Palladyne AI Corp.(PDYN) - 2023 Q4 - Annual Report

PART I Item 1. Business Sarcos pivots to an AI/ML Software Platform for third-party robots, enabling 'on the edge' learning and adaptation - Sarcos' mission is to deliver AI/ML software that enhances third-party stationary and mobile robotic systems, enabling them to observe, learn, reason, and act in diverse environments without extensive programming[22] - In November 2023, Sarcos suspended hardware product development to focus on commercializing its AI/ML Software Platform, aiming for a broader market reach and better cash resource utilization[23][76] - The AI/ML Software Platform is designed to be hardware agnostic, compatible with most industrial robots, and capable of real-time, 'on the edge' decision-making, reducing reliance on continuous cloud connectivity and associated costs[24][33] Overview Sarcos is shifting its focus to an AI/ML Software Platform for robotic systems, suspending most hardware development - Sarcos' AI/ML Software Platform is designed to enable robotic systems to perceive, adapt, and learn from experience in real-time, 'on the edge,' reducing reliance on cloud connectivity and extensive programming[22] - The company pivoted in November 2023 to focus on commercializing its AI/ML Software Platform, suspending most hardware development to target a broader market and optimize cash resources[23] Industry Background Traditional industrial robots face limitations in dynamic environments, while current AI solutions incur high cloud costs - Traditional industrial robots are typically fixed, perform repetitive tasks, and require costly, time-consuming reprogramming for dynamic environments or production changes[27][28] - Current AI solutions for dynamic environments often rely on extensive cloud-based databases and LLMs, leading to increased costs and latency due to persistent connectivity requirements[29] Our Solution Sarcos' AI/ML Software Platform enables industrial robots to learn, reason, and make real-time decisions 'on the edge' - Sarcos' AI/ML Software Platform aims to enable industrial robots to be quickly programmed/reprogrammed, observe and assess environments, learn tasks with minimal data, reason dynamically, and make real-time decisions 'on the edge' without cloud dependency[30][31][32] - The platform's 'on the edge' operation and closed-loop autonomy are key differentiators, allowing robots to adapt to new circumstances efficiently and fuse multi-sensor data for improved situational awareness[33] The AI/ML Software Platform The AI/ML Software Platform enables robots to observe, learn from demonstrations, reason, and act adaptively in real-time - The AI/ML Software Platform enables robots to observe (using various sensors), learn (from 1-5 human demonstrations, creating a 'Task Library'), reason (using probabilistic ML), and act (adapting in real-time to complete tasks despite disruptions)[35][36] - The platform will be provided with baseline edge computing and training hardware, including a controller, sensor package, and human/machine interface, alongside a cloud-based customer portal for software management and support[38][39] Market Opportunity The AI/ML software market for industrial robotics is growing, offering Sarcos opportunities to augment existing solutions - The market for AI/ML software in industrial robotics is expected to grow significantly, driven by the need for more efficient and flexible manufacturing processes[40] - Sarcos' AI/ML Software Platform is expected to augment existing robotic hardware and AI solutions from companies like ABB, Fanuc, and KUKA, and has potential applicability in cobots, UAV, ROV, and UGV markets[41][42] - Initial target customers include innovators and early adopters in industrial manufacturing, warehousing, logistics, defense, infrastructure maintenance, energy, and aerospace/aviation[43] Commercialization & Growth Strategy Sarcos plans to offer its AI/ML Software Platform in packages, pursue R&D, and collaborate with development customers - Sarcos plans to offer its AI/ML Software Platform in packages, with or without teleoperation devices, and will continue R&D to improve the platform and develop additional functionalities[44][45] - The company intends to collaborate with development customers to validate the platform's benefits, fund development, and build relationships, accelerating brand awareness and product refinement[46][47] Competitive Strengths Sarcos leverages extensive robotics experience, R&D investment, early customer engagements, and an experienced management team - Sarcos leverages over 30 years of robotics experience and significant R&D investment, including previous innovations in hardware and related software, to develop its hardware-agnostic AI/ML Software Platform[48][49] - The company benefits from early customer engagements and an experienced management team, including CEO Benjamin Wolff and CTO Dr. Denis Garagic (25+ years in AI/ML), to drive its commercialization efforts[50][51] Competition Sarcos competes with automation software companies and faces potential competition from industrial robotics manufacturers - Sarcos competes with companies focused on automation-enhancing software capabilities, such as Bright Machines, C3.ai, and Dexterity, many of whom have commercially available products or significant resources[52][54][56] - Industrial robotics manufacturers and system integrators (e.g., Fanuc, KUKA) are potential customers/partners but could also become formidable competitors through internal development or acquisitions[53] Customers and Partners Historically, Sarcos served development customers like the U.S. Department of Defense, and anticipates initial commercial customers in various industrial sectors - Historically, Sarcos' customers have been development customers, including the U.S. Department of Defense, which contributed to the AI/ML Software Platform's development[57] - The company currently has no commercial customers for its AI/ML Software Platform but anticipates initial customers in industrial manufacturing, warehousing, logistics, defense, and other sectors[57] Intellectual Property Sarcos protects its IP through various means but is culling its patent portfolio to reduce costs and focus on essential assets - Sarcos protects its intellectual property through patents, copyrights, trade secrets, trademarks, and non-disclosure agreements[58] - The company is seeking patent protection for its AI/ML Software Platform but is also culling its extensive patent portfolio to reduce maintenance costs and focus on essential assets[59] Sales and Marketing Sarcos is engaging potential customers, leveraging existing relationships, and plans to invest in sales and marketing for its licensing model - Sarcos is actively engaging potential customers for its AI/ML Software Platform, leveraging existing relationships from previous hardware efforts, and plans to invest in sales and marketing[61] - The company intends to pursue strategic relationships with system integrators, technology partners, distributors, and consulting firms to expand market reach and customer base[62] - The AI/ML Software Platform is expected to be offered through a term-based licensing model for recurring revenue, with potential add-on functionalities and upfront fees for teleoperation devices[64] Suppliers Sarcos relies on a limited set of U.S.-based, single or sole-source suppliers for minimal hardware components, posing supply chain risks - Sarcos relies on a limited set of U.S.-based suppliers for minimal hardware components, some of which are sole or single-source, posing supply chain risks[65] Government Regulation Sarcos is subject to various U.S. federal, state, and local laws, including occupational health and safety, export controls, and government procurement regulations - Sarcos is subject to various U.S. federal, state, and local laws, including occupational health and safety, export controls, FCC rules for sensors, and government procurement regulations (FAR, DFARS)[66][67][68][69] Legal Proceedings Sarcos is not currently involved in any legal proceedings expected to materially adversely affect its business or financial condition - Sarcos 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[71] Human Capital Sarcos conducted significant workforce reductions in 2023 due to its strategic pivot, with approximately 70 employees as of February 2024 - Sarcos conducted two reductions in force (RIFs) in 2023, affecting approximately 24% (July) and 70% (November) of its workforce, as a result of shifting its strategy to focus on the AI/ML Software Platform[72] - As of February 1, 2024, the company had approximately 70 full-time and part-time employees, with about 65% in engineering functions[73] Facilities Sarcos operates a primary corporate and manufacturing facility in Salt Lake City, Utah, and is winding down its Pittsburgh office - Sarcos operates a primary corporate and manufacturing facility in Salt Lake City, Utah (61,000 sq ft, lease expires May 2033) and is winding down operations in its Pittsburgh, Pennsylvania office[74] History, Corporate Information and Website Sarcos has a long history in robotics, including acquisitions and a recent strategic pivot to AI/ML software in November 2023 - Sarcos originated from a University of Utah spin-out in 1983, was acquired by Raytheon in 2007, and re-established as Sarcos Corp. in 2014. It merged with Rotor Acquisition Corp. in 2021 and acquired RE2, Inc. in 2022[75] - On November 14, 2023, the company announced a strategic pivot to prioritize its commercial AI/ML Software Platform and suspend hardware commercialization efforts[76] Item 1A. Risk Factors Sarcos faces significant risks as an early-stage company with a history of losses and uncertain software commercialization - Sarcos is an early-stage company with a history of significant net losses ($115.6 million in 2023, $157.1 million in 2022) and expects to incur further losses, with profitability dependent on successful AI/ML Software Platform commercialization and cost reduction[82][84] - The company's pivot to AI/ML software, after unsuccessful hardware commercialization, is a complex, long-term initiative with uncertain market acceptance and potential delays due to hiring challenges, increased costs, and lack of prior software commercialization experience[86][87][92][95] - Key risks include potential software defects leading to property damage or injury, dependence on single/sole source hardware suppliers, intense competition in a rapidly changing industry, and the need for significant capital that may dilute stockholders[130][152][119][158] - The company faces cybersecurity risks, evolving data privacy regulations (e.g., CCPA, GDPR), and legal liabilities as a government contractor, alongside challenges in protecting its intellectual property in a complex technological landscape[205][201][213][225] - The price of Sarcos' Common Stock has been volatile and may decline due to factors like fluctuating financial results, market expectations, and potential delisting from Nasdaq if minimum bid price or market value requirements are not met[248][249][251][252] Summary Risk Factors Sarcos faces risks as an early-stage company with a history of losses, unproven software commercialization, and intense competition - Sarcos is an early-stage company with a history of losses and expects significant future losses, having suspended hardware development due to limited resources and misestimated commercialization costs[4][5] - The company has no prior experience commercializing software products, and the AI/ML Software Platform's commercialization may be delayed, with anticipated revenues primarily derived from its licensing[6][7] - Key risks include potential failure to attract customers, inaccurate market demand assumptions, dependence on single-source hardware suppliers, intense competition, and the possibility of product flaws or reputational harm[8][9][10][11] Risks Related to Our Business and Industry Sarcos faces risks from its history of losses, unproven software commercialization, and intense competition in a rapidly changing industry - Sarcos has a history of losses, including $115.6 million in 2023 and $157.1 million in 2022, and expects continued operating and net losses as it develops and commercializes its AI/ML Software Platform[82][84] - The company's pivot to AI/ML software, after unsuccessful hardware commercialization, is a complex, long-term initiative with uncertain market acceptance and potential delays due to hiring challenges and increased costs[86][87][95] - Sarcos has no prior experience commercializing software products and faces risks that its AI/ML Software Platform may not meet customer expectations, leading to delayed or no revenue, and potential reputational harm from development issues[92][97][98][99] - The company operates in a rapidly changing and competitive AI/ML and robotics industry, with risks that its products may not keep pace with technological advancements or compete effectively against well-resourced competitors[119][120][124] Risks Related to Our Operations & Growth Operational risks include software defects, open-source software use, reputational harm, dependence on key personnel, and single-source suppliers - Defects, connectivity issues, or user errors in the AI/ML Software Platform could lead to lower customer ROI, property damage, personal injury, and significant safety concerns, adversely affecting operations and reputation[130][131][133] - The use of 'open source' software in the AI/ML platform could negatively impact commercialization, potentially requiring the release of proprietary source code or leading to costly litigation[137][138][139] - Sarcos' brand and reputation could be harmed by negative publicity, especially given past unsuccessful hardware commercialization, and the company plans a costly re-branding effort[141][142] - The company is highly dependent on its senior management and key employees, particularly its CTO, Dr. Denis Garagic, for AI/ML Software Platform development, and their loss could severely harm the business[168][169] - Sarcos relies on a limited set of single or sole-source suppliers for minimal hardware components, posing risks of supply chain disruptions, increased costs, and inability to meet product specifications[152][153] Risks Related to Our Finances Sarcos' financial risks include significant capital needs, potential equity dilution, and volatile financial results due to workforce reductions - Sarcos' business plans require significant capital, and while it believes it has sufficient funds for 12 months, additional financing may be needed, potentially leading to equity dilution or restrictive debt covenants[158][159][161] - Recent workforce reductions (RIFs) in July and November 2023, affecting 24% and 70% of staff respectively, aim to improve cost structure but may not yield anticipated savings, could incur higher-than-expected costs, and disrupt business operations[164][165] - The company's financial results are expected to vary significantly period-to-period due to fluctuations in operating costs, revenue from development contracts, and product demand, making quarter-to-quarter comparisons unreliable[166][167] Risks Related to Claims, Legal and Regulatory Compliance Sarcos faces risks from evolving AI/ML regulations, data privacy laws, cybersecurity threats, and government contract compliance - The evolving regulatory landscape for AI/ML technologies, including new laws like the EU AI Act and U.S. Executive Orders, could impose onerous obligations, increase costs, limit functionality, and expose Sarcos to litigation or reputational harm[189][190][191] - Sarcos is subject to various U.S. and international laws and regulations, including data privacy (CCPA, GDPR), cybersecurity, export controls, and anti-corruption laws, with non-compliance potentially leading to significant fines, penalties, and business disruption[194][195][199][201][202][215][216][219][220] - As a government contractor, Sarcos faces increased risks from audits, investigations, and potential termination of contracts for non-compliance with specific government procurement laws and regulations[213][214] - Cybersecurity risks, including sophisticated attacks, data breaches, and system outages, could disrupt operations, lead to loss of intellectual property or sensitive data, harm reputation, and result in significant legal and financial exposure[205][206][207][208][212] Risks Related to Our Intellectual Property Sarcos' success depends on IP protection, but patent litigation is costly, foreign protection is difficult, and government funding may limit rights - Sarcos' success depends on its ability to obtain and maintain intellectual property protection (patents, trademarks, trade secrets), which is challenging due to the complex and evolving nature of robotics software and AI[225][226][227] - Patent litigation is costly and uncertain, potentially leading to invalidation or narrow interpretation of patents, and the company plans to reduce resources on new patent filings and maintenance to cut operational expenses[227][228] - Protecting IP in foreign markets is expensive and difficult, especially in countries with weaker IP laws, potentially allowing competitors to use Sarcos' technologies without authorization[233] - Intellectual property developed with U.S. government funding may be subject to 'march-in' rights, reporting requirements, and a preference for U.S.-based manufacturing, potentially limiting exclusive rights and manufacturing options[241][242] Risks Related to Ownership of our Securities Sarcos' stock price faces volatility, potential delisting from Nasdaq, and warrant expiration risks - The price of Sarcos' Common Stock could decline due to large sales from employee equity awards, especially during concentrated vesting periods or 'sell-to-cover' transactions for tax obligations[245][246][247] - The markets for Sarcos' Common Stock and Warrants have been volatile and may continue to fluctuate significantly due to various factors, including financial results, market expectations, competition, and changes in laws[248][249] - Sarcos' Common Stock is likely to be delisted from The Nasdaq Global Market due to non-compliance with minimum bid price ($1.00) and market value ($15 million) requirements, which would impair liquidity and reduce investor interest[251][252][253][254][256] - Warrants may expire worthless as their exercise price ($11.50 per share, adjusted 1-for-6 for reverse stock split) is higher than typical, and Sarcos may redeem unexpired warrants at a disadvantageous time for holders[260][261] Item 1B. Unresolved Staff Comments Sarcos Technology and Robotics Corporation has no unresolved staff comments from the SEC - The company has no unresolved staff comments[276] Item 1C. Cybersecurity Sarcos maintains a risk-based cybersecurity program, led by its VP of Information Systems, with external audits and no material incidents to date - Sarcos implements a risk-based cybersecurity program aligned with industry standards, including technical, administrative, and physical controls like encryption, firewalls, and anti-virus systems[277] - The Vice President of Information Systems leads the IT team, reports directly to the CEO, and provides regular cybersecurity updates to the Audit Committee of the Board of Directors[277] - Sarcos engages external cybersecurity experts for audits, threat assessments, and consultations, and has established processes for overseeing third-party service provider risks, including ongoing monitoring[277][278] - To date, Sarcos has not encountered cybersecurity challenges that have materially impaired its business strategy, results of operations, or financial condition[279] Item 2. Properties Sarcos' primary corporate and manufacturing facility is a 61,000 square foot leased space in Salt Lake City, Utah, expiring in May 2033 - Sarcos' primary facility is a 61,000 square foot leased corporate and manufacturing space in Salt Lake City, Utah[280] - The lease for the Salt Lake City facility expires in May 2033 and includes two options for three-year extensions[280] Item 3. Legal Proceedings Sarcos is not currently involved in any material legal proceedings, though litigation can negatively impact the company - Sarcos is not currently a party to or aware of any legal proceedings that are believed to have a material adverse effect on its business, financial condition, or results of operations[281] - Litigation can adversely impact the company due to defense and settlement costs, as well as the diversion of management resources[281] Item 4. Mine Safety Disclosures This item is not applicable to Sarcos Technology and Robotics Corporation - This item is not applicable[282] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Sarcos' Common Stock and Warrants trade on Nasdaq, with no anticipated cash dividends as earnings are retained for growth - Sarcos' Common Stock and Warrants are traded on The Nasdaq Stock Market under symbols "STRC" and "STRCW"[283] - As of February 14, 2024, there were 429 stockholders of record for Common Stock and 29 for warrants[283] - The company intends to retain all available funds and future earnings for business growth and does not plan to pay cash dividends in the foreseeable future[284] Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Sarcos transitions to AI/ML software, optimizing cash and accelerating licensing revenue, reporting a $115.6 million net loss in 2023 - Sarcos' mission is to deliver AI/ML software to enhance third-party robotic systems, enabling them to observe, learn, reason, and act in structured and unstructured environments[286] - In November 2023, Sarcos suspended hardware product development to focus on commercializing its AI/ML Software Platform, optimizing its organization and reducing costs through recent RIFs and consolidating operations to Salt Lake City[287][289] - The company's future success depends on the development, testing, and commercial launch of its AI/ML Software Platform, securing financing, generating customer demand, and continuous innovation in a volatile geopolitical and macroeconomic environment[291][292][293][294][295] Overview Sarcos is focusing on its AI/ML Software Platform, suspending hardware development to optimize cash and consolidate operations - Sarcos is focusing on its AI/ML Software Platform to enhance third-party robotic systems, enabling them to learn and adapt in real-time 'on the edge' without continuous cloud connectivity[286] - The company suspended hardware development in November 2023 to prioritize AI/ML software commercialization, aiming for a broader market and efficient use of cash resources[287] - This strategic shift includes optimizing the organization, reducing costs through RIFs, and consolidating operations to Salt Lake City, Utah[289] Key Factors Affecting Operating Results Sarcos' future success depends on its AI/ML Software Platform's development, market acceptance, financing, and cost management - Sarcos' future success hinges on the timely and successful development, testing, and commercial launch of its AI/ML Software Platform, which is currently in its development phase[291] - The company relies on existing cash and may seek additional financing to fund operations and product development, with recent RIFs (July and November 2023) aimed at conserving cash and managing expenses[292] - Customer demand for the unproven AI/ML Software Platform is critical, and the company's financial performance is dependent on its ability to innovate, respond to evolving customer needs, and manage geopolitical and macroeconomic factors[293][294][295] Basis of Presentation Sarcos operates as a single segment, with all long-lived assets and losses attributable to the United States - Sarcos conducts business through a single operating segment, with all long-lived assets and losses attributable to the United States[296] Components of Results of Operations Future revenue is expected from AI/ML Software Platform licensing, while operating expenses include R&D, G&A, and asset write-downs - Historically, revenue came from product development contracts and product sales; future revenue is expected primarily from AI/ML Software Platform licensing fees, with no licensing revenue recognized yet[297][298] - Operating expenses include cost of revenue, R&D, G&A, sales & marketing, intangible amortization, asset write-down & restructuring, and goodwill impairment[302][303][304][305][307][308] - Other income (loss) components include interest income, gain/loss on warrant liability, and other miscellaneous non-operating items[310][311] Results of Operations Sarcos reported a net loss of $115.6 million in 2023, an improvement from $157.1 million in 2022, driven by reduced G&A and no goodwill impairment Revenue, Net (2023 vs. 2022) | (In thousands) | 2023 | 2022 | Change | % Change | |:---------------|:-----|:-----|:-------|:---------| | Product Development Contract Revenue | $5,256 | $14,239 | $(8,983) | (63)% | | Product Revenue | $890 | $330 | $560 | 170% | | Revenue, net | $6,146 | $14,569 | $(8,423) | (58)% | - Product Development Contract Revenue decreased by $9.0 million (63%) due to the completion of certain contracts not yet replaced. Product Revenue increased by $0.6 million (170%) primarily from the sale of two Guardian Sea Class systems[315][316] Operating Expenses (2023 vs. 2022) | (In thousands) | 2023 | 2022 | Change | % Change | |:---------------|:-----|:-----|:-------|:---------| | Cost of revenue | $5,041 | $11,614 | $(6,573) | (57)% | | Research and development | $39,012 | $34,144 | $4,868 | 14% | | General and administrative | $31,454 | $63,480 | $(32,026) | (50)% | | Sales and marketing | $10,828 | $9,949 | $879 | 9% | | Intangible amortization expense | $2,821 | $2,184 | $637 | 29% | | Asset write-down and restructuring | $37,946 | $— | $37,946 | *NM | | Goodwill impairment | $— | $70,236 | $(70,236) | (100)% | | Total operating expenses | $127,102 | $191,607 | $(64,505) | (34)% | - General and administrative expenses decreased by $32.0 million (50%) primarily due to reduced stock-based compensation and lower legal/insurance fees. Asset write-down and restructuring expenses were $37.9 million in 2023, including inventory write-downs and accelerated amortization of intangibles due to product development reprioritization[320][323] - Goodwill impairment was $0 in 2023, down from $70.2 million in 2022, as goodwill was fully impaired in the prior year due to sustained decreases in share price and market capitalization[324] Other Income (Loss) (2023 vs. 2022) | (In thousands) | 2023 | 2022 | Change | % Change | |:---------------|:-----|:-----|:-------|:---------| | Interest income, net | $3,294 | $1,831 | $1,463 | 80% | | Gain on warrant liability | $162 | $13,442 | $(13,280) | (99)% | | Other income, net | $1,914 | $743 | $1,171 | 158% | | Total other income | $5,370 | $16,016 | $(10,646) | (66)% | Backlog and Total Estimated Contract Value Sarcos' backlog was $8.1 million as of December 31, 2023, with a total estimated contract value of $18.1 million - As of December 31, 2023, Sarcos' backlog (remaining performance obligations) was $8.1 million, with $6.5 million funded and $1.6 million unfunded, mostly expected to be recognized within 12 months[327] - Total estimated contract value, including backlog and unexercised options, was $18.1 million as of December 31, 2023[327] Liquidity and Capital Resources Sarcos had $39.1 million in cash as of December 31, 2023, sufficient for 12 months, but future funding may be needed - As of December 31, 2023, Sarcos had $39.1 million in cash, cash equivalents, and marketable securities, which it believes is sufficient to support operations for at least the next 12 months[328] - Future funding requirements depend on product development, commercialization success, and capital needs. Delays in software commercialization will negatively impact revenue and profitability, potentially requiring additional capital sooner[329][330] - The company may opportunistically raise additional equity or debt financing, which could dilute existing stockholders or impose restrictive covenants[331] Cash Flows Net cash used in operating activities increased by $11.2 million in 2023, while investing activities provided $173.7 million more cash Cash Flow Data (2023 vs. 2022) | (In thousands) | 2023 | 2022 | Change | % Change | |:---------------|:-----|:-----|:-------|:---------| | Net cash used in operating activities | $(76,620) | $(65,391) | $(11,229) | 17% | | Net cash provided by (used in) investing activities | $64,682 | $(109,045) | $173,727 | (159)% | | Net cash used in financing activities | $(82) | $(7,519) | $7,437 | (99)% | | Net decrease in cash, cash equivalents | $(12,020) | $(181,955) | $169,935 | (93)% | - Net cash used in operating activities increased by $11.2 million to $76.6 million in 2023, primarily due to a decrease in non-cash expenses (goodwill impairment, stock-based compensation) partially offset by a decrease in net loss[334] - Net cash provided by investing activities increased by $173.7 million, mainly due to $65.5 million in marketable securities maturities (net of purchases) in 2023, compared to $77.9 million in purchases and $29.7 million for the RE2 acquisition in 2022[335] - Net cash used in financing activities decreased by $7.4 million, primarily due to an $8.0 million decrease in funds used for tax withholdings upon equity award vesting[336] Emerging Growth Company Status Sarcos is an "emerging growth company" under the JOBS Act, allowing for an extended transition period for accounting standards - Sarcos is an "emerging growth company" (EGC) under the JOBS Act and has elected to use the extended transition period for new or revised financial accounting standards[337][338] - This EGC status allows Sarcos to delay adopting certain accounting standards until private companies are required to comply, potentially making financial comparisons with non-EGCs difficult[338] Critical Accounting Policies and Estimates Critical accounting policies include revenue recognition for long-term contracts and stock-based compensation fair value estimation - Critical accounting policies and estimates include revenue recognition (especially for long-term product development contracts using cost-to-cost method) and stock-based compensation (fair value estimation using Black-Scholes model)[339][340][342] - Estimates for revenue recognition, such as total expected costs, are reviewed at least quarterly, and changes are recognized on a cumulative catch-up basis[340][341] Recent Accounting Pronouncements Sarcos adopted ASU 2016-13 with no material impact and expects no material impact from ASU 2023-09 in 2026 - Sarcos adopted ASU 2016-13 (Financial Instruments—Credit Losses) on January 1, 2023, with no material impact on its financial statements[403] - ASU 2023-09 (Income Taxes) issued in December 2023, requiring improved income tax disclosures, will be effective for Sarcos in annual periods beginning January 1, 2026, and is not expected to have a material impact[404] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Sarcos is a smaller reporting company and is therefore not required to provide market risk disclosures - Sarcos is a smaller reporting company and is exempt from providing quantitative and qualitative disclosures about market risk[344] Item 8. Financial Statements and Supplementary Data Presents audited consolidated financial statements for 2023 and 2022, reflecting the AI/ML pivot and a $115.6 million net loss - The consolidated financial statements for Sarcos Technology and Robotics Corporation as of December 31, 2023 and 2022, and for the two years then ended, have been audited by Ernst & Young LLP and present fairly the financial position, results of operations, and cash flows in conformity with U.S. GAAP[346] Consolidated Balance Sheet Highlights (in thousands) | Metric | December 31, 2023 | December 31, 2022 | |:-------|:------------------|:------------------| | Cash and cash equivalents | $23,139 | $35,159 | | Marketable securities | $15,947 | $79,337 | | Total current assets | $45,063 | $129,099 | | Total assets | $60,426 | $167,625 | | Total liabilities | $19,521 | $23,175 | | Total stockholders' equity | $40,905 | $144,450 | | Accumulated deficit | $(418,214) | $(302,621) | Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | |:-------|:------------------------|:------------------------| | Revenue, net | $6,146 | $14,569 | | Total operating expenses | $127,102 | $191,607 | | Loss from operations | $(120,956) | $(177,038) | | Net loss | $(115,593) | $(157,130) | | Basic and diluted net loss per share | $(4.51) | $(6.42) | Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | |:-------|:------------------------|:------------------------| | Net cash used in operating activities | $(76,620) | $(65,391) | | Net cash provided by (used in) investing activities | $64,682 | $(109,045) | | Net cash used in financing activities | $(82) | $(7,519) | | Net decrease in cash, cash equivalents | $(12,020) | $(181,955) | Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on Sarcos' 2023 and 2022 consolidated financial statements, affirming GAAP conformity - Ernst & Young LLP audited Sarcos' consolidated financial statements for 2023 and 2022, expressing an unqualified opinion that they present fairly, in all material respects, the financial position and results of operations in conformity with U.S. GAAP[346] - The audit was conducted in accordance with PCAOB standards, assessing risks of material misstatement and evaluating accounting principles and estimates[348][349] Consolidated Balance Sheets Consolidated Balance Sheet (in thousands) | Assets | Dec 31, 2023 | Dec 31, 2022 | |:-------|:-------------|:-------------| | Cash and cash equivalents | $23,139 | $35,159 | | Marketable securities | $15,947 | $79,337 | | Accounts receivable | $555 | $1,866 | | Unbilled receivables | $2,034 | $4,160 | | Inventories | $1,065 | $3,562 | | Prepaid expenses and other current assets | $2,323 | $5,015 | | Total current assets | $45,063 | $129,099 | | Property and equipment, net | $4,842 | $7,640 | | Intangible assets, net | $— | $19,116 | | Operating lease assets | $10,092 | $11,283 | | Other non-current assets | $429 | $487 | | Total assets | $60,426 | $167,625 | | Liabilities | | | | Accounts payable | $1,291 | $3,620 | | Accrued liabilities | $5,805 | $6,025 | | Current operating lease liabilities | $1,360 | $887 | | Total current liabilities | $8,456 | $10,532 | | Operating lease liabilities | $11,036 | $12,387 | | Other non-current liabilities | $29 | $256 | | Total liabilities | $19,521 | $23,175 | | Stockholders' Equity | | | | Additional paid-in capital | $459,113 | $447,085 | | Accumulated other comprehensive income (loss) | $3 | $(17) | | Accumulated deficit | $(418,214) | $(302,621) | | Total stockholders' equity | $40,905 | $144,450 | | Total liabilities and stockholders' equity | $60,426 | $167,625 | Consolidated Statements of Operations Consolidated Statements of Operations (in thousands, except per share data) | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | |:-------|:------------------------|:------------------------| | Revenue, net | $6,146 | $14,569 | | Operating expenses: | | | | Cost of revenue | $5,041 | $11,614 | | Research and development | $39,012 | $34,144 | | General and administrative | $31,454 | $63,480 | | Sales and marketing | $10,828 | $9,949 | | Intangible amortization expense | $2,821 | $2,184 | | Asset write-down and restructuring | $37,946 | $— | | Goodwill impairment | $— | $70,236 | | Total operating expenses | $127,102 | $191,607 | | Loss from operations | $(120,956) | $(177,038) | | Interest income, net | $3,294 | $1,831 | | Gain on warrant liability | $162 | $13,442 | | Other income, net | $1,914 | $743 | | Loss before income tax (expense) benefit | $(115,586) | $(161,022) | | Income tax (expense) benefit | $(7) | $3,892 | | Net loss | $(115,593) | $(157,130) | | Net loss per share (Basic and diluted) | $(4.51) | $(6.42) | | Weighted-average shares used in computing net loss per share (Basic and diluted) | 25,639,270 | 24,473,212 | Consolidated Statements of Comprehensive Loss Consolidated Statements of Comprehensive Loss (in thousands) | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | |:-------|:------------------------|:------------------------| | Net loss | $(115,593) | $(157,130) | | Change in unrealized gain (loss) on available-for-sale investments | $20 | $(17) | | Total other comprehensive income (loss) | $20 | $(17) | | Comprehensive loss | $(115,573) | $(157,147) | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (in thousands) | Cash flows from operating activities: | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | |:--------------------------------------|:------------------------|:------------------------| | Net loss | $(115,593) | $(157,130) | | Stock-based compensation | $12,043 | $35,645 | | Depreciation of property and equipment | $1,554 | $1,409 | | Amortization of intangible assets | $2,821 | $2,184 | | Change in fair value of warrant liability | $(162) | $(13,442) | | Asset write-down | $30,101 | $— | | Goodwill impairment | $— | $70,236 | | Changes in operating assets and liabilities (net) | $(6,330) | $2,042 | | Net cash used in operating activities | $(76,620) | $(65,391) | | Cash flows from investing activities: | | | | Purchases of property and equipment | $(782) | $(1,498) | | Acquisition of a business, net of cash acquired | $— | $(29,687) | | Purchases of marketable securities | $(64,536) | $(177,860) | | Maturities of marketable securities | $130,000 | $100,000 | | Net cash provided by (used in) investing activities | $64,682 | $(109,045) | | Cash flows from financing activities: | | | | Proceeds from exercise of stock options | $— | $683 | | Shares repurchased for payment of tax withholdings | $(78) | $(8,107) | | Payment of obligations under capital leases | $(4) | $(95) | | Net cash used in financing activities | $(82) | $(7,519) | | Net decrease in cash, cash equivalents | $(12,020) | $(181,955) | | Cash and cash equivalents at end of period | $23,139 | $35,159 | Consolidated Statements of Stockholders' Equity Consolidated Statements of Stockholders' Equity (in thousands, except share data) | Metric | Dec 31, 2023 | Dec 31, 2022 | |:-------|:-------------|:-------------| | Class A Shares | 25,877,865 | 25,708,519 | | Additional Paid-In Capital | $459,113 | $447,085 | | Accumulated Other Comprehensive Income (Loss) | $3 | $(17) | | Accumulated Deficit | $(418,214) | $(302,621) | | Total Stockholders' Equity | $40,905 | $144,450 | Notes to Consolidated Financial Statements 1. Basis of Presentation and Summary of Significant Accounting Policies Sarcos' financial statements reflect its pivot to AI/ML software, significant restructuring charges, and sufficient liquidity for 12 months - Sarcos' mission is to deliver AI/ML software to enhance third-party robotic systems, enabling them to observe, learn, reason, and act in structured and unstructured environments[361] - The company completed a business combination with Rotor Acquisition Corp. in September 2021 and acquired RE2, Inc. in April 2022. A 1-for-6 reverse stock split was effected on July 5, 2023[363][364][365] - In 2023, Sarcos announced two restructuring efforts (July and November) to pivot its strategy to focus on the AI/ML Software Platform, resulting in total charges of $37.9 million, including inventory write-downs, accelerated intangible amortization, and severance[366][367] - As of December 31, 2023, cash, cash equivalents, and marketable securities totaled $39.1 million, with an accumulated deficit of $418.2 million. The company believes it has sufficient liquidity for at least the next 12 months[369][370] - Sarcos' revenue is primarily from product development contracts and product sales, with future revenue expected from AI/ML Software Platform licensing. Revenue recognition for contracts is generally over time using a cost-to-cost input method[389][390][392] 2. Fair Value Measurements Sarcos measures financial assets and liabilities at fair value using a three-level hierarchy, with warrants transferred to Level 2 in Q1 2022 - Sarcos measures certain financial assets and liabilities at fair value on a recurring basis, categorizing them into a three-level hierarchy based on observable inputs[405][406][407] Financial Assets and Liabilities Measured at Fair Value (in thousands) | Category | December 31, 2023 | December 31, 2022 | |:---------|:------------------|:------------------| | Assets: | | | | U.S. Treasury securities (Cash equivalents) | $4,973 (Level 1) | $— | | U.S. Treasury securities (Marketable securities) | $15,947 (Level 1) | $79,337 (Level 1) | | Total assets | $20,920 | $79,337 | | Liabilities: | | | | Warrant liability | $29 (Level 2) | $253 (Level 2) | | Total liabilities | $29 | $253 | - In Q1 2022, the fair value measurement of private placement warrants was transferred from Level 3 to Level 2 due to the availability of public warrant trading prices[408] 3. Balance Sheet Components Sarcos' inventories decreased significantly in 2023, and property and equipment, net, also declined due to depreciation Inventories, Net (in thousands) | Category | December 31, 2023 | December 31, 2022 | |:---------|:------------------|:------------------| | Raw materials | $— | $2,081 | | Work-in-process | $— | $180 | | Finished goods, net | $1,065 | $1,301 | | Total inventories | $1,065 | $3,562 | Property and Equipment, Net (in thousands) | Category | December 31, 2023 | December 31, 2022 | |:---------|:------------------|:------------------| | Robotics and manufacturing equipment | $1,841 | $1,610 | | Leasehold improvements | $4,458 | $4,442 | | Computer equipment | $1,729 | $1,719 | | Financed leased computer equipment | $19 | $271 | | Software | $44 | $389 | | Furniture and fixtures, and other fixed assets | $1,018 | $1,835 | | Property and equipment, gross | $9,109 | $10,266 | | Accumulated depreciation | $(4,267) | $(2,626) | | Property and equipment, net | $4,842 | $7,640 | - Depreciation expenses were $2.8 million in 2023, including $1.2 million of accelerated depreciation related to shutting down Pittsburgh facilities, compared to $1.4 million in 2022[411] 4. Leases Sarcos leases office space with a weighted-average remaining lease term of 9.0 years and total future minimum payments of $15.6 million - Sarcos leases real estate for office space under operating leases expiring through 2033. Lease costs for operating leases were $1.86 million in 2023 and $1.64 million in 2022[414][415] - The weighted-average remaining lease term for operating leases was 9.0 years as of December 31, 2023, with a weighted-average discount rate of 5.4%[416] Undiscounted Future Minimum Lease Payments (in thousands) | Year | Operating Leases | |:-----|:-----------------| | 2024 | $1,968 | | 2025 | $1,619 | | 2026 | $1,488 | | 2027 | $1,529 | | 2028 | $1,571 | | 2029 and thereafter | $7,465 | | Total lease payments | $15,640 | | Less interest | $3,244 | | Present value of lease liabilities | $12,396 | 5. Acquisition Sarcos acquired RE2, Inc. in April 2022 for $90.1 million, recognizing $70.2 million in goodwill and $21.3 million in intangible assets - On April 25, 2022, Sarcos acquired RE2, Inc., a developer of mobile robotic systems, for an aggregate consideration of $90.1 million, comprising $30.7 million in cash, $44.0 million in common stock, and $15.4 million in assumed options[420] - The acquisition resulted in the recognition of $70.2 million in goodwill and $21.3 million in identifiable intangible assets, including trade names, developed technology, and customer relationships[422][423] Identifiable Intangible Assets Acquired (in thousands) | Category | Amounts | 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 | 6. Goodwill and Intangible Assets Sarcos fully impaired its goodwill in 2022 and recorded $16.3 million in accelerated intangible asset amortization in 2023 - Sarcos fully impaired its goodwill, recording a non-cash goodwill impairment of $70.2 million as of December 31, 2022, due to sustained decreases in its publicly quoted share price and market capitalization[425] Acquired Intangible Assets, Net (in thousands) | Category | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |:---------|:----------------------|:-------------------------|:--------------------| | December 31, 2023 | | | | | Trade name and trademarks | $1,000 | $1,000 | $— | | Developed technology | $9,600 | $9,600 | $— | | Customer relationships | $10,700 | $10,700 | $— | | Total | $21,300 | $21,300 | $— | | December 31, 2022 | | | | | Trade name and trademarks | $1,000 | $111 | $889 | | Developed technology | $9,600 | $1,280 | $8,320 | | Customer relationships | $10,700 | $793 | $9,907 | | Total | $21,300 | $2,184 | $19,116 | - In 2023, Sarcos recorded $16.3 million of accelerated amortization expense for intangible assets due to its product development reprioritization, resulting in a net carrying amount of $0 for all acquired intangible assets by year-end[427] 7. Earn-Out Shares Holders of Old Sarcos capital stock are entitled to up to 4,687,500 Earn-Out Shares if specific common stock price thresholds are met - Holders of Old Sarcos capital stock are entitled to up to 4,687,500 Earn-Out Shares, payable if the company's common stock closing price meets specific thresholds ($90.00 or $120.00) within defined periods post-Business Combination[428] - These Earn-Out Shares are treated as equity-linked instruments and are not included in shares outstanding on the consolidated balance sheets[429] 8. Warrants Sarcos has 20,549,453 Warrants outstanding as of December 31, 2023, each for one-sixth of a share at $11.50, expiring September 24, 2026 - Sarcos has Public Warrants and Private Placement Warrants outstanding, each entitling the holder to purchase one-sixth of a Common Stock share at $11.50, expiring September 24, 2026[430][431] - As of December 31, 2023, there were 20,549,453 Warrants outstanding[431] - The company may redeem outstanding Warrants if the Common Stock price equals or exceeds $108.00 (at $0.01 per Warrant) or $60.00 (at $0.10 per Warrant, with cashless exercise option), subject to certain conditions[435][437] 9. Stock-based Compensation Sarcos' 2021 Equity Incentive Plan had 2.7 million shares available for grant as of December 31, 2023, with $10.4 million in unrecognized compensation cost - Sarcos' 2021 Equity Incentive Plan allows for stock options, RSUs, RSAs, and performance awards, with 2.7 million shares available for grant as of December 31, 2023[438] Stock Option Activity (2023 vs. 2022) | Metric | Number of Shares (2023) | Weighted Average Exercise Price (2023) | Number of Shares (2022) | Weighted Average Exercise Price (2022) | |:-------|:------------------------|:---------------------------------------|:------------------------|:---------------------------------------| | Outstanding – Dec 31 | 2,845,084 | $9.82 | 2,377,503 | $16.80 | | Granted | 1,859,200 | $2.78 | 1,255,904 | $12.31 | | Cancelled | (1,391,619) | $12.35 | (233,953) | $33.08 | Stock-Based Compensation Expense (in thousands) | Category | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | |:---------|:------------------------|:------------------------| | Cost of revenue | $107 | $87 | | Research and development | $1,127 | $712 | | Sales and marketing | $808 | $863 | | General and administrative | $5,606 | $33,983 | | Asset write-down and restructuring | $4,395 | $— | | Total stock-based compensation expense | $12,043 | $35,645 | - As of December 31, 2023, unrecognized stock-based compensation cost was approximately $10.4 million, expected to be recognized over a weighted average period of 2.5 years[448] 10. Net loss per Share Sarcos reported a basic and diluted net loss per share of $(4.51) in 2023 and $(6.42) in 2022 Net Loss Per Share (Basic and Diluted) | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | |:-------|:------------------------|:------------------------| | Net loss (in thousands) | $(115,593) | $(157,130) | | Weighted average shares outstanding | 25,639,270 | 24,473,212 | | Basic and diluted net loss per share | $(4.51) | $(6.42) | - Basic and diluted net loss per share were the same for both periods as the inclusion of potential common stock shares would have been anti-dilutive[449] 11. Income taxes Sarcos recorded a $7 thousand income tax expense in 2023, with a full valuation allowance against deferred tax assets Income Tax Benefit (Expense) (in thousands) | Category | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | |:---------|:------------------------|:------------------------| | Current | $(7) | $(3) | | Deferred | $0 | $3,895 | | Total income tax benefit (expense) | $(7) | $3,892 | - Sarcos recorded a $7 thousand income tax expense in 2023, a decrease from a $3.9 million benefit in 2022, which was due to the removal of a valuation allowance on deferred tax assets from the RE2 acquisition[326][450] - As of December 31, 2023, Sarcos had cumulative federal net operating losses of $201.5 million (mostly with indefinite carryforward) and state net operating losses of $145.5 million[454][456] - A full valuation allowance of $78.6 million was recorded against deferred tax assets as of December 31, 2023, due to cumulative losses, indicating uncertainty of future realization[453] 12. Commitments and Contingencies Sarcos has no material loss contingencies from legal proceedings and has not accrued liabilities for indemnifications - Sarcos may be involved in various claims and lawsuits in the normal course of business but has not recorded any material loss contingency related to legal proceedings as of December 31, 2023 and 2022[461] - The company provides indemnifications to investors, directors, officers, employees, customers, or vendors, but has not accrued a liability for these obligations as the likelihood of material payment is not probable or estimable[462] 13. Segment information Sarcos operates as a single reportable segment, with most revenue and all long-lived assets attributable to the U.S - Sarcos operates as a single reportable segment, with the CEO acting as the Chief Operating Decision Maker (CODM) who allocates resources and makes operating decisions based on consolidated financial information[463] - The majority of Sarcos' revenue is derived from U.S. customers, with $1.9 million from non-U.S. customers in 2023 and $2.8 million in 2022. All long-lived assets and losses are attributable to operations within the United States[464] 14. Employee Benefits Sarcos offers 401(k) plans with matching contributions, which increased to $1.5 million in 2023 - Sarcos offers defined contribution 401(k) plans to substantially all employees, with matching contributions beginning in April 2022[465] - The company recognized $1.5 million in 401(k) matching contributions expense in 2023, an increase from $0.9 million in 2022[465] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Sarcos Technology and Robotics Corporation reports no changes in or disagreements with its accountants on accounting and financial disclosure matters - There have been no changes in or disagreements with accountants on accounting and financial disclosure[466] Item 9A. Controls and Procedures Sarcos' management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Sarcos' management, including its Certifying Officers, concluded that disclosure controls and procedures were effective as of December 31, 2023[467] - Management also concluded that internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[469] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended December 31, 2023[470] [Item 9B. Other Information](index=102&type=section&id=Item%209B