PALLADYNE AI CORP. Throughout this section, unless otherwise noted, the "Company," "Sarcos Technology and Robotics Corporation ," "Sarcos," "we," "us," and "our" refers toSarcos Technology and Robotics Corporation , and its subsidiaries, collectively. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited interim condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report (this "Report") as well as our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 (the "2021 Form 10-K") and our other filings, including Current Reports on Form 8-K, that we have filed with theSEC through the date of this Report. As discussed in the Special Note Regarding Forward-Looking Statements below, in addition to historical information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in Part II Item 1A Risk Factors and elsewhere in this Report.
Special Note Regarding Forward-Looking Statements
Certain statements in this Report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business. Specifically, forward-looking statements may include statements relating to:
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our ability to successfully integrate RE2 and achieve the expected benefits of the acquisition;
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our ability to sell our products to or obtain RaaS subscriptions from new and existing customers;
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our plans to expand our product availability globally;
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our product roadmap, including the expected timing of new product releases;
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our ability to manage and overcome supply chain challenges, including increases in the cost of and an interruption in the supply or shortage of materials;
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competition from existing or future businesses and technologies;
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the impact of the COVID-19 pandemic and global economic conditions on our business and the business of our customers;
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our ability to manage our growth and expenses;
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our ability to maintain, protect and enhance our intellectual property;
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our ability to comply with modified or new laws and regulations applicable to our business;
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our ability to attract and retain qualified personnel with the necessary experience;
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our ability to introduce new products that meet our customers' requirements and to successfully transition to high volume manufacturing of our products by third-party manufacturers or by us;
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our projected financial and operating information;
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our future financial performance;
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changes in the market for our products and services;
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expansion plans and opportunities;
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future capital requirements and sources and uses of cash;
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the outcome of any known and unknown litigation and regulatory proceedings;
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our ability to maintain and protect our brand; and
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other statements preceded by, followed by or that include the words "may," "can," "should," "will," "estimate," "plan," "project," "forecast," "intend," "expect," "anticipate," "believe," "seek," "target" or similar expressions.
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These forward-looking statements are based on information available as of the
date of this Report and our management's current expectations, forecasts and
assumptions, and involve a number of judgments, risks and uncertainties.
Accordingly, forward-looking statements should not be relied upon as
representing our views as of any subsequent date, and, in any event, you should
not place undue reliance on these forward-looking statements. We do not
undertake any obligation to update forward-looking statements to reflect events
or circumstances after the date they were made, whether as a result of new
information, future events or otherwise, except as may be required under
applicable securities laws.
These forward-looking statements involve a number of risks, uncertainties (some
of which are beyond our control) or other assumptions that may cause actual
results or performance to be materially different from those expressed or
implied by these forward-looking statements. These risks and uncertainties
include those factors described in Part II Item 1A Risk Factors of this Report.
Should one or more of these risks or uncertainties materialize, or should any of
the assumptions prove incorrect, actual results may vary in material respects
from those projected in these forward-looking statements. Our Risk Factors are
not guarantees that no such conditions exist as of the date of this report and
should not be interpreted as an affirmative statement that such risks or
conditions have not materialized, in whole or in part.
In addition, statements that "we believe" and similar statements reflect our
beliefs and opinions on the relevant subject. These statements are based upon
information available to us as of the date of this Report, and while we believe
such information forms a reasonable basis for such statements, such information
may be limited or incomplete, and our statements should not be read to indicate
that we have conducted an exhaustive inquiry into, or review of, all potentially
available relevant information. These statements are inherently uncertain and
investors are cautioned not to unduly rely upon these statements.
Overview
We are a technology leader in industrial highly-dexterous mobile robotic systems for use in dynamic environments. Our mission is to increase worker productivity and longevity and prevent injuries through robotics. The robotic systems we are developing are designed to combine human intelligence, instinct, and judgment with the strength, endurance and precision of machines. This technologically advanced line of products augments, rather than replaces, humans. We plan to offer our Guardian XO and Guardian XT primarily through a Robot-as-a-Service, or RaaS, subscription-based service model that will give customers the convenience of on-going maintenance, support, remote monitoring and software upgrades in addition to use of our products. We currently do not have any RaaS subscription agreements. As a result of our acquisition of RE2 onApril 25, 2022 , we now offer RE2's Sapien line of robotic arm products. Revenue from Sapien products are generally derived from development and sales contracts, rather than subscription arrangements, though we may decide to offer Sapien products under a RaaS subscription model in the future.
We expect that both our capital and operating expenditures will increase significantly in connection with our ongoing activities, as we:
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continue to develop and commercialize our products;
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develop and collaborate on production systems for manufacturing efforts in-house and by third-parties;
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continue to invest in our technology, research and development efforts and our product development efforts;
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obtain, maintain, and improve our operational, financial and management information systems;
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recruit, hire and retain additional personnel to support and sustain our needs in commercializing our products, producing them and delivering them to our customers;
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establish a sales, marketing, and distribution infrastructure for commercial distribution and placement of our robotic systems;
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implement and administer our maintenance and servicing infrastructure; and
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obtain, maintain and expand our intellectual property portfolio.
Response to COVID-19
OnJanuary 30, 2020 , theWorld Health Organization declared the COVID-19 outbreak a "Public Health Emergency of International Concern" and onMarch 11, 2020 , declared it to be a pandemic. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas and forced closures for certain types of public places and businesses. COVID-19 and actions taken to mitigate its spread have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical areas in which Sarcos operates. 24 -------------------------------------------------------------------------------- We have taken several actions in response to the COVID-19 pandemic which have the potential to result in a significant disruption to how we operate our business. Our customers and partners have adopted similar policies. These actions and policies of ours and our customers and partners are evolving as laws, regulations and recommendations evolve. We have experienced, and may continue to experience, an adverse impact on certain parts of our business as a result of measures to mitigate the COVID-19 pandemic and their resulting economic effects. We are currently experiencing disruptions in our supply chain, due in part to the global impact of the COVID-19 pandemic. Depending upon the duration of the ongoing COVID-19 pandemic and the associated business interruptions, our customers, suppliers, manufacturers and partners may suspend or delay their engagements with us, which could result in a material adverse effect on our financial condition and ability to meet current timelines. In an effort to manage potential supply chain risks we expect to accelerate purchases of materials and components during the latter part of the year to prepare for production of our commercial units. In addition, the COVID-19 pandemic has affected and may continue to affect our ability to recruit skilled employees to join our team. The conditions caused by the pandemic have adversely affected and may in the future adversely affect, among other things, demand for our products, the ability to test and assess our robotic systems with our potential customers, our IT and other expenses, our ability to recruit and the ability of our employees to travel, all of which could adversely affect our business, results of operations and financial condition. The ultimate duration and extent of the COVID-19 pandemic cannot be accurately predicted at this time, and the direct or indirect impact on our business, results of operations and financial condition will depend on future developments that are highly uncertain. We have also experienced, and may continue to experience, certain positive financial impacts on other aspects of our business, including a reduction in certain operating expenses due to reduced business travel, deferred hiring for some positions, and the virtualization or cancellation of customer and employee events. However, as restrictions ease we are likely to begin to incur increased travel and other such expenses, though the exact timing and amounts are not predictable. Additionally, we believe that the COVID-19 pandemic could also enhance customer interest in our Guardian products as a means to assist and protect the current labor force and that our products are well suited to the new working environment as a result of the pandemic. The global impact of COVID-19 continues to rapidly evolve, and we will continue to monitor the situation and the effects on our business and operations closely. We do not yet know the full extent of potential impacts on our business or operations. In particular, the effect of the COVID-19 pandemic may not be fully reflected in our operating results until future periods. Given the uncertainty, we cannot reasonably estimate the impact of the COVID-19 pandemic on our future results of operations, cash flows, or financial condition.
Recent Developments
Acquisition of
OnApril 25, 2022 , we acquiredRE2, Inc. , aPittsburgh, PA based developer of manipulator arms with human-like performance, intuitive robot interfaces and advanced autonomy capabilities for use in any environment. At closing, the Company paid approximately$30 million in cash, net of cash acquired, issued approximately 10.8 million shares of Common Stock and assumed certain outstanding options to acquire RE2 common stock which, following such assumption, represent rights to acquire 3.9 million shares of Common Stock. The results presented and discussed below are those of the Company alone and do not reflect the impact of the RE2 acquisition.
Key Factors Affecting Operating Results
We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in Part II Item 1A Risk Factors.
Development, Testing and Commercial Launch of the Guardian XO and Guardian XT Products
We currently expect to derive revenue from the commercial launch of our Guardian
XO and Guardian XT products, with initial production of commercial units
beginning at the end of 2022 for delivery to customers in early 2023. Such
timeline may be delayed, including due to challenges in recruiting skilled
employees, difficulties in securing components and materials, development
delays, difficulties relating to manufacturing of the units and other factors
discussed under Part II Item 1A Risk Factors "Initial production of commercial
units of our core products, the Guardian XO and Guardian XT, may be delayed
beyond the end of 2022 and therefore initial delivery to customers could be
beyond early 2023." Such challenges may result in further delay of the
anticipated commercial launch of one or more of our products, which would
adversely affect our financial condition and operating results.
Prior to commercialization, we must complete the development, testing and
manufacturing requirements of these products. As a result, we will spend a
material portion of our cash on hand to develop our products and fund operations
for the foreseeable future. The amount and timing of our future funding
requirements, if any, will depend on many factors, including the pace and
results of our product development efforts. Any delays in the successful
completion of the commercialization of our Guardian XO and Guardian XT products
will impact our ability to generate revenue, our profitability and our overall
operating performance.
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--------------------------------------------------------------------------------Integration with RE2
We are in the early stages of integrating with RE2, which we acquired onApril 25, 2022 . While we believe that the organizations share common values and cultures and that the acquisition will help us expand our product portfolio, serve additional markets and further our product development efforts, integration involves significant risk and management attention. If these efforts divert management time and company resources from our product development efforts, the commercial production and release of our Guardian XO and Guardian XT products could be delayed. The development and sales of our Sapien products could also be adversely affected. If we are not able to successfully integrate RE2 and achieve the expected benefits of the acquisition while managing the development and commercialization of our core products, the Guardian XO and Guardian XT, commercialization of the Guardian XO and Guardian XT could be delayed, which would adversely impact our operating results and financial condition, and the value of our investment in RE2 could be impaired.
Customer Demand
Although our Guardian XO and Guardian XT units are not yet commercially available, we have received interest from potential customers that have tested or witnessed demonstrations of our prototypes and alpha units. However, because our robotic systems represent a new product category in markets that currently rely on conventional, manual systems, the market demand for our products is unproven, and important assumptions about the characteristics of targeted markets, pricing and sales cycle may be inaccurate. If customer demand does not develop as expected or we do not accurately forecast pricing, adoption rates and sales cycle for our products, our business, results of operations and financial condition will be adversely affected. We expect to offer our Guardian XO and Guardian XT primarily through a RaaS subscription model, which we believe will drive accelerated adoption of our product offerings following their commercial launch. We believe the RaaS subscription model will be attractive to our customers and accelerate market adoption of our robotic systems because it will lower the upfront costs of deployment, shift customers' capital expenditures to operating expenditures, allow customers to more nimbly scale deployments up or down in response to market conditions and make our products more accessible to customers of all sizes. However, our RaaS subscription model is unproven and may fail to gain commercial acceptance. Going forward, we expect the volume of our committed RaaS contracts to be an important indicator of our future performance.
We are a pioneer in the robotic systems industry and benefit from lessons learned over 30 years and more than$300 million in research and development investment in our proprietary technologies and our extensive patent portfolio. However, our financial performance is significantly dependent on our ability to maintain this leading position and further dependent on the investments we make in research and development. It is important that we continually identify and respond to rapidly evolving customer requirements, develop and introduce innovative new products, enhance and service existing products and generate active market demand for our robotic systems. If we fail to do this, our market position and revenue may be adversely affected, and our investments into these technologies will not be recovered.
Results of Operations
The discussion below regarding our results of operation for the three months endedMarch 31, 2022 , does not include the financial results of RE2 as we had not acquired RE2 as ofMarch 31, 2022 . However, upon our acquisition of RE2 onApril 25, 2022 , RE2's financial results began to be consolidated with ours. As a result, beginning with our Quarterly Report on Form 10-Q for the quarter endingJune 30, 2022 , we will report our financial results on a combined basis and our results of operations will include those of RE2 from the acquisition date. Our results will not include RE2's financial information prior to the acquisition. Beginning with our Quarterly Report on Form 10-Q for the quarter endingJune 30, 2022 , our revenue and expenses will increase as compared to the corresponding periods in 2021 in large part due to incorporating the operating results of RE2. Where we indicate our beliefs as to future trends in financial performance in our discussion below and elsewhere in this Report, we focus on business drivers of those trends and, except as expressly stated, do not repeat the general impact of combining RE2's financial performance or condition with ours as a driver of future changes. 26 --------------------------------------------------------------------------------
Comparison of the Three Months Ended
Revenue, Net
The following table presents our revenue for the three months ended
Three Months Ended March 31, 2022 vs. 2021 Change
(In thousands) 2022 2021 Change % Change
Research and Development Services $ 733 $ 1,600 $ (867 ) (54 )%
Product Revenue 10 199 (189 ) (95 )%
Revenue, net $ 743 $ 1,799 $ (1,056 ) (59 )%
Revenue decreased by
Research and Development Services
Revenue derived from research and development services decreased by$0.9 million , or 54%, from$1.6 million for the three months endedMarch 31, 2021 to$0.7 million for the three months endedMarch 31, 2022 . The decrease was a result of a net change in work efforts for various projects during the comparable periods and a decision to focus only on projects fully aligned with our product commercialization efforts. We expect future revenue from research and development services to fluctuate as we develop our products and narrow our focus to accepting only those development contracts that are fully aligned with our product commercialization efforts.
Product Revenue
Revenue derived from product sales decreased by$0.2 million , or 95%, from$0.2 million during the three months endedMarch 31, 2021 to$0.0 million for the three months endedMarch 31, 2022 . During the three months endedMarch 31, 2022 , we had minimal product sales compared to$0.2 million in sales of our Guardian S during the three months endedMarch 31, 2021 .
Operating Expenses
The following table presents our operating expenses for the three months ended
Three Months Ended March 31, 2022 vs. 2021 Change
(In thousands) 2022 2021 Change % Change
Operating expenses:
Cost of revenue $ 488 $ 1,202 $ (714 ) (59 )%
Research and development 5,881 2,815 3,066 109 %
General and administrative 17,792 2,314 15,478 669 %
Sales and marketing 2,211 656 1,555 237 %
Total operating expenses $ 26,372 $ 6,987 $ 19,385 277 %
Cost of Revenue
Cost of revenue decreased by $0.7 million , or 59%, from $1.2 million for the
three months ended March 31, 2021 , to $0.5 million for the three months ended
March 31, 2022 . Cost of revenue decreased at a similar rate as revenue
decreased, driven by a decrease in expense in the use of direct labor, applied
overhead and the use of third-party contractors.
Research and Development
Research and development expenses increased by$3.1 million , or 109% from$2.8 million for the three months endedMarch 31, 2021 , to$5.9 million for the three months endedMarch 31, 2022 . The increase was driven primarily by an increase in labor and overhead expense as a result of increased headcount and our focus on the development and commercialization of our Guardian XO and Guardian XT products. We expect our research and development expenses to continue to increase due to our focus on product development. 27 --------------------------------------------------------------------------------
General and Administrative
General and administrative expenses increased by$15.5 million , or 669%, from$2.3 million for the three months endedMarch 31, 2021 , to$17.8 million for the three months endedMarch 31, 2022 . The largest portion of the increase,$10.5 million , is due to stock-based compensation expense, mainly for stock grants that began vesting upon the closing of the Merger. Additionally, general and administrative expense increased primarily due to increased legal expenses and business insurance expense. We expect our general and administrative expenses to be higher year-over-year for the remainder of 2022 as we work on our commercialization pathway.
Sales and Marketing
Sales and marketing expenses increased by$1.6 million , or 237%, from$0.7 million for the three months endedMarch 31, 2021 , to$2.2 million for the three months endedMarch 31, 2022 . This increase was driven by an increase in professional service fees due to the engagement of a third-party vendor utilized in data management of our products and services and stock-based compensation expense. We expect our sales and marketing expenses to be higher year-over-year for the remainder of 2022 as we work on our commercialization pathway.
Other Income (Loss)
The following table presents other income for the three months endedMarch 31, 2022 and 2021: Three Months Ended March 31, 2022 vs. 2021 Change (In thousands) 2022 2021 Change % Change Other income (loss) Interest income (expense), net $ 11$ (10 ) $ 21 (210 )% Gain on warrant liability 6,414 - 6,414 *NM Other income, net 2 - 2 *NM Total other income (loss) $ 6,427 $
(10 )$ 6,437 (64,370 )% *NM - Not Meaningful Other income (loss) increased by$6.4 million for the three months endedMarch 31, 2022 as compared to the prior year period, as a result of the$6.4 million in unrealized mark-to-market gain on our outstanding private placement warrants.
Liquidity and Capital Resources
Prior to the closing of the Business Combination, Old Sarcos financed its operations through private placements of redeemable convertible preferred stock, from the limited sale of Guardian S units and other commercially available products and by providing research and development services underSmall Business Innovation Research contracts and as a subcontractor for prime contractors working with theU.S. Department of Defense .
Upon the closing of the Business Combination, we retained approximately
We currently use cash to fund operations and capital expenditures and meet working capital requirements. As ofMarch 31, 2022 , we had$199.0 million in cash and cash equivalents. In the second quarter of 2022, we used approximately$30 million in cash, net of cash acquired, in connection with our acquisition of RE2. We believe that our cash and cash equivalents on hand will be sufficient to support operations, working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue growth rate, our ability to commercialize and deploy into the market our Guardian XO and Guardian XT products, our decision to outsource manufacturing of our robotic systems or develop high-volume production manufacturing capabilities in-house, unanticipated supply chain delays, the impact of inflation on the cost of labor, materials and components, availability of required materials and components, the extent to which we use capital to support further infrastructure development and research and development efforts, additional capital expenditures required for existing and new facilities, the expansion of sales, marketing, service and maintenance efforts, and development expenses related to designing and developing of new product capabilities. In addition, we may enter into arrangements to acquire or invest in complementary businesses, services, and technologies, which may require acquisition capital as well as operational capital for these acquisitions or arrangements. We may be required to seek additional equity or debt financing to facilitate these arrangements. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations and financial condition would be materially and adversely affected. 28 -------------------------------------------------------------------------------- We expect our operating and capital expenditures to increase as we increase headcount, expand our operations and grow our customer base. If additional funds are required to support our working capital requirements, for acquisitions or for other purposes, we may seek to raise funds through additional debt or equity financings or from other sources. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our equity holders could be significantly diluted and these newly issued securities may have rights, preferences or privileges senior to those of existing equity holders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility and would also require us to incur additional interest expense. Additional financing may not be available at all or, if available, may not be available on terms favorable to us or that we find acceptable.
Cash Flows
The following table summarizes our cash flow data for the periods presented (in thousands):
Three Months Ended March 31, 2022 vs. 2021 Change
(In thousands) 2022 2021 Change % Change
Net cash provided by (used in):
Net cash used in operating activities
222 %
Net cash used in investing activities (514 ) (962 ) 448 (47 )%
Net cash (used in) provided by
financing activities (5,190 ) 1,819 (7,009 ) (385 )%
Net decrease in cash and cash
equivalents $ (18,156 ) $ (3,014 ) $ (15,142 ) 502 %
Cash flows used in operating activities during the three months endedMarch 31, 2022 increased by$8.6 million to$12.5 million from$3.9 million during the same period in 2021. The increase to net cash used in operating activities was primarily attributable to a$14.0 million increase to net loss, partially offset by an increase of$4.4 million in stock-based compensation expense and other non-cash expenses. Additionally, net cash used in operating activities related to changes in operating assets and liabilities increased by$1.0 million , driven mainly by increases in prepaid expenses, partially offset by increases in operating liabilities.
Our net cash used in investing activities decreased by
Our overall cash used in financing activities increased by$7.0 million . The increase was due mainly to$5.3 million for shares repurchased for payment of tax withholding obligations upon the vesting of equity awards during the three months endedMarch 31, 2022 , as compared to$2.0 million of proceeds from loans received under the Paycheck Protection Program for the three months endedMarch 31, 2021 .
Emerging Growth Company Status
Section 102(b)(1) of the Jumpstart our Business Startups Act of 2012 (the "JOBS Act") exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable. We are an "emerging growth company" as defined in Section 2(a) of the Securities Act, and have elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of Common Stock that is held by non-affiliates exceeds$700 million as of the end of that year's second fiscal quarter, (ii) the last day of the fiscal year in which we have total annual gross revenue of$1.07 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which we have issued more than$1 billion in non-convertible debt in the prior three-year period or (iv)December 31, 2025 , and we expect to continue to take advantage of the benefits of the extended transition period, although we may decide to early adopt such new or revised accounting standards to the extent permitted by such standards. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used. 29 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. There have been no material changes to our critical accounting policies or estimates as disclosed in the Company's 2021 Form 10-K.
Recent Accounting Pronouncements
See Note 1, Basis of Presentation and Summary of Significant Accounting Policies, to our unaudited interim condensed consolidated financial statements included elsewhere in this Report for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Report.
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