Palladyne AI Corp.(PDYN) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis of Sarcos Technology and Robotics Corporation's financial performance and condition Item 1. Financial Statements (Unaudited) This section presents Sarcos Technology and Robotics Corporation's unaudited condensed consolidated financial statements and detailed explanatory notes Condensed Consolidated Balance Sheets Total assets decreased from $167.6 million to $120.7 million, primarily due to reduced cash and marketable securities, while total stockholders' equity significantly declined Balance Sheets Data | Metric | Dec 31, 2022 (in millions) | Jun 30, 2023 (in millions) | Change (in millions) | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | | Cash and cash equivalents | $35.16 | $25.57 | $(9.59) | | Marketable securities | $79.34 | $49.58 | $(29.76) | | Total current assets | $129.10 | $85.27 | $(43.83) | | Total assets | $167.63 | $120.67 | $(46.96) | | Total current liabilities | $10.53 | $9.69 | $(0.85) | | Total liabilities | $23.18 | $21.62 | $(1.56) | | Total stockholders' equity | $144.45 | $99.05 | $(45.40) | Condensed Consolidated Statements of Operations The company experienced a significant decrease in revenue and an increased net loss for both the three and six months ended June 30, 2023 Statements of Operations Data | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Revenue, net | $1.28 | $3.04 | $(1.76) | (58)% | | Cost of revenue | $0.94 | $3.15 | $(2.20) | (70)% | | Research and development | $11.71 | $7.57 | $4.14 | 55% | | General and administrative | $8.25 | $18.15 | $(9.89) | (55)% | | Sales and marketing | $4.41 | $2.59 | $1.82 | 71% | | Intangible amortization expense | $0.82 | $0.57 | $0.25 | 43% | | Asset write-down and restructuring | $5.11 | $0.00 | $5.11 | *NM | | Net loss | $(28.66) | $(23.12) | $(5.54) | 24% | | Net loss per share (Basic and diluted) | $(1.12) | $(0.95) | $(0.17) | 18% | Statements of Operations Data | Metric | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Revenue, net | $3.57 | $3.78 | $(0.21) | (6)% | | Cost of revenue | $2.73 | $3.63 | $(0.91) | (25)% | | Research and development | $21.11 | $13.45 | $7.66 | 57% | | General and administrative | $17.99 | $35.94 | $(17.95) | (50)% | | Sales and marketing | $8.15 | $4.80 | $3.35 | 70% | | Intangible amortization expense | $1.64 | $0.57 | $1.06 | 185% | | Asset write-down and restructuring | $5.11 | $0.00 | $5.11 | *NM | | Net loss | $(50.14) | $(42.32) | $(7.82) | 18% | | Net loss per share (Basic and diluted) | $(1.97) | $(1.79) | $(0.18) | 10% | Condensed Consolidated Statements of Comprehensive Loss The company reported a comprehensive loss primarily driven by the net loss, with minor impact from changes in unrealized gains/losses on investments Comprehensive Loss Data | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Net loss | $(28.66) | $(23.12) | $(50.14) | $(42.32) | | Change in unrealized (loss) gain on available-for-sale investments | $(0.05) | $0.00 | $0.00 | $0.00 | | Comprehensive loss | $(28.71) | $(23.12) | $(50.13) | $(42.32) | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased primarily due to the accumulated deficit from net losses, partially offset by stock-based compensation Stockholders' Equity Data | Metric | Dec 31, 2022 (in millions) | Jun 30, 2023 (in millions) | Change (in millions) | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | | Common Stock (shares) | 25,708,519 | 25,841,889 | 133,370 | | Additional Paid-In Capital | $447.08 | $451.82 | $4.73 | | Accumulated Other Comprehensive Loss | $(0.02) | $(0.01) | $0.00 | | Accumulated Deficit | $(302.62) | $(352.76) | $(50.14) | | Total Stockholders' Equity | $144.45 | $99.05 | $(45.40) | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities increased, while investing activities shifted to a net provision, and financing activities saw a significant decrease in cash used Cash Flows Data | Cash Flow Activity | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | | Net cash used in operating activities | $(39.98) | $(27.92) | $(12.06) | | Net cash provided by (used in) investing activities | $30.46 | $(109.88) | $140.34 | | Net cash used in financing activities | $(0.06) | $(6.05) | $5.98 | | Net decrease in cash, cash equivalents | $(9.59) | $(143.86) | $134.26 | | Cash, cash equivalents at end of period | $25.57 | $73.26 | $(47.69) | Notes to Unaudited Condensed Consolidated Financial Statements The notes provide essential context to the financial statements, detailing the company's business, accounting policies, and significant events including liquidity 1. Basis of Presentation and Summary of Significant Accounting Policies Sarcos designs, develops, and manufactures advanced robotic systems, with recent events including a reverse stock split and a restructuring charge - Sarcos is a technology leader in designing, developing, and manufacturing advanced robotic systems, solutions, and AI/ML software for dynamic and unstructured environments[18] - On July 5, 2023, the company effected a 1-for-6 reverse stock split, retroactively adjusting all share and per share amounts[28] - The company announced a restructuring on July 12, 2023, to focus on products with near-term revenue potential, incurring $5.1 million in charges for inventory write-down ($4.4 million) and fixed asset impairment ($0.7 million) in Q2 2023[29] Basis of Presentation and Summary of Significant Accounting Policies Data | Metric | Jun 30, 2023 (in millions) | Dec 31, 2022 (in millions) | | :------------------------------------ | :-------------------------- | :-------------------------- | | Cash, cash equivalents and marketable securities | $75.14 | $114.50 | | Accumulated deficit | $(352.76) | $(302.62) | | Working capital | $75.58 | $118.57 | - The company expects to have sufficient financial resources for at least the next 12 months[32] Basis of Presentation and Summary of Significant Accounting Policies Data | Revenue Source | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Product Development Contract Revenue | $1.27 | $2.98 | $3.57 | $3.72 | | Product Revenue | $0.00 | $0.06 | $0.00 | $0.07 | | Total Revenue, net | $1.28 | $3.04 | $3.57 | $3.78 | - As of June 30, 2023, the company had $4.8 million in backlog (remaining performance obligations), mostly expected to be recognized within the next 12 months[45] 2. Fair Value Measurements The company measures certain financial assets and liabilities at fair value, primarily marketable securities and warrant liability Fair Value Measurements Data | Asset/Liability | Fair Value (Jun 30, 2023, in millions) | Fair Value (Dec 31, 2022, in millions) | Fair Value Hierarchy Level | | :------------------------------------ | :-------------------------------------- | :-------------------------------------- | :------------------------- | | Marketable securities (U.S. treasury securities) | $49.58 | $79.34 | Level 1 | | Warrant liability | $0.19 | $0.25 | Level 2 | 3. Balance Sheet Components Inventories, net, increased while prepaid expenses, property and equipment, and accrued liabilities decreased Balance Sheet Data | Metric | Jun 30, 2023 (in millions) | Dec 31, 2022 (in millions) | Change (in millions) | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | | Inventories, net | $3.72 | $3.56 | $0.16 | | Raw materials | $2.76 | $2.08 | $0.68 | | Inventory reserves | $1.10 | $0.40 | $0.70 | Balance Sheet Data | Metric | Jun 30, 2023 (in millions) | Dec 31, 2022 (in millions) | Change (in millions) | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | | Prepaid expenses and other current assets | $3.59 | $5.02 | $(1.42) | | Prepaid insurance | $1.30 | $3.42 | $(2.12) | Balance Sheet Data | Metric | Jun 30, 2023 (in millions) | Dec 31, 2022 (in millions) | Change (in millions) | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | | Property and equipment, net | $6.76 | $7.64 | $(0.88) | | Accumulated depreciation | $(3.31) | $(2.63) | $(0.69) | Balance Sheet Data | Metric | Jun 30, 2023 (in millions) | Dec 31, 2022 (in millions) | Change (in millions) | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | | Accrued liabilities | $4.05 | $6.03 | $(1.98) | | Payroll and related costs | $2.97 | $4.27 | $(1.30) | 4. Acquisitions Sarcos acquired RE2, Inc. for $90.1 million, expanding its engineering team and product offerings, with goodwill of $70.2 million - On April 25, 2022, Sarcos acquired RE2, Inc., a developer of manipulator arms and autonomy capabilities, for an aggregate consideration of $90.1 million[57] - The acquisition included $30.7 million in cash, $44.0 million in common stock (1.6 million shares), and $15.4 million in assumed options (646,173 shares)[57] Acquisition Details Data | Acquired Asset/Liability | Amount (in millions) | | :------------------------------------ | :-------------------- | | Intangible assets | $21.30 | | Goodwill | $70.24 | | Total acquisition consideration | $90.08 | 5. Goodwill and Intangible Assets The company fully impaired its goodwill, while acquired intangible assets totaled $17.5 million net of amortization - All goodwill was fully impaired as of December 31, 2022, due to sustained decreases in the company's publicly quoted share price[62] Goodwill and Intangible Assets Summary Data | Intangible Asset | Net Carrying Amount (Jun 30, 2023, in millions) | Weighted Average Remaining Useful Life (in years) | | :------------------------------------ | :----------------------------------------------- | :------------------------------------------------ | | Trade name and trademarks | $0.81 | 4.8 | | Developed technology | $7.36 | 3.8 | | Customer relationships | $9.31 | 7.8 | | Total | $17.48 | | Goodwill and Intangible Assets Summary Data | Year | Amortization Expense (in millions) | | :------------------------------------ | :---------------------------------- | | 2023 (remaining) | $1.64 | | 2024 | $3.28 | | 2025 | $3.28 | | 2026 | $3.28 | | 2027 | $2.00 | | 2028 and thereafter | $4.02 | | Total | $17.48 | 6. Reverse Recapitalization The Business Combination was accounted for as a reverse recapitalization, entitling holders to earn-out shares - The Business Combination was accounted for as a reverse recapitalization, with Old Sarcos deemed the accounting acquirer[65] - Holders of Old Sarcos capital stock are entitled to up to 4.7 million shares of Common Stock upon achieving stock price thresholds of $90.00 and $120.00[66][67][68] 7. Warrants Outstanding warrants to purchase 3.4 million shares of Common Stock exist at an exercise price of $11.50 per warrant, redeemable under certain conditions - As of June 30, 2023, there were outstanding warrants to purchase 3.4 million shares of Common Stock[70] - Each whole warrant entitles the holder to purchase one-sixth of a share of Common Stock at $11.50 per warrant, subject to adjustment[70] - The company may redeem warrants if the common stock price equals or exceeds $108.00 per share (at $0.01 per warrant) or $60.00 per share (at $0.10 per warrant, with cashless exercise option)[73][75] 8. Stock-based Compensation The company operates under the 2021 Stock Plan, with 1.9 million shares available for grant, and reported $4.7 million in stock-based compensation expense for the six months ended June 30, 2023 - As of June 30, 2023, 1.9 million shares were available to grant under the 2021 Plan[76] Stock-based Compensation Summary Data | Stock Option Activity | Dec 31, 2022 | Jun 30, 2023 | | :------------------------------------ | :----------- | :----------- | | Options Outstanding (Number of Shares) | 2,377,503 | 3,618,404 | | Weighted Average Exercise Price | $16.80 | $10.08 | | Exercisable (Number of Shares) | 1,414,864 | 1,429,424 | Stock-based Compensation Summary Data | Stock-Based Compensation Expense | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Total stock-based compensation expense | $2.07 | $10.27 | $4.73 | $21.12 | 9. Net Loss Per Share The basic and diluted net loss per share was $(1.12) and $(1.97) for the three and six months ended June 30, 2023, respectively, with anti-dilutive securities excluded Net Loss Per Share Data | Metric | 3 Months Ended Jun 30, 2023 | 3 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss | $(28.66) | $(23.12) | $(50.14) | $(42.32) | | Weighted average shares outstanding, basic and diluted | 25,512,057 | 24,379,549 | 25,491,654 | 23,685,766 | | Basic and diluted net loss per share | $(1.12) | $(0.95) | $(1.97) | $(1.79) | | Anti-dilutive securities, excluded | 13,389,271 | 11,586,027 | 13,389,271 | 11,586,027 | 10. Income Taxes The company recorded an income tax expense of $3 thousand for both periods, with the effective tax rate differing due to net losses and a full valuation allowance Income Tax Data | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Income tax (expense) benefit | $0.00 | $1.61 | $0.00 | $1.61 | - The company recorded net losses during the period with a corresponding full valuation allowance on the net deferred tax assets[85] 11. Commitments and Contingencies The company is involved in various legal proceedings but has not recorded any material loss contingency, and had an unconditional purchase commitment of $2.0 million - The company has not recorded any material loss contingency related to legal proceedings as of June 30, 2023, or December 31, 2022[86] - The maximum potential amount of future payments under indemnification provisions is indeterminable[87] - As of June 30, 2023, the company had an unconditional purchase commitment of $2.0 million, which was paid during the third quarter of 2023[88] 12. Segment Information The company operates as a single reportable segment, with revenue primarily derived from U.S. customers - The company has a single reportable segment and operating segment structure, as the CODM allocates resources and makes decisions based on consolidated financial information[89] Segment Data | Revenue from Customers Outside US | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Revenue | $0.20 | $0.60 | $0.90 | $0.60 | 13. Employee Benefits The company offers a defined contribution 401(k) plan to employees, with matching contributions initiated in April 2022 - The company has a defined contribution 401(k) plan covering substantially all employees[92] - The company began providing 401(k) matching on a portion of employee contributions in April 2022[92] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting a refined sales strategy and restructuring charges Special Note Regarding Forward-Looking Statements This section cautions readers that the report contains forward-looking statements about future financial performance and strategies, subject to significant risks - The report contains forward-looking statements regarding future financial performance, business strategies, and product releases[95][96] - These statements are subject to risks and uncertainties, including the impact of COVID-19, supply chain challenges, competition, and the ability to manage growth and expenses[95][96][98] - The company does not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, except as required by applicable securities laws[97] Overview Sarcos is a technology leader in advanced robotic systems and AI/ML software, having refined its sales strategy to focus on near-term revenue potential products - Sarcos is a technology leader in designing, developing, and manufacturing advanced robotic systems, solutions, and AI/ML software to augment human productivity and prevent injuries[100] - On July 12, 2023, the company refined its sales strategy to focus on products with near-term revenue growth potential, specifically Guardian Sea Class, aviation, solar solutions, and a commercial AI autonomy software platform[102] - Optimization efforts include reducing headcount and consolidating Pittsburgh manufacturing into Salt Lake City, incurring $5.1 million in Q2 2023 restructuring charges and anticipating an additional $6.0 million in Q3 2023[103] - The company plans to offer robotic systems and solutions through a standard product sales model and commercial AI autonomy software via a SaaS model[105] Continuing Impact of COVID-19 The COVID-19 pandemic has caused and may continue to cause supply chain disruptions, affecting recruitment and timelines, leading to accelerated material purchases - The COVID-19 pandemic has caused and may continue to cause disruptions in the company's supply chain, affecting its ability to recruit skilled employees and meet product development timelines[107] - The company has accelerated purchases of materials, parts, and components to manage potential supply chain risks, which has increased and will likely continue to increase cash usage[107] - The duration and extent of the COVID-19 pandemic's impacts cannot be accurately predicted, and its full effect may not be reflected in operating results until future periods[108] Key Factors Affecting Operating Results The company's future success depends on the successful development and commercial launch of its focus products, facing significant capital requirements and unproven market demand Development, Testing and Commercial Launch of our Products The company's near- to mid-term financial success depends on successfully developing and selling its focus products, with potential delays from hiring, component availability, and cost increases - The company's near- to mid-term financial success depends on the successful development, launch, and sale of its focus products: Guardian Sea Class, aviation, solar solutions, and a commercial AI autonomy software platform[110] - Delays in product development and commercialization are influenced by the ability to hire and retain qualified employees, timely component availability, and increased personnel and materials costs due to inflation and supply chain issues[174][175] - Product testing and improvements may delay estimated production and customer delivery timelines, potentially harming reputation and financial condition[176] Financing of Operations The company will incur significant cash expenditures for product development and operations, expecting positive operating cash flow no earlier than 2025, and may seek opportunistic financing - The company will spend a material portion of its cash on hand to develop products and fund operations for the foreseeable future[111] - The company expects to achieve positive operating cash flow no earlier than 2025 and believes it has sufficient liquidity to operate into 2025 without needing additional capital, partly due to a reduction in force[111][112] - The company may opportunistically raise capital when market conditions are favorable to bolster cash reserves, reduce financial risk, and finance product manufacturing and inventory costs[112] Acquisition and Integration of RE2 The company acquired RE2, Inc. on April 25, 2022, integrating its activities into Sarcos' consolidated financial statements from the acquisition date - On April 25, 2022, Sarcos acquired RE2, Inc., a developer of manipulator arms and autonomy capabilities[113] - The financial results presented include RE2's activity from the acquisition date through June 30, 2023[113] Customer Demand The company refined its sales strategy to focus on specific solutions and AI autonomy software, acknowledging that market demand for these new product categories is unproven - The company refined its sales and product development strategy to focus on specific solutions (Guardian Sea Class, aviation, solar) and a commercial AI software platform, based on customer feedback for specialized systems[114] - Market demand for these new product categories is unproven, and inaccurate assumptions about market demand, pricing, adoption rates, and sales cycles could adversely affect the business[114] Manufacturing of Our Products The company plans to outsource manufacturing to a third-party contract manufacturer, with high-volume production not anticipated until after 2023, posing risks if the transition is unsuccessful - The company intends to outsource manufacturing of its products to a third-party contract manufacturer over time[115] - High-volume production by the contract manufacturing partner is not anticipated until after 2023, and the transition may be delayed by the new sales and product development strategy[115] - The company believes it has sufficient internal manufacturing capacity to meet near-term demand for its focus products[115] Continued Investment and Innovation The company's financial performance relies heavily on maintaining its leading position through continuous investment in research and development and innovation - Financial performance is significantly dependent on maintaining a leading position in the robotic systems industry through continuous investment in research and development[116] - The company must continually identify and respond to evolving customer requirements, competitive threats, and introduce innovative products to avoid adverse effects on market position and revenue[116] Geopolitical and Macro-economic Environment Geopolitical and macroeconomic factors can significantly impact economic activity, affecting demand, supply chain reliability, and costs - Geopolitical and macroeconomic factors (e.g., inflation, interest rates, war in Ukraine) can significantly impact economic activity and demand for products[117] - These factors can affect the supply chain, ability to hire, labor and materials costs, product pricing, and customer budgets[117] - Inability to manage business successfully in response to these factors could adversely affect business and operating results[118] Results of Operations The company's results of operations for the three and six months ended June 30, 2023, show decreased revenue, impacted by R&D, G&A, and restructuring charges Comparison of the Three Months Ended June 30, 2023, and 2022 For the three months ended June 30, 2023, revenue decreased by 58% to $1.3 million, with operating expenses slightly down, but R&D up and G&A down, alongside restructuring charges Revenue, Net Total revenue decreased by $1.8 million (58%) to $1.3 million for the three months ended June 30, 2023 Revenue Summary Data | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Revenue, net | $1.28 | $3.04 | $(1.76) | (58)% | Product Development Contract Revenue Product development contract revenue decreased by $1.7 million (57%) to $1.3 million, mainly due to contract completion and a shift to commercial sales focus Product Development Contract Revenue Summary Data | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Product Development Contract Revenue | $1.27 | $2.98 | $(1.71) | (57)% | - The decrease was primarily due to the completion of certain product development contracts that have not yet been replaced[121] - Future revenue from product development contracts is expected to decrease as a percentage of total revenue as the company focuses on initial commercial sales[121] Product Revenue Product revenue remained insignificant due to customer budget constraints, macroeconomic factors, and lack of near-term customer need for general-purpose systems Product Revenue Summary Data | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Product Revenue | $0.00 | $0.06 | $(0.05) | (95)% | - Lack of significant product sales in Q2 2023 was due to customer budget constraints, macroeconomic factors, and lack of near-term customer need for general-purpose systems (other than Guardian Sea Class)[122] Operating Expenses Total operating expenses decreased slightly by 2% to $31.2 million, driven by reduced cost of revenue and general and administrative expenses, offset by increases in R&D and restructuring charges Operating Expenses Summary Data | Operating Expense | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Total operating expenses | $31.24 | $32.02 | $(0.78) | (2)% | Cost of Revenue Cost of revenue decreased by $2.2 million (70%) to $0.9 million, primarily due to reduced labor and material expenses charged to product development contracts Cost of Revenue Summary Data | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Cost of revenue | $0.94 | $3.15 | $(2.20) | (70)% | - Decrease mainly due to decreased labor and material expenses charged to product development contracts[125] Research and Development Research and development expense increased by $4.1 million (55%) to $11.7 million, driven by higher headcount and a shift of labor from cost of revenue to R&D Research and Development Summary Data | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Research and development | $11.71 | $7.57 | $4.14 | 55% | - Increase driven by increased labor and overhead expense due to higher headcount (RE2 acquisition) and a shift of labor from cost of revenue to R&D, focusing on new product development[126] General and Administrative General and administrative expense decreased by $9.9 million (55%) to $8.3 million, primarily due to reduced stock-based compensation expense General and Administrative Summary Data | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | General and administrative | $8.25 | $18.15 | $(9.89) | (55)% | - Decrease primarily due to reduced stock-based compensation expense of $8.5 million from certain awards vesting in the prior year[127] Sales and Marketing Sales and marketing expense increased by $1.8 million (71%) to $4.4 million, driven by higher professional service fees and increased promotional and event expenses Sales and Marketing Summary Data | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Sales and marketing | $4.41 | $2.59 | $1.82 | 71% | - Increase driven by higher professional service fees for third-party data management platforms and increased promotional/event expenses[128] Intangible Amortization Expense Intangible amortization expense increased by $0.2 million (43%) to $0.8 million, due to amortization expenses on intangible assets acquired in the RE2 acquisition Intangible Amortization Expense Summary Data | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Intangible amortization expense | $0.82 | $0.57 | $0.25 | 43% | - Increase due to amortization expenses on identified intangible assets recorded as part of the RE2 acquisition[129] Asset Write-down and Restructuring The company incurred $5.1 million in asset write-down and restructuring expenses from product development reprioritization Asset Write-down and Restructuring Summary Data | Metric | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Asset write-down and restructuring | $5.11 | $0.00 | $5.11 | *NM | - Expenses include $4.4 million for inventory write-down and $0.7 million for fixed asset impairment due to product development reprioritization[130] Other Income Total other income decreased by $3.0 million (69%) to $1.3 million, primarily due to a lower gain on warrant liability Other Income Summary Data | Other Income | 3 Months Ended Jun 30, 2023 (in millions) | 3 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Interest income, net | $0.87 | $0.15 | $0.73 | 491% | | Gain on warrant liability | $0.44 | $4.11 | $(3.67) | (89)% | | Other loss, net | $(0.01) | $0.00 | $(0.01) | 450% | | Total other income | $1.30 | $4.26 | $(2.96) | (69)% | - Decrease primarily due to reduced unrealized mark-to-market gain on private placement warrants, partially offset by increased interest income[133] Comparison of the Six Months Ended June 30, 2023 and 2022 For the six months ended June 30, 2023, total revenue decreased by 6% to $3.6 million, with operating expenses down, and significant changes in R&D, G&A, and restructuring charges Revenue, Net Total revenue decreased by $0.2 million (6%) to $3.6 million for the six months ended June 30, 2023 Revenue Summary Data | Metric | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Revenue, net | $3.57 | $3.78 | $(0.21) | (6)% | Product Development Contract Revenue Product development contract revenue decreased by $0.1 million (4%) to $3.6 million, primarily due to contract completion and a shift to commercial sales focus Product Development Contract Revenue Summary Data | Metric | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Product Development Contract Revenue | $3.57 | $3.72 | $(0.15) | (4)% | - The decrease was primarily due to the completion of certain product development contracts that have not yet been replaced[135] - Future revenue from product development contracts is expected to decrease as a percentage of total revenue as the company focuses on initial commercial sales[135] Product Revenue Product revenue remained insignificant due to customer budget constraints, macroeconomic factors, and lack of near-term customer need for general-purpose systems Product Revenue Summary Data | Metric | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Product Revenue | $0.00 | $0.07 | $(0.06) | (95)% | - Lack of significant product sales in H1 2023 was due to customer budget constraints, macroeconomic factors, and lack of near-term customer need for general-purpose systems (other than Guardian Sea Class)[136] Operating Expenses Total operating expenses decreased by $1.7 million (3%) to $56.7 million, influenced by reduced cost of revenue and general and administrative expenses, offset by increases in R&D and restructuring charges Operating Expenses Summary Data | Operating Expense | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------- | | Total operating expenses | $56.72 | $58.39 | $(1.67) | (3)% | Cost of Revenue Cost of revenue decreased by $0.9 million (25%) to $2.7 million, primarily due to reduced labor and material expenses charged to product development contracts Cost of Revenue Summary Data | Metric | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Cost of revenue | $2.73 | $3.63 | $(0.91) | (25)% | - Decrease mainly due to decreased labor and material expenses charged to product development contracts[139] Research and Development Research and development expense increased by $7.7 million (57%) to $21.1 million, driven by higher headcount and a shift of labor from cost of revenue to R&D Research and Development Summary Data | Metric | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Research and development | $21.11 | $13.45 | $7.66 | 57% | - Increase driven by increased labor and overhead expense due to higher headcount (RE2 acquisition) and a shift of labor from cost of revenue to R&D, focusing on new product development[140] General and Administrative General and administrative expense decreased by $18.0 million (50%) to $18.0 million, primarily due to reduced stock-based compensation expense General and Administrative Summary Data | Metric | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | General and administrative | $17.99 | $35.94 | $(17.95) | (50)% | - Decrease primarily due to reduced stock-based compensation expense of $16.8 million from certain awards vesting in the prior year[141] Sales and Marketing Sales and marketing expense increased by $3.4 million (70%) to $8.2 million, driven by higher professional service fees, promotional expenses, and additional headcount Sales and Marketing Summary Data | Metric | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Sales and marketing | $8.15 | $4.80 | $3.35 | 70% | - Increase driven by higher professional service fees, increased promotional/event expenses, and additional headcount from the RE2 acquisition[142] Intangible Amortization Expense Intangible amortization expense increased by $1.1 million (185%) to $1.6 million, due to amortization expenses on intangible assets acquired in the RE2 acquisition Intangible Amortization Expense Summary Data | Metric | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Intangible amortization expense | $1.64 | $0.57 | $1.06 | 185% | - Increase due to amortization expenses on identified intangible assets recorded as part of the RE2 acquisition[143] Asset Write-down and Restructuring The company incurred $5.1 million in asset write-down and restructuring expenses, including inventory write-down and fixed asset impairment from product development reprioritization Asset Write-down and Restructuring Summary Data | Metric | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Asset write-down and restructuring | $5.11 | $0.00 | $5.11 | *NM | - Expenses include $4.4 million for inventory write-down and $0.7 million for fixed asset impairment due to product development reprioritization[144] Other Income Total other income decreased by $7.7 million (72%) to $3.0 million, primarily due to a lower gain on warrant liability, partially offset by increased interest income and employee retention credit refunds Other Income Summary Data | Other Income | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | % Change | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Interest income, net | $1.97 | $0.16 | $1.81 | 1,141% | | Gain on warrant liability | $0.00 | $10.53 | $(10.52) | (100)% | | Other income, net | $1.04 | $0.00 | $1.04 | *NM | | Total other income | $3.01 | $10.69 | $(7.67) | (72)% | - Decrease primarily due to reduced unrealized mark-to-market gain on private placement warrants, partially offset by increased interest income and employee retention credit refunds[145] Liquidity and Capital Resources As of June 30, 2023, the company had $75.1 million in cash, cash equivalents, and marketable securities, believing it has sufficient liquidity for at least the next 12 months Liquidity and Capital Resources Summary Data | Metric | Jun 30, 2023 (in millions) | | :------------------------------------ | :-------------------------- | | Cash, cash equivalents and marketable securities | $75.10 | - The company believes it has sufficient liquidity to operate into 2025 without the need to raise additional capital, partly due to a reduction in force[149] - The company expects to need additional capital before becoming cash flow positive, which is not anticipated until at least 2025[149] Liquidity and Capital Resources Summary Data | Cash Flow Activity | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | | Net cash used in operating activities | $(39.98) | $(27.92) | $(12.06) | | Net cash provided by (used in) investing activities | $30.46 | $(109.88) | $140.34 | | Net cash used in financing activities | $(0.06) | $(6.05) | $5.98 | Net Cash Used in Operating Activities Net cash used in operating activities increased by $12.1 million to $40.0 million, primarily due to a higher net loss and increased cash used for changes in operating assets and liabilities Operating Cash Flow Summary Data | Metric | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | | Net cash used in operating activities | $(39.98) | $(27.92) | $(12.06) | - Increase primarily attributable to a $7.8 million increase in net loss and a net decrease of $0.8 million in non-cash expenses[151] - Changes in operating assets and liabilities increased cash used by $3.4 million, driven by increased inventory purchases and decreases in accrued liabilities[151] Net Cash Provided by (Used in) Investing Activities Net cash provided by investing activities increased by $140.3 million, shifting from a net use to a net provision, predominantly due to marketable securities maturities Investing Cash Flow Summary Data | Metric | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | | Net cash provided by (used in) investing activities | $30.46 | $(109.88) | $140.34 | - Increase predominantly due to $31.1 million of maturities of marketable securities, net of purchases, in 2023[153] - In 2022, investing activities included $79.5 million in marketable securities purchases and $29.7 million for the RE2 acquisition[153] Net Cash Used In Financing Activities Net cash used in financing activities decreased by $6.0 million, primarily due to a reduction in funds used to repurchase shares for tax withholding obligations Financing Cash Flow Summary Data | Metric | 6 Months Ended Jun 30, 2023 (in millions) | 6 Months Ended Jun 30, 2022 (in millions) | Change (in millions) | | :------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | | Net cash used in financing activities | $(0.06) | $(6.05) | $5.98 | - Decrease mainly due to a $6.6 million reduction in funds used to repurchase shares for tax withholding obligations[154] Emerging Growth Company Status The company qualifies as an "emerging growth company" under the JOBS Act, allowing it to take advantage of exemptions from certain reporting requirements - The company is an "emerging growth company" (EGC) under the JOBS Act[155] - As an EGC, it is exempt from auditor attestation for internal controls, say-on-pay votes, and has reduced executive compensation disclosure obligations[155] - The company has elected to use the extended transition period for new accounting standards, which may make financial statements difficult to compare with non-EGCs or EGCs that opted out[156] Critical Accounting Policies and Estimates The company's financial statements are prepared in accordance with GAAP, with no material changes to its critical accounting policies or estimates - Financial statements are prepared in accordance with GAAP, requiring estimates and judgments[157] - No material changes to critical accounting policies or estimates were disclosed in the 2022 Form 10-K[158] Recent Accounting Pronouncements The company adopted ASU 2016-13 on January 1, 2023, with no material impact, and has elected to delay new accounting pronouncements as an emerging growth company - The company adopted ASU 2016-13 on January 1, 2023, with no material impact on its financial statements[47] - As an emerging growth company, the company has elected to delay the adoption of new or revised accounting pronouncements until they are applicable to private companies[46] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Sarcos is not required to provide quantitative and qualitative disclosures about market risk - The company is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[160] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of June 30, 2023[160] - Disclosure controls and procedures provide reasonable, not absolute, assurance that objectives are met[161] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2023[162] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings The company may be involved in various legal claims and lawsuits but is not currently a party to any proceedings expected to have a material adverse effect on its business - The company is not currently a party to any legal proceedings expected to have a material adverse effect on its business, financial condition, or results of operations[164] - Litigation can have an adverse impact due to defense and settlement costs and diversion of management resources[164] Item 1A. Risk Factors This section outlines numerous risks and uncertainties that could materially harm the company's business, emphasizing its early stage, history of losses, and unproven commercialization efforts Risks Related to Our Business The company is an early-stage entity with a history of significant losses, limited experience commercializing products at scale, and faces delays in product development - The company is an early-stage company with a history of losses, incurring a net loss of $50.1 million for the six months ended June 30, 2023, and expects to incur significant expenses and losses until 2025 at the earliest[166][169] - The company has very limited experience commercializing products at a large scale, and its new sales strategy focusing on specific solutions (Guardian Sea Class, aviation, solar, AI/ML software) may not be effective[171][173] - Commercialization may be delayed due to challenges in hiring, component availability, increased personnel and materials costs, and the need for product improvements based on testing and customer use[174][176] - Revenue will be concentrated in a limited number of products, and the market demand for new product categories (robotic systems and AI autonomy software) is unproven, with important assumptions about pricing, adoption rates, and sales cycles potentially inaccurate[177][189][190] - The company has limited current customers and no binding orders for commercial versions of its focus products, and expected customer trials may not result in binding orders[178][179][180] - Customer employees may resist the adoption of robotic products due to lack of instruction, perceived difficulties, labor union resistance, or workplace injuries, negatively impacting sales[194] - The company operates in a competitive industry subject to rapid technological change, with competition expected to increase from existing and new players offering alternative or superior solutions[199][201][204] Risks Related to Our Operations & Growth The company's ability to develop and manufacture products at scale is unproven, with plans to outsource manufacturing and reliance on single-source suppliers posing significant risks - The company's ability to develop and manufacture products of sufficient quality on schedule and at a large scale is unproven, with plans to largely outsource manufacturing to third-party partners, which could lead to delays and reduced control[210][211] - Dependence on single, sole, or limited source suppliers for key components, and the inability to identify all future suppliers, poses significant risks to supply, pricing, and product specifications[214][215][217] - Continued supply chain disruptions, including cost increases and availability issues for components (e.g., semiconductors, lithium-ion batteries), could delay commercialization and negatively impact profitability[219] - Design or manufacturing flaws, defects, glitches, or user errors in products can result in recalls, lower ROI for customers, harm to users, and significant safety concerns, adversely affecting operations, financial condition, or reputation[221][222][225] - The company has no experience maintaining or servicing its products at a large scale and may face challenges in establishing a widespread service network, potentially impacting customer satisfaction and sales[230][231] - The expected transition to an outsourced manufacturing business model may not be successful, leading to delays, lost revenue, increased costs, and reduced control over quality and supply[234][235] - Failure to effectively manage growth, including challenges in expanding management, engineering, and product teams, and integrating new employees, could materially and adversely affect business operations[248][249][250] - Recent workforce reductions (affecting ~24% of workforce) may not result in anticipated savings, could incur greater-than-expected costs, and disrupt business operations, including loss of expertise and impact on employee morale[265] Risks Related to Our Finances The company requires significant capital for its business plans, expecting to need additional financing before achieving positive operating cash flows - The company's business plans require significant capital, and it expects to need additional financing before achieving positive operating cash flows, which are not anticipated until at least 2025[258][259] - Future capital needs may require selling additional equity or debt securities, potentially diluting stockholders or introducing restrictive covenants[258][263] - Financial results may vary significantly from period to period due to fluctuations in operating costs, product demand, and the pace of product development and manufacturing[266][267] - Strategic alliances or acquisitions carry risks such as sharing proprietary information, non-performance by third parties, increased expenses, and integration challenges, which may not yield anticipated benefits[268][269][272] - Operating and financial projections rely on management assumptions and analyses, which, given limited commercial experience, may prove incorrect, leading to actual results materially different from forecasts[273][274] - Adverse events or perceptions affecting the financial services industry could impact the company's operating results, liquidity, financial condition, and prospects, as seen with recent bank failures[292][293][294] Risks Related to Claims, Legal and Regulatory Compliance The company faces potential litigation due to prior material weaknesses, is subject to evolving data privacy and security laws, and new risks from AI technologies - The company faces potential litigation or disputes due to prior material weaknesses in internal control over financial reporting and the restatement of financial statements[295][297][298] - Changes in tax laws, such as the Tax Cuts and Jobs Act of 2017 and the Inflation Reduction Act of 2022, could adversely affect the company's effective tax rate, operating results, and cash flows[300][302] - The company may become subject to new or changing governmental regulations related to product design, manufacturing, marketing, distribution, servicing, or use, with non-compliance potentially leading to product withdrawal, delays, increased costs, or making the business unviable[303][304] - The company is subject to evolving laws, regulations, standards, and contractual obligations related to data privacy and security (e.g., CCPA, CPRA, GDPR), with actual or perceived failure to comply potentially harming reputation, leading to significant fines, and liability[308][309][310][311][312] - Issues in the development and use of artificial intelligence (AI), combined with an uncertain regulatory environment, may result in reputational harm, liability, or other adverse consequences due to complexity, ethical concerns, and potential for inaccurate content[314][315][