Kraken Robotics Stock

Good morning everyone and welcome to the Kraken Robotics second quarter 2026 results conference call. As a reminder, all participants are in a listen-only mode. The conference is being recorded. My name is Jamie and I will be your operator today. Following prepared remarks, there will be an opportunity for analysts to ask questions. To join the question queue, you may press star and then 1 on your telephone keypads. Should anyone need assistance during the conference call, they may reach an operator by pressing star and zero. I would now like to turn the floor over to Sean Madian, Director of Capital Markets.

Good morning, everyone, and thank you for joining Kraken Robotics' earnings call. The three and six months ended June 30th, 2026. Before we begin, I want to remind everyone that certain statements in this call may be forward-looking in nature. Matters discussed, including management estimates, statements involving known and unknown risks, uncertainties and other factors, could cause actual results to differ materially from those expressed or implied in our forward-looking statements, which reflect the company's judgment based on information available at the time of this call. I'd also like to refer you to the forward-looking statements, risk factors, and additional detail on non-IFRS financial measures we have provided in our AAF, release MD&A and presentation, which are either available on CEDARplus or our website. Otherwise stated, all dollar amounts mentioned during this call are denominated in Canadian dollars. Joining today's call from Kraken Robotics is Greg Reed, Chief Executive Officer and Joe McKay, Chief Financial Officer.

I'll now pass the call over to Greg for his opening remarks. Greg?.

Good morning, Sean, and good morning, everyone. During today's call, we'll start off with some key highlights during the year, a quick review of our second quarter results, followed by an update of our business post the closing of our transformative acquisition of Covalu Group, which we close on June 1st. July 2nd this year, so just after the quarter ended. Some recent highlights, looking back at our results during the second quarter in the first half of 2026, we continue to focus on building the business for long-term growth. In addition to closing our Cobelli acquisition, these growth initiatives were supported by five key points. First, our enhanced organizational structure, which includes several new additions to our senior leadership team. 355 million of product orders to date in 2026 for both Kraken and Covilia, including over 27 million incremental product orders since our last corporate update in July. An expanding customer base with new customer relationships, including a recent long-term master supply agreement with an international manufacturer of extra large UUVs, or what's known as XL UUVs, and increase manufacturing capacity, including our new facility in Nova Scotia, Canada, alongside our new building at our campus in the UK, which we take possession of in Q3.

Lastly, our ongoing discipline to maintain a strong balance sheet. Through our Covalia acquisition, we have significantly increased our technological capabilities, total addressable market in the overall ocean economy, and our ability to provide both products and services to a range of customers with our dual-use technologies. We are in the early stages of what we believe will be a significant growth cycle. This growth is expected to be driven by the defense industry due to geopolitical drivers and industry upgrade cycle and the changing nature of warfare towards autonomous and hybrid fleets. For commercial sectors such as offshore energy, companies are continuing to transform to automation and robotics to deliver long-term reliable energy in a safe and cost-effective matter. This cycle is already occurring with applications of our technology already in various end markets, such as mine countermeasures, intruder detection, critical underwater infrastructure inspection, anti-submarine warfare, and intelligence surveillance and reconnaissance, among others. On a similar note, our commercial applications include projects relating to asset integrity for key infrastructure, marine construction, offshore oil and gas, offshore wind, cable installations, subsea mining, carbon capture and storage, and maritime shipping, in addition to ocean science and environmental research.

As a trusted engineering group to the challenging maritime industry, we continue to work with our customers on such projects and help to develop new solutions that will require our systems and technology. Before I pass things over to Joe to review our Q2 results, I want to expand on a new organizational structure, which we created as part of the integration plan with Cobellia, alongside some of the key appointments we have made to the team. Our new structure consists of crack and group, led by myself as CEO, and several executives focused on the financial governance corporate development, legal, enterprise systems and security, and human resource related aspects of the overall business. Reporting into the Kraken Group is a clearly delineated Kraken Robotics operating business that is led by Bernard Mills, who was recently promoted to president from his previous role as executive vice president of Kraken's defense business. Bernard brings a wealth of experience from running large global organizations and previously served as CEO and managing director of a subsidiary of the Airbus Group. Prior to that, he was president of Ultra Sonar Systems, a division of Ultramaritime, who are a leader in anti-submarine warfare solutions, required by Lockheed Martin. As illustrated on slide 8, the operating side of the business will include teams led by various members from Covalia and Kraken, alongside a new recruit, Joanne Roberts.

Based in the UK, Joanne starts in October and brings relevant experience from defence companies such as Drum Range, Ultra and Calus. This structure allows us to integrate Covelia alongside its various subsidiaries in an efficient manner with clear leadership and accountability, structure go to market and ensuring we develop the connective tissue between our previously independent organizations. With this new organizational structure, our integration efforts are well underway, including identified revenue enhancement opportunities and execution against our targeted cost synergies. With that, I'll now pass the call over to Joe to review our.

our Q2 results. Joe? Thanks, Greg. As a reminder, our second quarter results do not include any contribution from the conveyor acquisition, which closed subsequent to the quarter. Q3 ended September 30th will be the first quarter of the combined financial results. We expect to report our Q3 results on November 24th. Consolidated revenue for Q2 totaled $27 million, including product revenue approximately $17 million and service revenue of over $10 million. Product revenue during the quarter continued to reflect strong demand for Kraken SAS and sub-sea battery products, and included the delivery of a spare catfish tow body that will be used by a European Navy customer for its mine hunting program. Product revenue during the second quarter was negatively impacted by $1.5 million due to a change in scope associated with an integration project that is nearing completion.

Excluding this impact, consolidated revenue during the quarter increased approximately 10%. On a product revenue basis, year-over-year growth would have equated to 11% during the quarter and 25% for the first half of the year. Service revenue grew 6% in the quarter on a year-over-year basis, or 9% for the first half of the year. Quarterly revenues in year-over-year comparisons in this segment of the business can fluctuate significantly due to the timing of products and seasonality in the offshore energy business. Gross profit during Q2 increased to over 16 million, while gross profit margin remained strong at 59%, up slightly over the prior year. Adjusted EBITDA in the quarter increased slightly to 5 million, resulting in adjusted EBITDA of a margin of 18% in line with the prior period. Excluding the impact from the change in scope mentioned earlier on the integration project, adjusted EBITDA margins in the quarter would have equated to 20% with adjusted EBITDA growth of 26%.

Capital expenditures and tangible assets purchased during the quarter totaled just over $9 million compared to $6 million in the prior year. These expenditures were for new marine assets to support revenue growth and additional tools and equipment related to Krakow's new subsea power manufacturing facility in Halifax. Our balance sheet remains strong at the end of the quarter, with cash transition of just over $91 million and working capital of $152 million. Long-term debt and obligations and lease liabilities were approximately $40 million, and Kraken continues to maintain a strong balance sheet subsequent to the closing of the Covea transaction with minimal debt. Minimal net debt, I should add. On July 2nd, upon the closing of the CAVEA transaction, we issued 2026 guidance to reflect approximately six months of contribution from CAVEA. This guidance remains unchanged. For 2026, we expect annual revenues of $209 million to $320 million, adjusted EBITDA between $65 and $60 million. 75 million, and capital expenditures in the range of 27 million to 33 million.

In terms of revenues, over 75% is expected to be comprised of product revenue with the balance coming from our service business.

I'll now pass the call back to Greg to discuss further updates on our look at our business. Thanks, Joe. Excuse me. Thanks, Joe. As we focus on the new track and moving forward, including Covalia, we're very excited about the opportunities ahead of us in both defense and commercial markets. We're now a global organization with a highly specialized workforce of approximately 1,200 employees, over 450,000 square feet of production capacity. and a strong portfolio of dual-use technologies covered by more than 110 active or pending patents. Our combined technology is integrated across a large number of major OEMs from crude systems, such as ships and submarines, alongside various uncrued systems, including AUVs, unmanned surface vessels, and ROVs. For those following along on our webcast, slide 12 is just a small subset of some of the various OEM platforms our technologies are integrated on. As each of these verticals expands, we have an opportunity for continued strong growth, including new customer relationships and cross-selling opportunities.

After announcing our acquisition of Covelia, we've received positive feedback from many customers who are looking forward to working with our combined engineering teams. And we've already been discussing integrated subsidy technologies technology solutions and new applications with such clients. As defense spending and the adoption of autonomous vehicles continues to accelerate as part of maritime security, Kraken's well-positioned benefit through increased product and integrated system sales. This includes subsea batteries, various sonar solutions, navigation and positioning systems, and imaging payloads, amongst other technology within our portfolio. Our dual-use technology also supports offshore energy customers through various phases of their project lifecycle, including discovery, construction, pipe or cable installation, installation, inspection, repair, and maintenance, monitoring, as well as decommissioning. This exposure throughout the entire value chain places us in a strong position to benefit from our long-established customer base at a time when energy security is becoming increasingly important. Beyond crude or uncrewed vessel platforms, our acquisition of Covelia expanded our total addressable market into stationary sensors that sit on the ocean floor or are in the water column or on the ocean surface for monitoring and communication purposes.

These sensors in effect act as satellites of the sea, providing various end market applications, such as intruder detection, anti-submarine warfare, offshore oil and gas seismic data, and monitoring carbon capture projects, along with monitoring subduction zones for ocean science. These types of monitoring applications provide us with various opportunities for both product sales and long-term service revenue. For example, our Sentinel intruder detection system automatically detects, classifies, and tracks subsea threats from divers and swimmer delivery vehicles to AUVs. At hundreds of critical infrastructure sites, such as power plants, liquid natural gas facilities, desalination plants, and other waterside properties. This product has been used significantly in recent years in the Baltic region, the Middle East, Asia Pacific, and other European countries, and continues to be in solid demand today. Another is our on-demand ocean bottom nose, or OD-OBN. This is a new breakthrough technology for the offshore oil and gas industry that our Sonar Dynastos Ciderary has been working on in Brazil with a major opportunity. operator in Brazil since 2018.

This technology allows operators to conduct more frequent on-demand seismic surveys with higher fidelity data and at a fraction of the cost of conventional seismic survey methods. We expect this product to move into the commercial phase in 2027. On the defense side, the current situation in the Strait of Hormuz is only one example of various threats that have taken place on strategic choke points throughout the world and highlight the importance of maritime security to the overall economy. We continue to see a strong pipeline of opportunities and growing interest in unmanned underwater vehicle solutions for mine countermeasures and critical underwater infrastructure, which includes recent demand across North America, Europe, the Middle East, and Asia Pacific. We expect several new and upgrade programs to be awarded to industry starting in 2023. and have been permanently building our teams and inventory in anticipation of these potential awards. Before closing, I think it's worth touching on some recent industry consolidation that's been announced during the past quarter. The maritime domain is seeing increasing focus across defense and commercial budgets.

The oceans are getting more connected, the undersea domain is getting more contested. Maritime security, whether it's for port and harbor security, the littoral waters, or the deep blue ocean is increasingly in focus, driven by geopolitics and energy security. As we've highlighted before, we operate in an industry that requires a highly specialized workforce with extensive experience in the subsea domain, given the physics and the harsh operating environments. This creates a high barrier to entry to establish proven technology. There are also challenges in displacing technology that's already integrated on established platforms. It's for these reasons that we aren't surprised to see consolidation, including sizable transaction and maritime defense companies, as well as defense companies with expertise in other domains such as land, aerospace, expanding through acquisition into the maritime domain. We believe this industry consolidation reaffirms our strategic direction to acquire Covalia to create a global supplier of mission-critical subsea intelligence solutions for maritime security and offshore energy.

It also underscores the strategic value of our business and further narrows an already limited competitive landscape of mid-sized players. We retain a strong competitive position in the marketplace with mission-critical dual-use sensor and power technology, and the fact that we remain a platform-agnostic, independent supplier to the uncrewed underwater vehicle and the uncrewed surface vehicle market. Crack is well positioned in this growing market with long-standing customer relationships in both defense and offshore energy, strong product portfolio and applied integrated solutions, outstanding R&D capabilities for product innovation, and significant production capacity that's already in place. With Crack, we're able to provide a wide range of services, including a wide range that we'll wrap up our prepared remarks. I'd also point you to our website, crackinrobotics.com for more info and we update our website regularly including our financial filings and other updates and you can find our financial filings on CDAR+. I will now pass the call back to the operator.

Thank you. We will now begin the question and answer session with analysts. To join the question queue, you may press star and then 1 on your telephone keypads. You will hear a tone acknowledging your request. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. To withdraw your questions, you may press star and 2. Again, that is star and then 1 to join the question queue. Our first question today comes from Benoit Poirier from Desjardins Capital Markets.

Please go ahead with your question.

Yes, good morning, Greg. Good morning, Joel, and congrats on the strong execution. Yes. Thanks, Ben. Yes, on the battery side, could you talk whether you're seeing any customers move their battery manufacturing process internally? Yes. Yes, I'll talk to that then.

We can't talk about specific customers, but our battery customers, they rely on us for rechargeable pressure tolerant batteries. You can appreciate that our customers build products that also do not need rechargeable pressure-tolerant batteries for every product. and for just to give an example these batteries can be for aerial drones surface drones shallow water AUVs that don't need pressure tolerant batteries some of these shallow water AUVs are not intended to return to home base. And so, thus they don't require a rechargeable battery. So those are some areas of the battery ecosystem we don't play in. And I think, you know, comparison can be seen on the sensor and the sonar side of our business where we've been selling systems into the UUB, ADB space for several decades. Our customers who make these vehicles also have internal sensor and sonar expertise, just like they might have battery expertise, but that doesn't mean they're designing and building their own sensors and sonar. So a similar analogy applies to pressure tolerant batteries for underwater vehicles.

So the short answer is no, we're not seeing our customers manufacture crack and equivalent batteries in-house. That would take away our demand. In fact, it's quite the opposite, Ben. Okay. and to a narrative that another analyst recently referenced. So a few more comments on that. As a company whose expertise on this dates back more than 15 years on the battery side, subsea batteries, our engineers are leaders in underwater battery expertise and we'll work closely with our customers performance and reliability that meets the requirements. And I think finally, to kind of wrap it up, As I mentioned in my prepared remarks earlier, we recently signed a long-term master supply agreement with an additional manufacturer of XL-UUVs for our batteries.

We've also started to supply batteries to two other XL UUB OEMs. and obviously fielding inquiries and quoting several other OEMs who are developing or planning to develop both large diameter and extra large diameter UUVs. So overall, the past, call it 12, 18, 20 months or so, we've added almost 10 new UUV battery OEMs as customers. customers, and they're located in North America, Europe, and Asia. And so we expect our subsea battery business has long legs to it. We'll continue to see strong growth for that in the coming years.

That's very good. No, that's very good caller, Greg. And maybe specifically for the CAM program, what is the timeline on this and how Kraken is positioned with the potential contenders? I think we are up to four contenders right now. I believe there was one addition not too long ago.

Yes, again, given too much detail on customers, it implies too much detail on some of our customers. But yes, there's four so far, and we're on several of those platforms. one that we are not on. We've got discussions and we'll see where that goes if that becomes an opportunity. But you know it's kind of like both for our batteries and our navigation systems and our solar and our optical systems. We are the agnostic independent supplier and we've got great from our technology and so we will continue as the industry grows we expect to be on lots of these platforms.

Okay, and last one for me before I pass the line. You reiterated your guidance for 2026. Could you maybe provide some color about the cadence of revenue growth between Q3 and Q4, and maybe what's missing in terms of order activity in order to reach that? the bottom end of your guidance. Thank you. I think obviously the second half of the year, you know, the.

the majority of the growth is obviously going to come from the CAVEA transaction. We do also expect an uptick in service revenue just based on timing of certain oil and gas projects. And then obviously, you know, we have to probably win, you know, a certain catfish contract that we were expecting. But in terms of the second half, I would kind of guide you to wait it a bit more to Q4 over Q3.

Okay, that's great, caller. Thank you.

Thank you. Our next question comes from Kevin Krishnaratne from Scotiabank. Please go ahead with your question.

Hey there gentlemen, good morning. Just following up on the guidance question Ben will ask, on the seasonality Q3, Q4 stronger than Q3, do we also expect that on the services side, both on the services and the product side, that we would expect Q4 to be stronger than Q3?.

Yes, that would definitely be equivalent to both products and service. Q4 would be stronger.

Okay. And I just also on the catfish, did I hear you correctly that in this quarter, you won an order, but was that a spare unit? And was that within your expectations to land in Q2?.

Yes, we have a spare tow body that we shipped to a European Navy, so just the tow body, no ALRs, just a yellow.

stations, yes. Okay, got you. And then maybe for Greg, it's been some time since you gave us an update on the pipeline. I think it was maybe two billion, over two billion last April. So I'm wondering if you have any thoughts on where you stand today. I mean, you certainly had a lot of, you know, You talk about this new long-term MSA. You've got the 10x vendors in there. So I'm just wondering if there's a, you know, in Covalia as well. So any way you can give us sort of where you stand today in terms of the pipeline?.

Yes, so I think overall, Kevin, what we reported in the past as an independent company and now combined with Covalia, I think as we get later in the year and then when we start to give 27 guidance and then medium term guidance several years out, you'll get a lot more color on that. So I'm not going to state a specific pipeline number right now. we always have to say directionally it's obviously significantly higher than it would have been a year ago,.

both for Kraken and for Covelia as independent businesses. Okay, maybe just the last one then just to Joe, just on the revenue recognition reversal, one and a half million in the quarter, does any of, do we expect any more of that in the Q3 and Q4 that we need to be aware of? And then I'll pass the line.

No, there won't be. That's not completed. Okay. Thanks very much.

Thanks, James. Our next question comes from Aravinda Galapadige from Canaccord Genuity. Please go ahead with your question.

Good morning. Thanks for taking my questions. I just wanted to follow up a little bit on the stationary census, the opportunity there. I know you've been highlighting it in recent times. Can you speak to what the trends have been? I mean, how material the sales have been in the past and, you know, how we can probably try and size up the opportunity there. And then connected to that, I mean, from a competitive standpoint, are the dynamics generally similar with respect to the rest of your products as well?.

Yes, I'll start. Again, I'll divide it into commercial markets, so offshore energy, ocean science-type applications versus defense. I would say on the defense side, that is really newer business. So Kraken itself wasn't in that business. Colbelia, that's newer business for them. with very strong technology with some important OEM partners for that. And, you know, sizing the opportunity for that. So we'll have to come back and provide you some more detail. Don't have my fingertips now, but you know, there are, significant contracts opportunities, it's not like a million or two million dollars a year.

It's, you know, this can be a tens of millions of dollar a year type business or larger in the future. It really depends on what the scope is. You know, sometimes you might be just providing a sensor that sits on the seafloor, other times you might be providing some other equipment that's on the surface. as well. But generally, if you look at Kraken's business, historically, we were predominantly in mine countermeasure activity. with our catfish or with our customers that use our sensors and batteries on their AUVs. Now, you know, the ASW market or the anti-submarine warfare market is, It's a very large market and we've got some great capability and our customers are very interested in working with us on that. So that's the fence. On the commercial side, I'm actually going to, One of the big potential opportunities for us is the on-demand ocean bottom nodes. To put it in context, just some prototype activity for Covalia last year was north of $20-25 million for one opportunity, one field.

And really there's multiple fields around the world where this technology can be applicable. This year it's going from last year was prototype. This year is a bunch of testing with it. on the ocean floor. And we expect that that will move into commercial production in 2027. And I'm going to be able to to kick it over to Shaun here for one second just to discuss OED again.

Yes, I can jump in here. Thanks, Greg. Yes, traditionally, when you're doing these types of seismic work, rock shore oil and gas, you're using permanent type cables, which are very, very expensive. hundreds of millions of dollars. And when you think about that, those cables can be damaged. You have to worry about the sort of infrastructure on the ground as well, or where they're being laid. And you know, from an on-demand ocean bottom node solution, you're putting these sort of nodes, multiple nodes on the ground. There could be hundreds or up to a thousand that would be sitting there on a full commercial phase of the field. and then you're having a remotely operated vehicle go over and collect that data. So you're able to get the seismic data before you're drilling, while you're drilling, if you're doing a secondary type of flood or a tertiary type of flood, you can see how that's performing as well.

So it's quite useful to get that on-demand type data, which is again, that's the breakthrough technology around it. So it's useful and much,.

much more cost efficient than that traditional permanent cable system that I referred to. And I just had two points to that. One, I mean, it's public knowledge. There's been industry articles written about it. Sonar Dine has been working on that with I believe Petrobras and Shell in Brazil going back six years now. The second point about that is we're the only company, so competitive landscape, there's no one else with this type of technology. So, you know, it's still, it is still early days on that and we'll come back and educate the market more on that.

But we're hopeful this could be a very meaningful business and starting to kick back in in 2026.

that more than it goes to the commercial production. Thanks, Craig. And everyone's quite helpful. And just a last one from me. Can you drill in a little bit more now that you've closed the transaction, the cross-selling opportunities here? I know that, obviously, you deal with a lot of customers that can use the navigation and positioning systems of Covax. And then, you know, that opens the door, on the other hand, for you into Europe. I mean, which one, I mean, how quickly do you think sort of those opportunities can be sort of expanded? extracted and which ones are sort of the more low-hanging fruit in your opinion. Thank you.

Thanks, Aravinda. So there's many ways we could discuss certain customers of ours that do underwater vehicles today. They buy some of the equipment that goes in their underwater vehicles from their vehicle competitors. And we provide that technology, Covelia provides that technology. So we're agnostic, independent providers. So if they have the capability to work with us instead of one of their competitors on the vehicle side, then we've got a good opportunity there. With greater combined capabilities, more customers are looking to us to help solve some of their challenging problems. The other thing I think as we educate the market about our business, customers use a variety of platforms. Everything from USBs to sometimes they're using ROV, sometimes they're using battery operated AUVs.

And depending on the mission, they are using a variety of different sensors. system integration and calibration is often not easy. So by working with us and our solutions, customers will have fewer vendors to coordinate with, less engineering efforts, optimized size, weight, and power, and all that adds to faster, reliable deployment. So, we continue to add new customers to the list of that 30 plus or so UUB platforms that we're on today. And I think the final thing I would say is there are cases where we might initially have just sold the product or someone or nine sold the product, co-value group sold the product. where there's now some discussions about, well, don't just sell a product, maybe provide it as a service to us over a period of time, maybe monitoring solutions for us under water for a period of time. So it can be a data sale. So, So we're exploring a bunch of those different things. I'm not really sure there's too much more detail we could get into right now.

Thank you very much. Our next question comes from Mike Stevens from National Bank Markets. Please go ahead with your question.

Yes, good morning guys and appreciate you taking the time to answer a couple questions here. I just want to circle back, you know, appreciate the commentary on the guidance. I just wanted to kind of dig into maybe the visibility side. I think historically with Kraken on a standalone basis, it may have been easier to piece together, you know, the awarded to date and your services revenue with Covalia and, you know, I understand some of this awards to date are kind of more backlog, future years. Can you give any color on the visibility into the 26th guide? And I know you mentioned the expectations for catfish still to come. Is it fair to characterize that as one of the key sort of risks, execution risks on the guide?.

Yes, I'll start and Joe will chime in here in a second. Well, I would say the nature of Covelia's business is they are generally a wider customer base less lumpy than the traditional Kraken would be. and generally have really good visibility for 2026. So, you know, It again comes back down to the cracker side. And we've got a lot of sass and a lot of battery orders in-house, and we know how the service will do. And there's a couple things we're working on to get over the line on the catfish side.

Yes, I think Craig sums up pretty well. I think we have strong visibility, and we obviously have one. We have to... target one catfish that we, you know, we have good visibility on the contract, but obviously it always comes down to the procurement cycle and the double in the details on that. So, but we have visibility on the actual contract. So it's...

I think Greg has summed it up pretty well, but yes, that would be it in a nutshell. Okay, no, that's great to hear. Appreciate that. And then just double clicking on the catfish. You know, outside of that kind of expectation that you highlighted, Greg obviously mentioned in the prepared remarks about awards starting in 2026. Obviously, there was a comment earlier about the camp program. Just wondering, would any of that be kind of for Toe Fish awards? Like, is that still expected to... to maybe come through as far as the decision on various awards in the back half of this year or any clarity on timing for that? Yes.

Yes, we've mentioned some country names in the past, and I'm not going to rhyme them all off now, but on the tow fish side, there are specific programs that are If you look back at what's happened over the last five years, you've probably got triple the amount of activity that's going to happen over the next four years here based on those programs. Yes, some of them will start to get awarded this year and into the first half of next year. it'll be a steady drumbeat of award opportunities for the industry over the next couple of years.

Okay, that's helpful. Thank you. And just the last one for me on the battery success. It's great to hear the new battery customer wins and just the overall diversification of that business. Just on timing, you know, how these relationships typically progress from from say like an initial order to kind of more meaningful production. I'm not sure if you'd have at this point any lens into when you think we could expect to see some more meaningful contributions from those customers.

But yes, any color there would be helpful. Yes, I think the best color we could say right now is that, you know, for some of our customers, we've been having good volume sales for, you know, five, six years. with some of these new players. Um, and these new players aren't startups. They are, you know, existing defense customers that might do, uh, They might do crewed ships or submarines and others that are smaller AUVs and they're struggling So it's really the way it works is oftentimes they do a prototype. Let's say the vehicle could have a thousand kilowatt hours on it. out to prove the endurance of the vehicle but really to show the vehicle in the water the software works they're able they're able to you know, prove the capability of the vehicle. And so what I mean there is on those prototypes you might have, you know, they might put 200 kilowatt hours or 300 kilowatt hours of batteries instead of a megawatt hour plus that they could put in. So we're in that phase with a few players.

There's a few others that... are just starting to, they've gone from prototype already and now they're starting to produce a few vehicles. So I think as you start to look into a year around 18 months, you can see some of these become fairly meaningful players, but again, They are all competing with each other. So, yes, the good thing is we're on a bunch of these platforms, and there are some countries, there are some really dominant players, but there are some countries where the Navy is, the governments are going to go with their domestic champion because they're building up their domestic defense industry.

I think that's about the only call that we could give on that right now. Yes, no, it sounds like you guys are obviously very well positioned for these tailwinds. So appreciate all the insights, guys. Cheers.

Okay, thanks, Mike. Thanks, Mike. And with no further questions, I would like to turn the floor back over to management for any closing remarks.

That is it. Thanks, everybody. Look forward to talking with you again soon. We report in the second half of November on our Q3 results and quite excited to be able to expose you to what the full business looks like. So talk soon in the future. Thank you.

Ladies and gentlemen, that will conclude today's conference call. We thank you for your participation. You may now disconnect your lines.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Good morning, and welcome to the Kraken Robotics Fourth Quarter and Year-End 2025 Results Conference Call. [Operator Instructions] The conference is being recorded. My name is Drew, and I will be your operator today. [Operator Instructions]

I will now turn the call over to Shant Madian, Kraken's Director of Capital Markets. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining Kraken Robotics' earnings call for the 3 and 12 months ended December 31, 2025. Joining today's call from Kraken is Greg Reid, President and CEO; and Joe MacKay, Chief Financial Officer.

Before we begin, I want to remind everyone that certain statements in this call may be forward-looking in nature. Matters discussed, including management estimates, statements involving known and unknown risks, uncertainties and other factors could cause actual results to differ materially from those expressed or implied in our forward-looking statements, which reflect the company's judgment based on information available at the time of this call.

I'd also like to refer you to forward-looking statements, risk factors and additional detail on non-IFRS financial measures we have provided in our press release, MD&A presentation and AIF, which are available on SEDAR+ in addition to our website. Unless otherwise stated, all dollar amounts mentioned during this call are denominated in Canadian dollars.

I'll now pass the call over to Greg Reid, our President and CEO. Greg?

Thanks, Shant. Good morning, everyone. During today's call, we'll start off by reviewing our key accomplishments and financial results during the past year. We'll then review our outlook for the business, including our guidance for 2026. And lastly, we'll revisit the strategic merits of our recently announced acquisition of the Covelya Group, which is expected to close during the current quarter.

As background, for those of you new to the story, to the Kraken story, I'll start off by summarizing that Kraken is a marine technology company focused on transforming subsea intelligence. Our technologies are dual use and serve customers globally, supporting the defense industry and various commercial markets such as offshore energy and scientific exploration. We're headquartered in Canada with manufacturing and service operations in Canada, the U.S., the U.K. and Germany and sales and R&D offices in Australia, Denmark and Brazil.

We report across 2 lines of business, products and services. For our products business, it's focused on subsea power solutions such as our SeaPower batteries, platforms such as our KATFISH towed system and advanced sensors, including our Synthetic Aperture Sonar or SAS. We also provide services to the offshore energy and defense clients, including sub-bottom imaging, LiDAR and KATFISH solutions for seabed and sub-seabed imaging surveys.

Looking back at our annual results, 2025 was a very successful year for Kraken. We generated record revenue and adjusted EBITDA, which was driven by significant demand for our SeaPower batteries and SAS products as well as growth in our subsea service business. During the past year, we've taken several steps to help facilitate additional growth in our business, including the expansion of battery manufacturing capacity with the recent completion of our new facility in Nova Scotia, continued product innovation, including a new higher energy density battery design with approximately a 30% improvement in energy density for large and extra-large underwater vehicles and plans for more compact designs to address smaller and medium-sized UUVs.

We also developed a new launch recovery system to target smaller unmanned surface vessels and a dual frequency circular SAS that provides a higher fidelity imagery, detection, classification and plausible identification of objects from a single payload. We also enhanced our balance sheet strength and expanded our shareholder base through a successful equity financing, resulting in a cash position at over $120 million at year-end. And we further strengthened our leadership team, including several new senior executives and Board members that bring a diverse array of experiences and relationships.

Strategically, we also executed the tuck-in acquisition of 3D at Depth in 2025, expanding our service offering to include optical LiDAR technology and our geographic presence within the U.S. Most recently, in March, we announced the acquisition of Covelya Group, bringing 2 leaders in underwater technology together to create a global marine supplier and mission-critical solutions for maritime security and critical underwater infrastructure inspection.

I'll speak to this strategic acquisition in more detail later during the call.

As we look closer at some of the work our teams executed this past year, we saw continued demand for both defense and commercial customers. Within our products business, which primarily sells into the defense market, we saw record sales of SeaPower batteries and SAS units in 2025. The number of SAS units sold in 2025 were almost equal to the total units delivered from the previous 2 years. And in batteries, we have added multiple new UUV OEM customers since mid-2025. This highlights the growing demand for subsea technology and the continued adoption of unmanned underwater vehicles as well as us winning market share in the battery business.

We expect this trend of increased customers to continue in 2026, supporting our growth expectations and added diversification. Our KATFISH or towfish product. On KATFISH, sales were lower than expected during the past year due to the timing of expected project bids by various navies. Since year-end, we've seen an increase in demand for KATFISH-related products, including a recent order from the Polish Navy. In total, there are currently over a dozen programs of record for towfish vehicles currently in the RFP stage or expected to go to RFP from various navies worldwide with final selection expected over the next 2 to 3 years.

In addition to these Navy programs, we are seeing an uptick in inbound interest for our products given the recent developments in the Middle East, in particular, related to solutions for mine countermeasures. Whether in the Middle East, Europe, Indo-Pacific or the Arctic, we are seeing an increasing trend towards accelerating investment in marine technology given geopolitical tensions and the need to protect critical underwater infrastructure. In the service side of our business, we worked on a number of offshore energy projects in 2025 for both major oil and gas and renewable companies and their offshore service providers.

This work included site surveys, UXO site investigations and cable burial assessments for our sub-bottom imaging sensors throughout Europe, U.S. and Asia. For example, in the Black Sea, we worked on a deepwater oil development project where Kraken scope of work was performed nonferrous UXO survey support along the export pipeline routes for which we utilized a suite of our sub-bottom imager systems.

In Taiwan, we also performed cable burial assessments during the construction of wind farms, including both the inter-array and export cables, which on a combined basis totaled almost 400 kilometers in length. Our LiDAR services group, which we acquired last April, worked on a number of projects in 2025, including subsea jumper metrologies and onshore nuclear projects located in South America, Europe, the Middle East, Australia, U.K. and U.S.

As we look forward, we remain excited about the long-term prospects for this segment of our business given the need for global energy. This is supported by the growing number of final investment decisions expected for major offshore oil and gas projects in the coming years as well as the forecast for global offshore wind capacity. According to Rystad Energy, 42 deepwater final investment decisions are expected in 2026 compared to 37 in 2025 and increasing to approximately 75 in 2027.

Before I pass it over to Joe to discuss our financial results and our 2026 guidance, I'd like to thank our employees for their continued hard work and execution during the quarter and throughout the past year. Joe?

Thanks, Greg. Today, I'll start by reviewing our full year results ending December 31, and then move on to our fourth quarter results. Consolidated revenue in 2025 totaled $102 million, up from $91 million in 2024. The same revenue growth was driven by significant demand for Kraken SeaPower batteries and SAS products, which grew approximately 30% and 60%, respectively, in comparison to the prior year. Revenues were also supported by strong results in the company's Subsea services division, which grew over 60% in comparison to 2024, driven by the continuation from the 3D at Depth acquisition and higher utilization of service equipment fleet during the year.

As previously released, our strong revenue growth was partially offset by a decline in our sonar-related product revenue due to the timing of KATFISH and RMDS projects. KATFISH project activity can vary year-to-year due to the natural procurement cycle associated with these contracts and sonar revenue was also lowered due to the near completion of the acquisition of the Canadian Navy RMDS project.

Gross profit for the year increased 42% to $63 million, while gross profit margin improved to 62%, up from a margin of 49% in the prior year. This margin improvement is due in part to product mix due to products sold during the year in addition to higher-margin service revenue from the acquisition of 3D at Depth. Adjusted EBITDA in 2024 (sic) [ 2025 ] increased 21% to $25 million, resulting in an adjusted EBITDA margin of 24%, up from 23% in 2024. CapEx and intangible assets purchased during the year totaled $30 million, which included significant growth capital related to our new battery manufacturing facility in addition to new marine assets, which includes sub-bottom imagers, KATFISH equipment as well as supporting customer trials and demonstrations that occur -- that will occur throughout 2026.

We ended the year with a strong balance sheet. Total assets at the end of 2025 were $313 million compared to $162 million in the prior year, and cash stood at $120 million and working capital of $171 million. Switching to our Q4 results. Consolidated revenue in the quarter was flat at $28 million compared to the prior year. Like our annual results, growth in batteries, and SAS, and subsea services were offset by declining revenue associated with our RMDS project. Gross profit in Q4 increased 48% to $20 million, implying a gross profit margin of 70% compared to 48% in the prior year.

This year-over-year improvement relates to the combination of product mix of products sold during the year in addition to higher-margin service revenue and lower-than-expected costs related to one project. Adjusted EBITDA increased 36% to $9.5 million in Q4, up from $7 million in the prior year due to stronger gross profit margins. Implied adjusted EBITDA margin in the quarter equated to 33.5% compared to 25% in the comparable quarter.

Turning to the guidance. On a stand-alone basis, we reiterate our guidance given on March 3 and expect revenues to range from $165 million to $175 million, the midpoint of which represents 65% annual growth versus 2025. Adjusted EBITDA is expected to be between $40 million and $50 million, the midpoint of which represents 80% annual growth. This adjusted EBITDA guidance also equates to a margin of over 26%. CapEx will be in the range of $15 million to $18 million in 2026, down significantly from the prior year due to the recent completion of our new battery manufacturing facility in Halifax.

Similar to prior years, we expect revenue in 2026 to be weighted towards the second half of the year. This guidance is based on existing and expected contracts from the company's battery, SAS and KATFISH products. These strong orders also reflect growth in the company's customer base, including several new defense customers underpinning a strong demand environment given the recent geopolitical events. Our 2026 guidance is also driven by expected growth in the commercial services business, including a full year contribution from LiDAR solutions offering from our 3D at Depth acquisition. We do plan on updating our annual guidance upon the closing of the announced acquisition of Covelya Group.

And for now, I'll pass it back to Greg for closing remarks.

Thanks, Joe. As you've heard throughout the call, we're very excited about the start to our year and our growth prospects on both the defense and the commercial lines of our business. In addition to these organic opportunities, we're looking forward to closing our strategic combination with Covelya Group, where Kraken is a leader in subsea batteries and synthetic aperture sonar, Covelya is a leader in subsea navigation, positioning, monitoring and communications with a diversified customer base and an extensive track record of over 50 years.

In addition to expanding our product offering and competitive position, this strategic acquisition increases our scale and accelerates our growth potential, expands our total addressable market, adds significant in-house technical capabilities, including additional production capacity and improves our financial profile. As an example, in Q1, Covelya has seen solid order intake with total new orders of approximately $135 million from various defense and commercial customers, including products such as Sonardyne's navigation and positioning equipment and its Wavefront subsidiary, Sentinel Intruder Detection system and Vigilant Forward Looking Sonar.

Prior to turning the call over to the operator for Q&A, I wanted to take a moment to thank Peter Hunter, who has stepped down as our Chairman for personal reasons, but will remain on our Board as an Independent Director. Peter joined Kraken's Board in 2023 and became Chair in 2024. During that period, he's provided tremendous leadership and guidance and has played an important role in our growth to date. I also want to congratulate Shaun McEwan, who has been appointed as our new Chairman, Shaun has been with Kraken's board since 2016, and he's a seasoned executive with over 30 years of experience across technology, manufacturing and defense.

With that, we'll wrap up our prepared remarks, and I'd also point you to our website, krakenrobotics.com, for more information. We update our website regularly, including our financial filings and other updates, and you can also find our financial filings on SEDAR+.

I'll now pass the call back to the operator.

[Operator Instructions] The first question comes from Benoit Poirier with Desjardins Capital Markets.

Congrats for the year-to-date orders for the combined entity. It looks like that it's in excess of $200 million. So could you maybe make some comments about your overall bidding pipeline and especially in light of the situation in Iran. Just wondering if the $200 million in new orders year-to-date for the combined entity is kind of a sustainable run rate going forward?

Thanks, Ben. I'll talk about a few various segments of our order portfolio. I guess starting with batteries. As most people know, we've seen some strong demand in the XL-UUV space. With one very significant customer. And over the last 6 months, we've started to add several other customers that have XL-UUV development efforts. So we're pleased to say we've added a number of new customers on the battery side.

And obviously, bringing on the new facility in Nova Scotia to add significant capacity is all tied into the growth outlook we see in the battery business. So very strong demand there.

On the KATFISH side, which, as we pointed out, some orders last year had slipped at the end of the year. If we look at the existing Kraken business, and we have 3 pillars to our business, one being sonar, two being batteries and three being services. We could say, honestly, that the KATFISH business over the last year has been the disappointing one versus our original expectations.

Happy to say now that we think that has turned the corner, and we'll see some solid demand on the KATFISH side this year, and I'll call it really for 2 reasons. One was a number of programs that have been coming down the pipeline for several years, working their way from initial shaping to request for information to RFP. And I'd characterize it -- what you're going to see over the next 2 to 3 years is a number of programs coming to market that is significantly larger than what the industry has seen over the last 5 to 6 years. So that's one driver.

And then the other adding to that is just, obviously, mine countermeasures, which is the main application for the KATFISH product is seeing a lot of attention given what's going on in the Strait of Hormuz in the Middle East. And as a result of that, we're seeing lots of customer inquiries, and we expect to convert some of that activity, our fair share of that into revenue. So KATFISH, we expect will be strong this year.

And then as I mentioned on our SAS business, we've seen a real uptick in that in the last couple of years. And this year, we expect a strong continuation of that. And that is really driven by the growth of underwater vehicles, AUVs, UUVs, and we're one of just a couple of merchant suppliers to AUV companies for Synthetic Aperture Sonar, and those customers are seeing pretty solid demand, strengthening demand for their vehicle sales. So we'll participate along there.

As it relates to Covelya, their business in Q1 saw a strong order activity, and that was across the board, both on the defense side and the offshore energy side. So I don't want to say that -- look for $200 million of new orders a quarter. But just I'd say that both of our businesses are having a solid order -- new order start to the year, driven by those factors that we just talked about.

Okay. That's excellent, Greg. And Joe, could you talk maybe a little bit more about the upcoming seasonality, whether Covelya is similar to Kraken legacy, but also maybe about the working cap requirement this year as you grow the combined entity?

Yes. The seasonality would be somewhat similar to Kraken legacy. It's -- there -- just in general, the industry does have a lower revenues in Q1 right across the industry just because of how budgets are kind of flowed down. So the second half of Covelya is very similar to Kraken and it will be stronger. In terms of working capital, obviously, CapEx of the combined entity. The intensity would be around 8%. So that's going to be coming down from what we've seen in last year.

Also, we've had that contract asset on the balance sheet for $10 million or $12 million for a while. That relates to one project that will be coming to completion. So that will convert into working capital this year. So there'll be a small burn on just as we increase inventory just to meet demand, but it will be an improvement from what we've seen here in the recent past.

Okay. And last one for me. Could you maybe talk about the next milestone related to the closing of the transaction? And maybe the next steps in terms of the TSX listing?

Yes. I'll start with the closing of the transaction and Joe can talk to the TSX listing. But I mean, the next milestone is you will see a press release out of us saying that we close the transaction when that happens. And as we mentioned in the past, there's a few regulatory filings that we've done, and we're making good progress on that front. And our current view is that we will close this transaction in the second quarter. Over to -- regarding the TSX, Joe will comment on that.

Yes. TSX remains been on our road map for 2026. The timing of actually going to the TSX is somewhat determined by the closing of the Covelya transaction, but it continues to be a major milestone for us and on our road map for this year.

The next question comes from Mike Stevens with National Bank Financial.

Maybe just to drill down on the outlook and the guide for Kraken. Obviously, good to see the announced $87 million in orders so far just on the product side alone. Should we interpret that as a pretty large weight in hand on the guide? And I'm not sure if you can frame sort of the expectations for new orders versus what is in hand on the visibility front?

Mike, I'll start with that. I think just for people that aren't aware of the nature of our business. Generally, the products -- for the product side of our business, you can see the number of orders that we've announced over the last few months in the order of $87 million, $88 million. Then if you look at our guidance of $165 million to $175 million for the year, we've got a full 4 quarters of 3D at Depth this year. So if you add in our original service business and 3D at Depth, we never announced orders for that business. That is more shorter lead time activity. But generally, we've been suggesting that's in the $50 million-ish range revenue side.

So you take that plus the orders that we've announced so far, and you can kind of see what the gap is to meet our number for this year. And like every year that we've been in business, we closed a lot of SAS-related business during the year and some of our other products during the year. So that gives you -- that should give you a little bit of color on that front.

Yes. No, that's super helpful. Appreciate that. And then on the sonar side, you mentioned a lot of RFPs and significantly bigger than the previous few years. I'm kind of wondering on the non- kind of RFP, you've obviously had some orders for KATFISH direct sales. Is there any way to kind of give us a ballpark of that opportunity and maybe even in light of what's gone on geopolitically recently, if that's a sizable opportunity? Just any color there.

Yes. It's tough to frame a market size in the short term on it. But I think what we can say is that across both our SAS business where there's OEM customers that -- or navies that have vehicles in the field already and want to put a SAS payload on those vehicles. We're seeing a lot of extra interest in that. It's obviously a mine countermeasure vehicle. And then on the KATFISH side, there's a lot of interest.

These are urgent operational requirements for a number of navies now given the situation out there. And one thing that over the last year, we've done prior to raising capital was the conscious decision to want to build up inventory and to have assets available to sell to customers for a situation like we see today. And we think that some -- we think it's an advantage, our ability to shorter lead time deliver to customers is going to win us some business maybe versus some of our larger peers that might take quite a bit of time to deliver product to customers.

So overall, I'd just summarize it by saying stay tuned, and we expect this year to be some solid activity as a result of what you're pointing out.

Okay. Great. Appreciate that. And maybe just a last one for me. On the battery capacity and launch of the new facility, any sense of kind of when that could get up to your full capacity of $150 million in terms of -- I'm sure it takes time to kind of ramp up to that. And then I think previously, you guys have mentioned opportunities to maybe unlock additional capacity beyond the total $200 million. Any update on that and maybe opportunities to do so in the next couple of years?

Yes. So starting with Halifax, people have moved in. All the equipment has been there through this quarter. We'll start to increase production in the current quarter, initial production there. And that will ramp steadily throughout the year. As to when we are going to have that facility full up, where -- I think we're going to just say that we see strong demand across our customer base, and we're thinking about what capacity needs are as we plan it out a few years out here, but we expect to see very good activity at that facility throughout the year and definitely into 2027.

In terms of additional capacity, we did take on some additional space in our German facility. I believe that was towards the end of last year. And that gives us a little bit of additional capacity as well. And ultimately, in the future in the U.S. -- or sorry, in Canada, as demand grows and we need it, we also have the opportunity to add a second shift there. Besides that, we've stated in the past that we want to have a bigger presence in the U.S., and we've got a variety of discussions happening with customers and with various opportunities that we're looking at to have a more established manufacturing presence in the U.S. as well. And I don't want to pin ourselves down on timing on that, but it's something that's important for both ourselves and Covelya as well as a combined entity.

And just in general, it's -- we're just continuing to see increased demand in the battery space. Very good trends.

Yes. One thing I would add, I guess, we're quite excited that we feel that we've been winning some share with some new customers as well. Maybe some companies that might have been doing it in-house themselves are trying to do it in-house. And we think that there's -- we've got good insight into who in the industry is looking for to do batteries with us, and we've got a lot of positive discussions.

So we said 6 or 9 months ago that you'll see progress on the batteries in terms of other customers. We can't name names, but we can just tell you that we did land one large U.S. defense -- another large U.S. defense company as a battery customer recently and a number of other fairly well-known names that people in the industry would know. So we're making progress there on that front.

The next question comes from Kevin Krishnaratne with Scotiabank.

Gentlemen, on the strong order intake at both Kraken and Covelya, more on Covelya, I mean, probably not, but just curious, understanding the deal hasn't closed, what extent might be seeing your combined scale helping there, improved sales cycles, cross-selling opportunities and whatnot? I mean it's still early and it hasn't closed. But just kind of maybe more wondering what has the feedback been with customers and potential customers post the announcement of the combined entity?

Yes. I think, Kevin, overall, yes, we're still operating as independent businesses until we close. But general feedback from everyone from our largest customers to the small customers is a great combination of 2 companies with complementary technology and the opportunity, what's probably most exciting for our customers and for us is the ability to provide some integrated solutions in the future that allow our customers to be operational quicker, have less calibration as they put vehicles in the water to having to deal with less suppliers and dealing with one bigger trusted supplier group. So a lot of good feedback from our customers, both on the defense side and the commercial side as well.

Maybe for Joe. Can you dig in on the gross margin strength that you saw in the quarter? I know there was the one-time items. So maybe just comment on what happened in the quarter. And then maybe going forward, if you can give us a view gross margin in your key products and service lines and specifically on the battery product, what you're seeing there given some of the new innovations that you're discussing there? The 30% higher energy density battery and then your newer form factors that you're releasing this year?

Yes. In the quarter -- thanks, Kevin. In the quarter, it really -- there was just lower costs than anticipated on one project. We had anticipated certain materials to be within a project throughout the year. And at the end of the year, those materials were not required. So it resulted in a higher gross margin in Q4. What I would guide you on gross profit -- we're not going to break down gross profit, gross margin by product. It's just too sensitive on a competitive side. But I would guide folks to be -- gross profit will be in the 55% to 60% range in 2026, consistent with kind of if you look at the first 3 quarters of this year, we're in that range. And I think we anticipate we'll be in that same range in 2026 in our guidance.

Got you. Maybe just the last one for me. Certainly talked a lot on the call today about geopolitical news and that driving momentum for the business. But one thing that I don't think you mentioned was the Canadian government has also been stepping up their plans for increased defense spending. And so just curious if you can have a comment on your conversations with the government and how you see Canada as a customer over the coming years for Kraken given just the upside in spending that the country is seeing here?

Yes. Overall, we're quite positive on the activity. The intentions of the new government and the defense industrial strategy are a good first start for sure. The devil is really in the details of how quickly governments are able to execute on those -- their strategic intentions. We expect Canada to be a growing customer for us in the future. And there's a number of different opportunities that we're always in discussion with them about.

So in the grand scheme of things, though, like historically, Kevin, we will continue to get the majority of our business in the export market. And -- but there's -- we are happy to see the increased acceptance that the defense customers in Canada are starting to step up activity. And that's the same thing that's happening in other NATO countries as well. There's a growing view that countries will increase their own defense spending and same thing that's happening in NATO countries. We're seeing it in many other countries around the world.

So overall, on the Canadian front, I would also say, yes, just stay tuned, and we're looking forward to future opportunities there.

At this time, I'll pass the call back to management for closing remarks.

Yes. Thanks, everyone, for joining the call today. If you have additional questions, you can reach out to the Investor Relations line. We look forward to talking to you again soon.

Thank you. This concludes today's conference call. Thank you for your participation.