10-Q/A: Nauticus Robotics Restates Q1 2024 Financials Due to Debt Accounting Error

Nauticus Robotics is amending its Q1 2024 report to correct debt accounting related to convertible debentures, changing from debt modification to extinguishment accounting.

Summary

• Nauticus Robotics is filing an amendment to its Q1 2024 report due to an error in debt accounting related to convertible debentures issued on January 30, 2024.
• The company initially applied debt modification accounting but has determined that extinguishment accounting should have been used.
• The audit committee concluded that the original financial statements should no longer be relied upon and require restatement.
• The restatement impacts the Balance Sheet, Statements of Operations, Statements of Cash Flows, Statement of Stockholders' Deficit, and several footnotes.
• The company's CEO and Interim CFO have provided new certifications in connection with the amendment.
• As of May 10, 2024, the company had 62,431,772 shares of common stock outstanding.
• The company had a net loss of $72,838,936 for the three months ended March 31, 2024.
• Revenue for the three months ended March 31, 2024 was $464,354.
• The company's total assets as of March 31, 2024 were $29,431,488.
• Total liabilities as of March 31, 2024 were $142,186,965.
• The company is developing autonomous robots for the ocean industries.
• The company does not currently generate sufficient revenue to cover operating expenses.
• A current investor has committed to provide additional liquidity.
• The company believes it has sufficient resources to continue as a going concern for at least one year.

Sentiment

Score: 3

Explanation: The sentiment is negative due to the restatement of financials, significant net loss, revenue decline, and concerns about liquidity and internal controls; however, the commitment from a current investor provides some reassurance.

Positives

• A current investor has committed to provide additional liquidity, which the company believes will be sufficient to continue as a going concern for at least one year.
• The company is taking cost-cutting measures to preserve cash.
• Gain on lease termination of $15,365 was reported primarily due to the reduction in office space leased in Norway.
• Gain in the fair value of warrant liabilities of $8,309,623 was reported as compared to a loss of $2,236,904 for the three months ended March 31, 2023.
• Gain on the fair value of the new convertible debentures of $4,504,426 was reported.

Negatives

• Nauticus Robotics is restating its Q1 2024 financials due to a debt accounting error.
• The company initially used debt modification accounting but should have used extinguishment accounting.
• The restatement affects key financial statements, including the balance sheet and statements of operations.
• The company reported a significant net loss of $72,838,936 for the three months ended March 31, 2024.
• Revenue for the three months ended March 31, 2024 was $464,354, a decrease of 84% compared to the same period in 2023.
• The company does not currently generate sufficient revenue to cover operating expenses.
• Loss on the extinguishment of debt of $78,734,949 was reported driven by the Amendment and Exchange Agreement.

Risks

• The company does not currently generate sufficient revenue to cover operating expenses, working capital, and capital expenditures.
• The company may require additional liquidity to continue its operations over the next twelve months.
• The company has a limited number of customers, and the loss of these customers could have a material adverse impact.
• The company identified a new material weakness in its internal controls over accounting for significant and complex transactions related to prior periods which resulted in restatements for Q1, Q2 and Q3 2024.
• The company's disclosure controls and procedures were not effective as of March 31, 2024, due to the continuation of a previously disclosed material weakness and a newly identified material weakness.

Future Outlook

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.

Industry Context

The company operates in the ocean robotics industry, focusing on autonomous robots for commercial and government applications; the restatement and financial challenges highlight the difficulties faced by companies in this developing sector, particularly in achieving profitability and maintaining adequate financial controls.

Comparison to Industry Standards

• It is difficult to compare Nauticus Robotics directly to industry standards due to its unique combination of AUV and ROV capabilities.
• However, comparable companies in the subsea services sector, such as Oceaneering International and TechnipFMC, typically have more diversified revenue streams and established profitability.
• Nauticus's focus on autonomous technology and remote connectivity solutions positions it differently from traditional ROV service providers, but also presents challenges in terms of market adoption and technological development.
• The company's financial performance lags behind industry leaders, reflecting its early stage of development and reliance on external funding.

Related Party Transactions

• The SPA Warrants are held by related parties ATW I, MIF and SLS Family Irrevocable Trust.
• In March 2024, ATW exercised 5,700,000 SPA Warrants in exchange for Common Stock.
• On January 30, 2024, the Company and certain of its subsidiaries and ATW I entered into an Amendment and Exchange Agreement.
• 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.
• 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.
• 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.
• Flexible Consulting, LLC is considered to be a related party from December 1, 2023.

Stakeholder Impact

• Shareholders: The restatement and financial losses may negatively impact shareholder value and confidence.
• Employees: Cost-cutting measures and potential liquidity issues could lead to job losses or reduced compensation.
• Customers: Financial instability could affect the company's ability to deliver products and services.
• Creditors: Increased debt and potential liquidity issues could increase the risk of default.

Next Steps

• The company plans to formally document the system controls that we have in place, including user access reviews and a formally documented segregation of duties that includes formal system-based roles.
• The company is implementing a formal Significant and Complex Transaction review process that will identify transactions that should be reviewed by 3rd party experts to ensure proper treatment.

Key Dates

Keywords

restatement, convertible debentures, debt accounting, financial statements, Nauticus Robotics, liquidity, going concern, material weakness, internal controls, ocean robotics