Mr. Greg Reid reports

KRAKEN ROBOTICS REPORTS RECORD FINANCIAL RESULTS

Kraken Robotics Inc. has filed financial results for the third quarter ended Sept. 30, 2023 (Q3 2023).

Management comments

"With Q3 being our strongest quarter in history and Q4 expected to show further improvement, we are on track to hit our financial guidance for 2023," said Kraken president and chief executive officer Greg Reid. "More importantly, we are confident that our momentum will continue in 2024 as our sonar and subsea power business are seeing strong growth opportunities.

"There is a clear uptick in demand for uncrewed underwater vehicles (UUVs) where we sell both sonar and batteries to AUVs [autonomous underwater vehicle] and provide minehunting solutions to navies with our Katfish towed synthetic aperture sonar solution. The emergence of a new class of UUVs, the extra-large UUV (XLUUV) is driving much higher energy requirements in UUVs and our subsea battery business is benefiting. Many countries and navies around the world are in various stages of upgrading their subsea surveillance equipment, with underwater solutions such as towed sonar or autonomous underwater vehicles that are deployed from crewed or uncrewed surface vessels (USVs). Kraken's technology portfolio and product and service offering are well positioned to ride this demand wave. Our second-largest market, offshore wind, has seen continued solid demand for subseabed services. The offshore wind and offshore oil and gas market represents 15 to 20 per cent of our overall revenue stream.

"During the quarter, we eliminated most of our long-term debt as we paid off the PanGeo acquisition debt, with no further contingent consideration, and we almost doubled our credit facilities to $12-million, providing greater flexibility for our working capital requirements. Given our forecast, we believe we have all the cash we need to execute on our business plan, and expect cash balances to improve as orders are executed and we hit various payment milestones. As said previously, we believe our value in the market is not reflective of our significant investment to date, our unique competitive position and strong pipeline. We will continue our focus on execution as we believe we are in the early days of creating significant shareholder value."

Q3 2023 financial highlights:

• Consolidated revenue for Q3 2023 was $20.3-million compared with $12.3-million, an increase of 66 per cent over the comparable quarter, and was Kraken's strongest revenue quarter to date. Revenue mix was 85 per cent Products/15 per cent Services.
• Product revenue in the quarter was $17.2-million, an increase of 126 per cent over the comparable quarter. The increase was the result of continued sales of subsea batteries, work with the Canadian Navy on its Remote Minehunting and Disposal Systems (RMDS) program, the production of the Katfish product, as well as the sale of synthetic aperture sonar (SAS) systems.
• Service revenue in the quarter was $3.2-million, a decrease of 32 per cent over the comparable quarter due to a large Acoustic Corer project in the comparable quarter a year ago.
• Gross margin percentage in Q3 2023 was 49 per cent compared with 36 per cent in Q3 2022. The improvement was due to increased sales volumes of higher-margin products during the quarter compared with the prior year.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the quarter was $4.4-million compared with an adjusted EBITDA of $1.7-million in the comparable quarter. Adjusted EBITDA margin in the quarter was 22 per cent compared with 11 per cent in the comparable quarter with the increase due to higher revenue and improved gross margin.
• Net income in the quarter was $2.3-million, compared with net loss of $900,000 in Q3 2022.

Highlights year-to-date Sept. 30, 2023:

• Consolidated revenue year to date was $41.6-million compared with $32.1-million, an increase of 30 per cent over the comparable nine-month period ending Sept. 30, 2022.
• Product revenue year to date was $33-million compared with $19.8-million to Sept. 30, 2022, an increase of 66 per cent.
• Service revenue year to date was $8.6-million, a decrease of 30 per cent compared with the comparable period ending Sept. 30, 2022. The decline is related to having a large Acoustic Corer project completed in the prior year that was not repeated in 2023.
• Gross margin percentage year to date was 53 per cent as compared with 39 per cent in year-to-date 2022. The increase is due to sale of higher-margin products during the current year compared with the prior year.
• Adjusted EBITDA year to date was $8.4-million compared with an adjusted EBITDA of $4.4-million in the comparable period, an increase of 92 per cent. Adjusted EBITDA margin year to date was 20 per cent compared with 14 per cent in the comparable year. This is due to higher revenue and improved gross margins.
• Total assets were $70.5-million on Sept. 30, 2023, compared with $65.5-million on Sept. 30, 2022.
• At Sept. 30, 2023, Kraken had $9.5-million remaining in grant funding to be offset against research and development activities. This off-balance sheet item relates to government or commercial contracts that are not recorded as revenue, but will reduce the company's actual R&D costs through the end of 2025.

Financial update

As it approaches year-end, Kraken is tightening its range for 2023 financial guidance. The company expects revenue to be in the $66-million to $72-million range (previously $66-million to $78-million) and adjusted EBITDA in the $12-million to $15-million range (previously $12-million to $17-million). The midpoint of the company's guidance range ($69-million in revenue and $13.5-million in adjusted EBITDA) implies revenue growth of 70 per cent and adjusted EBITDA growth of 155 per cent over 2022. Capital expenditure in 2023 is expected to be approximately $6-million. Consistent with the last two years, Kraken expects to give guidance for 2024 in the April, 2024, time frame. The company will enter 2024 with notable contracts in hand, a very strong pipeline and solid end market demand in its largest market: defence.

About Kraken Robotics Inc.

Kraken Robotics is a marine technology company providing complex subsea sensors, batteries and robotic systems. Its high-resolution 3-D acoustic imaging solutions and services enable clients to overcome the challenges in oceans -- safely, efficiently and sustainably. Kraken Robotics is headquartered in Canada and has offices in North and South America and Europe. Kraken is ranked as a top 100 marine technology company by Marine Technology Reporter.

We seek Safe Harbor.