Q3 2024 Nauticus Robotics Inc Earnings Call

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Speaker Change: Good day everyone and welcome to today's Nauticus Robotics 2024 Q3 earnings call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session.

Speaker Change: You may register to ask a question at any time by pressing the star and 1 on your telephone keypad You may withdraw yourself from the queue by pressing star 2

Speaker Change: Please note this call is being recorded and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Kristen Moorman, Special Projects Lead.

Kristen Moorman: Thank you and good morning everyone. Joining me today and participating in the call are John Gibson, CEO and President.

Kristen Moorman: Interim CFO, J.D. Yamakowski, CTO and Government Lead, and other members of our Leadership Team.

Kristen Moorman: On today's call, we will first provide prepared remarks concerning our operations and financial results. Following that, we will answer questions.

Kristen Moorman: We have now released our results for the third quarter of 2024, which are available on our website. In addition, today's call is being webcast and a replay will be available on our website shortly following the conclusion of the call.

Kristen Moorman: Please note that comments we make on today's call regarding projections or our expectations for future events are forward-looking statements.

Kristen Moorman: Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control.

Kristen Moorman: These risks and uncertainties can cause actual results to differ materially from our current expectations.

Kristen Moorman: We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC.

Kristen Moorman: Also, please refer to the reconciliations provided in our earnings press release as we may discuss non-GAAP metrics on this call.

I will now turn it over to John.

Speaker Change: Well, good morning and thank you for joining us for our conference call today. At the end of our prepared remarks this morning and before we open up the floor to questions, I will provide an update on our Q3 revenue performance and try to set expectations for the future.

Speaker Change: Now in the third quarter, we achieved an industry first by successfully conducting Aquanaut's first commercial project. This is a significant milestone for us and for the industry.

Speaker Change: We're now focused on leveraging the success to create our company's first business backlog of 2025 consisting of both commercial and defense work.

Speaker Change: We plan to press release the closing of any contracts as they occur.

Speaker Change: In addition, we continue to receive strong support from our existing lenders as they are converting to ventures, which has the impact of materially increasing our shareholder equity, which should allow us to remain listed on NASDAQ.

Speaker Change: I bet he'll explain more. We completed customer qualifications and began commercial execution in Q3 2024 with our Aquanaut vehicle in the Gulf of Mexico.

Speaker Change: During qualification, we discovered an anomaly that resulted in additional commercial work.

Speaker Change: During the commercial work in an active field, we've discovered yet another anomaly as a result of the unique capabilities of the Aquanaut vehicle.

Speaker Change: These discoveries have resulted in commercial discussions for the 2025 season around the unique capabilities of the Aquanaut vehicle versus current ROV capabilities.

Speaker Change: Customers are expanding their scope of work to include these unique capabilities in order to assess their fields going forward.

Speaker Change: During the winter months, we will concentrate on building our pipeline for the 2025 Gulf season. We are actively working to eliminate seasonality in our business. To do that, Daniel will discuss in just a minute the technical modifications that should allow year-round work in the Gulf of Mexico.

Speaker Change: We're also working with South American customers to mitigate North American seasonality or Northern Hemisphere seasonality.

Speaker Change: Daniel will cover more of that in our field operations section as well. Now before we turn to our operational activities, I want to update you on the progress with meeting NASDAQ's continued listing standards.

Speaker Change: Our stock price remains above a dollar minimum bid price. We also just announced an exchange agreement to convert debt into preferred stock. This action is intended to get us into compliance with NASDAQ's listing requirements, and I'll leave that to Vicky in the financial section.

Speaker Change: Now with that, I'm going to turn it over to Daniel Descartes, our field operations leader, to give you an operational update. Daniel? Thank you, John. Let me bring you up to date on the recent operational projects for the Aquanaut vehicle.

Daniel Descartes: In Q3, we conducted our first commercial project utilizing the Aquanaut system. This is a significant milestone for us and represents proof that our technology solutions are ready for consistent commercial service.

Daniel Descartes: The project consisted of using the Aquanaut vehicle to complete surveys of both an abandoned field and an active field for customers in deepwater Gulf of Mexico. We are excited to report the project exceeded our expectations and, more importantly, the expectations of our customers.

Daniel Descartes: The Aquanaut vehicle was able to provide high-quality data on our customer's subsea assets, utilizing untethered autonomy at depths up to 1,000 meters.

Daniel Descartes: The aquanaut vehicle was able to survey assets in the field while also providing high-level inspection and help with field deliverables.

Daniel Descartes: With this commercial contract, we have achieved an industry first. Customers are excited about the capabilities and impact it will have on future operations.

Daniel Descartes: In addition, we plan to continue developing technology that provides an attractive return on investment to shareholders and customers.

Daniel Descartes: The second Aquanaut vehicle is expected to complete factory acceptance testing in Q4 of 2024 to ensure readiness for the demand we see coming in 2025 and beyond. We expect this second vehicle to be available for commercial service sometime in the first quarter of 2025.

Daniel Descartes: I would like to thank all the employees at Nauticus Robotics. We could not have accomplished all that we have without the commitment and dedication of all of you. Our customers are highly satisfied with the service we provide and this is a direct result of our employees.

Daniel Descartes: Before I turn it back over to John, I just want to emphasize that we are on the cusp of achieving what we set out to do when Nauticus Robotics was founded back in 2014, that is provide autonomous underwater robotics solutions for our customers on a commercial basis. I will now turn it back to John.

Well, thank you, Daniel.

John Gibson: It has certainly been a journey, but we have a vehicle capable of capturing commercial work today.

John Gibson: and the data we collect is proven valuable to our customers beyond what's available from other vendors.

Speaker Change: We're truly differentiated. With that, I'd like to turn it over to Jason Close, who's our Toolkit Software Leader, for an update on Toolkit. Jason? Thank you and good morning. We continue to advance both the functionality and commerciality of our Toolkit software platform.

Jason Close: The software performed reliably during our operations in the Gulf of Mexico, and we will now focus our efforts on delivering a commercial release to the market in 2025.

Jason Close: Additionally, the team continues to progress the technology towards higher levels of autonomy and broader commercial functionality, which will not only improve our capabilities for the Aquanaut vehicle, but also provide value-added differentiation for third-party platform integration.

Speaker Change: We continue to progress positive conversations with third-party ROV manufacturers and service providers and look forward to working closely with them as we move into 2025. Our 2025 goal is to sell our first commercial license of Toolkit. And with that, I'll turn it back to John.

Thanks guys so much.

Speaker Change: It exceeded customer expectations, and we are excited to make that available to the general market in 2025. With that, I'm going to turn it over to JD for an update on our government business. JD?

Speaker Change: Building on this success, both companies seek to leverage their complementary strengths together to serve the interests of national defense.

JD: The Government Business Unit is also investigating opportunities in environmental monitoring, leveraging the large and reconfigurable payload capacity of the Aquanaut vehicle to collect samples.

Speaker Change: I'll now turn it over to Vicki Hay for our discussion of our financial results.

I'm J.D. and good morning.

Speaker Change: As previously discussed, NASDAQ gave us an extension until December 31st to resolve our stockholder's equity non-compliance.

We have several initiatives underway to address this.

Speaker Change: First, we have entered into an agreement with our investors to exchange the originally issued Discount Senior Secured Convertible debentures to Preferred Convertible Stock.

This currently comprises approximately $27 million of principal.

Speaker Change: $3,000,000 of interest and $3,000,000 of additional liabilities that have come as a result of conversions of the initial debenture below the floor price of $3.16.

Speaker Change: This will be an agenda item at the shareholders meeting scheduled for December 18, 2024.

Speaker Change: Second, we are working on additional items which will deleverage our balance sheet further while increasing shareholders equity. None of these discussions are at a stage yet where we can disclose them in more detail, however we do expect significant progress on these prior to the end of the year.

Speaker Change: We are confident that the steps we are taking will allow us to bring our stockholders equity back into compliance in the required time frame.

Speaker Change: In addition to regaining NASDAQ compliance, we are keenly focused on securing the cash we will need through the end of 2025 while we ramp up commercialization as discussed by Daniel.

Speaker Change: To that effect, we closed $1.1 million of funding last Friday, which is the first tranche of up to $21.1 million available to us through a new convertible debenture.

Speaker Change: We also have lenders that are willing to modify their current debt agreements to capitalize cash payments until Q3 2025

effectively allowing us to use this cash for working capital.

We anticipate this to close in the fourth quarter.

Speaker Change: I will now discuss in more detail our financial results for the quarter.

Speaker Change: Revenue for the third quarter was $0.4 million, which is down $0.1 million from the second quarter 24, and down $1.2 million from the same period last year.

Speaker Change: The magnitude of the decline in revenue was largely due to a late start driven by bad weather in the Gulf of Mexico resulting in some revenues shifting to Q4.

Speaker Change: Operating expenses for the third quarter were $5.9 million, which is a $3.9 million improvement from Q3-23 and a sequential improvement of $0.6 million.

G&A

Cost for the third quarter was $2.8 million.

Speaker Change: This is the result of dedicated focus on reducing costs and eliminating non-value-added spend.

Speaker Change: Each quarter we continue to improve our DNA run rate, and this focus will continue through the end of 2024 and into 2025.

Speaker Change: Net loss for the quarter was $11.4 million. This is a $6.3 million reduction from the third quarter of 2023 and a $6 million increase sequentially.

Speaker Change: The large variant sequentially is driven by the non-cash fair value change of outstanding warrants.

Speaker Change: with a 4.4 million gain in Q2'24 versus a 0.6 million gain in Q3'24.

Speaker Change: The third quarter in 2024 also included a $2.1 million charge relating to the conversion of debentures mentioned earlier, whereby the company owes the debt holder the difference between the floor price of $3.16 and the alternative conversion price.

Speaker Change: Cash at the end of Q3 2024 was $2.9 million compared to $0.7 million at the end of 2023.

Speaker Change: This is a result of funding received in the first half of 2024 of $14.3 million, along with raising $9.4 million to our at-the-market facility in the second quarter.

For more information, visit www.fema.gov

Speaker Change: We have a signed offer on our Hydronaut vessel, which has been held for sale since December 2023. This is expected to close prior to the end of the fourth quarter.

I will now pass the call back to John.

Hi Vicky

John Gibson: Reflecting on our Q3 results, it really is as if we were competing in the NCAA championship game. We beat the odds. We delivered performance that unearned us national championship in Q3. Now, we achieved this by playing exceptional defense.

John Gibson: In our context, defense means creating a new market, exceeding customer expectations, and delivering on promises that our largest competitors cannot deliver on today. Additionally, we introduced capabilities that the commercial and defense markets have never seen before. In short, we excelled.

John Gibson: However, when it comes to offense or revenue, our efforts only produced a late fourth quarter field goal. So, why was our revenue performance lower and what are we doing to improve that?

John Gibson: For historical context, our Q3 revenue results stem from contracts that were executed in 2023 by prior management.

John Gibson: These revenues were generated from a turnkey R&D proof-of-concept contract. The contract was intended to offset testing and certification costs while fostering customer support, which it's done.

John Gibson: Now rest assured, we understand the need for the office to score more consistently and a lot higher number of points.

John Gibson: We're currently negotiating day rate contracts which, in a single week, can surpass the total revenue produced in Q3. While Q3 revenue may seem modest, there is really no reason to apologize for it. We claimed the national championship with what we accomplished.

John Gibson: Now, as I look ahead, I believe our technical achievements in Q3 will soon translate into contracts, revenues, and gross margins that are the envy of our large competitors.

John Gibson: Furthermore, our success in the quarter demonstrates that our Deepwater Autonomous Software capabilities surpass that of all competitors, paving the way for commercial licenses in 2025, as Jason Close previously stated.

John Gibson: Today, I believe the strategics are evaluating us. Well, this concludes our remarks for today, and operator, I'd like to turn it back over to you and open it up for a few questions.

Speaker Change: At this time, if you would like to ask a question, please press the star and one on your telephone keypad.

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Speaker Change: And once again, that is star and one to ask a question.

Speaker Change: And it appears that we have no questions in the queue at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

Speaker Change: Thank you for the commitment to the company. This is a great long term play. And we're developing and delivering things to the market that just astound. And I appreciate you being in the shares. I fully understand that we need to play better offense and our team is focused on that. We are really appreciative for you being on the call. We look forward to the conference call at the end of Q4 and wrapping up the year. Take care. We'll talk again soon.

Speaker Change: That concludes today's teleconference. Thank you for your participation. You may now disconnect.