Corporate Presentation

Oct 6, 2021

Good afternoon. Thank you all for joining us today for the Lytham Partners Fall 2021 Investor Conference. My name is Joe Dorme, Managing Partner of Lytham Partners. Our next presentation comes from Kraken Robotics Inc, ticker symbol PNG on the TSX Venture and KRKNF on the OTC. Presenting from the company is Greg Reed, Chief Operating Officer. Today, Greg will run through the company's slide presentation. A copy of the presentation can be found on today's webcast or on the company's website at krakenrobotics.com. As a reminder, management will be available for 1 on 1 virtual meetings. If you'd like to sign up, please visit lithonpartners.com/virtual and click the 1 on 1 meeting request button. Now I'd like to turn the presentation over to Greg Reed, Chief Operating Officer of Kraken Robotics. Greg? Thank you, Joe, and we appreciate the invite and the chance to speak to investors today. Good day, everyone. Kraken Robotics is a Canadian based subsea robotics company. So we sell both sensors and subsea robotics equipment. On the front slide of your investor deck, you'll see a picture of 2 of our subsea products that we sell. The one on the left is called the Catfish and the one on the right is called the Thunderfish. So I think to simplify terms for everybody, we'll just refer to these as underwater drones. We predominantly sell to the military market, but increasingly we're starting to sell to the commercial market as well. And to give you a sense, the two products that you see on the front page there, the Catfish, that's a shallow water product used in underwater mine hunting and a sale of that Catfish with associated equipment can range anywhere from $2,000,000 to $5,000,000 per system. So that is a tethered product that goes about 300 meters deep and still attached to a surface vessel. On the right hand side is a product called Thunderfish. That is battery operated. It's not attached to a boat. So it is autonomous. It can go 6,000 meters deep. This particular product, the Thunderfish, we don't sell it as a product on a commercial basis. We use it in a service offering where we provide the service to customers to go out and collect the data. So that's just a very high level of 2 of our key products. Switching to Page 3 as the corporate overview. On the right hand side, we show a number of our customers. As I said, a lot of them are military related, whether they're actual navies or whether they're defense contractors that sell into these navies. As well increasingly, we'll talk about on some future slides here, we have a growing customer base in the offshore wind market. And you can see both Tennant and at the bottom of the customer list there. So what is our technology used for? It's used for applications like seafloor mapping and inspection of critical underwater infrastructure. So that could be everything from subsea cables to subsea pipelines, looking for things that have fallen to the ocean floor, like shipwrecks or airplanes, as well as through a recent acquisition, we can now image we can provide images of buried things as well. So traditional Kraken technology would find things at a long distance and high resolution on the ocean floor. But with the recent acquisition we did of a company called Pangio, we can now find things penetrated that have been buried into the sea floor. So we're almost 10 years old. We have customers in approximately 15 countries. And as I noted, there are a number of the leading navies and defense contractors out there. Approximately 2 20 employees today, North American base with offices in Germany, the UK, Denmark and Brazil. And from a financial point of view, we're at an inflection point where we've gone from selling unit selling products, 1 unit here, 1 unit there, to the point where we've won some recent programs where we're starting to see a significant ramp in revenue and multi unit orders. So last year in 2020, we did $12,000,000 of revenues and we lost a few $1,000,000 This year, our current guidance is for $28,000,000 to $30,000,000 in revenues based off of some recent program wins over the last year. And we're forecasting positive EBITDA this year as well. As I mentioned previously, we closed an acquisition a couple of months ago called Pangio. Really what that does is it moves us more into the commercial market as opposed to the defense market where most of our business is today. And it also moves us beyond being predominantly a product related company and provides us a more recurring service revenue base, primarily targeted at the offshore wind market. So what does that mean? Ultimately, it means we have a company with a more balanced revenue mix between defense and commercial, as well as a more balanced mix between product sales and service. From a management and technical team and Board of Directors, I would highlight that this is a niche industry. We have some very qualified people in the business that are recognized as experts in their field on a global basis. And we always make the point that putting things deep in the ocean is harder than putting something in outer space. And a lot of people don't realize that. You've got extreme pressures, you've got corrosion. Undersea, there is no GPS and your RF communications is very, very limited. So once you drop the equipment into the ocean, it has a range of factors that are working against it. So that means that it's a tough business to be in. We have some very good people and we have high barriers to entry. On Slide 4, just from a market cap point of view, just highlight we're approximately CAD100 million market cap. Management and insiders own almost 20% of the company. And we have a strategic investor, a U. K. Based offshore services company that owns roughly 11% of us. That is a company called Ocean Infinity and they have a variety of offshore equipment that incorporates our batteries and our sensors. On Slide 5, to give you a sense of the market, we divided into both military and the commercial market. Roughly a $10,000,000,000 market by 2025. That's more than doubling from where the market is currently today. On the military side, we predominantly play in the top silo there on the left hand side called mine countermeasures. So this is looking for underwater mines of which there are a lot of those out there from the 2nd World War in geographies like the Baltic. And then you've got other geographies such as the Middle East where there is concerns about mines being laid in the Strait of Hormuz and then you've got challenges in the South China in the South Pacific and the South China Sea. So all these geopolitical factors have created an uptick in demand for mine countermeasures equipment and we supply into that market. On the commercial market, there's a variety of niche markets out there across a bunch of different applications. Hydrography and seabed mapping is one of the larger parts of that market. If you think about offshore energy companies and offshore wind companies, they need cable and pipeline surveys done. They need surveys done before they build an offshore wind farm, then they need inspection of that subsea equipment when wind farms are built and operating. And then you've got certain niche segments such as marine archaeology, which is shipwrecks. And you've got a new emerging market called seafloor mineral extraction, where you have companies that are out there exploring the ocean, looking for polymetallic nodules that will be used in electric vehicles. So that's a sense of various end markets that we address. We have on Slide 6, sorry, yes, on Slide 6, offshore wind. We put this in here. We didn't really address this market very much at all until our recent acquisition of Pangio. And Pangio, the bulk of their revenue comes from the offshore wind market, predominantly in Europe. So the key theme here is that there is a given all the renewable energy and climate change mandates that are emerging, that offshore wind, which is big in Europe today, big in Europe and big in China today will become increasingly important in a number of other geographies, including the United States. So you could see between now and the end of this decade, a fourfold increase in offshore wind capacity. In the United States, on the East Coast, there's been some large wind farms that are moving towards construction phase. So on the right hand side of this chart, you can see a variety of what that equipment looks like underwater. Today, the majority of the offshore wind market are fixed platforms, but you'll start to hear more and more about these floating offshore wind platforms. And you can see they all have mooring chains that are holding them to the ocean floor. Our technology, both on the sonar and acoustic side, can be used across a variety of survey and inspection opportunities in this market. Slide 7 gives you a sense of what is our strategy, where did we come from and where are we going. So as I mentioned, we started out as a sensor company. Our focus was really on the technology called synthetic aperture sonar or we use the acronym SAS. SAS technology is the under forms the basis of or underpins the basis of all our other products. And as we've evolved over the years, we've gone from selling just a sensor onto other people's underwater vehicles to providing our own underwater vehicles, underwater platforms on a product basis. And then over the last couple of years, both organically and through an acquisition of Pangio, we've increasingly taken our technology and started to use it in a service offering basis, which we call robotics as a service. So ultimately, as we go forward, it will be a combination of both products, mainly on the military side and then services, mainly addressing the commercial market. I'll talk about our financials in a few slides upcoming, but really what's driving our financials this year and next year is a strong existing backlog, predominantly driven by 2 big wins for us, roughly a $40,000,000 backlog as a result of some military programs both with the Danish Navy and with the Polish Navy. And in this particular case, what you see here on this slide is you see a picture of our vessel, the Ocean Seeker with both our Catfish equipment on the back of it as well as the launch and recovery equipment associated with that. So over the next year and a half, we will deliver roughly 6 systems to both the Danish and the Polish Navy, which sees them upgrading their mine hunting equipment after technology bake off with ourselves and some big competitors. So in this particular case, you can see we competed against Northrop Grumman, a large U. S. Defense contractor and Talos, a large French defense contractor and we're successful in these programs. Overall, if we look at what our pipeline of current contract pursuits is, it's more than $250,000,000 on the product side and we've broken into several silos. So on the left hand side, you see the international Navy sonar upgrade. So think of those as similar type opportunities as Denmark and Poland that we've recently won. And where if we look at the various countries where we are bidding our Catfish product into upgrades, there's a variety of NATO countries as well as a variety of friendly Asia Pacific and Middle Eastern countries as well. So if you look at the various countries listed there, the opportunities, the bids in each of these countries range from a couple of systems on the low side to upwards of 12 systems on the high side. So we're talking $5,000,000 to $10,000,000 opportunity on the low side to $60,000,000 to $70,000,000 opportunity on the big side. So that is for the Catfish product. The second picture on the top there, we see 2 Navy SEALs holding an AUV putting it into the water. In that case, we sell our synthetic aperture sonar sensors into those underwater vehicles. So the dollar volume isn't as big because we're talking about a $300,000 or $400,000 or $500,000 sale, but there is a large market opportunity there. So in the U. S, whether it's a small underwater vehicle or a large underwater vehicle, there's a variety of programs that are up for build, new builds or retrofits today. And then similar to the U. S. And a number of European and other NATO countries, you've got similar upgrades happening there. Traditionally, on these smaller vehicles, they've never used synthetic aperture sonar technology before because it wasn't it was too power hungry and the equipment was too big. And I'll show in a few slides here how we've engineered a new product to be able to fit on there. And as a result, we expect to capture our fair share of the market there. Another notable one in that upgrade is a program in Canada, which is currently out for bid. And the bids will be submitted here in Q4. Contract award is expected next year. And that is the expectation is that is going to be around the CAD50 million project opportunity, which we think we're well positioned for. So the message on Slide 9 is that there is a solid pipeline of activity to go along with the solid backlog that we have as well. Slide 10 addresses our financial performance. And the message here, as I mentioned earlier, is that we're coming off a small base. We're selling single units here and there on various opportunities. Now with our Catfish product being a new product introduced in the last couple of years as well as the upgrade cycle happening in the industry, we're very well positioned on a number of programs. And that's really driving this year's revenue growth and next year's revenue growth and will be the key driver of the company going forward. So numbers wise, we grow from about $12,000,000 in 2020. We're expecting $28,000,000 to $30,000,000 this year. And then in 2022, we've got targeting about $45,000,000 in revenue, which is really about 20% organic growth off of 2021 as well as a full year growth from our Pangio acquisition, which we acquired in August. For 2021, our EBITDA range is between $3,000,000 $4,500,000 dollars off of that $28,000,000 to $30,000,000 revenue stream. Okay. So in summary, that's really the highlights of the Kraken story. The following slides, we've got another 10 slides or so. I'll quickly breeze through those. It just gives you a little bit more detail on our products as well as our service offering to help you understand our business a bit more. Slide number 12 talks about our extensive IP and product portfolio. And what we're highlighting here is a broad range of activities in the underwater domain. So with everything from our synthetic aperture sonar, which we brand as Aquapix to a laser scanner, which we brand as C Vision. Those are sensors that would go on our underwater vehicles, which we brand as Catfish and Thunderfish. We also provide the subsea batteries that go in underwater vehicles. And these are lithium polymer batteries, which we brand under the Sea Power name and we make those in our German facility. And as important as the underwater equipment is the launch and recovery equipment to put the equipment in the water and take it out of the water is also just as important. And we have a handling systems group that manufacture this equipment in Canada. They are a very highly skilled team from former Rolls Royce Marine employees, which joined Kraken about 5 years ago to push the charge in the handling systems business. Slide 13 talks about our synthetic aperture sonar technology. So this is what's the key differentiator of Kraken versus other companies. It's synthetic aperture sonar versus conventional sonar technology. So what this really means, you see some fancy pictures here, but with SaaS technology, you're able to see objects on the seafloor at very high resolution at long distances. So the comparison versus conventional technology is thinking of 1970s black and white versus 2020 4 ks ultra high definition technology that you see today. And I show a variety of pictures here. The one that says small lines and riser bases, that is a subsea oilfield and you can see the various equipments in high definition. If you were able to scroll in, which the customer would have access to this technology, you could scroll in and you could see the concrete mats that are holding down some of these flow lines in very, very high detail. Also subsea sand dunes, aquatic habitat mapping. So this is important for scientists who are looking scientists and people in the fisheries industry that are looking for what's down there on the ocean floor and where are schools of fish likely to be and likely to prosper. So ultimately, this high definition technology allows us to cover greater areas of the sea floor in high definition. So if you think of the way the offshore industry works today, you might have a company that says I need 1,000 square kilometers of the ocean mapped. And with conventional technology, you would run a lawnmower pattern, and your line spacing would be very small because of the limits of the technology. With synthetic aperture sonar, you're able to go to cover much wider line spaces in high resolution. So ultimately that 1,000 square kilometers could be covered in a much shorter period of time, which means that the surface vessel is out there in a much shorter period of time, which saves the customers money. So that's the background of Synthetic Capture Sonar technology. On Slide number 14, we just highlight that we've integrated our SaaS sensors on more than 20 underwater platforms out there today from a variety of customers. Everybody from the industry leaders like Hydroid in the U. S, which is now owned by Huntington Ingalls to Kongsberg, which is a Norwegian company and one of the biggest players in the underwater domain. A variety of defense companies as well. You'll see Lockheed Martin on there. ECA of Robotics out of France on there, as well as DIVE Technologies, which is the red AUV on the left hand side there. They're ex Bluefin General Dynamics folks out of the Boston area. So we've got lots of experience integrating our technology into other people's underwater vehicles. And we believe we're by far the have sold by far the largest number of SaaS sensors to third parties in the industry. Slide 15 talks about one of our recent developments called the MAN Portable SaaS. So this is a case of a small underwater vehicle. The U. S. Navy has more than 100 of these in its fleet today, and they continue to build new ones. Non U. S. Navies, friendly navies also have a large number of these and they continue to build new ones as well. And historically, SaaS technology has never been we've never been able to no one in the industry has ever been able to integrate SaaS technology onto these underwater vehicles. But we've done that over the last year. We've sold a couple of units into the U. S. And we're in active pursuit on a number of programs, which could turn into a very nice revenue stream for us. Our main competitor on these particular programs in the synthetic aperture sonar space sell a much more expensive product, which reports have been that the operator experience isn't nearly as good as well. So, so far we've received good feedback and we expect this to be a good revenue driver for the business going forward. Slide 16 is just an example of our Catfish technology. I think the key thing to point out here is that we sold our first one 3 years ago. So this is a new product for us. We've won a couple of major programs recently with it. And as I mentioned earlier, we have a large pipeline of opportunity with the Catfish products. So we expect we'll continue to win our fair share of that business going forward. On the right hand side, you can see our Catfish on that is an unmanned surface vessel or think of a drone boat from a large Israeli defense contractor called Elbit Systems, that's one of our customers. So we've got a variety of different customers and potential customers in various geographies that have lots of interest in this catfish product. I mentioned previously our battery business. The important thing to point out about our sub sea power business, which is based out of Germany, is that we don't have any special sauce within or any secret sauce within the type of battery. We're using lithium ion batteries like lots of our lots of people in the industry use. What's unique about our technology is the pressure tolerant gel encapsulation that we use, which means that we can pack more energy into the same footprint and go 6,000 meters deep. What does that ultimately mean? That means that a person that has an underwater vehicle can stick its underwater vehicle in the water and go on longer mission times without having to worry about coming back and changing the batteries. So Ocean Infinity was our largest customer in this space. They have 15 of those orange underwater vehicles. You can see Kraken batteries inside those. So when they bought those vehicles, they had they came with the original OEM batteries. Ocean Infinity removed those batteries and bought batteries from us to upgrade. So that's a good little business for us and we use those batteries in our own AUV platforms as well. Okay. So switching gears here, getting towards the end. Robotics, most of the discussion so far has been focused on the product side of the business. Now I'll talk about the service side, which we call robotics as a service. We've been from a revenue point of view, it hasn't moved the needle very much, but this is something that's been in development for us for a number of years. A key accelerator of this was in 2019, we were awarded a $20,000,000 pilot project with the Canadian government and some industry folk in Canada to take our technology and expand upon it and go out and start to offer it on a service basis as opposed to selling it as a product to another service company. So where we sit today is the Catfish product that I've mentioned before is we've got some of that equipment built for our own survey use. Our laser scanner business, we're not in the process of selling that as a product. We're going to generate inspection revenues of that as a service business. And over the last 6 months, we've added dedicated personnel to operate the equipment for this robotics as a service team and they've come from some of the bigger offshore survey companies in the industry. So we've had the technology. It was a matter of putting the people in place to offer it on a service basis. And then when Pangio came into the fold as an acquisition, what they really do is they are a business that has been around for more than 10 years with existing customers, established contracting and operations processes and disciplines. They know how to operate equipment out there for weeks at a time offshore. And so we're taking all those skill sets that they have and we're putting our technology into their service offering and it's a real nice combination. So on Slide number 20, you can see just an example of various pieces of equipment that we have to offer as an offshore service business. Those are deepwater AUVs and to shallow water catfish that I talked about previously. And in the top right corner is a more in chain inspection tool, which takes advantage of our laser scanning technology. Okay, for time purposes, I'm just going to flip forward a few slides. On Slide 23, to highlight our cVision laser scanner tool, you can see that this technology gets integrated on to remotely operated vehicles or ROVs and it's used a number of applications, one of which is mooring chain inspections. So it's a great application of this technology. And on the right hand side, you can see example of a mooring chain And we've provided a color map, which is basically showing corrosion, various levels of corrosion on a mooring chain. So it's a large market opportunity. This is new technology into a market where previously the way of inspecting some of these chains was either to just take the chains out or to put divers down or to use mechanical calipers on remotely operated vehicles. So we're really bringing new sensors and robotics to this market, which we expect will start to generate really decent revenues for us. On Pangio, just to give you a little bit of background. So they are also an acoustic sensor technology company. As I said, they provide it on a service basis versus Kraken provides it on a product basis. On Slide number 24, you can see that their technology can image objects that are buried into the seabed up north of 30 meters buried into the seabed versus Kraken's technology is used to find and inspect objects that were on the seabed. So we can cover the whole gamut now. We closed this acquisition at the end of August. We paid $14,000,000 for this company, doing about $10,000,000 in trailing revenues. Of that $14,000,000 we paid $3,000,000 in cash, dollars 7,000,000 in stock and a vendor take back note of $4,000,000 for 2 years. We can also pay up to $9,000,000 based on the earn out over the next 2 years based on Pangio's revenue. So we think it was an attractive acquisition and we've highlighted the strategic rationale of the business previously. I would highlight on Slide number 25, Pangio, as you can see about 80% of their market is the offshore renewable market. And you can also see a number of repeat customers both on the contractor side and the offshore wind operator side, a number of notable names that folks would be familiar with. So in summary, yes, that's I guess that is it in summary. So we play in a niche industry. We now have a combined mix of both products and services, which makes our business less lumpy than it used to be. We've got a solid backlog and we're at an inflection point where we're going from starting to see significantly increased revenues with nice profitability just starting to kick in as those revenues start to accelerate. And that is everything for me. Thank you very much for your time. Thank you, Greg, for that overview. Let's expand a bit on a few topics here. Looking forward, what are the most important things you are focused on to drive success for 2022 and beyond? Yes, I would say probably three things. First of all, would be this execution on the backlog that we have today. So that is predominantly the Danish and Polish Navy shipments, which we will see. There's been a lot of engineering work that has gone into that over the last year. And we're in the production build phase right now and we'll start to ship the first units here in Q4. We should have finished shipments of those by Q3 of next year. So there's a flurry of activity happening on the production side over the next year to get those out the door. And then it that contract converts the Danish Navy contract converts into a support contract over the following 14 years after we've delivered the initial product. So that's the first thing. The second thing is the integration of Pangio. So as I mentioned, we're Kraken, original Kraken is a product company. Pangio is a service company. We're in the process of integrating the management team and the employees today. There's complementary skill sets where Kraken brings a deep engineering and technical value into Pangio. And Pangio brings very strong processes, contracting and operational experience in the offshore services market to Kraken and we can slot our technology into their service offering to really drive the revenues and profitability that we're looking at from a service business. So that was the second point. And then the third point would be really continued execution or execution on the pipeline of opportunities or capturing the opportunities that are in front of us. As I mentioned, we are predominantly on the product side military focused. The negative thing about that market as a small company, a small public company is that they can be the orders can be lumpy and there's long lead times. But on the positive side, a lot of the things that we've seen over the last year and that we're going to see later this year and over the next couple of years, are opportunities that have been in the pipeline for a number of years maturing and now they're finally starting to get contracted. So really the focus is making sure that we have the proper feet on the ground on the contract pursuit and we're partnered with the right defense contractors to go after all these opportunities. Well, that's great. Well, Greg, we are out of time. So I want to thank you very much for your time today. We greatly appreciate it. Again, if you'd like to sign up for 1 on 1 meetings with Kraken Robotics, please visit lithampartners.com/virtual and click the 1 on 1 meeting request button. Finally, we have another presentation coming up here shortly. Again, visit the website for details. We wish you all