Nauticus Robotics, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion is intended to assist you in understanding our results of operations and our present financial condition and contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. We caution you that our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences are discussed elsewhere in this Annual Report on Form 10-K, particularly in the “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors,” all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law. Overview Nauticus Robotics, Inc. (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. GAAP. 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 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 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.” 46 Table of Contents Results of Operations Year Ended December 31, 2024 Compared to Year Ended December 31, 2023 The following table sets forth summarized consolidated financial information: For The Year Ended December 31, Change $ Change % 2024 2023 Revenue: Service $ 1,807,472 $ 6,605,852 $ (4,798,380) -73 % Service - related party - 500 (500) -100 % Total revenue 1,807,472 6,606,352 (4,798,880) -73 % Costs and expenses: Cost of revenue (exclusive of items shown separately below) 9,732,205 11,928,931 (2,196,726) -18 % Depreciation 1,736,828 729,412 1,007,416 138 % Research and development 82,850 1,399,560 (1,316,710) -94 % General and administrative 13,370,486 18,271,832 (4,901,346) -27 % Severance - 1,476,636 (1,476,636) -100 % Impairment of property and equipment - 25,354,791 (25,354,791) -100 % Loss on contract - 2,542,913 (2,542,913) -100 % Total costs and expenses 24,922,369 61,704,075 (36,781,706) -60 % Operating loss (23,114,897) (55,097,723) 31,982,826 -58 % Other (income) expense: 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 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 % Total other (income) expense, net 111,791,752 (4,411,122) 116,202,874 -2634 % Net loss $ (134,906,649) $ (50,686,601) $ (84,220,048) 166 % Revenue. 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 t he reduction in government contracts in 2024. Cost of revenue. 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. 47 Table of Contents Depreciation. 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 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, 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. 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 . 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. 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, 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 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 48 Table of Contents 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. As of December 31, 2024, we had $1,186,047 of cash and cash equivalents. 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 $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 $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, 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. Indebtedness. 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. Off-Balance Sheet Arrangements As of December 31, 2024, we had no material off-balance sheet arrangements. Critical Accounting Policies and Estimates The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates, assumptions and judgments that can significantly impact the amounts we report as assets, liabilities, revenue, costs and expenses and the related disclosures. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Actual results could differ significantly from these estimates under different assumptions and conditions. Significant accounting policies are described in Note 2, "Summary of Significant Accounting Policies", in Item 8 - "Financial Statements and Supplementary Data" of this Annual Report. The accounting policies discussed below are critical to understanding our historical and future performance as these policies involve a greater degree of judgment and complexity. Revenue Recognition - Our primary sources of revenue are from providing technology and 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 fee) or product sales and typically have terms of up to 18 months. The Company has limited product sales as its core products are still under development. A performance obligation is a promise in a contract to transfer distinct goods or services to a customer. The products and services in our contracts are typically not distinct from one another. Accordingly, our contracts are typically accounted for as one performance obligation. 49 Table of Contents The Company’s 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 the Company’s results of operations. Cost plus fixed fee contracts are largely used for development projects. Firm-fixed price contracts provide products or services generally over an agreed upon time frame for a predetermined amount. 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. Service revenue includes equipment operating lease income recognized based on the contractual cash lease payments for the period. Contract assets include unbilled amounts typically resulting from sales under contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Contract assets are recorded at the net amount expected to be billed and collected. Contract liabilities include billings in excess of revenue recognized and accrual of certain contract obligations. Stock-Based Compensation - Nauticus recognizes the cost of stock-based awards granted to its employees and directors based on the grant-date fair value of the awards. Cost is recognized on a straight-line basis over the service period, which is the vesting period of the award. Nauticus elected to recognize the effect of forfeitures in the period they occur. Nauticus determines the fair value of stock options using the Black-Scholes option pricing model, which is impacted by the following assumptions: • Expected Term—We use the “simplified method” for expected term. • Expected Volatility—We use the historical volatility of Nauticus’ publicly traded Common Stock. • Expected Dividend Yield—The dividend rate used is zero as Nauticus has never paid any cash dividends on its Common Stock and does not anticipate doing so in the foreseeable future. • Risk-Free Interest Rate—The interest rates used are based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. 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 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 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. 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 (defined below) should be accounted for as liabilities. 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 50 Table of Contents 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 issuance and will not be subsequently remeasured. Item 7A. Quantitative and Qualitative Disclosure About Market Risk Not required for smaller reporting companies. 51 Table of Contents