What changed in this filing

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Item 1. Financial Statements

2024-05-14 compared with 2023-11-14 · 498 added, 1035 removed, 193 unchanged (89% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

2024 December 31,

Current Assets:

1 unchanged sentence

Restricted certificate of deposit 50,706 201,822

Short-term investments

Accounts receivable, net 157,327 212,428

Contract assets

Inventories 2,214,726 2,198,797

Prepaid expenses 1,579,585 1,889,218

Other current assets 316,018 1,025,214

Assets held for sale 1,310,832 2,940,254

Total Current Assets 11,816,501 9,221,131

Property and equipment, net 15,858,895 15,904,845

Operating lease right-of-use asset

Liabilities and Stockholders’ Equity (Deficit)

Operating lease right-of-use assets 1,568,705 834,972

Other assets 187,387 187,527

Total Assets $ 29,431,488 $ 26,148,475

Liabilities and Stockholders’ Deficit

Current Liabilities:

9 unchanged sentences

Commitments and Contingencies

Stockholders’ Equity (Deficit):

Stockholders’ Deficit:

Common stock, $ 0.0001 par value;

625,000,000 shares authorized, 57,317,025 and 50,035,824 shares issued, respectively, and 57,317,025 and 50,035,824 shares outstanding, respectively

$ 5,732 $ 5,004

Additional paid-in capital 78,869,430 76,999,849

Accumulated deficit ( 118,378,091 ) ( 118,791,703 )

( 79,249,114 )

( 68,105,102 )

Total Stockholders’ Equity (Deficit)

( 2,676,314 )

Total Liabilities and Stockholders’ Equity (Deficit)

The accompanying notes are an integral part

of these condensed consolidated financial statements.

Total Stockholders’ Deficit ( 39,502,929 ) ( 41,786,850 )

Total Liabilities and Stockholders’ Deficit $ 29,431,488 $ 26,148,475

The accompanying notes are an integral part of these condensed consolidated financial statements.

NAUTICUS ROBOTICS, INC.

1 unchanged sentence

Three months ended

Nine months ended

September 30,

Service - related party

Service $ 464,354 $ 2,820,780

Total revenue 464,354 2,820,780

1 unchanged sentence

Cost of revenue (exclusive of items shown separately below) 2,093,955 2,932,267

Depreciation 426,185 273,099

Research and development 63,534 226,967

2 unchanged sentences

Operating loss ( 5,549,330 ) ( 5,824,197 )

( 8,198,314 )

( 6,045,830 )

( 20,891,533 )

( 11,256,395 )

Other (income) expense:

Other (income) expense, net ( 96,473 ) 1,152,381

Gain on sale of assets

Gain on lease termination ( 15,365 ) -

Foreign currency transaction loss (gain) 5,147 ( 9,884 )

Loss on exchange of warrants

Change in fair value of warrant liabilities ( 8,309,623 ) 2,236,904

( 18,775,158 )

Interest expense, net 2,453,372 4,935,067

Total other (income) expense, net ( 5,962,942 ) 8,314,468

( 9,747,521 )

$ ( 17,678,787 )

$ ( 13,176,497 )

$ ( 11,144,012 )

$ ( 20,037,455 )

Basic and diluted loss per share

Basic and diluted weighted average shares outstanding

The accompanying notes are an integral part

of these condensed consolidated financial statements.

Net income (loss) $ 413,612 $ ( 14,138,665 )

Basic earnings (loss) per share $ 0.01 $ ( 0.36 )

Diluted loss per share $ ( 0.11 ) $ ( 0.36 )

Basic weighted average shares outstanding 44,635,720 39,765,361

Diluted weighted average shares outstanding 66,742,808 39,765,361

The accompanying notes are an integral part of these condensed consolidated financial statements.

NAUTICUS ROBOTICS, INC.

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

Series A Preferred

Series B Preferred

Additional Paid-in

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES OF STOCKHOLDERS’ DEFICIT

Common Stock Additional Paid-in

Capital Accumulated

Deficit Total

Stockholders’

Shares Amount

Balance at December 31, 2023 50,035,824 $ 5,004 $ 76,999,849 $ ( 118,791,703 ) $ ( 41,786,850 )

$ ( 39,844,531 )

$ ( 6,611,457 )

Stock-based compensation - - 530,655 - 530,655

( 3,504,002 )

Vesting of RSUs 1,581,201 158 ( 158 ) - -

Exercise of warrants 5,700,000 570 1,339,084 - 1,339,654

Net income - - - 413,612 413,612

Balance at March 31, 2024 57,317,025 $ 5,732 $ 78,869,430 $ ( 118,378,091 ) $ ( 39,502,929 )

( 43,348,533 )

( 9,915,302 )

Stock-based compensation

( 3,356,956 )

Balance at June 30, 2022

$ ( 46,705,489 )

$ ( 13,083,601 )

Cancellation and exchange of convertible note in connection with reverse capitalization

Conversion of Series A preferred stock in connection with reverse recapitalization

Conversion of Series B preferred stock in connection with reverse recapitalization

Reverse recapitalization with Cleantech Acquisition Corp, net

Earnout shares placed in escrow

Issuance of common stock for PIPE Investment

Equity issuance costs

( 12,582,000 )

Stock-based compensation

( 13,176,497 )

Balance at September 30, 2022

$ ( 59,881,986 )

Balance at December 31, 2022 47,250,771 $ 4,725 $ 68,128,196 $ ( 68,105,102 ) $ 27,819

$ ( 68,105,102 )

Stock-based compensation - - 1,214,863 - 1,214,863

Exercise of stock options 30,504 3 59,187 - 59,190

( 14,138,665 )

Net loss - - - ( 14,138,665 ) ( 14,138,665 )

Balance at March 31, 2023 47,281,275 $ 4,728 $ 69,402,246 $ ( 82,243,767 ) $ ( 12,836,793 )

$ ( 82,243,767 )

$ ( 12,836,794 )

Stock-based compensation

Exercise of stock options

Exercise of warrants

Exercise of RSUs

Balance at June 30, 2023

$ ( 61,570,327 )

Stock-based compensation

Settlement of liquidated damages

Exercise of stock options

Exercise of RSUs

( 17,678,787 )

Balance at September 30, 2023

$ ( 79,249,114 )

$ ( 2,676,314 )

The accompanying notes are an integral part

of these condensed consolidated financial statements.

The accompanying notes are an integral part of these condensed consolidated financial statements.

NAUTICUS ROBOTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended

September 30,

Three months ended March 31,

Cash flows from operating activities:

$ ( 11,144,012 )

$ ( 20,037,455 )

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

Accretion of debt discount

Net income (loss) $ 413,612 $ ( 14,138,665 )

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

Depreciation 426,185 273,099

Amortization of debt discount 1,159,596 907,865

Amortization of debt issuance cost 142,821 -

Accretion of RCB Equities #1, LLC exit fee 24,212 -

Stock-based compensation 530,655 1,214,863

Loss on exchange of warrants

Change in fair value of warrant liabilities ( 8,309,623 ) 2,236,904

( 18,775,158 )

Noncash impact of lease accounting

Interest and legal expenses assumed into Bridge Note

Non-cash impact of lease accounting 115,778 60,819

Gain on disposal of assets ( 4,231 ) -

Gain on lease termination ( 15,365 ) -

Gain on short-term investments - ( 40,737 )

Changes in operating assets and liabilities:

Accounts receivable 55,101 ( 1,012,210 )

( 7,293,478 )

( 5,558,996 )

Inventories ( 15,930 ) ( 4,346,657 )

Contract assets - 249,964

( 4,817,187 )

Other assets 1,196,413 ( 328,609 )

Accounts payable and accrued liabilities ( 22,133 ) 6,193,155

( 9,013,681 )

Contract liabilities ( 2,289,834 ) -

Operating lease liabilities ( 67,539 ) ( 143,729 )

Net cash from operating activities

( 16,435,894 )

( 31,534,544 )

Net cash used in operating activities ( 6,660,282 ) ( 8,873,938 )

Cash flows from investing activities:

Capital expenditures ( 324,147 ) ( 1,493,978 )

( 10,745,111 )

( 6,805,648 )

Proceeds from sale of assets held for sale 384,708 -

Proceeds from sale of property and equipment 7,921 -

Proceeds from sale of short-term investments - 5,000,000

Net cash from investing activities 68,482 3,506,022

( 5,785,848 )

( 6,805,648 )

Cash flows from financing activities:

Proceeds from notes payable 13,305,000 -

Payment of debt issuance costs on notes payable ( 1,279,291 ) -

Proceeds from exercise of stock options - 59,190

Payments of note payable

( 17,850,333 )

Proceeds from reverse recapitalization with CleanTech Acquisition Corp, net

Proceeds from exercise of warrants

Proceeds from issuance of common stock for Pipe Investment

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

Payment of transaction costs on equity funding

( 12,582,000 )

Net cash from financing activities 12,025,709 59,190

Net change in cash and cash equivalents 5,433,909 ( 5,308,726 )

( 11,015,628 )

Cash and cash equivalents, beginning of period 753,398 17,787,159

4 unchanged sentences

Non-cash investing and financing activities:

Capital expenditures included in accounts payable

Capitalized interest $ - $ 234,985

Operating leases at inception $ 1,185,119 $ -

Settlement of liquidated damages with common stock

Conversion of convertible debt and interest expense to common stock

Conversion of Series A preferred stock in connection with reverse recapitalization

Conversion of Series B preferred stock in connection with reverse recapitalization

Private and Public Warrant Liabilities assumed in reverse recapitalization

The accompanying notes are an integral part

of these condensed consolidated financial statements.

Exercise of warrants $ 1,339,654 $ -

Liabilities relieved through sale of asset held for sale $ 1,158,609 $ -

Transfer from assets held for sale to property and equipment $ 55,642 $ -

The accompanying notes are an integral part of these condensed consolidated financial statements.

NAUTICUS ROBOTICS, INC.

2 unchanged sentences

Nauticus Robotics, Inc.

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

delivered in a modern business model to the ocean industry.

We were initially incorporated as CleanTech Acquisition Corp.

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

(the “Company”, “our”, "us" or “we”) develops autonomous robots for the ocean industries.

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

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

business model and direct product sales for both hardware platforms and software licenses.

Besides a standalone service offering and forward-facing

products, our approach to ocean robotics has also resulted in the development of a range of technology products for retrofitting/upgrading

legacy systems and other 3 rd party vehicle platforms.

Our services provide customers with the necessary data collection, analytics,

and subsea manipulation capabilities to support and maintain assets while reducing their operational footprint, operating cost, and greenhouse

gas emissions, and to improve offshore health, safety, and environmental exposure.

Business Combination – On September 9, 2022

(the “Closing Date”), the Company (prior to the Closing Date, CLAQ) consummated its initial business combination (the “Closing”)

pursuant to that certain Agreement and Plan of Merger, dated as of December 16, 2021 (as amended, the “Merger Agreement,”

and together with any other agreements and transactions contemplated by the Merger Agreement, the “Business Combination”),

with CleanTech Merger Sub, Inc., a Texas corporation and wholly owned subsidiary of CLAQ (“Merger Sub”), and Nauticus Robotics

Holdings, Inc.

(prior to the Closing Date, “Nauticus Robotics, Inc.”), a Texas corporation (“Nauticus Robotics Holdings”).

Pursuant to the terms of the Merger Agreement, a business combination between CLAQ and Nauticus Robotics Holdings was affected through

the merger of Merger Sub with and into Nauticus Robotics Holdings, with Nauticus Robotics Holdings surviving the merger as a wholly owned

subsidiary of CLAQ.

On the Closing Date, CLAQ was renamed “Nauticus Robotics, Inc.” and the 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 (“Nauticus Convertible Notes Conversion”);

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 (defined below).

Shares issued at Closing are 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 Robotics Holdings, Inc.

Common Stock are

entitled to receive their pro rata share of up to 7,499,993 additional Earnout Shares of Common Stock that were issued and are held in

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

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

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

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

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Investment”), consisting of:

● immediately prior to the Closing, the issuance to certain investors of 3,100,000 shares of Common Stock, for a purchase price of $ 10.00 per share, and an aggregate purchase price of $ 31 million (the “Equity Financing”);

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

The fair value of the Original SPA Warrants was estimated to be $ 20,949,110 using a Monte Carlo valuation model incorporating future projections of the various potential outcomes and any exercise price adjustments based on future financing events.

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

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

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

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

See Note 12 for additional information regarding the SPA Warrants.

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 .

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 Business Combination and Equity Financing, which primarily consisted of investment banking, legal, accounting, and other professional

Impact of COVID-19 Pandemic on Business

– The global spread of COVID-19 and its variants (e.g., the omicron variant) created significant market volatility,

economic uncertainty, and disruption during 2021 and 2022 and continuing into 2023.

The Company was adversely affected by the deterioration

and increased uncertainty in the macroeconomic outlook as a result of the impact of COVID-19.

We have experienced and may continue to

experience disruptions in our supply chain, due in part to the global impact of the COVID-19 pandemic.

Depending upon the duration, including

the extent of any residual or further effects, of COVID-19 pandemic-related business interruptions, our customers, suppliers, manufacturers,

and partners may suspend or delay their engagements with us, which could result in a material adverse effect on our financial condition

and ability to meet current timelines.

In addition, the COVID-19 pandemic has affected and may continue to affect our ability to recruit

skilled employees to join our team.

The conditions caused by the COVID-19 pandemic have adversely affected and may continue to adversely

affect, among other things, demand for our products and the ability to test and assess our robotic systems with potential customers, any

of which, in turn, could adversely affect our business, results of operations and financial condition.

Any further or future impacts of

COVID-19 or of another pandemic, epidemic or outbreak of an infectious disease cannot be accurately predicted at this time, and the ultimate

direct and indirect impacts on our business, results of operations, and financial condition will depend on future developments that are

highly uncertain.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Liquidity – Total cash and cash equivalents on

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

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

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

thereof to continue financing its operations.

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

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

The cost savings that will be realized

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

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

million from the issuance of debt.

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

and debt funding, the Company anticipates having sufficient funds to meet its obligations for at least one year from the issuance date

of this Form 10-Q.

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

Summary of Significant Accounting Policies

Basis of Presentation – The accompanying condensed

consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the U.S.

and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments (consisting of normal, recurring

adjustments, unless otherwise disclosed) necessary for a fair statement of the condensed consolidated results of operations, financial

position, cash flows and changes in stockholders’ equity (deficit) for each period presented.

All intercompany balances and transactions

have been eliminated in preparation of these condensed consolidated financial statements.

The condensed consolidated results for the interim

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

The 2022 year-end consolidated balance sheet was derived

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

These financial statements should be read in

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

Nauticus’ robotic systems and services are designed to address both commercial and government-facing customers.

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, 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.

Liquidity – The Company continues to develop its principal products and conduct research and development activities.

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, which a current investor has committed to provide.

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 condensed consolidated financial statements contained in this Form 10-Q are issued.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are discussed in Note 1 to Nauticus Robotics, Inc.’s consolidated financial

statements included in its Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2022.

There have been no significant

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

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

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.

Basis of Presentation – The accompanying condensed consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the U.S.

Securities and Exchange Commission (“SEC”) and, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments, unless otherwise disclosed) necessary for a fair statement of the condensed consolidated results of operations, financial position, cash flows and changes in stockholders’ deficit for each period presented.

All intercompany balances and transactions have been eliminated in preparation of these condensed consolidated financial statements.

The condensed consolidated results for the interim periods are not necessarily indicative of results to be expected for the full year.

The 2023 year-end consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP.

These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Summary of Significant Accounting Policies – The Company’s significant accounting policies are discussed in Note 1 to Nauticus Robotics, Inc.’s consolidated financial statements included in its Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2023.

There have been no significant changes to these policies which have had a material impact on the Company’s interim unaudited condensed consolidated financial statements and related notes during the three months ended March 31, 2024.

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.

Restricted Certificates of Deposit — The Company

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

against corporate credit cards.

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

was required to collateralize a letter of credit.

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 March 31, 2024 and December 31, 2023.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Short-term Investments – Short-term investments

on December 31, 2022, include an investment in a US Treasury Bill that matured on March 14, 2023.

The original maturity for this investment

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

On March 14, 2023,

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

under cash flows from investing activities.

Revenue – Our primary sources of revenue

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 for the three and nine months ended

September 30, 2023 and 2022, respectively.

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

goods or services to a customer.

For all contracts, we assess if there are multiple promises that should be accounted for as separate

performance obligations or combined into a single performance obligation.

We generally separate multiple promises in a contract as separate

performance obligations if those promises are distinct, both individually and in the context of the contract.

If multiple promises in

a contract are highly interrelated or require significant integration or customization within a group, they are combined and accounted

for as a single performance obligation.

Our performance obligations under service agreements generally are

satisfied over time as the service is provided.

Revenue under these contracts is recognized over time using an input measure of progress

(typically costs incurred to date relative to total estimated costs at completion).

This requires management to make significant estimates

and assumptions to estimate contract sales and costs associated with its contracts with customers.

At the outset of a long-term contract,

the Company identifies risks to the achievement of the technical, schedule and cost aspects of the contract.

Throughout the contract term,

on at least a quarterly basis, we monitor and assess the effects of those risks on its estimates of sales and total costs to complete

the contract.

Changes in these estimates could have a material effect on our results of operations.

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

potentially resulting in lower-than-expected contract profits and margins.

This risk is generally lower for cost plus fixed fee contracts

which, as a result, generally have a lower margin.

Performance obligations for product sales are typically satisfied at

a point in time.

This occurs when control of the products is transferred to the customer, which generally is when title and risk of loss

have passed to the customer.

Inventories – Inventories include raw materials

and work in progress used in the construction and installation of a portfolio of ocean robotics systems technology products that include

the Aquanaut and Olympic Arm.

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

and electrical components.

Work in progress inventories consist of raw materials and labor for construction of projects.

Inventories are

stated at the lower of cost or net realizable value.

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

The Company periodically

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

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

net realizable value.

Restricted Certificates of Deposit – The Company has restricted certificate of deposits of $ 50,706 and $ 201,822 , held by a bank on our behalf as of March 31, 2024 and December 31, 2023, respectively.

The restricted certificate of deposit at March 31, 2024, relates to a guarantee against corporate credit cards.

$ 150,000 of the balance at December 31, 2023 relates to a certificate of deposit required to collateralize a letter of credit which was released in the first quarter of 2024, with the remainder relating to a guarantee against corporate credit cards.

Short-term Investments – On March 14, 2023, the Company received proceeds of $ 5,000,000 from the maturity of a short-term investment in a US Treasury Bill.

The gain on the investment of $ 40,737 is included in other expense (income) on the condensed consolidated statements of operations for the three months ended March 31, 2023.

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 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.

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's accounts receivables are primarily derived from the provision of services to our 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.

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 as income in the year of recovery and as a reduction to the allowance, in accordance with the entity’s accounting policy election.

Assets Held For Sale ("AHFS") - 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.

AHFS 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.

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.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 for the three months ended March 31, 2024 and 2023, 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, consequently, often have a lower margin.

Inventories – The inventories of Olympic Arms comprise raw materials, work in progress, and finished goods, as applicable, and are valued 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 condensed consolidated statement of operations.

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:

September 30,

2024 December 31,

Raw material and supplies $ 897,880 $ 898,335

2 unchanged sentences

Total inventories $ 2,214,726 $ 2,198,797

Leases – The Company’s lease arrangements

are operating leases which are capitalized on the balance sheet as right-of-use (“ROU”) assets and obligations.

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.

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

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.

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

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 September 30, 2023, and December 31, 2022.

Foreign Currency Gains and Losses – Nauticus purchases

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

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

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

are included in other (income) expense.

Common Stock Warrants – We account for common

stock warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific

terms and applicable authoritative guidance.

This assessment considers whether the warrants are freestanding financial instruments, meet

the definition of a liability or requirements for equity classification, including whether the warrants are indexed to the Company’s

Common Stock, among other conditions for equity classification.

This assessment, which requires the use of professional judgment, is conducted

at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.

The Company had no material uncertain income tax positions as of March 31, 2024, and December 31, 2023.

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 $ 5,147 of foreign currency transaction losses and $ 9,884 of foreign currency transaction gains for the three months ended March 31, 2024 and 2023, respectively.

Common Stock Warrants – We account for common stock warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance.

This assessment considers whether the warrants are freestanding financial instruments, meet the definition of a liability or requirements for equity classification, including whether the warrants are indexed to the Company’s Common Stock, among other conditions for equity classification.

This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.

We have determined that the Public and Private warrants should be accounted for as liabilities.

The Private Warrants and Public Warrants were initially recorded at their estimated fair value.

They are then revalued at each reporting date thereafter, with changes in the fair value reported in the condensed 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 and are then revalued at each reporting date thereafter, with changes in the fair value reported in the condensed 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.

The fair value of the Original SPA Warrants was estimated using a Black-Scholes option pricing model (a Level 3 measurement).

The Earnout Shares will be released upon the

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 condensed consolidated statements of operations.

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

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

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

Derivative warrant

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

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

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

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

Earnout Shares – Earnout Shares, issuable to former

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 five years of the Closing Date.

The Earnout Shares are considered legally issued and outstanding shares of

Common Stock subject to restrictions on transfer and potential forfeiture pending the achievement of the earnout targets.

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.

occurrence of a triggering event within 5 years of the issue date (see Note 11, "Equity").

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

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

During the nine

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

and property and equipment, respectively.

Major Customer and Concentration of Credit Risk – We

have a limited number of customers.

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

and 99 % of total revenue, respectively.

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

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

respectively.

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

No other customer

represented more than 10 % of our revenue.

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 three months ended March 31, 2023, the Company capitalized interest totaling $ 234,985 , of which $ 95,886 and $ 139,099 related to inventory and property and equipment, respectively.

The Company did not capitalize interest during the three months ended March 31, 2024.

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 three months ended March 31, 2024, sales to two customers accounted for 100 % of total revenue.

The total balance due from these customers as of March 31, 2024, comprised 69 % of accounts receivable.

During the three months ended March 31, 2023, sales to two customers accounted for 99 % of total revenue.

The total balances due from these customers as of December 31, 2023, made up 68 % of accounts receivable, with the remaining 32 % due from one other customer.

No other customer represented more than 10% of our revenue.

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

Reclassifications – Financial statements presented

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

Recent Accounting Pronouncements – In September

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 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, 2023, and there was no impact on its financial position, results of operations

and cash flows upon adoption.

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 condensed consolidated financial statements for these changes.

Accounting Standards Issued but not adopted as of March 31, 2024 - In November of 2023, 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 condensed 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 condensed consolidated financial statements.

There are no other new accounting pronouncements that are expected to have a material impact on our condensed consolidated financial statements.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

There are no other new accounting pronouncements that are expected

to have a material impact on our condensed consolidated financial statements.

The following table presents the components of our revenue:

Three months ended

Nine months ended

September 30,

Cost plus fixed fee $ 214,414 $ 1,949,509

Firm fixed-price 249,940 871,271

Firm fixed-price-vehicle lease

Our performance obligations under service agreements are generally

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

Contract Balances – Accounts receivable, net as

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

to nine months.

Total $ 464,354 $ 2,820,780

Our performance obligations under service agreements are generally satisfied over time as the service is provided and, therefore, all revenue above has been recognized over time.

Contract Balances – Accounts receivable, net as of March 31, 2024, totaled $ 157,327 due from customers for contract billings and is expected to be collected within the next three to six months.

As of December 31, 2023, accounts receivable, net totaled $ 212,428 .

The decrease in accounts receivable as of September

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

As of September 30, 2023,

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

Bad debt expense was $ 0 for the

three and nine months ended September 30, 2023.

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

September 30, 2022.

Contract assets include unbilled amounts typically resulting from sales

under contracts when the cost-to-cost method of revenue recognition is utilized, and revenue recognized exceeds the amount billed to the

As of March 31, 2024, and December 31, 2023, allowances for doubtful accounts included in accounts receivable totaled $ 0 .

Bad debt expense was $ 39 and $ 0 for the three months ended March 31, 2024 and 2023.

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.

The Company had $ 26,712 of contract assets

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

Contract assets decreased $ 547,183 in the first nine months of 2023, primarily

due to the timing of the billing for the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations.

Contract liabilities include billings in excess of revenue recognized

and accrual of certain contract obligations.

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

31, 2022, respectively.

Unfulfilled Performance Obligations – As

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

from existing contracts with customers.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the expected revenue from our unfilled

performance obligations as of September 30, 2023:

Contract assets were $ 0 at March 31, 2024 and December 31, 2023.

Contract liabilities include billings in excess of revenue recognized and accruals for certain contract obligations.

The Company had contract liabilities at March 31, 2024 and December 31, 2023 of $ 478,079 and $ 2,767,913 , respectively, which includes costs accrued for an ongoing contract expected to be loss making.

The loss on contract was reported on the consolidated income statement in the fourth quarter of the year ended December 31, 2023.

The decrease in contract liabilities at March 31, 2024 is primarily attributable to costs incurred on the loss making contract in the first quarter of 2024 being offset against the accrual.

Unfulfilled Performance Obligations – As of March 31, 2024, we expect to recognize approximately $ 1,090,000 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 March 31, 2024:

Expected Revenue from Unfulfilled Performance

Obligations by Period

($ in millions)

Unfulfilled performance obligations:

1 unchanged sentence

Total unfulfilled performance obligations $ 1,090,000 $ 1,090,000

If any of our contracts were to be modified or terminated, the expected

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

Prepaid Expenses

Prepaid expenses consisted of the following:

September 30,

If any of our contracts were to be modified or terminated, the expected value of the unfulfilled performance obligations of such contracts would be reduced.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

2024 December 31,

Prepaid material purchases $ 157,953 $ 440,091

1 unchanged sentence

Other prepayments 182,829 166,424

Total prepaid expenses $ 1,579,585 $ 1,889,218

Term loan receivable $ - $ 695,000

Other current assets 316,018 330,214

Total other current assets $ 316,018 $ 1,025,214

1 unchanged sentence

Property and equipment consisted of the following:

September 30,

Life (years) March 31,

2024 December 31,

Leasehold improvements 5 $ 796,136 $ 796,136

Property & equipment

Technology hardware equipment

Less accumulated depreciation

Property & equipment 3 - 5 years

6,315,759 5,906,859

Technology hardware equipment 3 - 5 years

1,899,513 1,907,770

Total 9,011,408 8,610,765

Less accumulated depreciation ( 2,478,158 ) ( 2,035,034 )

Construction in progress 9,325,645 9,329,114

Total property and equipment, net $ 15,858,895 $ 15,904,845

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, the Drix unmanned surface vessel, and other miscellaneous equipment, as AHFS.

At March 31, 2024 property and equipment totaling $ 1,310,832 remains as AHFS with the decrease driven primarily by the sale of Hydronaut vessels 2 and 3 on January 22, 2024, for $ 1,533,609 which included cash of $ 375,000 , combined with the offset of open payable invoices .

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 third quarter of 2024.

NAUTICUS ROBOTICS, INC.

2 unchanged sentences

Accrued liabilities consisted of the following:

September 30,

2024 December 31,

Accrued compensation $ 425,186 $ 618,630

Accrued severance 1,130,217 1,375,000

Accrued professional fees 780,647 1,355,721

2 unchanged sentences

Accrued royalties 287,500 250,000

Accrued interest 1,466,433 -

Accrued AHFS liability - 1,158,609

Accrued lease termination costs 657,000 657,000

Other accrued expenses 13,607 162,697

Total accrued expenses $ 6,500,357 $ 7,339,099

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

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

The accrual is recorded under accrued liabilities of the condensed consolidated

balance sheet.

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 condensed consolidated balance sheet as of March 31, 2024.

The Hydronaut vessels 2 and 3 are reported as AHFS 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 AHFS 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.

Hydronaut vessels 2 and 3 were sold on January 22, 2024, and the AHFS current asset of December 31, 2023 was offset with the AHFS 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 condensed consolidated balance sheet as of December 31, 2023.

Notes Payable

Notes payable consisted of the following:

September 30,

2024 December 31,

Convertible secured debentures $ 36,530,320 $ 36,530,320

Convertible senior secured term loan 25,600,000 12,295,000

Total 62,130,320 48,825,320

debt discount, net ( 15,443,684 ) ( 16,593,357 )

( 18,205,199 )

( 20,608,202 )

current portion

capitalized debt issuance costs ( 1,788,468 ) ( 661,922 )

Senior bridge note exit fee provision 51,820 27,608

Total notes payable – long-term $ 44,949,988 $ 31,597,649

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 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

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.

The debt discount is being accreted to interest expense over the four-year

term of the Debentures.

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

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

The Debentures effective

interest rate is approximately 22.7% .

On September 9, 2022, we issued Debentures, secured debt instruments, which featured a 2 % original issue discount, in an aggregate principal amount of $ 36,530,320 , together with 2,922,425 associated warrants ("Original SPA Warrants"), for gross proceeds of $ 35,800,000 .

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 were convertible 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 protections.

Interest accrued on the outstanding principal amount of the Debentures at 5 % per annum, payable quarterly.

The Debentures were secured by first priority interests, and liens on, all our assets, and are scheduled to mature on the fourth anniversary of the date of issuance, September 9, 2026.

Exchanged Senior Secured Convertible Debenture

On January 30, 2024, the Company and certain of its subsidiaries and ATW Special Situations I LLC ("ATW I") entered into an Amendment and Exchange Agreement (the “Amendment and Exchange Agreement”), pursuant to which ATW I transferred its existing 5 % Original Issue Discount Senior Secured Convertible Debenture to the Company in exchange for a new Original Issue Discount Exchanged Senior Secured Convertible Debenture due September 9, 2026 (the “New Debenture”) in the aggregate principal amount of $ 29,591,600 .

The Amendment and Exchange Agreement provides for certain amendments to the Securities Purchase Agreement dated December 16, 2021, as amended, and contains certain covenants of the Company to, among other items, hold one or more stockholder meetings in respect of the shares of the Company’s common stock underlying the New Debentures and obtain certain voting agreements related thereto.

In addition, on January 30, 2024, the Company and certain of its subsidiaries entered into additional Amendment and Exchange Agreements with Material Impact Fund II, L.P.

(MIF) and SLS Family Irrevocable Trust on substantially similar terms, pursuant to which MIF and SLS Family Irrevocable Trust transferred their existing 5 % Original Issue Discount Senior Secured Convertible Debentures to the Company in exchange for New Debentures in the aggregate principal amount of $ 5,102,000 and $ 1,836,720 , respectively.

The New Debentures provide for, among other items:

(a) an interest rate of 5 % per annum, payable quarterly in shares of the Company’s common stock (if the conditions described therein are met) and/or in cash, at the Company’s option;

(b) conversion by the holder into shares of the Company’s common stock at any time (subject to limitations on conversion described therein);

(c) a conversion price of $ 0.4582 (subject to adjustment as provided therein) with shares of the Company’s common stock issuable on conversion determined by dividing 120 % of the applicable “conversion amount” (as defined in the New Debenture) by the conversion price;

(d) prior to the date of sale of the Company’s common stock (or equivalents) in one or in a series of transactions resulting in net cash proceeds to the Company of at least $ 30 million an alternate conversion price at the lower of (1) $ 0.4582 (subject to adjustment as provided therein) and (2) the greater of a floor price of $ 0.0878 (subject to adjustment as provided therein) and 98 % of the lowest volume-weighted average price ("VWAP") of the Company’s shares of commons stock during the applicable 10 -trading day period (subject to payment in cash if the applicable VWAP calculation is less than the floor price), and an interest conversion rate of 90 % of such alternate conversion price;

and (d) an option by the holder to extend the maturity date by an additional year.

Generally, upon an event of default the outstanding principal, interest, liquidated damages, and other amounts become immediately due and payable in cash (and interest then accrues at 18 % per annum).

The obligations of the Company under the New Debentures are generally secured by all assets of the Company and its subsidiaries, and are generally guaranteed by the Company’s subsidiaries.

The New Debentures include, among other items, representations, warranties, affirmative and negative covenants, certain adjustments (including in respect of stock dividends, stock splits, and subsequent equity sales and rights offerings, pro rata distributions, and fundamental transactions), certain limitations on share issuances (including prior to stockholder approval), optional redemption, liquidated damages, events of default, and remedies, in each case, as further described therein.

As of March 31, 2024 and December 31, 2023, the convertible secured debentures payable was $ 21,086,636 and $ 19,936,963 , respectively, including unamortized debt discount of $ 15,443,684 and $ 16,593,357 , respectively.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

discount is being accreted to interest expense over the four-year term of the Debentures.

Debt discount amortization of $ 1,149,672 was included within interest expense in the condensed consolidated statement of operations for the three months ended March 31, 2024 .

The Debentures effective interest rate was approximately 22.7 % at March 31, 2024 and 25.2 % at March 31, 2023.

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.

On July 14, 2023, the Company issued a secured promissory note to RCB Equities #1, LLC (RCB) for $ 5,000,000 .

The promissory note included a 2.5 % original issue discount or $ 125,000 , interest at 15 % per annum, and was scheduled to mature on September 9, 2026.

The promissory note provided 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 provided for an automatic rollover into the structure of certain future debt-financing transactions.

On September 18, 2023, the RCB promissory note was rolled into the convertible senior secured term loan discussed below bearing interest at 12.5 % per annum including the $ 125,000 exit fee.

Convertible Senior Secured Term Loan

On September 18, 2023, the Company entered into

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

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

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

The Convertible Senior Secured Term Loan Agreement

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

under the Convertible Senior Secured Term Loan Agreement.

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

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

The Convertible Senior Secured Term Loan Agreement

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

quarter commencing April 1, 2024.

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

promissory note.

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

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

The escrow balance will be held for at

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

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

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

Subject to the terms and conditions of the Term

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

then outstanding principal amount of the Loans.

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

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

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

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

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

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

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

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

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

On September 18, 2023, the Company entered into a convertible senior secured term loan agreement, the "2023 Term Loan Agreement", with ATW Special Situations II LLC ("ATW II") as collateral agent (in such capacity, the “Collateral Agent”) and lender, and Transocean Finance Limited, ATW I, MIF, and RCB, as lenders.

The 2023 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 5 days' prior written notice to each Lender.

The initial amount funded under the 2023 Term Loan Agreement was $ 11,600,000 , (the "2023 Term Loan").

The 2023 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 promissory note.

The loan includes assumed legal fees of $ 577,500 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 interest expense over the period of the loan.

The Loans will mature on the earliest of (a) the third anniversary of the date of the 2023 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 2023 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 2023 Term Loan Agreement)) (the “Optional Redemption Amount”) and (y) the product of (i) the aggregate number of shares of the Company’s common stock, par value $ 0.0001 per share (“Common Stock”), then issuable upon conversion of the applicable Optional Redemption Amount (without regard to any limitations on conversion set forth in the 2023 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 2023 Term Loan Agreement.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Loans are convertible, in whole or in part,

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

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

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

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

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

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

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

For leases in which the Company is the lessee

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

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

When a secured borrowing rate is not readily available, unsecured

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

The Company uses the implicit

rate for agreements in which it is a lessor.

First Amendment to Convertible Senior Secured Term Loan

On December 31, 2023, the Company entered into a First Amendment to 2023 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 II which amended that certain 2023 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 I, MIF, and 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 2023 Term Loan and be deemed to be Additional Term Loans for all purposes under the Term Loan Agreement.

The loan assumed debt issuance costs of $ 72,000 which are being amortized to interest expense over the period of the loan.

Second Amendment to convertible Senior Secured Term Loan

On January 30, 2024, the Company entered into a Second Amendment to 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 Term Loan Agreement, dated as of September 18, 2023, by and among the Company, Transocean Finance, ATW I, MIF and RCB as lenders and ATW II, as collateral agent (as succeeded by Acquiom Agency Services LLC).

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 MIF, 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 2023 Term Loan and be deemed to be Additional Term Loans for all purposes under the 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 “2024 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”), MIF, VHG Investments, ATW II and ATW I, as lenders.

The 2024 Term Loan Agreement provides the Company with an aggregate $ 9,551,856 of secured term loans (the "2024 Loans").

Any portion of the outstanding principal amount of the 2024 Loans are prepayable at the Company’s option pro rata to each Lender upon at least 5 days’ prior written notice to each Lender.

The 2024 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 2024 Loans assumed debt issuance costs of $ 1,237,291 which are being amortized to interest expense over the period of the loan.

The 2024 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 2024 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 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 “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”).

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 2024 Loans are convertible, in whole or in part, at the option of each Lender into shares of Common Stock until the date that the 2024 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 $ 0.4582 per share of Common Stock, subject to certain adjustments as described in the 2024 Term Loan Agreement.

As of March 31, 2024 and December 31, 2023, $ 23,863,352 and $ 11,660,686 , respectively, was payable under the 2023 Term Loan, the December 2023 Incremental Loan, the January 2024 Incremental Loan and the 2024 Loans (collectively the "convertible senior term loans") including unamortized debt issuance costs of $ 1,788,468 and $ 661,922 , respectively, and a provision for exit fees of $ 51,820 and $ 27,608 , respectively.

Interest expense for the three months ended March 31, 2024 includes $ 9,924 of debt discount amortization, $ 24,212 provision for exit fees and $ 142,821 amortization of debt issuance costs.

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 and 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

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

The Company’s secured borrowing rate

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

for this lease.

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

space in Scotland.

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

In March 2024, the Company extended the lease on its current office and manufacturing facility for an additional 3 years.

The incremental borrowing rate on this lease of 8 % was used to determine the present value of lease payments and establish the right-of-use asset and lease liability at lease inception for this lease.

In July of 2023, the Company entered into an operating lease for office space in Scotland.

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

Management is reasonably certain to exercise the first

option to extend the lease.

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

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

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

office space in Norway.

The 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.

During the first quarter of 2024 management decided the Company would not extend this lease beyond its initial term and a loss on lease termination of $ 356 was reported under other (income) expense on the condensed consolidated statement of operations.

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 unaudited condensed consolidated statements of operations:

During the first quarter of 2024, the Company agreed with the lessor to reduce the size of the office space leased and a gain on lease termination of $ 15,721 was reported under other (income) expense on the condensed consolidated statement of operations.

The Company’s other operating leases include leases for certain office equipment.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the Company’s lease costs which are included in general and administrative expenses in the unaudited condensed consolidated statements of operations:

Three months ended

Nine months ended

September 30,

Fixed lease expense $ 136,645 $ 102,969

1 unchanged sentence

Total operating lease expense 261,006 111,904

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

The following table presents the balance and classifications of the

Company’s right-of-use assets and lease liabilities included in the unaudited condensed balance sheets:

Balance Sheet Location

September 30,

Operating lease assets

Operating lease right-of-use asset

Operating lease liabilities

Operating lease liabilities - current

Operating lease liabitlies

Operating lease liabilities - long-term

Total lease liabilities

For operating lease assets and liabilities, the weighted average remaining

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

The weighted average discount rate

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

The following table presents the Company’s maturities of lease

liabilities as of September 30, 2023:

Short-term lease expense 20,513 -

Total lease expense $ 281,519 $ 111,904

Cash paid for operating leases was $ 147,116 and $ 92,629 for the three months ended March 31, 2024, and March 31, 2023, respectively.

The following table presents the balance and classifications of the Company’s right-of-use assets and lease liabilities included in the unaudited condensed balance sheets:

2024 December 31,

Operating lease right-of-use assets $ 1,568,705 $ 834,972

Current portion of operating lease liabilities 356,421 244,774

Long-term operating lease liabilities 1,229,219 574,260

Total operating lease liabilities $ 1,585,640 $ 819,034

For operating lease assets and liabilities, the weighted average remaining lease term was 3.9 years and 8.7 years as of March 31, 2024, and December 31, 2023, respectively.

The weighted average discount rate used in the valuation over the remaining lease terms was 12.6 % as of March 31, 2024, and 14.3 % as of December 31, 2023.

The following table presents the Company’s maturities of lease liabilities as of March 31, 2024:

2024 (excluding the three months ended March 31, 2024) $ 366,040

2029 onward -

Total lease payments 1,892,017

Total present value discount ( 306,377 )

( 2,416,801 )

Operating lease liabilities $ 1,585,640

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 condensed consolidated financial

statements with respect to any matters.

Income tax provisions for interim periods are generally based on an

estimated annual effective income tax rate calculated separately from the effect of significant, infrequent, or unusual items related

specifically to interim periods.

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

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

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 condensed consolidated financial statements with respect to any matters.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Common Stock were outstanding as of September 30, 2023.

Earnout Shares - Following the closing of the Business

Combination, former holders of shares of Nauticus Robotics Holdings’ 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 Earnout Shares which are held in escrow.

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

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

Public Warrants – We assumed

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

Each whole Public Warrant entitles

the holder to purchase one share of Common Stock at a price of $ 11.50 , subject to adjustment.

However, no Public Warrants will be exercisable

for cash unless we have an effective and current registration statement covering the shares of Common Stock issuable upon exercise of

the Public Warrants and a current prospectus relating to such shares of Common Stock.

During any period when we shall have failed to maintain

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

on a cashless basis pursuant to an available exemption from registration under the Securities Act.

The Public Warrants expire on the fifth

anniversary of our completion of the Business Combination, or earlier upon redemption or liquidation.

Our Public Warrants are listed on

Nasdaq under the symbol “KITTW”.

We may redeem the outstanding

Public Warrants, in whole and not in part, at a price of $ 0.01 per warrant:

Income tax provisions for interim periods are generally based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent, or unusual items related specifically to interim periods.

No income tax expense was recognized for the three months ended March 31, 2024, or 2023.

The Company has a full valuation allowance against its deferred income tax assets as of March 31, 2024, and December 31, 2023, respectively.

Common Stock – A total of 57,317,025 shares of Common Stock were outstanding as of March 31, 2024.

On December 31, 2023, the Company and ATW I, 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 .

Earnout Shares – Following the closing of the Merger between CleanTech, Merger Sub and Nauticus Robotics Holdings on September 9, 2022, former holders of shares of Nauticus Robotics Holdings’ 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 Earnout Shares which are held in escrow.

The Earnout Shares will be released from escrow upon the occurrence of the following (each a "triggering event"):

one-half of the Earnout Shares will be released if, within a 5 -year period from September 9, 2022, the volume-weighted average price of our Common Stock equals or exceeds $ 15.00 per share over any 20 trading days within a 30 -day trading period;

one-quarter of the Earnout Shares will be released if, within a 5 -year period from September 9, 2022, the volume-weighted average price of our Common Stock equals or exceeds $ 17.50 per share over any 20 trading days within a 30 -day trading period;

one-quarter of the Earnout Shares will be released if, within a 5 -year period from September 9, 2022, 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.

As of March 31, 2024, the Earnout targets have not been achieved, and the Earnout Shares remain in escrow.

Public Warrants – We assumed 8,624,991 Public Warrants on September 9, 2022 which remained outstanding as of March 31, 2024.

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 Stoc k.

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 of September 9, 2022, 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, subject to the terms of the governing warrant agreement, Public Warrants on a cashless basis pursuant to an available exemption from registration under the Securities Act.

The Public Warrants expire on September 9, 2027, or earlier upon redemption or liquidation.

Our Public Warrants are listed on Nasdaq under the symbol “KITTW”.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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,

2 unchanged sentences

• if, and only if, there is a current registration statement in effect with respect to the shares of Common Stock underlying such warrants at the time of redemption and for the entire 30 -day trading period referred to above and continuing each day thereafter until the date of redemption.

If we call the Public

Warrants for redemption as described above, we have the option to require all holders that wish to exercise warrants to do so on a “cashless

The exercise price and number of shares of

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

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

The Public Warrants, which are accounted for

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

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

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

Private Warrants – We assumed 7,175,000 Private

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

Each whole Private Warrant is exercisable for

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

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

of such warrants is not effective) or on a cashless basis, at the holder’s option, and will not be redeemable by us, in each case

so long as the initial purchasers or their affiliates still hold them.

The Private Warrants purchased by CleanTech Investments, LLC are

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

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 condensed consolidated balance sheets, were valued as of March 31, 2024 and December 31, 2023 at $ 251,850 and $ 451,088 , respectively, based on their publicly-traded price.

The gain in value of the Public Warrants during the three months ended March 31, 2024 and 2023, was $ 199,238 and $ 319,247 , respectively, and was reported within other (income) expense in our condensed consolidated statements of operations.

Private Warrants – We assumed 7,175,000 Private Warrants, which are not publicly traded, on September 9, 2022.

These remained outstanding as of March 31, 2024.

Each whole Private Warrant is exercisable for one share of Common Stock at an exercise price of $ 11.50 and is identical in all material respects to the Public Warrants except that the Private Warrants are exercisable for cash (even if a registration statement covering the shares of Common Stock issuable upon exercise of such warrants is not effective) or on a cashless basis, at the holder’s option, and will not be redeemable by us, in each case so long as they are still held by the initial purchasers or their affiliates.

The Private Warrants purchased by CleanTech Investments, LLC are not exercisable after July 14, 2026, as long as Chardan Capital Markets, LLC or any of its related persons beneficially own these Private Warrants.

The Private Warrants, which are accounted for as liabilities in our condensed consolidated balance sheets, were valued as of March 31, 2024 and December 31, 2023 at $ 212,476 and $ 380,531 , respectively.

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

stock price of $ 0.32 , no assumed dividends, a risk-free rate of 4.36 %, implied volatility of 99.9 %, and a remaining term of 3.44 years.

The gain in the value of the Private Warrants during the three months ended March 31, 2024 and 2023, totaled $ 168,055 and $ 281,362 , respectively, and was reported with other (income) expense in our condensed consolidated statements of operations.

SPA Warrants – On September 9, 2022 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

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Private Warrants, which are accounted

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

a Black-Scholes model.

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

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

The change in the

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

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

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

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 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.

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 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 were 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 was 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 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.

The registration statement was filed on August 7, 2023 and was declared effective on September 12, 2023.

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.

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 I 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

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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.

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 condensed

consolidated balance sheets, were valued as of September 30, 2023, at $ 10,969,897 and were estimated using a Monte Carlo valuation model

incorporating future projections of the various potential outcomes and any exercise price adjustments based on future financing events.

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

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

The change in the value of the SPA Warrants during

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

expense in our condensed consolidated statements of operations.

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

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

consolidated statements of operations.

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

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 I, 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 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 .

In March 2024, ATW I exercised 5,700,000 SPA Warrants in exchange for Common Stock.

The Company did no t receive cash in respect of this transaction.

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 condensed consolidated balance sheets, were valued as of March 31, 2024, at $ 8,262,577 and as of December 31, 2023 at $ 17,544,561 .

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

stock price of $ 0.32 , no assumed dividends, implied volatility of 99.9 %, and a remaining term of 8.5 years.

The change in value of the SPA Warrants during the three months ended March 31, 2024 and 2023, was a gain of $ 7,942,330 and a loss of $ 2,837,513 , respectively, and was reported with other (income) expense in our condensed consolidated statements of operations.

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, restricted stock units (“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 September 30, 2023, 7,789,663 equity units were available for future issuance under

the Omnibus Incentive Plan.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

At the Closing Date of the Business Combination, Nauticus Robotics

Holdings, Inc.

had 279,464 options outstanding for the purchase of its Common Stock.

Such options were originally issued under the 2015

Equity Incentive Plan (the “2015 Plan”) historically maintained by Nauticus Robotics Holdings, Inc.

The outstanding options

were converted into 3,970,266 options to purchase shares of our Common Stock.

Outstanding 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.

options are forfeited upon termination of employment.

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

remained available to purchase shares of our Common Stock.

Compensation expense for stock option grants is recognized based on

the fair value at the date of grant using the Black-Scholes option pricing model.

Stock-based compensation expense, which relates to options originally

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

and administrative expense.

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

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

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

a remaining weighted average period of 1.91 years.

The following table summarizes options outstanding, as well as activity

for the periods presented (prior year amounts have been converted using the conversion ratio of 14.2069 applied in the Business Combination):

Outstanding as of December 31, 2021

Outstanding as of September 30, 2022

Outstanding as of December 31, 2022

Outstanding as of September 30, 2023

The remaining weighted average contractual life of exercisable options

as of September 30, 2023, was 5.71 years.

The total intrinsic value of all options exercised during the nine

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

The intrinsic value of all options outstanding as of September

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

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

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

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

The tax benefit realized from stock-based compensation

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

Realization of this amount is dependent on the

generation of future taxable income.

Incentive Plans – During 2022, RSUs were granted

to certain of our key executives, employees, and non-employee directors.

Each RSU is a notional amount that represents the right to receive

one share of Common Stock of the Company if and when the RSU vests.

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

Employee RSU grants are time-based and vest equally

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

Non-employee director RSU grants are time-based and

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

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

Executive RSU grants issued as executive sign-on

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

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

restricted stock units (“PRSUs”) were made to members of the senior executive management team.

Each PRSU is a notional amount

that represents the right to receive one share of Common Stock if and when the applicable PRSU performance period is measured and the

settled PRSU vests.

PRSU participants may earn between 0 % and 150 % of the target PRSUs granted based on the attainment of performance

conditions connected to the Company’s 2022 revenues.

The PRSUs earned will vest 50 % on December 31, 2023, and 50 % on December 31,

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

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

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

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

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 RSU and PRSU activity for the first

nine months of 2023:

Outstanding as of December 31, 2022

Outstanding as of September 30, 2023

The remaining weighted average contractual life of RSUs granted as

of September 30, 2023, was 1.37 years.

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

rights unless the subject 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.

The RSU grants in 2022 were subject only to vesting conditioned on continued employment or service as a nonemployee

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

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock-based compensation expense attributable to PRSUs under the Omnibus

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

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

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

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

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

life of 1.37 years.

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

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

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

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

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, restricted stock units (“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.

During the three months ended March 31, 2024, 8,197,428 RSUs were granted with a weighted-average grant-date fair value of $ 0.33 .

As of March 31, 2024, 8,646,527 equity units remained outstanding.

At September 9, 2022, 279,464 options originally issued under the 2015 Equity Incentive Plan were converted into 3,970,266 options to purchase shares of our Common Stock.

As of March 31, 2024, 2,555,470 options remained outstanding.

Total stock-based compensation expense including options, PRSUs, and RSUs for the three months ended March 31, 2024 and 2023, net of forfeiture adjustments, totaled $ 530,655 and $ 1,214,863 , respectively.

Employee Benefit Plan

Nauticus offers a 401(k) plan which permits eligible employees to contribute

portions of their compensation to an investment trust.

The Company makes contributions to the plan totaling 3 % of employees’

gross salaries and such contributions vest immediately.

The 401(k) plan provides several investment options, for which the employee

has sole investment discretion.

The Company’s cost for the 401(k) plan was $ 103,446 and $ 262,952 for the three and nine months

ended September 30, 2023, respectively.

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

ended September 30, 2022, respectively.

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 $ 55,003 and $ 117,342 for the three months ended March 31, 2024 and 2023, respectively.

Related Party Transactions

PIPE Investment and Securities Purchase Agreement

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

Fund II, L.P.

(“Material Impact”) as their contribution to the PIPE Investment, (ii) $7,500,000 from related party Schlumberger

Technology Corporation as their contribution to the PIPE Investment, (iii) $7,500,000 from related party Transocean Ltd.

as their contribution

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

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

Impact pursuant to the Securities Purchase Agreement.

ATW, Material Impact and SLS Family Irrevocable Trust currently hold

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

quarterly, and mature on September 9, 2026.

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

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

Convertible Senior Secured Term Loan –

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

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

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

See “Financial Statements – Note 7 Notes Payable

for additional information.

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

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

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

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

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

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

in the RRA) of the Initial Registration Statement.

See Note 12 for more information.

Letter Agreements – On June 22, 2023, the Company

entered into Letter Agreements with ATW, 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.

SPA Warrants – The SPA Warrants are held by related parties ATW I, MIF and SLS Family Irrevocable Trust (see Note 12 – Warrants).

In March 2024, ATW exercised 5,700,000 SPA Warrants in exchange for Common Stock.

Convertible Secured Debentures – On January 30, 2024, the Company and certain of its subsidiaries and ATW I entered into an Amendment and Exchange Agreement (the “Amendment and Exchange Agreement”), pursuant to which ATW I transferred its existing 5 % Original Issue Discount Senior Secured Convertible Debenture to the Company in exchange for a new Original Issue Discount Exchanged Senior Secured Convertible Debenture due September 9, 2026 (the “New

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED 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

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

The exchange warrants were

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

Revenue and Accounts Receivable – Revenue from

Transocean Ltd.

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

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

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

Debenture”) in the aggregate principal amount of $ 29,591,600 .

In addition, on January 30, 2024, the Company and certain of its subsidiaries entered into additional Amendment and Exchange Agreements with MIF and SLS Family Irrevocable Trust on substantially similar terms, pursuant to which MIF and SLS Family Irrevocable Trust transferred their existing 5 % Original Issue Discount Senior Secured Convertible Debentures to the Company in exchange for New Debentures in the aggregate principal amount of $ 5,102,000 and $ 1,836,720 , respectively.

(see Note 7, “Notes Payable”).

For the three months ended March 31, 2024, interest payable to ATW, MIF, and SLS Family Irrevocable Trust was $ 369,895 , $ 63,775 and $ 22,959 respectively.

For the three months ended March 31, 2023 interest payable to ATW, MIF, and SLS Family Irrevocable Trust was $ 369,895 , $ 65,192 a nd $ 22,959 re spectively.

Convertible Senior Secured Term Loans – In the third quarter of 2023, the Company entered into a convertible senior secured term loan with related parties ATW II, ATW I, MIF and other non-related party lenders.

The loan was subsequently amended in the fourth quarter of 2023 and the first quarter of 2024 (see Note 7, “Notes Payable”).

On January 30, 2024, the Company also entered into the 2024 Term Loan Agreement with related parties ATW Management, as collateral agent and lender, and ATW III, ATW II, ATW I, MIF and another non-related party lenders.

The principal amounts outstanding on the convertible senior term loans to related parties ATW I, ATW II, ATW III and MIF at March 31, 2024 were $ 1,933,362 , $ 5,666,638 , $ 1,000,000 and $ 4,000,000 , respectively.

For the three months ended March 31, 2024, interest payable to ATW I, ATW II, ATW III and MIF was $ 58,609 , $ 140,514 , $ 25,000 and $ 102,083 , respectively.

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 for the three months ended March 31, 2024 was $ 220,000 and accounts payable included $ 102,824 and $ 95,177 due to Flexible Consulting, LLC at March 31, 2024 and December 31, 2023, respectively.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Earnings (Loss) Per Share

Following is the computation of earnings (loss) per basic and diluted

The following table is the basic and diluted earnings (loss) per share computation:

Three months ended

Nine months ended

September 30,

Net earnings (loss)

$ ( 17,678,787 )

$ ( 13,176,497 )

$ ( 11,144,012 )

$ ( 20,037,455 )

deemed dividend for Earnout Shares

( 4,957,366 )

Net earnings (loss) attributable to common stockholders

$ ( 17,678,787 )

$ ( 18,133,863 )

$ ( 11,144,012 )

$ ( 24,994,821 )

Net income (loss) for basic earnings per share $ 413,612 $ ( 14,138,665 )

Adjustments to net income (loss) available to shareholders

Change in fair value of SPA warrant liabilities ( 7,942,330 ) -

Adjusted net loss for diluted earnings per share $ ( 7,528,718 ) $ ( 14,138,665 )

Weighted average shares used to compute basic EPS 44,635,720 39,765,361

Basic and diluted earnings (loss) per share

Dilutive effect of:

Restricted and performance stock units 434,562 -

SPA Warrants 21,672,526 -

Weighted average shares used to compute diluted EPS 66,742,808 39,765,361

Basic earnings (loss) per share $ 0.01 $ ( 0.36 )

Diluted loss per share $ ( 0.11 ) $ ( 0.36 )

Anti-dilutive securities excluded from shares outstanding:

1 unchanged sentence

Restricted and performance stock units 4,624,496 3,169,269

Warrants 15,800,000 18,722,425

Earnout shares 7,499,993 7,499,993

Convertible debt 119,192,018 2,922,425

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Total 149,671,977 35,786,241

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:

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

Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets;

The Company measures and reports certain financial and non-financial assets and liabilities on a fair value basis.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The three levels related to fair value measurements are as follows:

Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets;

quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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, accrued expenses, and indebtedness with unrelated parties 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.

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The estimated fair values of accounts receivable, contract assets, accounts payable, accrued expenses, and indebtedness with unrelated parties 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

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 the periods presented:

Fair Value as of September 30, 2023

Carrying Value

The Company’s non-financial assets measured at fair value on a recurring basis include Public, Private and SPA Warrants.

The Private and SPA Warrants 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 the periods presented:

Fair Value as of March 31, 2024

Carrying Value Level 1 Level 2 Level 3

Financial liabilities:

2 unchanged sentences

Warrant liability - SPA Warrants 8,262,577 - - 8,262,577

NAUTICUS ROBOTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

of the Company’s financial liabilities:

Total $ 8,726,903 $ 251,850 $ - $ 8,475,053

The following table sets forth a summary of the changes in fair value of the Company’s financial liabilities:

Balance, December 31, 2023 $ 18,376,180

Loss on exchange of warrants

Exercise of warrants ( 1,339,654 )

Change in fair value of warrant liabilities ( 8,309,623 )

( 18,775,158 )

Balance, September 30, 2023

Balance, March 31, 2024 $ 8,726,903

Subsequent Events

Merger Agreement with 3D at Depth

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

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

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

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

Pursuant to the Merger Agreement, and upon the terms

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

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

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

The board of directors

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

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

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

The consideration

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

The “Per Share Equity Consideration” means, with respect

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

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

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

to be $ 2.04 .

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

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

and outstanding as of immediately prior to the Effective Time.

Closing of the transaction contemplated by the Merger Agreement is

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

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

On May 1, 2024, the Company entered into an amendment (the "Amendment") to the 2024 Term Loan Agreement dated January 30, 2024 between the Company, ATW Management, as collateral agent, and the lenders party thereto.

Pursuant to the Amendment, ATW III, one of the lenders under the 2024 Term Loan Agreement, will loan an additional $ 1,000,000 (the "2024 Incremental Loan") to the Company, as previously described in the Company's Current Report on Form 8-K filed with the Securities Exchange Commission on February 5, 2024.

The Incremental Loan will have the same terms as the Term Loan Agreement and will mature on 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.

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

What changed 10-Q

Item 1. Financial Statements