Thanks for joining us today. This is the WTR Virtual Insights Conference session with Nauticus Robotics. I'm Peter Gastreich, managing director of energy transition and sustainable investing at Water Tower Research. It's always a pleasure to welcome John Gibson, who's the President and Chief Executive Officer of Nauticus Robotics. John, thank you so much for joining us today.
Good morning, Peter. Glad to be here.
Just bear with me, we have a few housekeeping items before we get going here. First off, Nauticus Robotics' safe harbor statements can be found on the investor tab of the company's website, and I'd encourage you to review those. Second, investor questions are very welcome, so please enter those in the chat box, and we'll make sure those are delivered to John and his team. Finally, very important here, if you'd like to request a meeting with the Nauticus management team, you can register that interest through the conference portal. With that, let's get started. John, let's start at the top here. Could you walk us through kind of a high level what Nauticus Robotics does, the markets that you serve, and how you describe the strategy that you're executing now?
Well, for the new people out there, I would tell you that Nauticus is an Underwater Robotics and Autonomy company. We operate today in the offshore energy, offshore wind, and increasingly, we have opportunities in the defense and government markets. We have three important pieces of technology. We have Aquanaut, which is our autonomous subsea vehicle, Nauticus ToolKITT, which is our shared autonomy layer and software, and our electric manipulation technology and the services that go with those, as well as a pair of Comanche ROVs that we're able to do service work as well. Our strategy has evolved from being primarily an R&D company, to becoming a commercial technology company. We can generate revenue today through conventional subsea services, while we're introducing autonomy into those operations, so to begin that change in the industry.
Longer term, we believe the net scalability comes from software licensing, autonomous vehicles, and particularly our manipulation technology. Objective straightforward is we use robotics and autonomy to perform subsea work more efficiently with fewer people and less surface infrastructure. Peter.
Let's move on to. Thanks for that introduction there, John. We'll move on to the Nauticus ToolKITT in the field and, of course, always keeping in mind that for these fireside chats, we will have a few generalist investors who are new to the story. You mentioned that a Comanche running Nauticus ToolKITT went to work in customer operations this year. Your team said it exceeded expectations. That's what was mentioned at your analyst briefing. Could you start us off, again, for those newer investors, what a Comanche actually is and what the software did on that job, and what the customer ultimately gets out of it?
Well, Peter, let's see how I can do on this. A Comanche, really, it's a work-class remotely operated vehicle, ROV. It's the standard type of subsea robot, and it's really not a robot in some ways. It's just a remotely operated vehicle. It's a type of subsea equipment that's traditionally been connected to a vessel by a tether, and it gets its power from the vessel, and it's operated by a human pilot. Think of it as an airplane with a pilot sitting there, just happens to be connected with a 3 km long cable. They operate everything to do with the vehicle. Now what we've done is we've demonstrated with ToolKITT, the equivalent of an autopilot on an airplane. We can add autonomy to that existing vehicle, just like it was added to an airplane.
On the customer operation, ToolKITT helps the ROV hold position so they are not constantly struggling to keep the vehicle in the current in a specific location. Because it compensates for currents, it navigates between the waypoints going from one position to the next known position. If you are on the sea floor going from one wellhead to the next wellhead, it does that for you automatically. It still remains under pilot supervision or pilot observation, just like you would on an airplane. That reduces the pilot workload. It makes the vehicle safer and easier. It improves efficiency by as much as 20%. So think of the ToolKITT as really giving them the ability to do 20% more work, fewer ROVs for them to have to purchase, less capital to deploy. Or if they are doing turnkey work, increasing their profitability by completing that turnkey work more quickly.
We think that doing this is really allowing us to implement change management, which is taking people from doing things human supervised to robotics. We are doing it through the platform that they have used historically so that they can begin to move towards using Aquanaut and make that transition to full robotics where it is battery operated, no tether, and does not require a human operator.
You have said before that no autonomous underwater drone in the Aquanaut class carries a manipulator today. Why is that autonomous manipulation such a hard problem to solve, and what does it open commercially that inspection work alone does not for you?
Well, if you really think about what we are trying to do 3 km below the surface of the ocean, we are trying to move an autonomous vehicle through the water, and that is difficult by itself, just doing the navigation. Having that vehicle independently interact with subsea infrastructure and actually interacting with the environment it is in is considerably harder. Okay, because you are trying to do this without human. The manipulator has to identify the object, it has to position the vehicle precisely, it has to understand the environment, and then physically perform a task, so it has to be trained on behavior. That is all without a human pilot continuously controlling it. That is the important part. We believe combining autonomy and manipulation, and believe we are a leader in this.
This is not like welding in an automobile factory where it does a fixed move every time. It's having to adapt based on perception and perform behaviors. That is one of the remaining major challenges in subsea robotics, and I think we absolutely are leading in the development of that in the R&D. Commercially, that's important. Inspection allows you to observe something. Manipulation allows you to interact with those things. So having that manipulator sets us apart from all other AUVs, and having a payload capacity as well, so that we have the potential for turning a valve, recovering a black box, or making an adjustment on infrastructures on the sea floor.
So it's pretty exciting to see that our capabilities are absolutely differentiated and that we'll be able to move from inspection to intervention as we move forward and put this new generation of manipulators to work on the Aquanaut.
You recently pointed to substantially stronger third quarter activity, with work underway in two offshore markets in the Northeast and also in the Gulf Coast. What's really changed in the demand that you're seeing and, how much of that reflects the diversification that you've been deliberately building over the last year?
Demand is pretty excited about that, Peter. Sorry to cut you off. Go ahead and finish.
Nope. That's it.
No. Yeah, that's the trouble with us being live and spontaneous here. What we are seeing in the third quarter is a significant improvement in the commercial work and stronger utilization of particularly our ROVs. The Comanche systems are both working. One's up in the Northeast offshore wind market. I'm very excited about that. We are using ToolKITT, are eating our own dog food. We're using our autonomy on these ROVs, and we're seeing improved performance and customer satisfaction from it. They really like the elimination of non-productive time. We had a flawless run for them. They're doing the wind job. We're also seeing improved level activity in the Gulf Coast. What's really encouraging is the diversification, as you pointed out. A year ago, we were much more dependent upon the Gulf Coast, looking at oil and gas activity. We're really expanding more into offshore wind.
We're moving into both coasts. We've got work coming up on the Pacific side. We're moving into international markets, and we're very excited about what's emerging for the defense sector for us. We can talk about that in a minute, I hope. It's not about just having two vehicles offshore with the ROVs. We really want to show that all of our technology is expanding into more markets. It's being evaluated in international markets, and that's reducing any dependency we'll have in the future on a specific geography or a specific industry.
On the second quarter call, your team talked about moving up that contracting chain more towards a primary contractor on international work. What is that shift like? What does that really mean for the company overall in terms of your margin, and what do you need in place to execute and bid on that level?
Well, Peter, there's nothing like being a subcontractor. You have no control over anything at that point. You get told by the general contractor what to do and when to do it, and you can't control the timing on that as well. We really are moving towards being a prime contractor. That is, we want to manage that customer relationship, manage the expectations, and we want to capture more of the value of the technology because you know that any prime contractor's going to mark up your work if you're the sub. We'd just as soon keep that markup for Nauticus as opposed to transferring that over to another contractor. But to do that, you've got to earn that ability. You need operating experience, you need project management capability, customer relationships.
You have to have insurance, you have to have contracting infrastructure, and something that we're working on is you need balance sheet support. I think we'll grow even faster after we've got a stronger balance sheet because you're having to responsibly take on that risk when you're a prime contractor. We're trying to evaluate all of those and put them in place. We're developing the capabilities, particularly internationally. The objective isn't to just generate more revenue, it's to generate more profitable revenue and get a larger share of the economics, and that's our focus.
One thing that's been very noticeable this year is that you've been moving closer to that defense and government work is really becoming a center of your near-term strategy. What is it about those missions that fits what your technology does and how do those phased government programs suit a company at your stage right now?
This is both a really great story and a bit of a timing issue for us. In order for us to focus on defense, we haven't pursued as aggressively the lower margin oil and gas work here in the near term. The Aquanauts have been busier in doing projects to prepare for defense contracts, and so we are working on securing those contracts. You take a look at it. The whole of the defense industry lines up extremely well with the technology we've already developed. We have the autonomous navigation, we've got persistent subsea sensing, infrastructure inspection, and then obviously the manipulation allows you to intervene with the environment as well. That's important. The government's becoming increasingly interested in putting capability underwater without requiring large surface vessels or a large number of personnel. They would really like for it to be completely autonomous.
That's fundamentally what we develop here, and so we're really focusing on what is required to meet their missions. The phased nature of government programming also fits us well. Rather than requiring immediate fleet scale deployment, we can actually scale up with them and show progress through demonstrations. We're working on getting those engagements, doing evaluations in increasingly larger operational activities. We'll talk hopefully in a minute about some of the things we're doing to engage with the defense industry, because that's a market that we had done in the past, had moved to oil and gas, but now see defense being far better. It's something we've already done and have credibility in. We're approaching the defense market now as a long-term market, not simply an adjacent market.
I think this could increasingly be the major focus of the company is supporting defense-related work, both in the U.S. and internationally.
Yeah, on that note, you've got a lot of defense conferences coming up in the next few months. Could you talk about where you're headed? I understand those are in U.S. and Europe as well. Where are you headed? What are you going to achieve at those conferences?
You asked Europe and the Middle East, Peter.
Oh, Middle East.
Yeah, as well. We just got back from the Unmanned Maritime Systems Technology Conference in Arlington, Virginia. That's a great place to be because people at the Pentagon can just run over for a couple of hours and check out what's going on and then head back. You get to see a lot of customers there on the defense side of the business. It's pretty exciting. It's highly focused defense conference, bringing U.S. naval leadership together, acquisition organizations, industry, around unmanned maritime systems, which is precisely the market that we're in. It's not a general conference like an oil and gas technology conference. This is focused on unmanned maritime systems. I think we showed extremely well there. We've got some great leads to follow up on as we go through the rest of the year.
We also headed over to the Defence iQ event in Lisbon, Portugal, coming up shortly. That's going to be mostly the European defense industry as opposed to the U.S. industry. We're excited to be there. It'll put us in front of decision makers in the European market, military operators, the procurement organizations, and they also are looking at emerging autonomous and maritime technologies, which we fit perfectly. We'll be at ADIPEC, and I hate using acronyms like that, but that's the Abu Dhabi International Petroleum Exhibition and Conference, in Abu Dhabi. They have a lot of work to do in the development of that infrastructure as they try to expand production in the coming years to meet the shortfall that has developed.
It's one of the world's largest energy gatherings, bringing together both national and international companies, and it does allow us to stay engaged, particularly with our operations opening in Ras Al Khaimah, with that market so that we can pick up work as well in the Middle East. Those events aren't simply about exhibiting technology. We're using that to sit with people, define missions, control the programs, and what we really want is procurement and commercial decisions made. That's why we're attending. This isn't to do a show. This is to get immediate leads to build our revenue. The objective is to turn those conversations into funded programs, partnerships, commercial contracts, Peter. This isn't about just attending for marketing reasons. This is about going and securing work for the company in the near term, and particularly the 27th.
Okay, absolutely. Well, you mentioned Ras Al Khaimah. Could you talk a little bit more about what you're doing there with the Master Investment? Excuse me.
Yeah.
There we go. We're live. Just knocked over my microphone. This is live, folks. Going back to Master Investment Group, just a question about what would that do for you, and how would that change your cost position, access to customers there?
Yeah, we're going to have to buy you one of these desktop microphones that flat. The U.A.E. gives us a, it's a tremendous opportunity for us. It's the world's most important offshore energy region really is there, in Qatar and the U.A.E. It's exciting. It's a very strong gateway for us to be in Ras Al Khaimah to the GCC and to international markets. It's a great international hub there. We're establishing a presence in Ras Al Khaimah. I believe we've gotten our entity completed there, working with Master Investment Group, who have been just a fabulous partner. The vision is way broader than having a sales office.
That region, we believe is going to support our manufacturing. Our operations for that region is likely to become a headquarters for us, both customer support and deployment and training as we train locals there to actually operate our equipment so that we can be in line with the cost for the local labor markets. We should be manufacturing components and doing assembly of the manipulators in U.A.E. That's our first goal. I think it'll give us a different cost structure with improved profitability and put production closer to some of the customers that are going to demand it early on. Really, it's important to have a local presence because that changes the conversation. Being an American company trying to work there is not as enticing to the customers as being local and having a local presence.
We don't want to serve the Middle East from Houston, we want to serve the Middle East from the Middle East. I've spent a lot of time there and have great relationships. We want to be a regional operator, we want to be a technology provider, and we want to help them achieve their goal of really being in the robotics manufacturing sector. I think they're excited to fund and assist us on that, and we think that's a perfect fit for where we're going and the capital requirements we have and the markets that we're trying to approach.
Great. Let's move on to the financial position and funding strategy for the company. Your balance sheet work has been a significant part of this year, including debt for equity exchanges and the equity line. How would you describe your funding strategy from here, and what is a path toward self-sustaining revenue base look like as software and those fixed prices, that fixed price work, excuse me, start to contribute?
We're still fighting the good fight here on having sufficient capital, Peter. That's been a focus for us to develop the technology, and we've spent a considerable amount of effort and time improving our capital structure, as you mentioned. We've been exchanging debt for equity. We're putting additional financing mechanisms in place. We've done all the work to accommodate what looks like maybe Nasdaq changes and compliance for listing, and that's taking effort as well and consumes both time and cash. We're still at a stage where access to capital is important. We are an emerging company, and we've got fantastic technology, so we're managing our liquidity really carefully. the strategic objective is to increasingly fund our business through commercial activity rather than through relying entirely on the capital markets.
We've got the assets in place and the people in place to really secure work that can assist us in funding this emerging company without having to be entirely dependent on capital markets. Revenue mix matters, too, though. Conventional subsea services provides revenues and customer access today. Those ROVs are getting us into customers early, where we can build the master service agreements, get all the contracts put in place. Then we can go in and transition them from doing it the conventional way to being fully autonomous as we move to the Aquanaut. We're building a system that can pull through everything. ToolKITT, software always highest margin, lowest capital requirements, and we want to see recurring software revenue. We're focused on putting the ToolKITT ROV out, Nauticus ToolKITT ROV. Why?
Because there's a huge deployed base of ROVs, and selling the software into an established market that can use it and benefit from it and improve their performance makes the most sense. The path forward is sustainability. It's about converting technology into revenue and really getting a scalable revenue base. We're not losing customers. I can't explain how important this is, but the quality of the work we do, the focus that we have on customer success, the customers that we're working for call us back. We just have to get them to scale it to where they're signing longer-term, larger engagements as opposed to just calling us out and having us do transactional work, then that's where we're headed.
Okay, great. Could you share for investors, over the next several quarters, what are some of the key milestones or signposts that you'd suggest they follow to provide evidence that you're executing on your strategy?
The defense opportunities. We should listen for us talking about defense opportunities. This is the hottest market for maritime autonomy in the world today. We have got to make those engagements and work there. We had a fantastic conference there at the Unmanned Maritime System and engaging with them. Look for us to follow up on that and talk about that. Look at ToolKITT. We need to start converting from demonstrations into licenses and deployment on third-party vehicles on non-Nauticus Robotics robots. And since we're platform-agnostic, we need to be selling to other people's robots. International expansion, you're going to see more coming from us about the move to the U.A.E. That's going to translate into contracts and regional activity. We've got tremendous local support there. And then the Aquanaut itself, the manipulators are progressing well on the next generation.
Look for an announcement on those manipulators, and the market really is looking for us to get one of those out. And it's not just the manipulator, it's also the software that allows the manipulator to work autonomously. So you have two sales there. You have the actual hardware, and then you have the software to support it. And so we're excited about the delivery of the manipulators. So, defense, ToolKITT, international expansion, manipulation on the Aquanaut. Those are the four things I'd look for us to make announcements on, and those are the signposts to see that we're converting this from tech into revenue.
Okay. There you have it. Very clear. So John, I'm afraid we are running out of time here. This has been quite comprehensive, though. Is there anything, though, that we missed today or would you like to provide a few closing remarks?
No, I talked long enough today, but I would just say we have to execute, we have to execute. I have great people here. These are some of the leaders in robotics and commercial deployment of technology and software successfully. We have got good customer satisfaction with what we are doing today. Still emerging, still a venture capital company that happens to be listed on Nasdaq. The timing on getting the technology mature and the TRL level up to where we want it is taking us longer than I like, but we are closing that gap. I think this is a tremendous platform for the future, and I am just blessed to be here, Peter.
Okay, fantastic. Well, John, thank you so much. That was a great discussion as always with you. We appreciate you spending some time with us today, and we look forward to having you back very soon.
Thank you, Peter. Take care.
Great. Thanks as well to everyone who joined us for this session. Remember, if you would like to arrange a meeting with Nauticus management team, please indicate that through the conference portal. Additional research and content on Nauticus Robotics is available at watertowerresearch.com. We have another session starting shortly, so please stay with us for that. Thank you.