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Item 7. Management’s Discussion and Analysis

2025-04-15 compared with 2024-04-10 · 68 added, 90 removed, 108 unchanged (59% of the section changed)

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We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

Explanatory Note

On the Closing Date, we consummated the Business Combination with Merger Sub, and Nauticus Robotics Holdings, Inc.

Pursuant to the terms of the Merger Agreement, a business combination between CLAQ and Nauticus Robotics Holdings was effected through the merger of Merger Sub with and into Nauticus Robotics Holdings, with Nauticus Robotics Holdings surviving the merger as a wholly owned subsidiary of CLAQ.

On the Closing Date, CLAQ was renamed “Nauticus Robotics, Inc.” and the Nauticus Robotics Holdings’ predecessor was renamed “Nauticus Robotics Holdings, Inc.”

The Business Combination was accounted for as a reverse recapitalization under GAAP.

Nauticus Robotics Holdings, Inc.

was determined to be the accounting acquirer and CLAQ was treated as the acquired company for financial reporting purposes.

Accordingly, the financial statements of Nauticus represent a continuation of the financial statements of Nauticus Robotics Holdings, Inc.

Nauticus Robotics, Inc.

(the “Company,” “our,” “us” or “we”) is a developer of ocean robots, cloud software and services delivered to the ocean industry.

We were initially incorporated as CleanTech Acquisition Corp.

(“CLAQ”) under the laws of the State of Delaware on June 18, 2020.

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

Our services provide customers with the necessary data collection, analytics, and subsea manipulation capabilities to support and maintain assets while reducing their operational footprint, operating cost, and greenhouse gas emissions, as well as to improve offshore health, safety, and environmental exposure.

Our subsea robotic product, Aquanaut, is a vehicle that begins its mission in a hydrodynamically efficient configuration that enables efficient transit to the worksite (i.e., operating as an autonomous underwater vehicle, or “AUV”).

During transit (operating in survey mode), Aquanaut’s sensor suite provides the capability to observe and inspect subsea assets or other subsea features.

Once it arrives at the worksite, Aquanaut transforms its hull configuration to expose two work-class capable, electric manipulators that can perform dexterous tasks with (supervised), or without (autonomous), direct human involvement.

In this intervention mode, the vehicle has capabilities similar to a conventional remotely operated vehicle (“ROV”).

The ability to operate in both AUV and ROV modes is a quality unique to our subsea robot and is protected under a U.S.

To take advantage of these special configuration qualities, we have developed underwater acoustic communication technology, called Wavelink, our over-the-horizon remote connectivity solution, which removes the need for long umbilicals to connect the robot with topside vessels.

Eliminating these umbilicals and communicating with the robot through acoustic or other latent, laser, or RF methods reduces much of the system infrastructure currently required for ROV servicing operations and is core to our value proposition.

The component technologies that comprise the Aquanaut are also marketable to the existing worldwide ROV fleet.

Aquanaut’s perception and machine learning software technologies combined with its perception and electric manipulators can be retrofitted on existing ROV platforms to improve their ability to perform subsea maintenance activities.

Our key technologies are autonomous platforms, acoustic communications networks, electric manipulators, AI-based perception and control software, and high-definition workspace sensors.

Implementation of these technologies enables operators to reduce costs relative to conventional methods.

(the "Company", "our", "us" or "we") is a technology-driven company specializing in the development of advanced fully electric autonomous robotic solutions for subsea applications.

Our portfolio includes fully autonomous underwater vehicles (AUVs), robotic manipulators, an open robotic operating system, and related consulting and prototype services with a strong alignment to offshore energy and national security interests.

Our technology solutions enable autonomous operations for both the commercial and defense sectors.

Our addressable markets include upstream, midstream, and downstream oil and gas, defense, offshore renewables, seafloor telecommunications, aquaculture, port security, oceanographic research, and subsea mining.

Currently, our primary focus is on oil and gas operations and defense applications.

Basis of Presentation – The Company’s consolidated financial statements have been prepared in accordance with U.S.

The Business Combination was accounted for as a reverse business combination with Nauticus Robotics Holdings, Inc.

as the accounting acquirer and CLAQ as the accounting acquiree.

For the year ended December 31, 2022, our audited consolidated financial statements reflect the financial condition, results of operations, cash flows and changes in stockholders’ equity (deficit) of Nauticus Robotics Holdings for periods until September 9, 2022, the Closing Date of the Business Combination, and the consolidated results of operations, cash flows and changes in stockholders’ equity (deficit) of Nauticus Robotics, Inc.

and its consolidated subsidiary, Nauticus Robotics Holdings for the period from September 10, 2022 through December 31, 2022.

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

Liquidity — Total cash and cash equivalents on hand as of December 31, 2024 was $1,186,047.

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

The Company has incurred recurring losses each year since its inception and currently does not generate sufficient revenue to cover operating expenses, working capital and capital expenditures.

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

Supply chain disruptions instigated production delays and have continued to impact the Company’s ability to deploy its products and realize rental or product sale revenues.

Currently, the Company does not generate sufficient revenue to cover operating expenses, working capital and capital expenditures.

We do not have any commitments for equity funding at this time, and additional funding may not be available to us on favorable terms, if at all.

If additional financing is not raised, it would likely lead to the company reducing discretionary spending and other cost cutting measures.

The Company has embarked on cost-cutting measures to continue to preserve cash.

The Company may require additional liquidity to continue its operations over the next twelve months to sufficiently alleviate or mitigate the conditions and events noted above, which a current investor has committed to the Company, so the Company believes with the support that there will be sufficient resources to continue as a going concern within one year after the date that the consolidated financial statements contained in this Annual Report are issued.

See the sections entitled “Risks Related to Our Business and Industry — Almost all our revenues in 2022 and 2023 were derived from three customers.

A substantial portion of our current revenue is generated by sales to government entities, which are subject to a number of uncertainties, challenges, and risks,” “Risks Related to Our Business and Industry — Our business plans require a significant amount of capital.

The Company currently funds its operations with cash on hand, availability under the November 2024 Debentures (see Note 7 - Notes Payable) and the offer and sale of additional shares of Common Stock under the At The Market Offering Agreement (see Note 18 - Subsequent Events).

The Company may require additional liquidity to continue its operations over the next twelve months, which a current investor has committed to support.

The Company believes that with this investor support there will be sufficient resources to continue as a going concern for at least one year from the date that the consolidated financial statements contained in this Form 10-K are issued.

See the sections entitled “Risks Related to Our Business and Industry — A significant amount of our revenues in 2024 and 2023 was derived from a limited number of customers.

A substantial portion of our current revenue may be generated by sales to government entities, which are subject to a number of uncertainties, challenges, and risks,” “Risks Related to Our Business and Industry — Our business plans require a significant amount of capital.

Our future capital needs may require us to sell additional equity or debt securities that may dilute our stockholders or introduce covenants that may restrict our operations or our ability to pay dividends,” “Risks Related to Our Business and Industry — With our service offering still being commercialized at a large scale, we have limited current customers, and there is no assurance that expected customer demand will result in binding orders or subscriptions,” “Risks Related to Our Business and Industry — If we are successful in commercializing our products and services, our revenue will be concentrated in a limited number of models for the foreseeable future,” “Risks Related to Our Business and Industry — We may be unable to adequately control the costs associated with our operations.”

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Other (income) expense:

Other expense (income), net 627,580 (33,247) 660,827 -1988 %

Other (income) expense, net 110,361 627,580 (517,219) -82 %

Loss on lease termination 18,721 453,162 (434,441) -96 %

Foreign currency transaction loss (gain) 44,020 (260,615) 304,635 -117 %

Foreign currency transaction loss 61,597 44,020 17,577 40 %

Loss on extinguishment of debt 127,605,940 - 127,605,940 100 %

Loss on exchange of warrants - 590,266 (590,266) -100 %

Change in fair value of warrant liabilities (13,559,010) (14,902,427) 1,343,417 -9 %

Change in fair value of New Convertible Debentures (7,989,948) - (7,989,948) 100 %

Change in fair value of November 2024 Debentures

435,864 - 435,864 100 %

Interest expense, net 5,108,227 8,776,277 (3,668,050) -42 %

2 unchanged sentences

For the year ended December 31, 2024 , net revenue decreased by $4,798,880, or 73%, as compared to 2023 .

The decrease in revenue is primarily attributable to the reduction in government contracts in 2023.

The decrease in revenue is primarily attributable to t he reduction in government contracts in 2024.

Cost of revenue.

For the year ended December 31, 2023, cost of revenue increased by $65,069, or 1% as compared to 2022.

The decrease is partially related to the decline in activity offset by increased equipment, facility and direct travel costs.

For the year ended December 31, 2024, cost of revenue decreased by $2,196,726, or 18% as compared to 2023 .

The decrease is primarily attributable to the decline in activity partially offset by costs relating to the commercialization of the Aquanaut vehicle.

Depreciation.

For the year ended December 31, 2023, depreciation increased by $212,463, or 41%, as compared to 2022 primarily due to increased investment in operational assets.

For the year ended December 31, 2024 , depreciation increased by $1,007,416, or 138%, as compared to 2023 primarily due to the increase in property and equipment.

Research and development .

For the year ended December 31, 2024, total research and development expenses decreased by $1,316,710, or 94%, as compared to 2023 .

The decrease was due primarily to the Company meeting technological feasibility on both hardware and software development that has been capitalized throughout fiscal year 2023.

The decrease was due primarily to the Company achieving technological feasibility in both hardware and software development and focusing on bringing its products to market.

General and administrative.

For the year ended December 31, 2023, total general and administrative expenses increased by $3,231,229 or 21% , as compa red to 2022.

General and administrative expenses increased primarily due to an increase in company headcount, sales and marketing expenses, professional fees and other costs associated with being a public company.

For the year ended December 31, 2024 , total general and administrative expenses decreased by $4,901,346 or 27% , as compa red to 2023 .

The decrease was driven by headcount reductions and a concerted effort to reduce costs.

Severance costs for the year ended December 31, 2023 related primarily to the change in management team.

There were no severance costs reported for the year ended December 31, 2024.

Impairment of property and equipment .

For the year ended December 31, 2023, impairment of property and equipment increased by $25,354,791 and related mainly to partial impairment of the Aquanaut vehicles, Olympic Arms and Hydronaut vessels.

The fair value of the Aquanaut Mark 2 vehicles was determined by considering the value of similar vehicles in the market place, commercial invoices, insurable values and a discounted value of future potential cash generation less an estimate of costs to complete vehicles 1 and 3.

The fair value of Hydronaut vessels 2 and 3 was determined based on an offer for sale.

The Drix and Hydronaut 1 assets were valued at marketed sales price.

Olympic Arms 1 – 3 are fully impaired based on no realizable value.

Loss on lease termination .

In December 2023, the Company started negotiations to exit a lease for office space.

An exit fee agreement was reached with the lessor in March 2024, resulting in a loss on lease termination of $453,162.

There were no impairments for the year ended December 31, 2024.

I mpairment of property and equipment for the year ended December 31, 2023 included partial impairments of the Aquanaut vehicles, Olympic Arms and Hydronaut vessels.

Loss on contract.

The Company accrued $2,542,913 of contract liability costs in the year ended December 31, 2023 associated with the expected loss on a current contract.

Change in fair value of warrant liabilities.

For the year ended December 31, 2023, the Company reported a fair value gain of warrant liabilities of $14,902,427 compared to a fair value loss of warrant liabilities of $6,461,087 for the year ended December 31, 2022.

This is driven by the change in mark-to-market value of the SPA warrants and public and private warrants assumed by the Company in the Business Combination.

For the year ended December 31, 2023, contract liability costs of $2,542,913 were accrued associated with the expected loss on a current contract.

There were no contract liability costs reported for the year ended December 31, 2024.

Other expense, net.

For the year ended December 31, 2023, other expense, net increased by $660,827 as compared to 2022.

The increase was mainly driven by a state sales tax assessment of $0.6 million that the Company has reduced from $12 million in the fourth quarter of 2023.

The sales tax audit is currently ongoing and the Company plans to contest the updated estimate from the governmental entity, Texas Comptroller of Public Accounts.

For the year ended December 31, 2024 , other expense, net decreased by $517,219 as compared to 2023.

The year ended December 31, 2023 included an accrual for a state sales tax assessment of $600,000 .

Loss on lease termination .

For the year ended December 31, 2024, a loss on lease termination of $18,721 was reported primarily driven by the early termination of leased office space in Norway.

For the year ended December 31, 2023, the loss on lease termination of $453,162 relates to the exit of office space for which an exit fee arrangement was agreed with the lessor.

Loss on extinguishments of debt.

For the year ended December 31, 2024, loss on the extinguishments of debt of $127,605,940 was reported driven by the Amendment and Exchange Agreement.

See Note 7 "Notes Payable".

Change in fair value of warrant liabilities.

For the years ended December 31, 2024 and 2023, the Company reported a gain in change of fair value of warrant liabilities of $13,559,010 and $14,902,427 respectively.

Change in f air value of New Convertible Debentures.

For the year ended December 31, 2024, a gain on the fair value of the new convertible debentures of $7,989,948 was reported.

Change in fair value of November 2024 Debentures.

For the year ended December 31, 2024, a loss on the fair value of the November 2024 debentures of $435,864 was reported.

Interest expense, net.

For t he year ended December 31, 2023, interest expense, net increased by $5,062,260 as compared to 2022.

Interest expense, net increased primarily due to a settlement for liquidated damages of $3,685,629, net, and an increase in indebtedness entered into by the Company during the third quarter of 2022 and 2023.

For the year ended December 31, 2024, interest expense, net decreased by $(3,668,050) as compared to 2023.

Interest expense, net decreased due to no interest on the New Convertible Debentures or the November 2024 Debentures because this interest was included in the fair value of these instruments.

This was offset by interest on the convertible senior secured term loans which were received in the second half of 2023 and first half of 2024 and debt discount relating to the New Convertible Debentures being fully amortized due to the conversions to Common Stock and Series A Preferred Stock.

Interest expense, net included $4 million associated with liquidated damages and interest arising out of the RRA.

Liquidity and Capital Resources

The Company has incurred recurring losses each year since its inception and currently does not generate sufficient revenue to cover operating expenses, working capital and capital expenditures.

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

The Company currently funds its operations with cash on hand, availability under the November 2024 Debentures (see Item 8, "Financial Statements - Note 7 - Notes Payable") and the offer and sale of additional shares of Common Stock under the At The Market Offering Agreement (see Item 8, "Financial Statements - Note 18 - Subsequent Events").

The Company may require additional liquidity to continue its operations over

the next twelve months, which a current investor has committed to support.

As of December 31, 2024, we had $1,186,047 of cash and cash equivalents.

The cash equivalents consist of demand deposits and money market funds.

The cash equivalents consist of money market funds.

Significant sources and uses of cash during the year ended December 31, 2024.

Sources of cash:

• The Company received net proceeds of $11,248,614 from debt and equity financings and $5,000,000 proceeds from the sale of short-term investments.

• The Company received net proceeds of $24,496,163 from debt and equity financings comprising of additional convertible secured term loans, convertible debentures and an At The Market Offering (see Item 8, "Financial Statements - Note 7 - Notes Payable" and "Note 11 - Equity").

Uses of cash:

• Cash used in operating activities was $21,687,926, of which $3,781,040 was provided by working capital.

Cash used in operating activities varied from operating net loss primarily due to the impairment of property and equipment.

• Capital expenditures were $11,633,153.

• Cash used in operating activities was $24,201,567, of which $2,559,532 was used to increase working capital.

• Cash used in investing activities related to capital expenditures of $501,600 partially offset by proceeds from the sale of Assets Held For Sale of $676,177.

Future sources and uses of cash.

Our capital requirements will depend on many factors, including sales volume, the timing and extent of spending to support R&D efforts, investments in technology, the expansion of sales and marketing activities, and market adoption of new and enhanced products and features.

Our capital requirements will depend on many factors, investments in technology, the expansion of sales and marketing activities, and market adoption of new and enhanced products and features.

To date, our principal sources of liquidity have been proceeds received from the issuance of debt and equity funding and cash flow from our operations.

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

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

Supply chain disruptions instigated production delays and have continued to impact the Company’s ability to deploy its products and realize rental or product sale revenues.

Currently, the Company does not generate sufficient revenue to cover operating expenses, working capital and capital expenditures.

The Company has embarked on cost-cutting measures to continue to preserve cash.

The Company believes with this investor support that there will be sufficient resources to continue as a going concern for at least one year from the date that the consolidated financial statements contained in this Form 10-K are issued.

Indebtedness.

The Company’s indebtedness at December 31, 202 3 is presented in Item 8, “Financial Statements – Note 7 – Notes Payable” and our lease obligations are presented in Item 8, “Financial Statements—Note 8 – Leases.” Also, see Item 8, “Financial Statements – Note 18 – Subsequent Events” for additional information about additional indebtedness incurred by the Company after December 31, 2023.

Recent accounting pronouncements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses , which replaces the existing incurred loss impairment model with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

We adopted this standard on January 1, 2022.

There was no impact from the adoption of this standard on our consolidated financial statements.

The Company’s indebtedness at December 31, 2024 is presented in Item 8, “Financial Statements - Note 7 - Notes Payable” and our lease obligations are presented in Item 8, “Financial Statements - Note 8 - Leases.”

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

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We have determined that the Private Warrants and 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 and are then revalued at each reporting date thereafter, with changes in the fair value reported in the consolidated statements of operations.

The Private Warrants and Public Warrants were initially recorded at their estimated fair value on issuance and are then revalued at each reporting date thereafter, with changes in the fair value reported in the consolidated statements of operations.

Derivative warrant liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date.

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We have determined that the SPA Warrants (defined below) should be accounted for as liabilities.

The SPA Warrants were initially recorded at their estimated fair value on the Closing Date and are then re-valued at each reporting date thereafter, with changes in the fair value reported in the consolidated statements of operations.

At the Closing Date, the SPA Warrants’ fair value 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’ Common Stock, are held in escrow.

The Earnout Shares will be released upon occurrence of a Triggering Event within five years of the Closing Date.

The SPA Warrants were initially recorded at their estimated fair value on issuance and are then re-valued at each reporting date thereafter, with changes in the fair value reported in the consolidated statements of operations.

Derivative warrant liabilities are classified

in the balance sheet as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date.

On issuance, the SPA Warrants’ fair value upon issuance was estimated using a Monte Carlo valuation model (a Level 3 measurement).

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 208,333 Earnout Shares which are held in escrow.

The Earnout Shares will be released upon occurrence of a Triggering Event within five years from September 9, 2022.

The Earnout Shares are considered legally issued and outstanding shares of Common Stock subject to restrictions on transfer and potential forfeiture pending the achievement of the earnout targets.

The Company evaluated the Earnout Shares and concluded that they meet the criteria for equity classification.

The Earnout Shares were classified in

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

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

The Earnout Shares were classified in stockholders’ equity, recognized at fair value upon issuance and will not be subsequently remeasured.

Quantitative and Qualitative Disclosure About Market Risk

1 unchanged sentence

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-K

Item 7. Management’s Discussion and Analysis