C (6:02)

Yeah. On this podcast we typically talk a lot about software stocks or consumer applications.

A (6:09)

Financials.

C (6:10)

Yeah, financials. It's not often that we talk about very advanced engineering and manufacturing companies, but this one has seen a huge surge in revenue and adoption from customers. And for all the listeners out there that might be intimidated by some of the technical jargon, don't worry, don't worry, I am with you. Brett here is our resident engineer. He is mechanical, I guess, out of.

A (6:39)

Practice for a while.

C (6:41)

I will be the layman. So if he goes too deep on any technical jargon, I'll be sure to reel him back in. But let's start by laying the groundwork. Why is operating underwater so difficult to begin with?

B (6:55)

Right.

A (6:55)

This is what makes technological innovation so important for this sector is if you're, for example, 6,000ft under the ocean, you are facing more than 2,500 pounds per square inch of pressure, or psi. That means if you are a human or an animal or anyone that is used to operating at above water, which I think has. Well, it's just atmospheric pressure, But I think it's 15, whatever the number is.

C (7:22)

14.6, I believe.

A (7:24)

There you go. You look.

C (7:25)

I don't know why I have that number in my head, but I think.

A (7:28)

Yeah, that's a number that. It's stuck in a lot of people's brains. So if you're used to operating at totally different pressure, this is going to feel extremely heavy and you would die if you were under there without any sort of protective equipment. And this means if a submarine is not built properly, it will implode violently under deep sea pressure. If we remember the famous Top Titan submarine being the most recent example that they were going after to explore the Titanic, I think, and the systems weren't built properly and unfortunately, everyone passed away. And there's also the fact that if you're under in the deep ocean, it's pitch black, it's impossible to see through. Radar systems, any sort of video tracking technology are impossible to use. This is why submarines use sonar or sound systems to try and track objects in the ocean. But it's still really, really difficult. It's not like you can go, all right, let's post up a camera and we can see what's going on. If there's no light, you're not going to see anything. The deep ocean out there is so mysterious that things like whales or other animals that you would think that humans would be able to track, especially with all the research money spent on that, you barely know what's going on. For example, I Thought this was a fun fact. There's only been two blue whale births in history that have been seen by humans. There's a. It's kind of an anecdote. I'm not sure if it's exactly true, but I think it, maybe it's, it would be a good debate that humans know more about outer space than they do what goes on in the deep ocean or the Mariana Trench. But this, if you look at it from a crack and robotics standpoint or a company standpoint or the military standpoint, there is a huge room to invent and innovate on new technologies to circumvent these issues, get past past these issues and finally fully understand what is going on under the ocean in the subsea domain. And that's what I think Kraken Robotics, the United States military anduril, other defense contractors and their allies are trying to work towards and that's what gives this industry as we the defense contours, kind of get kickstarted and inspired. Maybe given the all the geopolitical issues out there right now, to work quicker, modernize all that good stuff, there is a huge opportunity to innovate and finally operate under the ocean with full autonomy. Yeah.

C (9:56)

And given that quote that we kicked the episode off with, Brett just alluded to it, there is sort of a defense spending quote, unquote super cycle going on at the moment. And a lot of that is just related to all the geopolitical events and I guess wars occurring right now.

A (10:16)

It's weird to talk about on the podcast that that's what's inspiring the spending, but it is. I mean, look at some of the European defense stocks out there, the budget proposals for increased spending that could flow through to other countries as well.

C (10:28)

And Kraken Robotics appears to be in a spot to I guess maybe somewhat unfortunately for humanity, reap the benefits or at least receive some of the spending from that super cycle. So let's go through the their actual solutions. What does Kraken Robotics provide?

A (10:47)

All right. On a wider note, Kraken Robotics motto is to transform subsea intelligence. I think that's a good motto for them. It kind of explains exactly what they're targeting, what their goal is to provide for customers. They have three different general product categories that they sell to both commercial and defense customers, but mostly defense customers. First and most important are sub C batteries. These are the C power batteries brand and they have 200% greater energy density and 46% weight reduction compared to the next best option. Don't remember those exact numbers. It's just what matters most for anyone that knows the battery industry is energy density and weight. Those are your killer features. So using a proprietary recipe, it uses something called polymer encapsulation instead of, I think an oil based one. For the competitors, they are currently beating any competition for underwater batteries and improved performance. I mean if it's 200% greater energy density, 40%, 6% weight reduction, as of now, you can be under the ocean longer. You can have more efficient design for the subsea vehicles that they're selling to. So you are able to sell at a higher price, still provide a better value to these customers that are building the UUV solutions. And the most vulnerable time for say a subsea military vehicle is when it comes to the surface because then it's exposed and anyone can see it. Meaning the longer a vehicle can stay underwater, the better. So that's what the customers want. And given the better weight reduction and energy density, they can be the premier provider for subsea batteries. Now the second one, Ryan, follow up there.

C (12:27)

Yeah, I'm going to pause you frequently for all our non engineering folks that are listening. Who are Kraken selling these batteries to primarily? Is this all US government? General Dynamics primarily, or who else would it be?

A (12:46)

Okay, yes, so that is a good question because there might be some confusion there. They are not generally a contractor that is selling to the military. They are a subcontractor for other defense contractors building solutions. We're going to talk about Anduril and their partnership later, which I think will further give detail on this. But they have say subsea batteries and then what we're talking about next year is their sonar systems. You sell these systems to an angel or a Boeing or a General Dynamics and they're building their own UUV system. When I talked to the investor relations at Kraken Robotics, they said that early on in their life cycle they were thinking about building their own uuv, but they realized that they could be better as the key subcontractor. I know we're using the word sub a lot, subcontractor for these systems, products and services that the subsea general defense contractors are using. Does that make sense?

C (13:48)

Yes, it does. In terms of the supply chain there what? When I think about a battery, I think about a Duracell AA battery. These I imagine are much larger. So this is manufacturing huge batteries. Correct.

A (14:04)

That are somewhat. Some of that. I think part of it is modular where they can kind of scale them up almost like a battery that would be used on a Tesla. Where or Any sort of electric vehicle where if you're using the same technology for your. Well, why am I can't think about your sedan versus a truck. You can kind of scale up to a larger battery, but what's important is the fact that they need to work underwater, which again, given what I talked about, the high pressure and the fact that it can't leak, right. You can't have water onto a battery system. It's. It's similar in a way to how you would use it for an electric vehicle, but there's way more complications because it needs to be operating underwater with no human intervention, with all that high pressure in an entirely different system.

C (14:52)

Okay, last question on the batteries and then we can move on. Are these like customer comes to them and wants a custom made battery or are they manufacturing many of these and it's like big bulk orders or they can, you know, customers can come and buy them and they've already made them. Do you know, I.

A (15:11)

It's a specific type of battery. They have this one type that they sell. But when they're working with customers, the sizing and I think how it fits within and we'll have pictures in the newsletter for anyone that wants to visualize this. You have say a uuv, which is an unmanned submarine. There's a specific size that an angel or Boeing or General Dynamics is making it at, so they have to fit the batteries within that. So I think just the way they scale it up, given the modular solution there, versus the size that that customer needs and how it fits into that, they'll specify for that. But the core, like how the actual battery is built, it's. It's the same, I believe, every time.

C (15:52)

Okay, second product category, what is it?

A (15:56)

So this one is called Synthetic Aperture Sonar. You don't need to memorize the name. It's just sonar systems. And this is using what they call side scanning technology, which I guess they don't just call that. It is side scanning technology. They are able to image and map underwater areas at a much better rate than historical solutions. So you can get up to 2 centimeters, zoom on objects up to 200 meters per side. And I think there you can do this from a decently sized distance away. So think about of it like an improved pixel rating for underwater mapping. This is something that's very difficult in the past. Again, you're going through water, it might be dark, it's blurry. It's much, much harder than taking a photo from even like a satellite up, up in orbit. So Kraken will Sell these, what they might call SAS products, which is synthetic aperture sonar, directly to customers. Or they will perform mapping contracts for their services segment for these customers using their own SAS systems. And then what's fascinating about this is they can also image the ocean floor below it up to a few meters. So again, that I thought that was kind of cool. I didn't even know that was possible. And in the newsletter I'll have a link to a YouTube video. There's plenty of YouTube videos out there that can show how this is exactly working. But it's important to note that again, like with imaging on land, the better quote, unquote, pixel rating, how much you can zoom the detail, the better detail can get, the better. And that's why they win contracts with these systems.

C (17:32)

So the customer base for this second product category I imagine is maybe there's some overlap, but there's also probably it applies to other industries like you mentioned, offshore energy. There's probably some oil companies or anyone that's drilling on those oil rigs out in the ocean could benefit from this, I think about that, right?

A (17:53)

That is correct, yes. So there will be anyone that wants to either map, monitor or explore anything underwater. So offshore oil, energy, you even have some. I think this is probably a small part of it, but marine researchers, marine life researchers, stuff like that, they want to use that to try to find something underwater. People that are exploring for shipwrecks, stuff like that. But again, it is overlapping a lot with. And what will matter over the long term is defense. You have a country and these ones, they might sell directly to countries or you might have a defense contractor under the same contract, maybe for uv, that is going to build something that utilizes these SAS systems. And it can help not only have an object underwater or have a UUV underwater, but the ability to start mapping the deep ocean. Before we move on, we want to talk about our friends at Interactive Brokers. Interactive Brokers is our favorite brokerage platform. They make it easy to buy stocks, ETFs, options, futures, currencies, bonds and more, all from a single unified platform. And Interactive Brokers allows you to maximize your returns by by minimizing your cost. They offer zero commissions on U.S. stocks and low commissions on international securities. They aren't cutting corners either. Interactive Brokers, one of a kind. Smart routing technology gets you the lowest price possible in 36 countries and 28 different currencies. Interactive Brokers is our home for stock trading. And we wouldn't go anywhere else. If you're getting serious about investing, it's time to upgrade to a broker that you can trust. Head on over to ibkr.com restrictions apply. Interactive Brokers is a member of SIPC.

C (19:40)

Okay, let's talk the third product category here and then I have a follow up question.

A (19:44)

All right, so the third one, and this is one that is a relatively new product line and it is 3D mapping systems as opposed to, you might think, oh, we were just talking imaging. So the sonar, the SAS is 2D images. But these 3D mapping systems is what they used for a company they just acquired called 3D at depth. They actually still keep that branding. So it's technically a separate company. If you can check out their website. And they do LiDAR mapping underwater. To use an analogy, we've I guess used automotive a lot as an analogy here. If the batteries are the electric vehicle batteries are the same, you know, that's the same type of system there. And then you have the sas, maybe that's your map. But the lidar is something like a Waymo or another self driving system would use to map their existing environment. And I think this is. And the reason they acquired them is this is the next step in underwater tracking, creating 3D scans of a systems. They call it, you know, digital twins. We've talked about four with energy engineering software providers to help really what's monitoring what's going on under the ocean with your assets. This one has actually been more of a commercial provider for an oil company, for example, wanting to accurately monitor its offshore assets all under one software program managed in the cloud. All that good stuff. Now they're going to try to sell that more than military solutions over time. But they just acquired them earlier this year and you know, TBD on that one now as a whole, before we go on the next section, Kraken is not necessarily selling these products or services to traditional submarines or the traditional subsea systems that have been around for many decades. But these systems have legacy contracts that are hard to rip and replace and they're generally not powered by electric batteries. They are looking to win new contracts for new types of research for military applications and commercial applications and specifically in that UUV space. As we'll talk about UUVs, the unmanned underwater vehicles, essentially the drones of underwater, a submarine of some kind that doesn't have any human operating with it. They are growing really rapidly and seem to have a huge Runway ahead of them.

C (22:02)

Okay, I'll have some follow up questions on the competitive landscape side of things, but as far as the three product categories that we just talked about, do you know what the rough revenue splits are? Is there one that's makes up the lion's share of the business at the moment?

A (22:18)

So they don't specifically disclose it. They do disclose product versus services but there is overlap from these three categories. I would hope over time they would change change it up. Although there is again a little bit of nuance for different sensors they might sell. But I tried to back into it. I think I got a decent estimate and let me try to figure it out. Yeah. Okay. I have it later on here in the newsletter. They did. And this is USD figures. Well, sorry for the Canadian listeners out there but we're using USD. We're a US podcast. They are guiding for on the low end about at the current exchange rate, $87 million in total USD revenue this year. And given their capacity that they've talked about four batteries which are at max capacity for their manufacturing right now. And given what they disclose for 3D at depth, I believe that 3D at depth does about 16 million USD and ARR. Although they and they're not going to have it for full 2025 on their actual income statement I believe $36 million comes from batteries revenue. Again that's a rough estimate. And then $39 million from the SAS Sonar Division. SAS is the oldest. This is their original product. This is the one that was kind of the innovation that started the business itself. So it's the older one but. And it's larger but it's not growing as quickly. So I say 3D at that smaller part of the business for sure. And then I probably generally an equal mix of batteries versus SAs but batteries are growing faster.

C (23:50)

Okay. I think when it comes to a advanced engineering type company or advanced manufacturing type of business, there is obviously the barriers to buying the stock oftentimes is understanding the product itself but on top of that it's understanding how and where does it fit within the competitive landscape. Because it's always. It's easy to hear about a product and think wow, that's revolutionary when you're not familiar with the industry and then.

A (24:21)

Maybe oh, someone copies it tomorrow.

C (24:23)

Exactly. So are there. Does Kraken Robotics have any specific competitive advantages within those product categories that you talked about?

A (24:33)

Okay. And then just for listeners to know that maybe are listening for the first time we when looking at a stock, at least I do specifically I think Ryan has similar framework. We want to look at, you know, potential growth competitive advantage which can give predictability for earnings power in our valuation estimates. We want a cheap price in relation to whatever they can earn in the future. And we care about management. So competitive advantage is very important to us. And generally technology is not. That doesn't give you a competitive advantage on its own. But if we look at. Let's go take first. Sonar and sensor systems they do have. Kraken does have direct competition in this space, namely from Northrop Grumman and what it calls its micro SAS product. I did some research into both of them. They essentially look like the exact same systems. Does that mean this is a wide moat business for Kraken? I'd say no. Kraken may have an edge in given that they focus over, you know, compared to a large defense contractor like Northrop Grumman as well as Northrop Grumman actually building their own UUV products, their own defense products that would actually probably compete with the sonar customers that they're selling to, where also that Kraken is selling to. But at the end of the day, these are very similar products. However, reportedly, from what I've read, Kraken is able to sell or is willing to sell its Kraken SAS system at half the cost of competitors like Northrop Grunen while still maintaining 50% gross margins. Perhaps maybe there's less bloat there that is making them more efficient. But as a whole, whole. I like that part. Of course we don't like that there's competition as an investor, but I would define this as a good business, not a great business. This is not something any startup can just go, oh, we'll just copy this product. I mean, it's an extremely hard engineering problem to solve. But it's not like they have a patent or an IP on it.

C (26:32)

Yeah, that makes sense. It does. It is somewhat concerning that there's seems to be sort of product parody, but the fact that they are able to still maintain 50% gross margins at a lower cost is history of selling, a.

A (26:49)

Long history of selling and winning contracts.

C (26:52)

So I guess my question is kind of a unrelated question, but you mentioned that they're a subcontractor and not specifically selling directly to the government. Is there like regulatory clearance needed for the employees at Kraken? Is there any sort of like, I guess barriers to entry to selling these types of products from that perspective.

A (27:18)

And I should say they do sometimes sell directly to militaries. It might be they announce stuff as a part of like okay, they might specifically with the sonar solution, sell to a military to. They might use it to do defense at a base, but with the batteries, I think they're mainly a subcontractor, honestly I'm not sure but I know of researching the defense industry as a whole is the fact that you need these regulations, you need all these certifications, you need your workers to pass the, what is it, national security clearances.

C (27:50)

Yeah.

A (27:50)

The fact that you can get embedded within these contracts, whether it's in air, army, navy, what have you, that can get you locked in and as we'll talk about later, that can build that competitive advantage over the long term.

C (28:04)

Okay, let's talk batteries. Who do they compete with primarily for subsea batteries?

A (28:10)

Right. If we want to do a spectrum of like technological modes and at the one end is the ASML EUV systems and at the other end is maybe a Duracell battery, I guess that could probably be a longer one maybe. Subsea batteries are closest of all their products to the ASML quote unquote technological hurdle moat. If we look at their latest earnings release, they said that subsea batteries grew significantly. So they're growing much faster. They had their highest quarterly revenue to date, this was Q2 2025. But that was offset by their sonar related revenue. So this is the business and the sub category that they're doing the best in. And if we look at just the actual UUV sales, a single Ghost Shark from Anduril, which is their UUV System, will have $2 million worth of crack and roll batteries plus more revenue from sensor sales added on top. If we look at Anduril, they just won a $1.12 million contract from the Australian Navy for the Ghost Shark as well as just exploring opportunities to sell to Taiwan and all these given that they're the contract, the subcontractor here will utilize Kraken batteries. I would expect other navies to follow suit. And there's plenty of opportunities out there for people to utilize something like a UUV to monitor bad actors out there. For example, you have the South American countries like Argentina and Peru that are getting, I would say upset, rightfully so, that illegal Chinese fishing crews are decimating all the fish outside of their waters. And if the Australian Navy for example wants to 185 ghost sharks, you know that the US Navy is going to want 250. That's just the way it goes. And this is not to say that Kraken has any IP protecting its battery technology. It simply out innovated the competition and so far they haven't been able to figure out how to copy their polymer based sealing system. Should that give you confidence in an emerging moat no, that would get me nervous. I know Ryan would probably be nervous just banking on that as a whole. But I think two things should help them maintain their edge and subsea batteries for at least the next five years. One, most battery makers out there are focused on the larger electric vehicle market. The niche players competing with Kraken have spent years trying to catch up. They haven't. There's not that much competition out there. You know, why would that change in the next few years? You have someone like Panasonic, Tesla, all the big East Asian players, they're not going to go after this 2,300 million dollar total addressable market that may materialize within a few years within UUVs. It just doesn't matter to them. No. Third, Kraken does have the ability now at a much larger scale to increase its R and D budget which will hopefully give them the opportunity to improve on their subsea batteries and further get them past the competition. They've gone from under $1 million a few years ago, which I say is highly efficient R and D spending to get all these innovative solutions out there and they're now up to $3.3 million again in USD over the last 12 months in R and D. I think the moat in defense doesn't come from technology. Even though a lot of these companies are really innovative when it comes to technologies and building all these new systems, making these incredible engineering problems or solving these incredible engineering problems. But the moat comes from and why companies like Lockheed Martin, Northrop Grumman have been incredible stocks to own is they get locked into contracts with defense programs such as the Andrew Ghost Chart. Contractors and militaries are not going to switch to another battery product on an existing contract if one was ever invented. And I think this gives me confidence in the sustained revenue growth for Kraken's battery segment over the next three to five years. Like just for example, think of you, were someone copied Kraken's product, would they give like again these, this is the US military. They're not focused on profitability. They're going to stick with Kraken because they're the best provider. Anduril is going to stick with them. There's no reason to switch except if a whole new product category comes out there which is what Kraken is doing to the legacy players with electric batteries and UUV systems.

C (32:29)

Yeah, a couple follow ups there. There are countless examples of once an organization is a big supplier to the U.S. government, they, the government sticks with.

A (32:42)

Them as their military too.

C (32:45)

Yeah, yeah. And part of that is there's so much clearance, there's so much red tape just to get deals done on that side of things. But also there's just an element of trust. I think you see that probably with Boeing. You see that with General Dynamics. Northrop Grumman probably as well. I don't really know that business. The. Once you've got that plugin, there's like decades worth of trust that have been built up. Second thing there, you mentioned the Anduril Ghost Shark. So anyone that doesn't follow this industry, Anduril is a. Yeah.

A (33:18)

Which is probably every listener, if we're being honest. No one really. This is such a niche place.

C (33:24)

Yeah. And they've kind of made waves, no pun intended, in really kind of the entire private markets generally. But it's a defense tech startup that was founded by Palmer Lucky, who was the former founder of Oculus, I believe, and he left Meta or Facebook at the time because of political, I think, differences. I believe he like spoke out about some of. Some said something that didn't resonate.

A (33:58)

Yeah, yeah, yeah, just say 2016. 2016. And he liked Trump at a Silicon Valley company, things.

C (34:04)

Yes. And so he ended up leaving. He started Anduril in 2017 and today they have a private market valuation of 30 and a half billion dollars. They're on a Series G funding round. Now that one to me makes a little more sense having that many funding rounds because it's a very capital intensive business. So.

A (34:24)

And their whole, their whole model, which is why they've been able to disrupt some of the existing defense contracts, is they started building projects without any contracts. So they started building their new technologies with a giant risk saying, look, you haven't bought, you haven't said you're going to buy our solutions yet, but we're going to prove to you that we can innovate and be better. And that's the risk that's needed to take to try to wiggle your way in to the existing players, which are still doing quite well.

C (34:52)

And you can't do that without having a very rich founder, most likely, which in this case they did. So. But that is also to say they are heavily financed by venture capital. And there is a ton of allure in Silicon Valley and the VC world generally about being involved with Anduril. The Andoril Ghost Shark, it sounds like, depends heavily on or relies on the batteries of Kraken Robotics. That's a pretty nice customer to have because chances are you are just, you can kind of hit your hitch your wagon or whatever to Anduril. And you're going to ride the coattails of their success as well. If you can continue to be a unique provider and specialized provider of a very valuable piece of equipment in the UUVs. Last one here. I don't think we talked about the imaging services. What's the competition look like there? This episode is presented by our brand new partner, Portcido. Do you know what your actual investment returns are? Well, if you're like me, then the answer is probably no. And that means you need to try Portcito. Portcito is the ultimate portfolio performance tracker. With Portcito you can easily aggregate your various brokerage accounts and instantly see your actual investment returns. That includes all your investments too. Stocks, ETFs, ETFs, even crypto if that's your thing. You no longer have to guess what your returns are. With Port Cyto you can find out in minutes whether or not you are actually beating the market. And that includes a dividend tracking dashboard and even tracking of short positions. I have been looking for a tool like this for a long time because I was sick and tired of tracking it manually and Port Cyto has finally built it. If you want to find out what your real returns are, check out Port Cyto. The link will be in our show notes.

A (36:44)

So when looking at imaging, this is the 3D at depth company that they just acquired. They've owned this company for less than a year, so we're still figuring out exactly how it's going to fit into the business. But it's mainly used right now for offshore energy and commercial subsea projects. Kraken believes it's going to cross sell to its military and surveillance customers, but it would not be bundled with batteries and sonar for UUVs, at least I don't think it's going to be bundled or needed for uuv. So there's almost an entirely different segment and that whole getting stuck within the defense contractor moat we talked about is not going to be part of this business yet, or it's not part of the business today. I don't think this is a bad business to own yet though, and I think it may have a moat from a different perspective, which is the switching cost that comes from using a cloud based analytics or software program to manage your underwater systems. If you're using an existing one, I think it's going to have similar switching costs to engineering software. Your employees get trained on the software while data gets accumulated using the systems every year, making it more of a pain to switch the longer you use it. Does that make sense? Ryan, I feel like that's a similar analogy here. You're getting it's the software layer plus I guess you have the LiDAR mapping stuff as well that might have some hardware associated with it, but it's going to be managed within your software systems. You have someone trained on it and that switching cost grows year after year after year after year the more you are a customer. Plus it looks to me like Kraken got a steal of an acquisition price. I'll lay these numbers out because I think it kind of shows that maybe there's an opportunity for them to go after more of these players within the subcontractor defense space and the subsea defense space. They spent $17 million on 3D at depth and according to their latest conference call management is expecting around $5 million in quarterly revenue. I believe when they reference that they're saying Canadian dollars. So let's say given the current exchange rate that's $4 million per quarter USD and the numbers from 2024 track closely with these projections. So the company has grown revenue at a 20. This is a quote from the acquisition, a news article from there. The company employs 56 people and has grown revenue at a 20% CAGR over the last three years and reported 2024 unaudited US GAAP revenue of $14 million, gross profit of $8.4 million for a 60% margin and $1.1 million of operating income. I'd say 56 people, $14 million in revenue growing 20%. That's a pretty efficient startup and they acquired them for around one times revenue for a services business with again 60% gross margins, durable history of revenue growth and a ton of cross selling opportunities for military and defense customers. I like this acquisition price a lot and I like this business and I think it can be a solid one for them to own.

C (39:33)

Yet I guess optionality here. Here's the pitch to small cap investors. Subsea subcontracting roll up.

A (39:43)

Yeah, growing revenue. That's what Kraken might end up being and they've talked about for anyone that the listeners they have talked about making more acquisitions in this space. So watch out for that. It's an opportunity or risk but if they can be like this one, I think that could have some promising ways to build up their bundle of solutions as the subsea subcontractor. And as on the whole if we're talking competitive advantage, I don't think Kraken has a wide moat today. But one of the themes we Talk about on this podcast and on the newsletter is the fact of a company having a potential emerging moat. Using that Buffett analogy of can the moat widen over the next five to 10 years. If we look at Kraken, they have a market cap of about a billion dollars today. It was only $15 million before the pandemic. This was a tiny micro cap company. I would not expect any microcap company to have a dominant competitive position. And it's only been a couple of years since then. But I think there is a path to building a competitive advantage over the next decade through three ways. One, using its lead in battery technology to lock in long term UUV contracts. Two, bundling batteries and sonar systems to sell to UUV systems. And three, developing and acquiring new subsea technologies to increase its value as a seller to defense contractors and directly to the militaries. I think that can build a nice defense moat over the long term.

C (41:12)

Yeah, I'm looking now and this is since 2017, a 50% compound annual growth rate in the stock price. Now that is off of a very small market cap.

A (41:29)

Yeah, there's been dilution. So that that's what factors into it even more.

C (41:34)

Yeah, it was a $10 million Canadian market cap in 2017. Today, like you said, 1.4 billion Canadian, probably closer to 1 billion USD. Let's go, let's, let's tie it all together here. So we've mentioned the different product segments, their revenue, the dynamics within each one and the competitive landscape. What do you think the future looks like for Kraken and can they continue to grow as they have over the last four or five years?

A (42:11)

Yeah, for the listener, this one will hopefully these last two sections here, last three will be shorter. I think as we kind of go through the numbers, it's going to be a lot more simpler. The hardest part was actually understanding the business and the competitive dynamics. So 2024, Kraken had 63 and a half million dollars in revenue. And in 2025, at the low end of its guidance, it's going for $87 million. Now around $12 million is going to be inorganic revenue from 3D at depth. But according to their current or their latest press release, the batteries business is what is driving the growth here, while sas, the sonar is not. So I assume the rest of the growth of their projection from 63 to $87 million is coming from substree battery sales. And Kraken's growth is going to rely on signing UV contracts. I wrote here with the US Navy, that's actually not correct. Again, what we talked about is with the defense contractors such as Anduril or others, there's like 10 others out there making UUVs. Anduril is just the fastest moving. And remember, a single Ghost Shark sale to angel comes with $2 million worth of batteries. This market is still in its infancy today if they're only doing 30, 40, $50 million in total battery sales. And in early September, as I was researching this, Kraken announced a 13 million dollar contract for SAS and subsea batteries. The orders quote the orders are from customers based in in the United States, Norway and Turkey and include an order for 10 SAs from one customer. The Kraken, SAS and C power battery systems from this order will be integrated on four different types of uncrewed underwater vehicle platforms ranging in size from small class to large class. So you have Anduril, Boeing, General Dynamics, Huntington, Ingalls Industries, Northrop Grumman, Lockheed Martin, all developing UUV systems from small to extra large. And that is only in the United States. You have Kongsberg, Saab, Atlas Electronic XL and others are working on EUVs in Europe, not to mention Australia and Taiwan. The budget from the United States Navy on uvs is small. Today it's mainly focused on research. Now Australia has been at the forefront of the industry, maybe because of its central nature in the Pacific as a US Ally. Not exactly sure, but they have been. They signed a recent deal with Andrew for over a billion dollars and he could really even sense this is where you have the Palmer lucky influence there. You could sense the passive aggressive tone from angel in the press release, essentially telling the US Navy it needs to get its act together and start building up its UV technology and signing contracts. And I think given that sale, given what we're seeing geopolitically over the last three years, there may be an inflection coming in. UV spending. Budget proposals have called for increased spending on the technologies. And while we don't need to go through all the exact details of budget reconciliations, what is important is that there is a long term trend of higher spending. And with by far the best batteries, Kraken should win most if not all of these contracts, even from companies like Northrop Grumman that it competes with with sonar. And Kraken believes it has a pipeline of potential contracts worth 2 billion. Now that's not each year, but that's cumulative right now. And with revenue of under $100 million over the last 12 months, that's a giant opportunity. Now Kraken is investing ahead of this growth today, it has maxed out capacity its current battery plants which can do about $36 million in revenue in USD at current exchange rates. By the end of this year, Kraken is going to open up its new facilities for batteries that have 3x the capacity of current levels and depending on pricing power and you know, obviously the exchange rates because it's Canadian company, Kraken could have the ability to pump out $150 million worth of subsea batteries in 2026. They're not going to fulfill that demand overnight, but they're increasing capacity greatly to catch up with the demand that's coming from these defense contractors. And I really imagine a world where there are thousands of UUVs used by the various militaries both large and small. At an average revenue of $2 million per UUV and at a rate of 100 vehicles per use per year, that would. That's all you need to suppress Kraken's upcoming facilities expansion in regards to battery sales. And that would be 5x6x the revenue of today. So long story short, there's a huge Runway of growth ahead for Kraken and UUV batteries and it has no relevant competition today. That's what I think should get investors the most excited about this company. And why? Well, we're not the first one to this party now that you know, we don't own the stock yet as of this recording. But that's why the stock is up so much and why investors are so excited.

C (46:59)

Okay, I have some follow ups there, but we got to jump to management. I think. In summary, it seems like there is going to be a surge in spending at the contractor level for UUVs which.

A (47:14)

Because of the military procurements.

C (47:16)

Yeah, ultimately.

A (47:17)

But inevitable.

C (47:17)

Yeah, yeah, ultimately going to benefit Kraken. Let's talk about management. Who runs the company today? What do you think of them?

A (47:26)

Okay, well, I've never met them. I've talked to the IR team. They actually outsource it since they're a micro cap and I think they may go to their own IR team. Not sure yet, but it's a outsourced IR team called Sophie Capital. A nice guy runs it. I got to chat with him. So if you want to talk with them, go talk with him. He'll give you some good info and answer any questions he can or that you may have. What I can really go off of here are anecdotes. Their track record and the small amount of public investor relations they have done because they only just started doing Conference calls, which, that was nice, good timing here. But they didn't really do a lot of those before. And given it's a Canadian company, they actually have less disclosures than SEC filings due for the United States. So it was actually much harder to find information on this business. But given their financial performance and the successful acquisitions, I mean, I really like the price they paid for 3D at depth. I'm pretty pleased with the management's track record. Like that box can be totally checked. And we look at their founding story. Carl Kenny founded Kraken in 2012 with the goal of commercializing high resolution sonar, which is what led to sas. He grew up in Newfoundland on the Atlantic coast and had a long history of working in technology and software, which made him a perfect fit of someone who, you know, he was an ocean guy, I guess. He loved the ocean and he also loved technology and software. Boom. That's why he wanted to start this business. He retired as CEO in December of 2022 and then CFO Greg Reed took the reins as CEO. I think unfortunately Carl Kenney was having health issues at the time because he passed away earlier this year. I think that's probably why they had to make the transition now. When Reed took over, Kraken had a market cap of just $81 million. And that was in early 2023 and today it is closing to hit $1 billion. So pretty good performance so far. Obviously the stock price has done quite well. And from my seat it looks like Reed has successfully navigated Kraken Robotics from a micro cap to a hyper growth small cap company that is going to keep emerging as a player in this defense space. He has straddled the line of rational capital allocation and innovation. Despite losing their founder, which is probably extremely hard to do. And acquiring the team from 3D at death will also give them a boost on their R D spending. Now, from what I've heard what people said, Reed is tireless, a tireless worker and frugal. He flies coach, which I think is a good sign. That's always the, the best indicator, right, that you have a, a management team that's not going to waste your money as a shareholder and the board of directors tells him they need to, they need to pay him more. I think that's much more palatable than the opposite when you have an average Large Cap Mercenary CEO from McKinsey that you go, what are you keep. Why are you getting paid so much? What are you wasting money on? What is this? What are the perks you're getting? I think it's a good side of the CFO culture that he's bringing to the executive suite. I do worry though about Reid's experience leading a public company that may turn into a multi billion dollar market cap sometime in the near future. He has plenty of experience in accounting and finance giving his bio, but that's it. You know, no large scale roles as an executive before. Maybe they will pass the torch to a seasoned defense contractor executive and have re moved back to the CFO at some point. I'm not sure. I don't know what's going to happen, but that's something they definitely will need to navigate. You went from a tiny company to now a hypergrowth company that may acquire more startups in this space. That's going to be something that's much, much more difficult to manage. But overall I'd say he's done a great job. And even though the company has funded growth through share issuance, they did $115 million in. Whoops, I said 2026 there. That's actually 2025. They can't do something in the future. They did $150 million earlier this year at $2.66, $52 million in October 2024 and 17 and a half million dollars in April 2024 to raise money. Even though they've done all that, their per share value has grown a ton I believe over the last five years. Revenue per share has grown at a 36% annual rate since 2020 per the fiscal AI chart I built. And this is understating growth as revenue is going to be weighted to the back half in in 2025. Gross margins are expanding. There's really a lot to like with how this management team is executed. And as I've noted in the newsletter, I'm not going to read this full quote for this guy's bio because it is quite extensive. They just brought on to the board of directors Vice Admiral Michael J. Connor, who was the old he worked 35 years in the United States Navy and he was I believe the head of the entire Allied Submarine command. So that's a good guy to have on your board of directors. And he's actually the CEO of another startup in this space called Thayer Mahan. Maybe they'll acquire them, who knows. But I think that's a fantastic person to have in your corner. They've really expanded the board of directors to be a good, you know, defense company board and it seems like Reed has done extremely well taking over this role from CFO to CEO. Now you have the founder passing. Kraken Robotics hasn't missed a beat. All right folks, before we move on, we need to tell you where we get our financial data. Fiscal AI Fiscal AI is the complete stock research platform for fundamental investors. I use the platform pretty much every single day. You'll see the charts on our podcast and you'll see it in our newsletter. This is our one stop shop for stock research. They've got up to 20 years of financial data on all companies globally, including company specific segment and KPI data. That means Amazon AWS revenue, SoFi's total members, Google's paid clicks, growth and literally millions of more data points. They've also got earnings call transcripts, ownership data, company specific research reports and much more. If you want complete financial data at your fingertips, then you need to check out fiscal AI. And if you use our link fiscal AI chitchat, you will get 15% off any paid plan. Again, that is fiscal AI chitchat. The link will be in the show notes.

C (53:53)

Yeah, I imagine it's fairly rare to see a engineering company go from micro cap to billion dollar market cap with a non founder in the CEO seat, especially one that's non technical, one that's primarily finance oriented. Right. However, if you can allow your teams to run autonomously and you give them the power and the reins to kind of do what they need to do while you take all the other work off of the company and, and you're kind of managing the finances and giving them the resources they need, I could see how that works. And in this case it totally has worked. And like you said, when you have someone with an accounting background in the CEO suite, sometimes there's a little more shareholder friendliness with how they spend money. It's always nice to see the CEO flying coach and I would actually maybe continue to monitor that as they go from. As they become a more than one billion dollar company. Does it continue to fly coach because.

A (55:03)

Exactly. I think you can fly first class if it's helpful for the work you have to do on there. Let's. It's not going to kill the budget, but I'd like the mentality from that.

C (55:14)

Okay, let's start to wrap things here with what you expect financially. What sort of numbers are you projecting modeling now and do you think there is any sort of a catalyst on the horizon?

A (55:29)

Okay, so right now as we talked about earlier about I think equal mix revenue from SAs and batteries and then maybe just around 15%, maybe lower from 3D at depth right now just for context and how what's the important business and what are the important business lines going forward forward. And I really just projected revenue growth based on my my research based on what the growth is for for these opportunities or for these three categories should be based. I projected revenue out to 2030 and I decided again this isn't precise but you have I have 15 annual revenue growth for 3D at depth given the opportunity there I have 25 annual revenue growth for batteries giving the huge inflection going on in that industry. And then I outlined 10% annual revenue growth for SAS as that's not a huge addressable market but still a good business. As we talked about above, winning new contracts combined that gets us to $205 million in 2030 revenue USD they have shown the ability to already reach 15% profit margins. There's actually I was surprised to see this looking at this fiscal AR chart in early 2024. In late 2023 and 2024 they posted 15% operating margins. And now given their reinvestment to grow and expand, that operating margin has shrunk to 9.6% or last 12 months. And it's a bit of a lumpy business given contracts can be large and just it's kind of how you are as a small cap manufacturer. But I do think with gross margins approaching 60% probably won't be that much higher than that. But in the 50, at least the 50 to 60% range, I think a 20% operating margin is entirely feasible. And if we do that, okay, current market cap, we do no shareholder dilution, which is probably going to happen. Kraken would be trading at 21 times 2030 EBIT or 21 times 2030 operating income. Were you disappointed in that number, Ryan?

C (57:39)

Yes, but I think there's a chance you could be very conservative here on the revenue growth.

A (57:47)

Yeah, two things I thought about is on the one hand projecting five years of 25% annual revenue growth for batteries for any business that seems in a vacuum, that's aggressive. But my estimate is saying that they'll have $110 million in battery revenue in 2030. And due to all the defense contrast building UUVs and the momentum building within the militaries that we talked about, there could be as a whole, the sector could be driving hundreds of millions of dollars in subsea battery sales across this entire sector. And Kraken could still be the premier provider that gets the majority of these contracts. So maybe batteries revenue is twice as high in 2030, I don't know. But should I bank on that? Happening is that my base case? I don't think it should be. And even with the stock up 500% in the last five years, Ryan said maybe 10x with the last three, depending on where it's traded, has been quite volatile. I think there's still room for a right tail event to happen here that could turn this into 100 bagger from the previous lows. I don't think investors should discount this probability to zero when saying, well, why should I project them to have 30, 30, 35, 40 revenue growth in batteries when that's actually realistic? That could happen now. The second thing that people I think should think about is a potential catalyst in the room in Angel. Kraken is one of, if not the key subcontractor for their sub for Andrew's UUV programs. The company is aggressive and working rapidly to rearm, modernize and disrupt the current protection procurement ecosystem for the United States defense contractors. They just raised $2.5 billion earlier this year and had a 30 has a 30.5 billion dollar valuation that Ryan talked about earlier. So they could use cash under stock as currency to acquire Kraken Robotics, which would give them a key advantage in the UUV space because other defense contractors would either have to go through Anduril in order to get Kraken's batteries or angel could decide to keep the batteries only for its own UV programs, forcing the competition to go elsewhere, which right now there is nothing that comes close to their, close to their technology. This is another right tail scenario that I think could lead to fantastic irr for investors. You could imagine like a two or three billion dollars acquisition price. I think something like that. I mean it's not going to be an insane premium, but you could get a solid return from an acquisition. That could also come into play here. I think that's how I'm modeling it. Base case solid growth, probably at a premium valuation. But there is a chance this becomes and stays a hypergrowth company that can grow. What was the revenue per share growth rate? 37. Yeah, I think that could.

C (60:36)

34. No, sorry, let me.

A (60:38)

37.

C (60:39)

37%.

A (60:40)

Yeah, I think that could stick around for the next five years as well. There's. There's a possibility.

C (60:47)

Yeah. I. Have there been any signs of interest from Anderil to like have they been serial acquirers in the past?

A (60:57)

Well, Andrew acquired Ghost, they acquired this UUV division. That's how they became a cracking customer. Because Ghost was a customer. Sorry, yeah, Ghost was a customer of Kraken and then it Got merged into Anduril. So possibility.

C (61:13)

Yeah, yeah, it's always nice. Kind of nice to have on the half chance that that does go through. Last question here as we wrap up the episode. Will you be buying the stock? Judging from your tone around valuation? I think I have an idea.

A (61:31)

But yeah, thank you for the listeners, this was more of an academic exercise, I think, than most podcast episodes. I'd say read the newsletter for more in depth thoughts on valuation. Just reading through it again to get all the numbers down there and I hope listeners got something out of this because I think this is a fascinating stock, but I believe things could change by Friday when I release the newsletter. But I believe I'm keeping on the watch list for now. Part of me, one side of one shoulder saying this is a David Garner rule breaker. It's going up, so that means you should buy it. But the other side of me is saying that's not how I like to invest. I would love for this to be a stock that fits into a. Not necessarily a basket approach for a sector, but small positions that could have a ton of growth. You know, high risk, high reward, reward positions. But at the time, right now, I think the valuation is a little too expensive for my blood. Anyone that found this a couple years ago, you're doing quite well. And I would just keep holding. I mean, this business is fantastic, but I would maybe want to buy it 10 times 20, 30 EBIT or if they show more momentum, the stock price goes down or something like that, macro stuff, what have you. Maybe we get a better buying opportunity right now, unfortunately, in the last, I think, few weeks. Let's look what's up in the last month. Yeah, it's up 30% in the last month. That unfortunately has made the valuation a lot more expensive. That's because they're winning some contracts and there is momentum there. But I don't really know how the numbers work out here for a huge return over the next five years. Although I'd love to own this one.

C (63:20)

Yeah, they're, I guess the one. The one thing to note here is that when it comes to small caps, there tends to be significant drawdowns, volatility and volatility. So when we say it's currently trading at 21 times or 20 times, what was it, 20, 30, EBIT and Brett wants it at 10 times, that's not out of the realm of possibility. I think a lot of people always assume a 50% drawdown is unrealistic and not going to happen. But I think let's go through let's, it's very.

A (63:55)

Let's look at the drawdowns right now in fiscal they went into a 70%, then a 60, then they were almost recovered and then went into 60 again. And then earlier this year they had a 20. I mean, it's, it's quite possible.

C (64:09)

Okay, I think that is going to do it. Like we said earlier in the show, if you want to seize the charts, the show notes some of the numbers because I know numbers over a podcast format can be a little hard to digest at times. Check out the substack. The link will be in the show notes. Also, quick shout out to our sponsors from this episode. Portcido Interactive Brokers and Fiscal AI. That's going to do it. Thank you everyone for tuning in. Brett and I are not financial advisors. Anything we say or discuss here on the podcast is not formal advice or recommendations. We may buy, sell or hold any of the securities discussed on this show. Thank you again for tuning in and we'll see you all next time.