Palladyne AI Corp.(PDYN) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Sarcos Technology and Robotics Corporation, including the balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific balance sheet components Condensed Consolidated Balance Sheets | Metric | September 30, 2023 (Unaudited) (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------------------------- | :------------------------------- | | Total current assets | $61,390 | $129,099 | | Total assets | $95,583 | $167,625 | | Total current liabilities | $7,947 | $10,532 | | Total liabilities | $19,428 | $23,175 | | Total stockholders' equity | $76,155 | $144,450 | | Accumulated deficit | $(381,738) | $(302,621) | Condensed Consolidated Statements of Operations | Metric | Three Months Ended September 30, 2023 (in thousands) | Three Months Ended September 30, 2022 (in thousands) | Nine Months Ended September 30, 2023 (in thousands) | Nine Months Ended September 30, 2022 (in thousands) | | :----------------------------------- | :--------------------------------------------------- | :--------------------------------------------------- | :-------------------------------------------------- | :-------------------------------------------------- | | Revenue, net | $1,827 | $4,667 | $5,400 | $8,448 | | Loss from operations | $(30,754) | $(27,250) | $(83,901) | $(81,862) | | Net loss | $(28,981) | $(22,499) | $(79,117) | $(64,819) | | Net loss per share (Basic and diluted) | $(1.13) | $(0.89) | $(3.09) | $(2.68) | Condensed Consolidated Statements of Comprehensive Loss | Metric | Three Months Ended September 30, 2023 (in thousands) | Three Months Ended September 30, 2022 (in thousands) | Nine Months Ended September 30, 2023 (in thousands) | Nine Months Ended September 30, 2022 (in thousands) | | :------------------- | :--------------------------------------------------- | :--------------------------------------------------- | :-------------------------------------------------- | :-------------------------------------------------- | | Comprehensive loss | $(28,967) | $(22,633) | $(79,098) | $(64,953) | Condensed Consolidated Statements of Stockholders' Equity | Metric | December 31, 2022 (in thousands) | September 30, 2023 (in thousands) | | :-------------------------- | :------------------------------- | :-------------------------------- | | Total Stockholders' Equity | $144,450 | $76,155 | | Accumulated Deficit | $(302,621) | $(381,738) | | Stock-based compensation (9M) | N/A | $10,808 | Condensed Consolidated Statements of Cash Flows | Metric | Nine Months Ended September 30, 2023 (in thousands) | Nine Months Ended September 30, 2022 (in thousands) | | :------------------------------------------ | :-------------------------------------------------- | :-------------------------------------------------- | | Net cash used in operating activities | $(60,123) | $(44,448) | | Net cash provided by (used in) investing activities | $60,345 | $(149,429) | | Net cash used in financing activities | $(71) | $(7,108) | | Net increase (decrease) in cash, cash equivalents | $151 | $(200,985) | | Cash and cash equivalents at end of period | $35,310 | $16,129 | Notes to Unaudited Condensed Consolidated Financial Statements 1. Basis of Presentation and Summary of Significant Accounting Policies - Sarcos is a leader in advanced robotic technology, focusing on AI/ML software for generalizable autonomy in challenging, dynamic environments[16] - The company completed a 1-for-6 reverse stock split on July 5, 2023, retroactively adjusting all share and per share amounts[26] - In July 2023, the company refined its sales strategy to focus on products with near-term revenue potential, including its commercial AI/ML software platform, leading to $5.5 million in restructuring charges for Q3 2023 and $10.6 million for the nine months ended September 30, 2023[27] - Subsequent to September 30, 2023, the company announced a decision to suspend commercialization efforts on subsea, aviation, and solar robotics hardware programs to focus on its commercial AI/ML software platform, anticipating an additional $22 million to $24 million in restructuring expenses in Q4 2023 and Q1 2024[28][29] | Revenue Source | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | | :------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | :----------------------------------------- | | Product Development Contract Revenue | $1,044 | $4,488 | $4,614 | $8,203 | | Product Revenue | $783 | $179 | $786 | $245 | | Total Revenue, net | $1,827 | $4,667 | $5,400 | $8,448 | 2. Fair Value Measurements | Asset/Liability | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :---------------------- | :-------------------------------- | :------------------------------- | | Total assets at fair value | $41,646 | $79,337 | | Warrant liability | $92 | $253 | 3. Balance Sheet Components | Metric | September 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------------------- | :-------------------------------- | :------------------------------- | | Inventories, net | $1,108 | $3,562 | | Inventory reserves | $1,100 | $400 | | Prepaid expenses and other current assets | $2,146 | $5,015 | | Property and equipment, net | $6,693 | $7,640 | | Accrued liabilities | $4,580 | $6,025 | 4. Acquisitions - On April 25, 2022, Sarcos acquired RE2, Inc., a developer of autonomous and teleoperated mobile robotic systems, for an aggregate consideration of $90.1 million[58] | Acquired Intangible Asset | Amounts (in thousands) | Weighted Average Useful Life (in years) | | :------------------------ | :--------------------- | :-------------------------------------- | | Trade name and trademarks | $1,000 | 6 | | Developed technology | $9,600 | 5 | | Customer relationships | $10,700 | 9 | | Total intangible assets | $21,300 | 7 | | Goodwill | $70,236 | N/A | 5. Goodwill and Intangible Assets - Goodwill was fully impaired as of December 31, 2022, due to sustained decreases in the company's publicly quoted share price[63] | Acquired Intangible Asset | Net Carrying Amount (in thousands) as of Sep 30, 2023 | | :------------------------ | :---------------------------------------------------- | | Trade name and trademarks | $764 | | Developed technology | $6,880 | | Customer relationships | $9,016 | | Total | $16,660 | | Period | Amortization Expense (in thousands) | | :----- | :---------------------------------- | | 3 Months Ended Sep 30, 2023 | $800 | | 3 Months Ended Sep 30, 2022 | $800 | | 9 Months Ended Sep 30, 2023 | $2,500 | | 9 Months Ended Sep 30, 2022 | $1,400 | 6. Reverse Recapitalization - The business combination was accounted for as a reverse recapitalization, with Old Sarcos deemed the accounting acquirer[66] - Earn-Out Shares of up to 4,687,500 common shares are potentially issuable upon achievement of stock price milestones ($90.00 and $120.00 per share) and are treated as equity-linked instruments, not outstanding shares[67][68] 7. Warrants - As of September 30, 2023, there were outstanding warrants to purchase 3,424,908 shares of Common Stock at an exercise price of $11.50 per warrant (adjusted for the reverse stock split), expiring on September 24, 2026[70] - The company may redeem outstanding warrants under certain conditions, including if the common stock price equals or exceeds $108.00 or $60.00 per share[74][76] 8. Stock-based Compensation - The 2021 Equity Incentive Plan has 2.5 million shares available for grant as of September 30, 2023[78] | Stock Option Activity | September 30, 2023 | | :-------------------- | :----------------- | | Options Outstanding | 3,164,964 | | Weighted Average Exercise Price | $9.79 | | Exercisable Options | 1,358,810 | | Weighted Average Exercise Price (Exercisable) | $11.26 | | Restricted Stock Units Activity | September 30, 2023 | | :------------------------------ | :----------------- | | RSUs Outstanding | 1,196,605 | | Weighted-Average Grant-Date Fair Value | $5.67 | | Stock-based Compensation Expense (in thousands) | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2023 | | :---------------------------------------------- | :-------------------------- | :-------------------------- | | Total stock-based compensation expense | $6,074 | $10,808 | 9. Net Loss Per Share | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss | $(28,981) | $(22,499) | $(79,117) | $(64,819) | | Weighted average shares outstanding | 25,706,023 | 25,156,756 | 25,563,895 | 24,180,445 | | Basic and diluted net loss per share | $(1.13) | $(0.89) | $(3.09) | $(2.68) | - Anti-dilutive securities totaling 12,473,978 for the nine months ended September 30, 2023, were excluded from diluted share calculation due to net losses[84] 10. Income Taxes | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income tax (expense) benefit | $0 | $2,465 | $(3) | $4,071 | - The company recorded a full valuation allowance on net deferred tax assets due to net losses, resulting in an effective tax rate differing from the U.S. federal statutory rate[86] 11. Commitments and Contingencies - The company is involved in various legal proceedings but has not recorded any material loss contingency as of September 30, 2023, or December 31, 2022[87] - No liability has been accrued for indemnification obligations as the likelihood of incurring a material payment is not probable or reasonably estimable[88] 12. Segment Information - The company operates as a single reportable segment, with the CEO acting as the Chief Operating Decision Maker[89] | Revenue from Customers Outside US (in thousands) | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2023 | | :----------------------------------------------- | :-------------------------- | :-------------------------- | | Revenue | $1,100 | $2,000 | 13. Employee Benefits - The company offers a defined contribution 401(k) plan to substantially all employees, with matching contributions initiated 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 the strategic pivot to focus on AI/ML software, the impact of restructuring efforts, and key factors affecting financial performance Special Note Regarding Forward-Looking Statements - The report contains forward-looking statements regarding future financial performance, business strategies, and expectations, including the successful pivot to AI/ML software, development and sales capabilities, market size, product roadmap, competition, growth management, intellectual property, and compliance[93][94] - These statements are based on current expectations and assumptions, involve risks and uncertainties, and should not be unduly relied upon, with no obligation to update them except as required by law[96][97][98] Overview - Sarcos is a leader in advanced robotic technology, specializing in AI/ML software for generalizable autonomy to enhance industrial robot intelligence, efficiency, and productivity[99] - On November 14, 2023, the company announced a strategic pivot to prioritize the development of its commercial AI/ML software platform, suspending commercialization efforts on subsea, aviation, and solar robotics hardware programs to reduce capital requirements and pursue near-term revenue[100] - The AI/ML software platform, initially conceived as CYTAR for internal hardware, is being de-coupled for application to a wide range of third-party robotics systems and will be offered through a software-as-a-service (SaaS) revenue model[102] Continuing Impact of COVID-19 - The COVID-19 pandemic has caused disruptions in recruitment, retention of qualified employees, supply chains, and customer demand, adversely affecting the business, results of operations, and financial condition[104] Key Factors Affecting Operating Results - The company's near- to mid-term financial success is dependent on the successful development, launch, and sale of its commercial AI/ML software platform, with potential delays impacting financial condition and operating results[106] - The company expects to launch its commercial AI/ML software platform in the first half of 2024 and begin recognizing revenue in the second half of 2024, with recent workforce reductions (RIFs) in July and November 2023 aimed at conserving cash and managing operating expenses[107][108] - Customer demand for the AI/ML software platform is unproven, and inaccurate assumptions about market characteristics, pricing, and sales cycles could adversely affect the business[109] - Financial performance relies on continuous investment in R&D to adapt to evolving customer requirements and competitive threats, with geopolitical and macro-economic factors also influencing demand and costs[110][111] Results of Operations Comparison of the Three Months Ended September 30, 2023, and 2022 | Metric | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | % Change | | :------------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Revenue, net | $1,827 | $4,667 | $(2,840) | (61)% | | Product Development Contract Revenue | $1,044 | $4,488 | $(3,444) | (77)% | | Product Revenue | $783 | $179 | $604 | 337% | - Product development contract revenue decreased due to the completion of contracts not yet replaced, while product revenue increased significantly due to the sale of two Guardian Sea Class systems[115][116] | Operating Expense | 3 Months Ended Sep 30, 2023 (in thousands) | 3 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Total operating expenses | $32,581 | $31,917 | $664 | 2% | | Cost of revenue | $1,222 | $3,578 | $(2,356) | (66)% | | Research and development | $10,011 | $10,497 | $(486) | (5)% | | General and administrative | $7,557 | $14,646 | $(7,089) | (48)% | | Sales and marketing | $1,750 | $2,405 | $(655) | (27)% | | Asset write-down and restructuring | $11,222 | $0 | $11,222 | *NM | - Asset write-down and restructuring expenses of $11.2 million were incurred, including severance, accelerated stock-based compensation, inventory write-down, and asset write-down, with additional expenses anticipated in Q4 2023 and Q1 2024[123] Comparison of the Nine Months Ended September 30, 2023 and 2022 | Metric | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | % Change | | :------------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Revenue, net | $5,400 | $8,448 | $(3,048) | (36)% | | Product Development Contract Revenue | $4,614 | $8,203 | $(3,589) | (44)% | | Product Revenue | $786 | $245 | $541 | 221% | - Product development contract revenue decreased due to contract completions, while product revenue increased significantly from Guardian Sea Class system sales[129][130] | Operating Expense | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Total operating expenses | $89,301 | $90,310 | $(1,009) | (1)% | | Cost of revenue | $3,951 | $7,212 | $(3,261) | (45)% | | Research and development | $31,120 | $23,947 | $7,173 | 30% | | General and administrative | $25,544 | $50,584 | $(25,040) | (50)% | | Sales and marketing | $9,901 | $7,202 | $2,699 | 37% | | Intangible amortization expense | $2,457 | $1,365 | $1,092 | 80% | | Asset write-down and restructuring | $16,328 | $0 | $16,328 | *NM | - R&D expenses increased due to headcount and focus on new product development, but are expected to decrease significantly due to RIFs and the AI/ML software pivot. G&A expenses decreased due to reduced stock-based compensation and legal fees, also expected to decrease further[133][135] | Other Income (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change (in thousands) | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total other income | $4,787 | $12,972 | $(8,185) | (63)% | - Other income decreased primarily due to a decrease in unrealized mark-to-market gain on warrant liability, partially offset by increased interest income and employee retention credit refunds[140] Backlog and Total Estimated Contract Value | Metric | As of September 30, 2023 (in millions) | | :------------------------------ | :------------------------------------- | | Backlog | $9.2 | | Funded Backlog | $7.4 | | Unfunded Backlog | $1.8 | | Total Estimated Contract Value | $19.1 | Liquidity and Capital Resources | Metric | As of September 30, 2023 (in millions) | | :------------------------------------ | :------------------------------------- | | Cash, cash equivalents and marketable securities | $55.1 | - The company believes it has sufficient liquidity to operate for at least the next 12 months and well into 2025 without needing to raise additional capital, but may seek opportunistic financing[143][146] - Future funding requirements depend on product development, commercialization success, and capital needs, with delays negatively impacting revenue and profitability[144] Cash Flows | Cash Flow Activity | 9 Months Ended Sep 30, 2023 (in thousands) | 9 Months Ended Sep 30, 2022 (in thousands) | Change (in thousands) | % Change | | :------------------------------------------ | :----------------------------------------- | :----------------------------------------- | :-------------------- | :------- | | Net cash used in operating activities | $(60,123) | $(44,448) | $(15,675) | 35% | | Net cash provided by (used in) investing activities | $60,345 | $(149,429) | $209,774 | (140)% | | Net cash used in financing activities | $(71) | $(7,108) | $7,037 | (99)% | - The increase in cash used in operating activities was primarily due to a $14.3 million increase in net loss, a $4.2 million increase in non-cash expenses, and increased inventory purchases[148] - Net cash provided by investing activities increased significantly due to marketable securities maturities and the absence of a business acquisition (RE2) cash outflow seen in the prior year[149] - Net cash used in financing activities decreased due to a reduction in share repurchases for tax withholding obligations[150] Emerging Growth Company Status - The company is an 'emerging growth company' and has elected to use the extended transition period for new or revised financial accounting standards, which may affect comparability with other public companies[151][152] Critical Accounting Policies and Estimates - There have been no material changes to the company's critical accounting policies or estimates as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022[154] Recent Accounting Pronouncements - Refer to Note 1 for information on recently adopted and recently issued accounting pronouncements not yet adopted[155] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Sarcos Technology and Robotics Corporation 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[156] Item 4. Controls and Procedures Management, with the participation of the Certifying Officers, evaluated the effectiveness of the company's disclosure controls and procedures as of September 30, 2023, concluding they were deemed effective - The company's disclosure controls and procedures were evaluated and deemed effective as of September 30, 2023[156] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended September 30, 2023[158] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any legal proceedings that are expected to have a material adverse effect on its business, financial condition, or results of operations, though litigation can still have an adverse impact - The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business, financial condition, or results of operations[160] Item 1A. Risk Factors This section outlines numerous risks and uncertainties that could materially harm the company's business, operating results, and financial condition, spanning across business operations, financial stability, legal and regulatory compliance, intellectual property, and ownership of securities, emphasizing the challenges of an early-stage company pivoting its strategy to focus on AI/ML software Risks Related to Our Business - The company is an early-stage company with a history of losses, expecting to incur significant expenses and losses until at least 2025, primarily due to the development and commercialization of its AI/ML software platform[162][163] - The strategic pivot to focus on the AI/ML software platform, suspending hardware commercialization, may not be effective and could be delayed beyond current expectations, impacting revenue and financial condition[165][174] - Revenue will be concentrated in the AI/ML software platform for the foreseeable future, and customer trials may not result in binding subscriptions due to the platform still being under development and the company's lack of commercialization history with software products[176][177][178][171] - The company operates in a competitive industry subject to rapid technological change, and failure to innovate or adapt to customer needs could harm its business[198][185] Risks Related to Our Operations & Growth - Design flaws, errors, or malfunctions in the AI/ML software platform could lead to lower customer ROI, property damage, personal injury, and significant safety concerns, adversely affecting reputation and financial results[207][208] - The use of 'open source' software in the AI/ML platform could negatively affect the ability to offer the platform and subject the company to litigation or require proprietary source code release[214][215][216] - The company's business and prospects depend significantly on building and maintaining its brand, which could be harmed by negative publicity or failure to provide high-quality software[219][220] - Failure to effectively manage growth, including expanding teams, commercializing the AI/ML platform, and integrating new employees, could materially and adversely affect the business[224][227] Risks Related to Our Finances - The company's business plans require significant capital, and future needs may necessitate selling additional equity or debt securities, potentially diluting stockholders or restricting operations[235][236] - Recent workforce reductions (RIFs) in July and November 2023, while intended to improve cost structure, may not result in anticipated savings, could incur greater-than-expected costs, and disrupt business operations[240][241] - Financial results may vary significantly due to fluctuations in operating costs and product demand, making quarter-to-quarter comparisons unreliable indicators of future performance[242] - The company is highly dependent on senior management and key employees; inability to attract and retain qualified personnel, especially after RIFs, could harm product design, business operations, and competitiveness[243][246] Risks Related to Claims, Legal and Regulatory Compliance - Prior material weaknesses in internal control over financial reporting and the restatement of financial statements expose the company to potential litigation or disputes[269][270] - The company may become subject to new or changing governmental regulations related to AI/ML software, and non-compliance could lead to market withdrawal, revenue delays, increased costs, or make the business unviable[275][276] - Evolving laws and regulations concerning data privacy and security, including CCPA, CPRA, and GDPR, could harm the company's reputation, lead to significant fines, and increase compliance costs[280][284] - Issues in AI/ML development and an uncertain regulatory environment may result in reputational harm, liability, or adverse consequences, potentially limiting functionality or sales of the software platform[286][287] Risks Related to Our Intellectual Property - Success depends on obtaining and maintaining protection for intellectual property (patents, trademarks, trade secrets), but patent positions are uncertain, and enforcement can be expensive and time-consuming[308][309][310] - Protecting intellectual property rights in all countries is prohibitively expensive, and foreign laws may not offer the same level of protection as in the U.S., potentially allowing competitors to use technologies without authorization[317] - The company may face intellectual property infringement or misappropriation claims, which could be costly, divert management attention, and limit the ability to commercialize software products[320][323] Risks Related to Ownership of our Securities - Resales of a substantial number of Common Stock shares, including those from the Business Combination and RE2 acquisition, could depress the market price of the company's Common Stock[329][330] - The markets for the company's Common Stock and Warrants have been volatile and may continue to fluctuate significantly due to various factors, including financial results, market expectations, and competition[337][338] - The company's Common Stock may be delisted from The Nasdaq Global Market if it fails to satisfy continued listing requirements, such as the minimum bid price and market value of publicly held shares[344][345] - The exercise price of the company's Warrants is higher than typical, and there is no guarantee they will ever be 'in the money,' potentially expire worthless[351] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds to report[369] Item 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities during the reporting period - Not Applicable[369] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Not applicable[369] Item 5. Other Information During the last fiscal quarter, no director or officer adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the last fiscal quarter[370] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including organizational documents, separation agreements, certifications, and XBRL-related documents - The exhibits include the Second Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, Separation Agreements, Certifications of Principal Executive and Financial Officers, and Inline XBRL documents[372] Signatures The report is duly signed on November 14, 2023, by Laura J. Peterson, President and Chief Executive Officer, and Andrew Hamer, Chief Financial Officer - The report was signed on November 14, 2023, by Laura J. Peterson (President and CEO) and Andrew Hamer (CFO)[375]