10-Q/A: Nauticus Robotics Restates Q2 2024 Financials Due to Debt Accounting Error; Reports Net Income Amidst Ongoing Liquidity Concerns

Nauticus Robotics files an amended 10-Q to restate its Q2 2024 financials due to an error in debt accounting, revealing a net income of $4.54 million for the quarter despite ongoing liquidity challenges.

Summary

• Nauticus Robotics is filing an amendment to its Q2 2024 report due to a restatement of its financial statements.
• The restatement is due to an error in accounting for a debt transaction from Q1 2024, where it was incorrectly treated as an amendment rather than an extinguishment.
• The company previously applied debt modification accounting to a January 30, 2024 transaction but has since determined that extinguishment accounting should have been used.
• The audit committee concluded that the original financial statements should no longer be relied upon.
• The restatement impacts the Balance Sheet, Statements of Operations, Statements of Cash Flows, Statement of Stockholders' Deficit, and several footnotes.
• The company reported revenue of $501,708 for the three months ended June 30, 2024, and $966,062 for the six months ended June 30, 2024.
• The company reported a net income of $4,540,975 for the three months ended June 30, 2024, and a net loss of $68,297,961 for the six months ended June 30, 2024.
• As of August 9, 2024, the registrant had 4,649,630 shares of common stock outstanding.
• The company is taking cost-cutting measures to preserve cash and may require additional liquidity over the next twelve months.
• A current investor has committed to providing additional liquidity.
• The company believes it has sufficient resources to continue as a going concern for at least one year from the date the financial statements are issued.

Sentiment

Score: 4

Explanation: The sentiment is neutral to slightly negative. While the company reports a net income for the quarter, it is restating its financials due to an accounting error and faces liquidity concerns, requiring additional funding from an investor. The presence of material weaknesses in internal controls further dampens the outlook.

Positives

• The company reported a net income of $4,540,975 for the three months ended June 30, 2024.
• A current investor has committed to providing additional liquidity.
• The company is actively pursuing the sale of remaining assets earmarked for sale and anticipates that the majority will be sold by the end of the third quarter of 2024.
• The company has embarked on cost-cutting measures to continue to preserve cash.
• For the three and six months ended June 30, 2024, a gain in the fair value of warrant liabilities of $4,422,701 and $12,732,324, respectively, was reported.

Negatives

• The company is restating its Q2 2024 financials due to an error in debt accounting.
• The company does not 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 reported a net loss of $68,297,961 for the six months ended June 30, 2024.
• For the three and six months ended June 30, 2024, revenue decreased $626,407 and $2,982,833, or 56% and 76%, respectively, as compared to the three and six months ended June 30, 2023, primarily driven by a reduction in government related contracts.
• In Q4 2024, we identified a new material weakness in our internal controls over accounting for significant and complex transactions related to prior periods which resulted in restatements for Q1, Q2 and Q3 2024.

Risks

• The company's ability to continue as a going concern is dependent on additional liquidity from a current investor.
• The company faces the risk of unreimbursed cost overruns on firm-fixed price contracts.
• Loss of major customers could have a material adverse impact on the company.
• The company is subject to litigation and other claims in the normal course of business.
• The company has a full valuation allowance against its deferred income tax assets.
• The company identified a material weakness in its internal control over financial reporting related to a lack of qualified accounting and financial reporting personnel and inadequate procedures for the accounting close process.
• The company identified a new material weakness in our internal controls over accounting for significant and complex transactions related to prior periods which resulted in restatements for Q1, Q2 and Q3 2024.

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 from the date that the condensed consolidated financial statements contained in this Form 10-Q/A are issued.

Management Comments

• 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 condensed consolidated financial statements contained in this Form 10-Q/A are issued.

Industry Context

The company operates in the ocean robotics industry, providing autonomous robots, cloud software, and services. The company's services provide customers with 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.

Management Changes

Legal Proceedings

• The company is subject to a state sales tax assessment of $1.2 million from the Texas Comptroller of Public Accounts for which the audit is currently ongoing.

Related Party Transactions

• SPA Warrants are held by related parties ATW I, MIF and SLS Family Irrevocable Trust.
• During the six months ended June 30, 2024, ATW exercised 22,161,186 SPA Warrants in exchange for Common Stock.
• During the second quarter of 2024, ATW I converted secured debentures with a principal value of $2,194,231 and interest of $43,167 into 22,641,909 shares on a pre Reverse Stock Split basis (628,942 shares post Reverse Stock Split).
• On January 30, 2024, the Company and certain of its subsidiaries and ATW I entered into an Amendment and Exchange Agreement.
• 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. The total value of services provided by Flexible Consulting, LLC to the Company for the three and six months ended June 30, 2024 was $240,000 and $460,000, respectively.

Stakeholder Impact

• Shareholders face potential dilution from the issuance of shares upon conversion of debt and exercise of warrants.
• Employees may be affected by cost-cutting measures and headcount reductions.
• Customers may be impacted by the company's ability to deliver services and products due to liquidity constraints.
• Creditors face the risk of non-payment if the company is unable to secure additional funding.

Next Steps

• The company will continue to develop its principal products and conduct research and development activities.
• The company will continue to implement remediation initiatives in response to the previously identified material weakness.
• The company is implementing a formal Significant and Complex Transaction review process that will identify transactions that should be reviewed by 3 rd party experts to ensure proper treatment.

Key Dates

Keywords

restatement, financial statements, debt accounting, liquidity, revenue, net income, Nauticus Robotics, robotics