to inventory. Earnings (Loss) per Share - Basic earnings per share is computed by dividing income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional shares of common stock that could have been outstanding assuming the exercise of stock options and warrants (determined using the treasury stock method) and conversion of convertible debt. The Earnout Shares, which are subject to forfeiture if the achievement of certain stock price thresholds is not met, are not considered participating securities and are not included in the weighted-average shares outstanding for purposes of calculating loss per share. Major Customer and Concentration of Credit Risk – We have a limited number of customers. During the year ended December 31, 2023, sales to two customers accounted for almost 100 % of total revenue. The total balance due from these customers as of December 31, 2023 comprised 68 % of accounts receivable with the remaining 32 % due from one other customer. During the year ended December 31, 2022, sales to two customers accounted for 95 % of total revenue. The total balance due from these customers as of December 31, 2022 comprised 82 % of accounts receivable. 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 year presentation. There was no material impact to the consolidated financial statements for these changes. Recent Accounting Pronouncements – In September 2022, the FASB issued ASU 2022-04, Liabilities – Supplier Finance Programs (Subtopic 405-60): Disclosure of Supplier Finance Program Obligations, which requires companies to disclose F-13 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the use and impact of such programs on a company’s working capital, liquidity, and cash flow. We adopted this standard on January 1, 2023. We do not utilize Supplier Finance Programs and therefore no further disclosure is required. In June 2016, the FASB issued ASU No. 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, 2022, and there was no impact on its financial position, results of operations and cash flows upon adoption. In March 2022, the FASB issued ASU No. 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. Accounting Standards Issued but not adopted as of December 31, 2023 - In November of 2023, the Financial Accounting Standards Board (FASB) issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . The amendments are intended to increase reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The ASU is effective on a retrospective basis for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. We are currently evaluating the impact of this guidance on the disclosures within our consolidated financial statements. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . The amendments require disclosure of specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold and further disaggregation of income taxes paid for individually significant jurisdictions. The ASU is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact that this guidance will have on the disclosures within our consolidated financial statements. 3. Revenue The following table presents the components of our revenue: Year Ended December 31, 2023 2022 Cost plus fixed fee $ 3,947,736 $ 6,898,450 Firm fixed-price 2,658,616 3,023,176 Firm fixed-price-vehicle lease - 1,513,333 Total $ 6,606,352 $ 11,434,959 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 at December 31, 2023 totaled $ 212,428 due from customers for contract billings and is expected to be collected within the next three to six months. At December 31, 2022, accounts receivable, net totaled $ 1,622,434 . The decrease in accounts receivable at December 31, 2023 as compared with December 31, 2022 corresponds to the decreased revenue recognized in 2023. At December 31, 2023 and December 31, 2022, allowances for doubtful accounts included in accounts receivable totaled $ 0 and $ 9,963 , respectively. Bad debt expense was $ 2,040 and $ 9,963 , respectively, for the years ended December 31, 2023 and 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. Contract assets are recorded at the net amount expected to be billed and collected. Contract assets were $ 573,895 at December 31, 2022, F-14 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS primarily due to the timing of the billing for the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations. Contract assets were $ 0 at December 31, 2023. Contract liabilities include billings in excess of revenue recognized and accrual of certain contract obligations. The Company had contract liabilities at December 31, 2023 of $ 2,767,913 which includes costs accrued for an ongoing contract which is expected to be loss making. The loss on contract of $ 2,542,913 is reported on the consolidated income statement for the year ended December 31, 2023. The Company had no contract liabilities at December 31, 2022. Unfulfilled Performance Obligations – As of December 31, 2023, we expect to recognize approximately $ 0.6 million of revenue in future periods from unfulfilled performance obligations from existing contracts with customers. The following table summarizes the expected revenue from our unfilled performance obligations as of December 31, 2023: Expected Revenue from Unfulfilled Performance Obligations by Period ($ in millions) 2024 Unfulfilled performance obligations: Performance obligations $ 0.6 Total unfulfilled performance obligations $ 0.6 If any of our contracts were to be modified or terminated, the expected value of the unfilled performance obligations of such contracts could be increased or reduced. 4. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consisted of the following: December 31, 2023 December 31, 2022 Prepaid material purchases $ 440,091 $ 2,454,298 Prepaid insurance 1,282,703 2,392,978 Other prepayments 166,424 199,323 Total prepaid expenses $ 1,889,218 $ 5,046,599 Term loan receivable $ 695,000 $ - Other current assets 330,214 56,410 Total other current assets $ 1,025,214 $ 56,410 F-15 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 . Property and Equipment Property and equipment consisted of the following: Useful Life (years) December 31, 2023 December 31, 2022 Leasehold improvements 5 $ 796,136 $ 789,839 Property & equipment 3 - 5 years 5,906,859 2,206,004 Technology hardware equipment 3 - 5 years 1,907,770 1,200,504 Total 8,610,765 4,196,347 Less accumulated depreciation ( 2,035,034 ) ( 2,003,341 ) Construction in progress 9,329,114 12,974,361 Total property and equipment, net $ 15,904,845 $ 15,167,367 During the year ended, December 31, 2023 the Company performed a discounted cash flow test to compare the carrying value of its assets with estimated future revenues and concluded that the carrying value of some of its assets were impaired. The Company recorded impairment charges of $ 25,354,791 relating to property and equipment, primarily arising from impairment of the Aquanaut Mark 2 vehicles, Hydronaut vessels, Drix, Olympic arms and some leasehold improvements. The fair value of the Aquanaut Mark 2 vehicles were determined by considering the value of similar vehicles in the market place, commercial invoices, insurable values and a discounted value of future potential cash generation less an estimate of costs to complete vehicles 1 and 3. The fair value of Hydronaut vessels 2 and 3 was determined based on an offer for sale, which subsequently closed on January 22, 2024 at the same value. The Drix and Hydronaut 1 assets were valued at marketed sales price. Olympic Arms 1 – 3 are fully impaired based on no realizable value, as are the certain leasehold improvements. During the year ended December 31, 2023 the Company conducted a thorough review of its assets and decided to divest items that no longer aligned with its strategic objectives. This strategic shift aimed to enhance cash flow within the company. Consequently, through an update of its business model, the Company identified and reclassified $ 2,940,254 worth of property and equipment, including Hydronaut vessels, Drix, and other miscellaneous equipment, as assets held for sale. Subsequently, Hydronaut vessels 2 and 3 were sold on January 22, 2024, for $ 1,533,610 , which matched their impaired carrying value. The Company is actively pursuing the sale of the remaining assets earmarked for sale and anticipates that the majority will be sold by the end of the second quarter of 2024. The company reported a net loss on disposal of property and equipment of $ 82,604 and $ 0 for the years ended December 31, 2023 and 2022, respectively, which is reported on the consolidated statements of operations. 6. Accrued Liabilities Accrued liabilities consisted of the following: F-16 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023 December 31, 2022 Accrued compensation $ 618,630 $ 1,501,736 Accrued severance 1,375,000 - Accrued professional fees 1,355,721 794,021 Accrued insurance 876,150 590,936 Accrued sales and property taxes 885,292 171,660 Accrued royalties 250,000 - Accrued AHFS liability 1,158,609 - Accrued lease termination costs 657,000 - Other accrued expenses 162,697 84,624 Total accrued expenses $ 7,339,099 $ 3,142,977 The Hydronaut vessels 2 and 3 are reported as assets held for sale at December 31, 2023 at an amount based on an offer for sale. The offer for sale contains both cash and non-cash considerations. The assets held for sale liability of $ 1,158,609 includes the non-cash consideration, which are purchase invoices submitted by the purchaser that will be foregone upon closing of the sale. The Hydronaut vessels 2 and 3 were sold on January 22, 2024 and the asset held for sale current asset was offset with the asset held for sale liability and cash received. In December 2023, the Company started negotiations to exit a lease for office space. The negotiations completed in March 2024 with the Company agreeing a settlement figure with the lessor of $ 657,000 . See Note 8, "Leases" for further discussion. The accrual is recorded under accrued liabilities on the consolidated balance sheet as of December 31, 2023. In April 2023, the Company received correspondence from the State of Texas assessing a sale and use tax liability of $ 575,602 . The sales and use tax audit is currently ongoing. The accrual is recorded under accrued liabilities of the consolidated balance sheet as of December 31, 2023. 7. Notes Payable Notes payable consisted of the following: December 31, 2023 December 31, 2022 Convertible secured debentures $ 36,530,320 $ 36,530,320 Convertible senior secured term loan 12,295,000 - Total 48,825,320 36,530,320 Less: debt discount, net ( 16,593,357 ) ( 20,608,202 ) Less: capitalized debt issuance costs ( 661,922 ) - Senior bridge note exit fee provision 27,608 - Total notes payable – long-term $ 31,597,649 $ 15,922,118 Convertible Secured Debentures Upon closing of the Business Combination, we issued to the SPA Parties the Debentures, which featured a 2 % original issue discount, in an aggregate principal amount of $ 36,530,320 , together with 2,922,425 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. This amount was recorded as a warrant liability and, together with the original issue discount, was recognized as a debt discount upon issuance totaling $ 21,679,716 . The Debentures may be converted at each holder’s option at 120 % of the principal amount at a conversion price of $ 15.00 or 2,922,425 shares of Common Stock, subject to certain adjustments including full ratchet anti-dilution price F-17 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS protections. Interest accrues on the outstanding principal amount of the Debentures at 5 % per annum, payable quarterly. The Debentures are secured by first priority interests, and liens on, all our assets, and mature on the fourth anniversary of the date of issuance, September 9, 2026. The Original SPA Warrants, upon issuance, were initially exercisable, at the holder’s option, at $ 20.00 per share over their 10-year term and featured the same anti-dilution provisions as those included in the Debentures. 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 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. As of December 31, 2023 the convertible secured debentures payable was $ 19,936,963 including unamortized debt discount of $ 16,593,357 . The debt discount is being accreted to interest expense over the four-year term of the Debentures. Debt discount accretion of $ 4,014,844 and $ 1,071,228 was included within interest expense in the consolidated statements of operations for the years ended December 31, 2023 and 2022, respectively. The Debentures effective interest rate was approximately 22.7 % at December 31, 2023 and 25.2 % at December 31, 2022. 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. The Convertible Senior Secured Term Loan Agreement provides the Company with up to $ 20 million of secured term loans. 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 initial amount funded under the Convertible Senior Secured Term Loan Agreement was $ 11,600,000 . The Convertible Senior Secured Term Loan Agreement included a 2.5 % exit fee of $ 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 exit fee is being provided for over the period of the loan. The loan agreement included a 2.5 % original issue discount of $ 125,000 from the RCB Equities #1, LLC promissory note. The loan includes assumed legal fees of $ 557,500 and deemed interest from convertible debentures of $ 378,118 . The debt discount is being accreted to interest expense over the period of the loan. The legal fees are being amortized to general and administrative expenses over the period of the loan. The 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 F-18 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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. First Amendment to Convertible Senior Secured Term Loan On December 31, 2023, Nauticus Robotics, Inc., a Delaware corporation (the “Company”), entered into a First Amendment to Senior Secured Term Loan Agreement, dated as of December 31, 2023 (the “First Amendment”), by and among the Company, the subsidiary guarantors (as defined in the First Amendment) and ATW Special Situations II LLC (“ATW II”), a Delaware limited liability company, which amended that certain Senior Secured Term Loan agreement dated as of September 18, 2023 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the “Term Loan Agreement”) with ATW II, as collateral agent (as replaced by Acquiom Agency Services LLC, in such capacity, the “Collateral Agent”) and lender, and Transocean Finance Limited (“Transocean Finance”), ATW Special Situations I LLC (“ATW I”), Material Impact Fund II, L.P. (“MIF”), and RCB Equities #1, LLC (“RCB”), as lenders (collectively, the “Initial Lenders”). The First Amendment provided the Company with an incremental loan in the aggregate principal amount of $ 695,000 (the “December 2023 Incremental Loan”), subject to the terms and conditions set forth in the Term Loan Agreement and the First Amendment. The total loan funded under the Term Loan Agreement and First Amendment as of December 31, 2023 is $ 12,295,000 . The December 2023 Incremental Loan would be made on the same terms as the Additional Term Loans funded on the Closing Date and be deemed to be Additional Term Loans for all purposes under the Term Loan Agreement. The loan assumed legal fees of $ 30,000 which are being amortized to general and administrative expenses over the period of the loan. As of December 31, 2023 the convertible senior term loan payable was $ 11,660,686 including unamortized debt issuance costs of $ 661,922 and a provision for exit fees of $ 27,608 . Interest expense for the year ended December 31, 2023 includes $ 378,116 of deemed interest expense, $ 18,486 of debt discount accretion and $ 27,608 of exit fees provision. General and administrative costs for the year ended December 31, 2023 include $ 52,092 of amortization of legal fees. 8. Leases The Company determines if an arrangement is a lease at inception based on whether the Company has the right to control the use of an identified asset, the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset. After the criteria are satisfied, the Company accounts for these arrangements as leases in accordance with ASC 842, Leases. 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 that 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 of 2023, the Company entered into an operating lease for office space. 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 December 2023, as a result of the Company looking to right-size the business and utilize cash for operations, the Company started negotiations to exit the lease, prior to occupying the building. These negotiations were completed in March 2024 F-19 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS with a settlement figure of $ 657,000 being agreed between the Company and the lessor. The Company removed the right-of-use asset and lease liability relating to this operating lease from the consolidated balance sheet as of December 31, 2023 and recorded a loss on lease termination of $ 453,162 which is r eported under other (income) expense in the consolidated income statement for the year ended December 31, 2023. The carrying value of leasehold improvements on this office space was included in the impairment loss reported on the consolidated income statement for the year ended December 31, 2023. 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. 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 and manufacturing facility and leases for certain office equipment. The following table presents the Company’s lease costs which are included in general and administrative expenses in the consolidated statements of operations: Years ended December 31, 2023 2022 Fixed lease expense $ 567,380 $ 275,763 Variable lease expense 195,637 178,032 Total operating lease expense 763,017 453,795 Short-term lease expense 58,379 - Total lease expense $ 821,396 $ 453,795 Cash paid for operating leases was $ 338,979 and $ 323,434 for the years ended December 31, 2023 and 2022, respectively. The following table presents the balances of the Company’s right-of-use assets and lease liabilities included in the consolidated balance sheets: Years ended December 31, 2023 2022 Operating lease right-of-use assets $ 834,972 $ 317,208 Current portion of operating lease liabilities 244,774 410,158 Long-term operating lease liabilities 574,260 87,214 Total operating lease liabilities $ 819,034 $ 497,372 F-20 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For operating lease assets and liabilities, the weighted average remaining lease term was 8.7 years and 2.2 years as of December 31, 2023 and 2022, respectively. The weighted average discount rate used in the valuation over the remaining lease terms was 14.3 % and 8 % as of December 31, 2023 and 2022, respectively. The following table presents the Company's maturities of lease liabilities as of December 31, 2023: Years Ending December 31, Operating Leases 2024 $ 243,350 2025 191,506 2026 186,641 2027 186,641 2028 139,168 2029 onward 325,072 Total lease payments 1,272,378 Total present value discount ( 453,344 ) Operating lease liabilities $ 819,034 9. Commitments and Contingencies Litigation – From time to time, we may be subject to litigation and other claims in the normal course of business. No amounts have been accrued in the consolidated financial statements with respect to any matters. 10. Income Taxes The income tax expense consisted of the following : Year Ended December 31, 2023 2022 Current income taxes: Federal $ - $ - State and local - - Total current tax - - Deferred income taxes: Federal - - State and local - - Total deferred tax - - Income tax expense $ - $ - F-21 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The effective tax rates on continuing operations for the years ended December 31, 2023 and 2022 were 0 % respectively. The table below reconciles these effective tax rates with the U.S. federal statutory income tax rate as follows: Year Ended December 31, 2023 2022 Income (loss) before income taxes $ ( 50,686,601 ) $ ( 28,260,571 ) Tax at Federal Statutory Rate ( 10,644,186 ) ( 5,934,720 ) Non deductible expenses 1,251,583 193,421 Deferred adjustment 510,514 - Federal return to accrual ( 13,141 ) - Change in valuation allowance 8,895,230 5,741,299 Income tax expense $ - $ - 0.00 % 0.00 % The Company’s deferred tax position reflects the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting. Significant components of the deferred tax assets and liabilities are as follows: Year Ended December 31, 2023 2022 Deferred tax assets: Fixed Assets $ 3,377,201 $ 113,135 Stock Compensation 267,236 758,306 Warrant Liability Gain/Loss 1,356,828 1,356,828 Net Operating Losses 15,627,776 9,666,591 Business Credit Carryforward 1,441,159 1,426,116 Capitalized R & D 614,299 449,626 Other assets 199,680 109,616 Subtotal 22,884,179 13,880,218 Valuation allowance ( 22,654,106 ) ( 13,758,875 ) Total deferred tax assets 230,073 121,343 Deferred tax liabilities: Fixed assets — - Unrealized F/X ( 54,729 ) ( 54,729 ) Other Liabilities ( 175,344 ) ( 66,614 ) Total deferred tax liabilities ( 230,073 ) ( 121,343 ) Net deferred tax assets/(liabilities) $ - $ - The Company has federal net operating loss carryforwards of approximately $ 74.4 million at December 31, 2023, of which ab out $ 646,000 b egin to expire in 2035 and the remainder have no expiration. The Company has recorded a full valuation allowance against its net deferred tax assets due to recurring net losses. 11. Equity Common Stock – A total of 50,035,824 shares of Common Stock were outstanding at December 31, 2023. F-22 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On December 31, 2023, the Company and ATW Special Situations I LLC, as the purchaser, entered into a Securities Purchase Agreement (the “PIPE SPA”), pursuant to which the purchaser agreed to purchase up to an aggregate of $ 5,000 of the shares of common stock of the Company, par value $ 0.0001 per share (the “Common Stock”), at a $ 2 per share purchase price. The sale of these shares of Common Stock was subject to the terms and conditions set forth in the PIPE SPA and pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 promulgated thereunder as a transaction by an issuer not involving a public offering. As a result of the sale of shares under the PIPE SPA, the conversion prices under the warrants and debentures issued pursuant to the Securities Purchase Agreement were reset to $ 2 pursuant to their terms, removing future dilutive effects pursuant to the “ratchet” provisions of such warrants and debentures . On August 3, 2023, the Company issued 1,890,066 shares of Common Stock, at the closing price of $ 1.95 , to the SPA parties as payment for liquidated damages and interest relating to the Registration Rights Agreement. See further discussion under Note 12, "Warrants". Earnout Shares – Following the closing of the Business Combination, former holders of shares of Nauticus Common Stock (including shares received as a result of the Nauticus Preferred Stock Conversion and the Nauticus Convertible Notes Conversion) are entitled to receive their pro rata share of up to 7,499,993 additional shares of Nauticus Common Stock which are held in escrow. The Earnout Shares will be released upon occurrence of certain Triggering Events. At December 31, 2023, the earnout targets have not been achieved and the Earnout Shares remain in escrow. The Earnout Shares were classified in stockholders’ equity and recognized at their fair value upon issuance totaling $ 4,957,366 . Their estimated fair value upon issuance was determined using a Monte Carlo valuation model which simulated our stock price and the timing of the lapse of the transfer restrictions. The issuance of the Earnout Shares was treated as a deemed dividend. Because the Company does not have retained earnings, the issuance was recorded within additional paid in capital. Series A and Series B Preferred Stock – The Company had 334,800 shares of Series A Preferred Stock and 725,426 shares of Series B Preferred Stock outstanding prior to the Business Combination. Nauticus Robotics Holdings, Inc. Common Stock was issued in connection with the Nauticus Preferred Stock Conversion . Each share of Nauticus Robotics Holdings, Inc. Common Stock was converted into (i) an aggregate of 15,062,525 shares of Common Stock and (ii) a pro-rata number of the total Earnout Shares in the Business Combination. Common Stock Equity PIPE – At closing, we received proceeds from Private Investment in a Public Entity subscribers (“PIPE Investment”) consisting of the issuance of 3,100,000 shares of Common Stock, for a purchase price of $ 10.00 per share, for an aggregate of $ 31 million. 12. Warrants Public Warrants – We assumed 8,624,991 Public Warrants in the Business Combination which remained outstanding as of December 31, 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. Notwithstanding the foregoing, if a registration statement covering the shares of Common Stock issuable upon exercise of the Public Warrants is not effective within 120 days following the consummation of the Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when we shall have failed to maintain an effective registration statement, exercise Public Warrants on a cashless basis pursuant to an available exemption from exemption under the Securities Act. The Public Warrants expire on the fifth anniversary of our completion of the Business Combination, or earlier upon redemption or liquidation. Our Public Warrants are listed on Nasdaq under the symbol “KITTW”. We may redeem the outstanding Public Warrants, in whole and not in part, at a price of $ 0.01 per warrant: • at any time after the Public Warrants become exercisable, • upon not less than 30 days’ prior written notice of redemption to each warrant holder, F-23 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS • if, and only if, the reported last sale price of the shares of Common Stock equals or exceeds $ 16.50 per share (subject to adjustment for splits, dividends, recapitalizations, and other similar events), for any 20 trading days within a 30 -day trading period ending on the third business day prior to the notice of redemption to warrant holders, and • if, and only if, there is a current registration statement in effect with respect to the shares of Common Stock underlying such warrants at the time of redemption and for the entire 30 -day trading period referred to above and continuing each day thereafter until the date of redemption. If we call the Public Warrants for redemption as described above, we have the option to require all holders that wish to exercise warrants to do so on a “cashless basis.” The exercise price and number of shares of Common Stock issuable on exercise of the Public Warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or our recapitalization, reorganization, merger or consolidation. The Public Warrants, which are accounted for as liabilities in our consolidated balance sheets, were valued as of December 31, 2023 at $ 451,088 based on their publicly-traded price. The gain in value of the Public Warrants during the year ended December 31, 2023 and 2022 totaled $ 1,825,047 and $ 570,114 , respectively and was reported with other (income) expense in our consolidated statements of operations. Private Warrants – We assumed 7,175,000 Private Warrants in the Business Combination which remained outstanding as of December 31, 2023. The Private Warrants are exercisable for one share of Common Stock at an exercise price of $ 11.50 and are identical in all material respects to the Public Warrants except that such Private Warrants are exercisable for cash (even if a registration statement covering the shares of Common Stock issuable upon exercise of such warrants is not effective) or on a cashless basis, at the holder’s option, and will not be redeemable by us, in each case so long as they are still held by the initial purchasers or their affiliates. The Private Warrants purchased by CleanTech Investments are not exercisable after July 14, 2026, as long as Chardan Capital Markets, LLC or any of its related persons beneficially own these Private Warrants. The Private Warrants, which are accounted for as liabilities in our consolidated balance sheets, were valued as of December 31, 2023 at $ 380,531 . The fair value of the Private Warrants was estimated using a Black-Scholes option pricing model using the following assumptions: stock price of $ 0.68 , no assumed dividends, a risk-free rate of 3.95 %, implied volatility of 80.3 % and remaining term of 3.69 years. The gain in value of the Private Warrants during the years ended December 31, 2023 and 2022 totaled $ 1,554,057 and $ 497,307 , respectively, and was reported with other (income) expense in our consolidated statements of operations. SPA Warrants – Substantially concurrent with the Closing and pursuant to the Securities Purchase Agreement, we issued an aggregate 2,922,425 Original SPA Warrants to the SPA Parties. Upon issuance, each whole Original SPA Warrant was exercisable over its 10-year term for one share of Common Stock at a price of $ 20.00 per share, subject to certain adjustments including full ratchet anti-dilution price protections. In connection with the Securities Purchase Agreement, the Company and the SPA Parties entered into that certain Registration Rights Agreement, dated as of September 9, 2022 (the “RRA”), pursuant to which the Company and the SPA Parties agreed to certain requirements and conditions covering the resale by the SPA Parties of the shares of Common Stock underlying the Debentures and Original SPA Warrants. Under the terms of the RRA, the Company was required to (i) file a registration statement (the “Initial Registration Statement”) covering such underlying shares within 15 business days of the Closing and (ii) use its best efforts to cause the Initial Registration Statement to be declared effective as promptly as possible after the filing thereof, but in any event no later than the applicable Effectiveness Date (as defined in the RRA) (the “Registration Requirements”). The RRA additionally provided for liquidated damages if the Registration Requirements were not met. On June 22, 2023, the Company and the SPA Parties entered into the 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 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 F-24 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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, ATW exercised 165,713 Amended SPA Warrants, pursuant to which 165,713 shares of Common Stock and 165,713 New SPA Warrants were issued 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 1, 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 to those already issued, are) substantially in the form of the Amended SPA Warrants as described above except that the New SPA Warrants (i) have an exercise price of $ 20.00 per share (including, for purposes of clarification, full-ratchet anti-dilution on the exercise price and number of underlying shares issuable based on the aggregate exercise price using $ 20.00 as the base exercise price), (ii) are immediately 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. On December 31, 2023, the Company and ATW Special Situations I LLC, as the purchaser, entered into a Securities Purchase Agreement (the “PIPE SPA”), pursuant to which the purchaser agreed to purchase up to an aggregate of $ 5,000 of the shares of common stock of the Company at a $ 2 per share purchase price. Based on the PIPE SPA, the exercise price of the SPA Warrants was reset from $ 6.00 to $ 2.00 . F-25 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As indicated in Note 1 above, 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 New SPA Warrants. The SPA Warrants, which are accounted for as liabilities in our consolidated balance sheets, were valued as of December 31, 2023, at $ 17,544,561 and were estimated using a Black-Scholes valuation model using the following assumptions: stock price $ 0.68 , implied volatility of 80.3 %, and remaining term of 8.75 years. 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 year ended December 31, 2023 is a gain of $ 11,523,323 , and during the year ended December 31, 2022 was a loss of $ 7,528,508 and was reported with other (income) expense in our consolidated statements of operations. 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 year ended December 31, 2023, wer e $ 338,055 . 13. Stock-Based Compensation On September 6, 2022, shareholders approved our 2022 Omnibus Incentive Plan (the “Omnibus Incentive Plan”) and on September 9, 2022, our board of directors ratified the Omnibus Incentive Plan. The Omnibus Incentive Plan provides for the grant of options, stock appreciation rights, RSUs, restricted stock and other stock-based awards, any of which may be performance-based, and for incentive bonuses, which may be paid in cash, Common Stock or a combination thereof. As of December 31, 2023, there were 10,525,072 shares authorized for issuance under the Omnibus Incentive Plan, and there were 7,651,662 remaining shares available for future grants. At the Closing Date of the Business Combination, Nauticus Robotics Holdings, Inc. had 279,464 options outstanding for the purchase of its common stock (originally issued under the 2015 Plan). The outstanding options were converted into 3,970,266 options to purchase shares of our Common Stock. As of December 31, 2023, 3,011,247 of those options remained outstanding and there were no remaining shares available for future grant. Options vest assuming continuous service to the Company with 25 % of the options vesting one year after grant and the balance vesting in a series of 36 successive equal monthly installments measured from the first anniversary of grant. During the vesting period, holders have no rights of a stockholder with respect to the shares of Common Stock subject to an option, and the options may not be sold, assigned, transferred, pledged, or otherwise encumbered. Unvested options are forfeited upon termination of employment. Compensation expense for stock option grants is recognized based on the fair value at the date of grant using the Black-Scholes option pricing model. The following inputs were used to calculate the fair value of the options as of the date of each grant: Years ended December 31, 2023 2022 Expected volatility N/A 36.7 - 36.9 % Expected term (years) N/A 4.69 - 4.94 Risk-free interest rate N/A 4.03 % - 4.06 % Expected dividends 0.00 % 0.00 % The expected volatility was calculated using the historical volatility of the Company’s publicly traded common stock. The Company used the “simplified method” for estimating the expected term of options, which is the average of the weighted-average vesting period and contractual term of the option. The risk-free rate was based on the U.S. Treasury yield F-26 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS curve in effect at the time of grant for the expected term of the stock options. The Company assumed the expected dividends to be zero as it has never paid dividends and at the grant date of the options had no plans to do so. Stock-based compensation expense, which relates to options originally issued under the 2015 Plan, totaled $ 530,019 in 2023 and $ 784,320 in 2022 and was recorded in general and administrative expense. As of December 31, 2023, there was $ 800,513 of total unrecognized compensation cost related to options to be recognized over a remaining weighted average period of 1.68 years. The following table summarizes options outstanding, as well as activity for the period presented: Shares Weighted Average Exercise Price Aggregate Intrinsic Value Outstanding as of December 31, 2022 3,506,184 $ 1.87 $ 6,554,541 Exercised ( 227,837 ) $ 1.85 Forfeited ( 92,040 ) $ 1.98 Expired ( 175,060 ) $ 2.18 Outstanding as of December 31, 2023 3,011,247 $ 1.85 $ 1.85 $ 9,717 Exercisable as of December 31, 2023 2,259,124 $ 1.74 $ 9,717 The weighted average remaining contractual term of outstanding options and exercisable options as of December 31, 2023, was 3.9 years and 3.97 years, respectively. The maximum contractual term of options is ten years . The weighted-average grant-date fair value of options granted during the years ended December 31, 2023 and 2022 was $ 0 and $ 1.31 , respectively. The total intrinsic value of all options exercised during the years ended December 31, 2023 and 2022 was $ 104,985 and $ 0 , respectively. During the year ended December 31, 2023, proceeds from option exercises under the 2015 plan were $ 421,175 and the tax benefit realized from those option exercises was $ 196,711 . Realization of this amount is dependent on the generation of future taxable income. The following tabulation summarizes certain information related to outstanding and exercisable options at December 31, 2023: Options Outstanding Options Exercisable Range of Exercise Prices As of December 31, 2023 Weighted Average Remaining Contractual Life In Years Weighted Average Exercise Price As of December 31, 2023 Weighted Average Exercise Price $ 0.63 $ 0.63 197,103 1.86 $ 0.63 197,103 $ 0.63 $ 0.70 $ 0.70 71,034 2.49 $ 0.70 71,034 $ 0.70 $ 1.13 $ 1.13 237,963 3.31 $ 1.13 237,963 $ 1.13 $ 1.46 $ 1.46 235,833 6.67 $ 1.46 191,613 $ 1.46 $ 1.94 $ 1.94 1,586,707 4.74 $ 1.94 1,225,479 $ 1.94 $ 2.50 $ 2.50 682,607 1.93 $ 2.50 335,932 $ 2.50 $ 0.63 $ 2.50 3,011,247 3.90 $ 1.85 2,259,124 $ 1.74 F-27 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Incentive Plans – The Compensation Committee and Board of Directors grant restricted units of our common stock to certain of our key executives, employees, and non-employee directors. Each Restricted Stock Unit (“RSU”) is a notional amount that represents the right to receive one share of common stock of the Company if and when the RSUs vest. RSUs were issued to the following recipients and vest as follows: Employee RSU grants are time-based and typically vest equally over a three-year period, conditional upon continued employment. Non-employee director RSU grants are time-based and vest fully on the earlier of the one-year anniversary of the grant date or the next Board of Directors Annual General Meeting if a grantee is not on the election ballot, conditional upon continued service as a director. Executive RSU grants issued as executive sign-on bonuses are time-based and vest 50 % on the one-year anniversary of the new hire date and 50 % on the two-year anniversary of the new-hire date. In addition, during 2022, the Compensation Committee and Board of Directors granted Performance-based Restricted Stock Units (“PRSUs”) to senior executives. Each PRSU is a notional amount that represents the right to receive one share of common stock if and when the PRSU vests. PRSU participants may earn between 0 % and 150 % of the PRSUs, subject to attainment of certain performance conditions which were based upon the Company’s 2022 revenues. In April 2023, the Company’s board of directors determined that 51 % of the performance target of the PRSUs was achieved and an aggregate 619,438 PRSUs were deemed earned by the members of the senior executive management team and vested/will vest 50 % on December 31, 2023 and 50 % on December 31, 2024, in accordance with the terms of the applicable award agreements. The Compensation Committee has a policy that the Company will not provide U.S. federal income tax gross-up payments to any of its directors or executive officers in connection with future awards of restricted stock or stock units. The following is a summary of our restricted and performance stock unit activity for 2023: Shares Weighted Average Grant Date Fair Value Outstanding as of December 31, 2022 3,134,677 $ 4.73 Granted 1,185,666 1.97 Vested ( 501,437 ) 4.31 Forfeited ( 1,446,933 ) 4.60 Outstanding as of December 31, 2023 2,371,973 $ 3.51 The weighted-average grant-date fair value of RSUs and PRSUs granted during the year ended December 31, 2023 and 2022 was $ 1.97 and $ 4.73 , respectively. The total fair value of RSUs and PRSUs vested during the years ended December 31, 2023 and 2022 was $ 1,132,352 and $ 0 . The RSUs and PRSUs granted in 2022 and 2023 do not have voting rights or dividend rights unless the RSU or PRSU has vested and the share of common stock underlying it has been distributed to the participant. Grants of RSUs are valued at their estimated fair values as of their respective grant dates. RSU grants in 2022 and 2023 were subject only to service and vesting conditions based on continued employment or service as a non-employee director; therefore, these grants were valued using the closing price of our stock on the Nasdaq Capital Market on the date of grant. The PRSUs granted in 2022 were subject only to performance and service conditions and did not contain a market condition. As a result, these grants were also valued using the closing price of our stock on the Nasdaq Capital Market on the date of grant. Stock-based compensation expense attributable to PRSUs under the Omnibus Incentive Plan for the years ended December 31, 2023 and December 31, 2022 was $ 480,279 and $ 858,278 , respectively and recorded in general and F-28 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS administrative expense. Stock-based compensation expense attributable to RSUs under the Omnibus Incentive Plan for years ended December 31, 2023 and December 31, 2022, respectively, was $ 3,416,775 and $ 959,367 and recorded in general and administrative expense. As of December 31, 2023, we had $ 386,976 of future expense related to PRSUs and $ 4,384,798 of future expense related to RSUs to be recognized over a weighted-average period of 2.16 years. Total stock-based compensation expense for the years ended December 31, 2023 and December 31, 2022, including options, PRSUs, and RSUs, totaled $ 4,427,073 and $ 2,602,175 , respectively. Total related recognized tax benefit for the years ended December 31, 2023 and 2022, was $ 818,000 and $ 409,000 , respectively. 14. 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 $ 342,459 and $ 367,796 at December 31, 2023 and 2022, respectively. 15. 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, (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 years ended December 31, 2023 and 2022, ATW Material Impact, and SLS Family Irrevocable Trust received $ 1,006,993 and $ 573,588 , respectively, in interest payments on the Debentures from the Company. Contingently Convertible Promissory Notes – As discussed in Note 5, upon consummation of the Business Combination outstanding contingently convertible promissory notes, including those held by related parties Schlumberger and Transocean Ltd., were converted into Common Stock. 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. 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 , 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 Warrants, for more information. Letter Agreements – On June 22, 2023, the Company 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. F-29 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On June 23, 2023, pursuant to its Letter Agreement with the Company, ATW exercised 165,713 Amended SPA Warrants, pursuant to which 165,713 shares of Common Stock and 165,713 New SPA Warrants were issued 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 1, 2024, the exercise price was reset from $ 20.00 to $ 6.00 per 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 . Flexible Consulting, LLC - On December 1, 2023, the Board appointed Victoria Hay as the Interim Chief Financial Officer and principal financial officer of the Company. Victoria Hay is the co-owner and President of Flexible Consulting, LLC, a financial and accounting consulting firm, with which the Company has engaged with since January 2023 to provide it with accounting and finance services relating to its quarterly reporting and mergers/acquisition activity. Flexible Consulting, LLC is considered to be a related party from December 1, 2023. The total value of services provided by Flexible Consulting, LLC to the Company from December 1, 2023 through December 31, 2023 is $ 65,735 and accounts payable included $ 95,177 due to Flexible Consulting, LLC at December 31, 2023. Revenue and Accounts Receivable – Revenue from Transocean Ltd. for contract services totaled $ 500 and $ 224,400 for the years ended December 31, 2023 and 2022, respectively. Accounts receivable included $ 0 and $ 21,000 outstanding from Transocean Ltd. at December 31, 2023 and 2022, respectively. 16. Loss Per Share Following is the computation of loss per basic and diluted share: Year Ended December 31, 2023 2022 Numerator: Net loss $ ( 50,686,601 ) $ ( 28,260,571 ) Less: deemed dividend for Earnout Shares — ( 4,957,366 ) Net loss attributable to common stockholders $ ( 50,686,601 ) $ ( 33,217,937 ) Denominator: Weighted average shares used to compute basic and diluted EPS 40,943,444 18,982,139 Basic and diluted loss per share $ ( 1.24 ) $ ( 1.75 ) Anti-dilutive securities excluded from shares outstanding: Stock options 3,011,247 3,506,184 Restricted and performance stock units 2,371,973 3,134,677 Warrants 43,524,241 18,722,425 Earnout shares 7,499,993 7,499,993 Convertible debt 4,971,592 2,922,425 Total 61,379,046 35,785,704 17. Fair Value Measurements The Company measures and reports certain financial and non-financial assets and liabilities on a fair value basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three levels related to fair value measurements are as follows: Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities. F-30 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data. Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. The estimated fair values of accounts receivable, contract assets, accounts payable and accrued expenses approximate their carrying amounts due to the relatively short maturity or time to maturity of these instruments. Notes payable with related parties may not be arms-length transactions and therefore may not reflect fair value. The estimated fair value of the Debentures approximates their carrying amount due to their recent issuance. The Company’s non-financial assets measured at fair value on a recurring basis include SPA Warrants and Private Warrants. These are considered Level 3 measurements as they involve significant unobservable inputs. See Note 12 for more information about the valuation methodologies and assumptions. In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial liabilities that are required to be measured at fair value on a recurring basis and the related activity for periods presented: Fair Value as of December 31, 2023 Carrying Value Level 1 Level 2 Level 3 Financial liabilities: Warrant liability - Public Warrants $ 451,088 $ 451,088 $ - $ - Warrant liability - Private Warrants 380,531 - - 380,531 Warrant liability - SPA Warrants 17,544,561 - - 17,544,561 Total $ 18,376,180 $ 451,088 $ - $ 17,925,092 The following table sets forth a summary of the changes in fair value of the Company’s financial liabilities: Warrant Liability Balance, December 31, 2022 $ 32,688,341 Loss on exchange of warrants 590,266 Change in fair value of warrant liabilities ( 14,902,427 ) Balance, December 31, 2023 $ 18,376,180 18. Subsequent Events Second Amendment to Senior Secured Term Loan Agreement On January 30, 2024, Nauticus Robotics, Inc., a Delaware corporation (the “Company”), entered into a Second Amendment to Senior Secured Term Loan Agreement, dated as of January 30, 2024 (the “Second Amendment”), by and among the Company, the guarantors (as defined in the Second Amendment) and the required lenders (as defined in the Second Amendment), which amended that certain Senior Secured Term Loan Agreement, dated as of September 18, 2023 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the “2023 Term Loan Agreement”), by and among the Company, Transocean Finance Limited (“Transocean Finance”), ATW Special Situations I LLC (“ATW I”), Material Impact Fund II, L.P. (“Material Impact”), and RCB Equities #1, LLC (“RCB”), as lenders (collectively, the “Initial Lenders”), and ATW Special Situations II LLC (“ATW II”), as collateral agent (as succeeded by Acquiom Agency Services LLC, the “Collateral Agent”). F-31 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In connection with the Second Amendment, the Company also entered into a Second Agreement Regarding Incremental Loans, dated as of January 30, 2024 (the “Second Agreement”), by and among the Company, the guarantors (as defined in the Second Agreement), and ATW II and Material Impact, as incremental lenders. The Second Agreement provides the Company with an incremental loan in the aggregate principal amount of $ 3,753,144 (the “January 2024 Incremental Loan”). The January 2024 Incremental Loan would be made on the same terms as the Additional Term Loans funded on the Closing Date and be deemed to be Additional Term Loans for all purposes under the 2023 Term Loan Agreement. New Senior Secured Term Loan Agreement On January 30, 2024, the Company also entered into a senior secured term loan agreement (the “Term Loan Agreement”) with ATW Special Situations Management LLC (“ATW Management”), as collateral agent (in such capacity, the “Collateral Agent”) and lender, and ATW Special Situations III LLC (“ATW III”), Material Impact, VHG Investments LLC (“VHG Investments”), ATW II LLC and ATW I LLC, as lenders (collectively, the “Lenders”). The Term Loan Agreement provides the Company with an aggregate $ 9.55 million of secured term loans (the “Loans”). 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 5 days’ prior written notice to each Lender. The Term Loan Agreement also provides for up to an additional $ 6 million of secured term loans within 180 days of signing, $ 1 million of which has already been committed by ATW III or an affiliate. The Loans bear interest at the rate of 15 % per annum, payable quarterly in arrears on the first day of each calendar quarter commencing April 1, 2024. The Loans (other than the ATW Extended Maturity Term Loan) will mature on the earliest of: (a) the third anniversary of the date of the Term Loan Agreement, (b) the maturity of the Indebtedness under that certain Senior Secured Term Loan Agreement among the Company, the lenders party thereto and Acquiom Agency Services LLC, as collateral agent, dated September 18, 2023, as amended on December 31, 2023, and as further amended on January 30, 2024 (the “2023 Term Loan Agreement”), and (c) 91 days prior to the maturity of the 5 % Original Issue Discount Senior Secured Convertible Debentures, dated as of September 9, 2022 (the “Original Debentures”), issued by the Company pursuant to that certain Securities Purchase Agreement, dated as of December 16, 2021, as amended on January 31, 2022, and as further amended on September 9, 2022, and as further amended on January 30, 2024 (the “SPA”). The ATW Extended Maturity Term Loan will mature on the earlier of the 30th anniversary of the date of the Term Loan Agreement or such earlier date as is required or permitted to be repaid under the Term Loan Agreement. The proceeds of the Loans are to be used by the Company solely for general administrative costs and working capital or other payments for the business operations of the Company and its subsidiaries; provided that the proceeds must be used in accordance with the initial budget of the Company produced in form and substance reasonably acceptable to the Collateral Agent. Together with the January 2024 Incremental Loan, the total gross proceeds to the Company were approximately $ 13.3 million. The Term Loan Agreement contains customary negative and affirmative covenants, subject to certain exceptions, as well as events of default customary for transactions of this nature, including with respect to (subject in certain cases to cure periods, thresholds and other qualifiers, as applicable), among other things, non-payment of principal, interest and other amounts contemplated by the Obligations, material inaccuracy of representations and warranties, covenant noncompliance, cross-defaults triggered by certain indebtedness, bankruptcy and insolvency, monetary judgments, change of control, failure to comply with certain financial covenants and other fundamental transactions and failure to deliver shares of Common Stock upon conversion of the Loans in accordance with the Term Loan Agreement. Subject to certain applicable cure periods, the occurrence of an event of default will result in the acceleration of the Obligations (as defined in the Term Loan Agreement). Commencing five business days after any event of default, the interest rate on the Obligations shall accrue at an interest rate equal to the lesser of 18 % per annum or the maximum rate permitted under applicable law. The Term Loan Agreement also provided for liquidated damages (and not as a penalty) in the event of late delivery of the conversion shares, late or failure to remove restrictive legends from the conversion shares or the delay in or reduction of Lender’s ability to sell the conversion shares due to the Company’s failure to satisfy the current public information requirement under Rule 144. Termination of Merger Agreement with 3D at Depth On April 4, 2024, the Company and 3D at Depth, Inc. mutually agreed to terminate the Agreement and Plan of Merger, dated October 2, 2023, by and among the Company, 3D Merger Sub, Inc., and 3D at Depth, Inc., which was previously F-32 Table of Contents NAUTICUS ROBOTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS disclosed on the Company’s Current Report on Form 8-K filed with the SEC on October 6, 2023. Pursuant to the Agreement and Plan of Merger, 3D Merger Sub, Inc. would have merged with and into 3D at Depth, Inc., with 3D at Depth, Inc. surviving the merger as a wholly owned subsidiary of the Company. Under the terminated Agreement and Plan of Merger, the “base equity value” at signing was $ 34 million. The consideration in the transaction would have been shares of the Company’s common stock. F-33 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.