Nauticus Robotics, Inc. (KITT) Earnings Call Transcript & Summary

Good day, everyone, and welcome to today's Nauticus Robotics 2023 Q4 Earnings Call. [Operator Instructions] 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 Kristin Moorman, Nauticus' Special Project Leader.

Thank you, and good morning, everyone. Joining me today and participating in the call are John Gibson, CEO and President; Vicki Hay, Interim CFO, and Nick Bigney, General Counsel; and other members of our leadership team. On today's call, we will first provide prepared remarks concerning our operations, vehicle testing and financial results. Following that, we will answer questions. We have now released our results for the full year and fourth quarter of 2023, which is 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. Please note that comments we make on today's call regarding projections or our expectations for future events are forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. 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.

Thanks, Kristin. Good morning, and thank you for joining us on the call this morning. I'm pleased to be presenting our quarterly results for the first time as CEO. A great deal has transpired since the last conference call. First, over the last 4 months, we've initiated the transformation of the company from being a research and development organization to being a customer-centric innovation for-profit enterprise. During the fourth quarter, we added an interim CFO, Vicki Hay, with 17 years of public company reporting and operational cost management skills, and we added a General Counsel, Nick Bigney, with public company experience as well as complex deal and financing expertise. We've recently added to the team sales leadership with Jorge Machnizh. Jorge has experience in domestic and international sales, including in Brazil and Norway, 2 important countries to us and has captained a 9-digit multiyear software and service sales in Latin America for a previous company. He brings superior skills in collaboration with customers combined with the full alignment of our company effort to deliver the contractual requirements we've signed up for. We also have an incredible team of engineers, mechanical, electrical and software who are currently certifying the Aquanaut Mk2 for commercial work during the fall of 2024. As the year progresses, we will have the leaders from each of our business units to present during the earnings call. With a great team, you can expect great results, as you will see in a moment, those results are beginning to be realized. And first, let me address a few historical matters. Previously, we announced the merger with 3D at Depth. When the announcement was made, the share price for Nauticus exceeded $2 and the structure was an all-stock deal. After much consideration, both parties agreed the best path forward was to terminate the prior agreement as the situation has materially changed. We remain collaborative with 3D at Depth and continue to seek ways to work together on customer projects. I believe this termination best allows us to focus on transforming our own business. A stronger Nauticus benefits our shareholders in any transaction, and we intend to build a stronger Nauticus. We've built an excellent working relationship with 3D at Depth leadership, and we intend to maintain that as we go forward. Now speaking of transforming our own business, we've changed our internal structure over the past few months. We've reorganized into 4 business units, autonomous solutions, electrical manipulators, autonomy software and government solutions. Autonomous solutions, electric manipulators and autonomy software were previously part of what was the bigger Aquanaut team. We changed them into 3 components because each has addressable markets and can grow independently. The capital required to deliver software manipulators is also significantly less than the capital needed to complete Aquanaut vehicles. Let's start off by talking about the Autonomous Solutions Group. The Autonomous Solutions team has accountability for the Aquanaut Mk2 vehicle. The Aquanaut vehicle is designed for subsea inspection, maintenance and repair, commonly called IMR work for projects including oil and gas, wind, telecommunications, midstream and aquaculture. The level of difficulty increases as you move from inspection to repair. Our initial efforts are focused entirely on inspection. We have contracts currently with an international oil company and a super major oil company, both early adopters to demonstrate the value of [ autonomy ] to the oil and gas operations. These untethered autonomy champions are providing regular guidance on what is required to replace their current methodology. The efficiency gains, decreases in staff, reductions in vessel size and hence submissions, the move to electrification and away from hydraulics to minimize the potential for hydraulic fluid leaks and the ability to work at depth regardless of weather make our AUV platform compelling to the industry. So where are we? We're currently doing full system testing in the Gulf of Mexico. And last week, we did testing exceeding 1,300 meters with an ROV monitoring our activity. We've made the transformation from idea to product. During these times, we're doing numerous system tests to include practicing and improving our launch and recovery, testing acoustic communications, emergency procedures to recover, descending and ascending optimization, station-keeping and many more tests prove the capabilities of the Aquanaut vehicle. It is going well thus far. The Nauticus team is performing well above expectations as is the vehicle. We have much to learn and need to validate our ability to conduct several operational tasks to move from testing to commercial work later this summer. We posted a video with some of our testing to our YouTube channel. Best video I've ever posted by the way. You can find the link to the video in our earnings release issued last night and is also linked in the webcast for those of you listening online. Please take a moment to watch the video, which shows our Aquanaut Mk2 vehicle diving to depths of greater than 1,300 meters, performing maneuvers and hovering less than 1 meter above the seabed, among other things. The Aquanaut we're testing in the Gulf of Mexico is Vehicle 2. Vehicle 1 is being assembled in our shop now, and Vehicle 3 is being prepped for simply an early 2025. I'd like to introduce you to a great leader and our Chief Engineer, [ Stu Donnan ], to make a few comments on the testing thus far. Stu?

Thanks, John. Over the last few days, we've made a lot of great progress confirming the functionality of Aquanaut Mk2 in the Gulf of Mexico. Our initial testing has been focused on tetherless commanding and navigation in the deepwater environment. We've performed test dives while recording data from all systems to analyze performance and identify any potential issues. Tetherless commanding of the vehicle has been demonstrated at depths greater than 1,200 meters, where we have executed various survey patterns and autonomous behaviors. We've also verified functional navigation at these depths. Analysis of the data will continue this week, while we wait for the weather to improve and return for more testings.

Well, I guess that's the end of your [indiscernible] turn it back to me. So let's pick up with talking about the autonomous software to what we call toolKITT. Now what we've realized the last couple of months is the value of our toolKITT software platform. The architectural decisions during the design of toolKITT software allows this system to be platform independent. It can be deployed on numerous subsea platforms, both tethered and untethered. We've already successfully used the toolKITT software on several subsea robots, both Nauticus developed and third-party developed. In short, imagine having numerous different robotic form factors operating on your infrastructure with a standard software system rather than having proprietary unintegrated platforms on each of the deployed robots. This facilitates a multi-agent robotic future creating an array of fit-for-purpose robots as an organism rather than as independent operators. To be the operating system of choice, we need to transform our service wear into commercial software. We're currently addressing the enhancements required to have a commercial software product. The primary enhancements or improvements in the user interface and user experience and a couple of features. But the needed knowledge to drive this development is being gained while we are testing the Aquanaut vehicle. If we move to the electric manipulators, that's what differentiates Nauticus from its competitors. The ability to interact with objects rather than only gathering data sets us apart from our other AUV suppliers. We're striving to offer a path to transition subsea's work to autonomous untethered replacement for the current generation of light duty ROVs. The manipulators are necessary for us to move up the value chain from inspection to maintenance and repair. Given the power and size of Aquanaut, we will be limited to doing light-duty work. Heavy-duty ROVs are needed, especially for construction-related work. We're discussing with other subsea service providers the possibility of supplying our manipulators for integration into their vehicles. We also see a move by all subsea providers to electric manipulators, like ours, to reduce the environmental impact of potential hydraulic fluid leaks. Conventional ROV operation has no autonomy associated with arms. Our arms are entirely autonomous. We have an outstanding team working on autonomous electrical manipulators and the same team is investigating how to deploy our autonomy on hydraulic manipulators as well. This is a market where we can have an immediate impact. Our government business. While the government market segment is enormous, it's believed to exceed $1.5 billion in 2025, the portion of the total available market we can address is much smaller. We do not have sufficient capital to undertake larger projects. Therefore, we are focused on projects matching our capital and competencies, which are seeking breakthroughs, new concepts, true innovation, which often gets timed in, in larger organizations. We have the talent and leadership to succeed in providing innovation. During the fourth quarter of 2023, we completed a project for the Defense Innovation Unit of the Department of Defense DIU, completed a second project in the first quarter of 2024. We anticipate receiving a letter of DIU and indicating we've successfully completed both projects. Both projects were innovation related. We do not currently believe any future work will be awarded related to these projects to Nauticus. Nauticus needs consistent revenue and cash flow and government contracts are often awarded sporadically. We sometimes call that lumpy and hence the pipeline and cash flow are hard to project. Consequently, the government team to augment the pipeline for revenue has the freedom to pursue nongovernment projects that demand our talents and competencies. Our government team is extremely talented and is pursuing new nongovernment-related opportunities, both domestic and international. We're currently having discussions with companies seeking insights into their robotic programs. We are well suited to assist a variety of larger companies seeking robotics expertise. Work will be taken if it does not disqualify us for U.S. defense industry opportunities. We have a total available market assessment being conducted for each of our 4 business units, which should be completed and we can communicate at our next call. Now with that, I'm going to turn it over to Vicki Hay to review our financials.

Thank you, and good morning. As John mentioned, I joined the organization as interim CFO in December last year. I will be covering an overview of our financial performance for the full year and fourth quarter of 2023. Revenue for the fourth quarter was $1.1 million, which is down $2.1 million from the previous year. Full year revenue for 2023 was $6.6 million, which is down $4.8 million from 2022. Revenue in 2023 primarily came from government contracts mentioned earlier. Operating expenses for the fourth quarter were $35.3 million, which is a $24.9 million increase from the same period in '22. This included a onetime impairment charge of $25.3 million, with $15.1 million being taken on the Aquanaut units after updating the future projected discounted cash flows for these units. We also recorded a $2.5 million loss on the contract relating to testing of the Aquanaut vehicle for an oil and gas commercial contract, the revenue for which will be recognized during 2024. Additionally, in 2023, we recorded a $1.5 million severance charge relating to the executives that departed in the fourth quarter of '23 and the first quarter of '24. Net loss attributable to common stockholders for the quarter was $39.5 million and $50.7 million for the full year. This is a $31.3 million increase from Q4 '22 and a $17.5 million increase from full year '22. Adjusted net loss for the fourth quarter was $8.8 million compared to $5.7 million for the same period in the previous year. We reported a full year adjusted net loss of $34.3 million, which is an $18.7 million larger loss than the previous year. As we have been working through the transformation of the business, we have taken a close look at the balance sheet and [indiscernible] items that do not fit the future vision. To that effect, we have moved $2.9 million worth of assets into assets held for sale, which include the 3 Hydronauts, the [ DRIP ] and numerous smaller excess assets. 2 of the Hydronauts were sold in the first quarter of '24, and the third vessel is still being actively monitored. These assets were collectively impaired by $9.9 million to reflect the actual or anticipated sales price. Cash at the end of 2023 was $800,000. However, during the first quarter of 2024, we secured $13.4 million of additional funding from current investors, which puts us in a stronger position going forward. With the recent organizational changes, we have evaluated additional opportunities to reduce costs. As a result, we are expecting to reduce G&A expenses in 2024 by more than 50% year-on-year through reduced headcount, enhanced cost management and streamlined efficiencies. Although these financial results are not very positive, the cost management efforts, combined with the rightsizing of the organization, our key pillars and the overall transformation of Nauticus to a customer-centric innovation for-profit enterprise. I will now pass the call back over to John.

Thank you, Vicki. And as prone to do, I would like to take a few questions, so I'll turn it back to the operator. And if you would like to ask, please get in the queue, and we look forward to responding.

[Operator Instructions] And we'll take our first question from Brian Dobson with Chardan Capital Markets.

From our contacts in the industry, we've been hearing that 2025 could be a meaningful upgrade or a meaningful year in the upgrade cycle for ROVs. What are you seeing for next year? And what are some of the key areas of opportunity, meaning which industries do you find most exciting in '25?

Appreciate the question, Brian. I appreciate you dialing today. So ROV market, oil and gas industry and commodity prices have really kept the offshore environment from having a lot of growth over the last 5 or 6 years. That's apparently also true for the ROV industry. So not a lot of new ROVs have been sold. So you're looking at an upcycle for all the manufacturers. Probably [ schilling ], Perry, oceaneering would all be looking at excellent growth in 2025 for sales of their ROVs to begin to replace the aging fleet. I think that also creates a good opportunity for us as we move forward because you're going to see people making a change in their capital infrastructure, and we should have a tested vehicle that's ready to go here during 2024. So we're looking forward to that 2025 market uplift for ROVs in general, I think we'll be able to step in and get our toe into water and enjoy some of that uplift.

Yes, very good. You delved into some of the government-related business during your prepared remarks. I guess could you give us a little bit of an update or any additional color on some of those DoD contracts you have been working on and will receive certificates related to?

Yes. Sure. I mean the DoD side, we really like that business. We think that our skills and our technology are really suited to providing innovation for that marketplace. However, for our shareholders and our company, it's pretty lumpy, and it's really sporadic. And so we need to get continuity in revenue and cash flow. And so we do need to branch out and do other projects with that group as long as it does not exclude us from doing defense-related work. We did complete 2. We completed 1 in December. We completed another in January. And I've personally spoken to them, and I believe we're going to receive our certificates indicating successful completion and did a conversation as well. They were very encouraging on us participating in future projects and wanted to make sure that we were excited about submitting proposals as we go forward. So I think we have a great opportunity there, excellent customer. But any American would realize that when you're dependent upon the U.S. government coming to conclusions and funding, that's not a place where you want to bet all of your money when you're a start-up company like we are.

Yes. We noticed that you've been making some changes to, call it, SG&A and also R&D expense and then move forward. Can you speak to some of the key levers you've been pulling to reduce those expenses and how you envision that line item, I guess, over the next, call it, a year or so?

If I can do that, Brian, for you said it's a difficult question because in this organization, the next product is what would have been the case if you were here a year ago. And now our entire focus is on the current product. And so while people might be interested in what are our comments on switching from lithium batteries to fuel cells, that's not what we're doing. We're not currently doing R&D. We are testing, certifying and ensuring that the product we have is commercially ready. And so I'd say we've got the R is small and the D is large. It's not quite silent, but it's close to silent. So the majority of our spending is shifted entirely to development and delivery as opposed to doing any future related work. We're at that point where we have a great product that needs to be completed, we shouldn't start working on anything that would distract us from getting the Aquanaut Mk2 in the market and successful. So anticipate us when you say R&D, the R is silent and the D stands for delivery as opposed to development. So I think that's where we're going at the moment, right.

Yes, very good. And speaking of deliveries and clients, can you give us a little bit of color on how your relationship with Petrobras is evolving?

I could do that. Jorge Machnizh with us too. I'll start off by saying just a couple of things. I'll turn it over to Jorge for a comment. I've never seen such enthusiastic champions for this technology is I have with our current set of customers. I mean, they've been entirely engaged, supportive, understands where we are and continue to talk about the amount of work that we'll win when we get the product certified. Jorge?

I can echo that in the context of the customer, customer is extremely supportive of what we're trying to accomplish offshore Brazil. As you know, that's a major area of offshore development in deepwater, has its complexities and significant opportunities.

Brian, we really aren't trying to shift from sort of being a company that was great at marketing to being a company that's great at delivery, and our customers [ deploy ] that, too. And I'm personally as well as Jorge, we're meeting with them in person, having discussions, we've got tremendous support. They see the future. They see the value we'll bring and we just have to bear down on getting this done, and that's what we're doing in the testing. That video is a pretty powerful testament to the fact we have a vehicle that works. We have some enhancements that need to be made and some additional testing, but we are getting very close to being in the commercial revenue model for the core of the business.

Yes. And final question, I know I've asked a lot here. As you're taking those steps to make the company more customer focused rather than R&D focused, I guess, what do you see as the most important factors for your team to focus on?

Actually, the contractual requirements we have is probably #1. The alignment of our culture to be customer-centric as opposed to technology-centric. We've got some work to do there. It's a big cultural transformation here. Another one is just be cost conscious. I think we probably haven't had a call on this or written a paper, but we have brought in number of employees down from over 100 to less than 50. We've reduced our G&A costs by more than 50%. We're incredibly focused on being good stewards of the money that we have and returning value to our shareholders and to our lenders and creating tremendous value for our customers. So I mean, we really intend to be great stewards and to turn this into an investment of note. And so that's where the focus is today.

We'll take our next question from [ David Marin ] with David Trading.

How many Aquanauts do you currently have as of today? And how many do you see for making in the near future?

Excellent question. We currently have 1 that is completely assembled in the water and being tested. And that's vehicle #2, a little confusing, but vehicle #1 is here in our shop, and it's being assembled, and we have all of the pieces and the parts we're just putting in the batteries and the sensors and completing the vehicle and making the modifications that are necessary as a result of the testing of Vehicle 2 to ensure that it will be quicker to certify. We're trying to take the cost and the time to certify down as from the learning and experience we gave with Vehicle 2. Vehicle 3 is still in [indiscernible] and pieces, and we will begin assembly of that in probably sometime in Q1 of 2025, unless we see a tremendous pickup in business and contracts here as we move forward with Vehicle 2. We do not have any plans on building a vehicle 4 or 5 or 6 at this point in time. We really need to see commercial success with the 3 vehicles we have to really provide some cash flow and some confidence that those vehicles are going to be hugely successful in the market in the near term. So people want Vehicle 2 in the water, 1 in the shop, 3 in a box and no 4, 5 or 6 on the drawing board at this time.

All right. One more question. Everyone sees this company, everyone with the intellectual property, the technology you guys were saying investors were amazed by this. And I'm just wondering, I am too, but I'm just wondering, why don't we see any insider buying? You see the filings and on the contrary, sometimes you see insiders maybe selling some shares. I mean at a $10 million valuation, the fact $0.20, $0.30 just a very least to instill confidence in the shareholder, why isn't there anyone buying?

Excellent question. I would actually maybe put it a little differently. If you take a look at my compensation, I've taken off a huge portion of it in shares. And that's because I think that's the greatest opportunity for me to earn what I'm accustomed to. And so I'm putting the risk of return here for myself and on my own compensation in shares, and it reduced what I would normally consider my base salary. I think other executives are doing the same here, including our CFO or General Counsel. This is a share-based management team where we think the future is in the shares and not in our bank salaries. And so while I'm not buying, I am definitely putting the weight of the arrow on stock. Now why others aren't buying, I think there's some opportunity, but the window has been closed for quite a long time as a result of the potential merger with 3D at Depth and other material nonpublic information. And so we're really going to open the window up here in the near future, and we'll see what transpires after that.

And it appears that we have no further questions at this time. I will now turn the program back over to John Gibson for any additional or closing remarks.

Well, I want to thank everybody that joined the call. I'm incredibly appreciative people that do own shares, and they are committed to the vision of this company long term. I think we're on track to really make a difference. I'm also appreciative to the lenders. And I also would like to thank our Board who's been very patient and this transformation and our employees in particular. We have a great group of employees here that are dedicated to seeing this become a huge success and transform the market. So we've got a lot of people that we're blessed to have on board with Nauticus and I'm blessed to be here. Thanks to all of you, and we'll talk to you again soon.

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