Palladyne AI Corp. (PDYN) Q3 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Q3 2021 Sarcos Technology and Robotics Corporation Earnings Conference Call. At this time all participants are in a listen-mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Ben Mimmack, Director of Investor Relations, and please go ahead.

Thank you, Judy. Good morning everyone and welcome to the Sarcos' third quarter earnings call. Joining upon the call this morning are Sarcos' Chairman and CEO, Ben Wolff; and Chief Financial Officer, Steve Hansen. Ben will start the call with an overview of the quarter and Steve will then talk in more detail about our financial results before we take questions from analysts. Before we begin, we must state that today's call will contain forward-looking statements, including statements concerning future commercial availability of our products, market trends, revenues costs and liquidity. These statements represent management's best predictions and expectations of the future event as of today, but there are many risks and uncertainties that could cause the actual results to differ from what we have projected. We encourage you to review the risks and uncertainties described from time to time in our filings with the SEC for further information regarding these actual and potential risks and uncertainties. We also encourage you to review the special note regarding forward-looking statements included in our earning release filed with the SEC this morning and which will be posted in the Investors section of our website at sarcos.com. In addition, we will be discussing certain non-GAAP financial measures this morning. Throughout this call all financial measures will be GAAP unless otherwise noted. A reconciliation of those numbers to the GAAP financials as well as the description, limitations and rational to such measures are included in the earning release filed with the SEC this morning, and which is available on our website. A recording of this call will also be archived on our website. The information that we are giving you on the call is as of today's date and we undertake no obligation to update the information subsequently. So thanks again for joining us. Now, at this point, I'd like to turn the call over to our Chairman and CEO, Ben Wolff.

Thanks, Ben, and thank you to everyone joining us for your interest in Sarcos. This morning, I will be giving you an update on the current state of our business and our expectations for the next few months. After that, I will hand the call over to Steve, who will give you an update our financial position before we end by taking questions from analysts. This earnings call is our first as a public company, since we listed on The NASDAQ Global Market at the end of September through a business combination with Rotor Acquisition Corp. The public listing of our stock has been a significant development for our company. The gross proceeds from the transaction of over $260 million provides us with liquidity we need to continue developing our technology and we firmly believe will be sufficient to enable us to bring our Guardian XO full-body exoskeleton robot and our Guardian XT teleoperated avatar robot to scale commercial production. On a side note, I would like to take this opportunity to share that now that we are listed. More than 80% of our shares are subject to lock-up periods of various lengths. 80% of the equity issued to current and former employees and common stockholders of Sarcos Corp in the merger, including myself, which represents over 34% of our fully diluted shares is restricted from being sold under lock-up of agreements and our bylaws until the earlier of the date on which we have shipped our first 20 Guardian XO and/or Guardian XT commercial units and the second anniversary of the closing of our merger with Rotor. By design, given the development stage of our company, we think has better aligns our interest with those of our investors. Events over the past few months have highlighted the ever growing need for our products and solutions. Shortages of workers to perform physically demanding work have challenged industrial companies all over the world. Our partners and prospective customers are telling us that the need for our unique highly dexterous mobile robots that can perform non-repetitive jobs is only becoming more urgent. This shortage of skilled workers is not just an immediate problem for the economy, but is one that is forecast to get worse in coming years. The combination of an aging workforce and lower participation rates in physically demanding jobs by number workers is expected to continue causing staffing challenges in many industries for decades to come. Sarcos is uniquely positioned to address these worker shortages. We are the only company bringing to market a full-body powered industrial exoskeleton that materially enhances both strength and endurance. Our Guardian XO wearable industrial robot is capable of lifting up to 200 pounds and can often improve worker efficiency by a multiple of two, three, or even more while making workers safe at the same time. Similarly Sarcos' teleoperated Guardian XT avatar robot allows operators to carry out work in dangerous environments or at type while remaining on the ground and out of harm's way. It is no exaggeration to say that our partners and potential customers tell us that these machines have the potential to transform the way work gets done across many different industries and it is the reason we expect our service obtainable market in the U.S. alone to grow to $24.8 billion over the next five years. Given this pent-up demand, we are working diligently to bring our flagship products to market. Over the past two years, we have been working with our partners and potential customers on the Alpha version of the Guardian XO exoskeleton robot to generate feedback on improvements and applications for different use cases. We have been doing the same with prototypes of the Guardian XT avatar robot. This work has been invaluable in improving our products and we are in the process of incorporating feedback we've received on our Alpha units into our XO and XT Beta designs. To that end, we are making substantial progress in the development of our XO and XT Beta units. The first XT Beta unit is being assembled as we speak and we expect to be ready to commence internal testing by the end of this year. Key areas of improvement between the XT prototype and XT Beta units are additional degrees of freedom in the arms to enhance range of motion, a new operator wearable control suit, improved advanced controllers and an improved optical system. As I mentioned, we are making the progress on the Guardian XO Beta units as well. We continue to develop and evolve the design and response to our continued testing of the Alpha units and also initial testing of some of our components and links for the Beta unit. The designs for some portions of the Beta are complete and assembly and testing of components, subsystems and links are underway. Key improvements from the Alpha design to the Beta design include additional degrees of freedom in the robot wrists and ankle, enabling the robot to be adjusted to accommodate a range of operator heights and other improvements to make the robot more robust and reliable. As an example, the limbs of the Alpha unit use a belt drive system while the Beta units will use an actuator driven system, eliminating the risk of belt breaking, which [indiscernible] introduced a safety risk. In order to develop this new actuator system, we are currently testing prototypes on our Alpha units, which enable us to advance necessary testing prior to the first Beta unit being complete. Another significant milestone we recently achieved for the XO Beta development relates to the robot controls algorithms. In January, our controls team was challenged to develop algorithms for the XO that would allow it to balance itself independently of an operator or external control much as you may have seen some humanoid robots do in popular videos. Achieving this capability on a wearable humanoid robot is substantially more challenging than a non-wearable robot. This achievement is essential to addressing some of the safety aspects of the XO and I am delighted to inform you that I was able to observe a successful demonstration of this capability just a few days ago. Having said all of that, the XO Beta is running somewhat behind the XT schedule because of the labor and supply chain challenges I referenced back in August. We currently have more than 30 open engineering positions. We are fortunate to be able to continue to hire great people, but we simple aren't hiring as quickly as we had expected earlier this year. And this is impacting our ability to develop our products as fast as we would like. Similarly, the wider supply chain issues have become even more challenging since August with even off the shelf components that's going out of stock with no notice and delivery for all orders lengthening. For example, the lead time of one key component required for the XO Beta was recently forecast into move from two to three weeks to 45 weeks. We, of course, are working diligently to source from other vendors. Fortunately, we have hired the right people to substantially improve our supply chain effort allowing us to become more agile and responsive to the situation with the result that our ability to source the necessary hardware while still not as efficient as we would like it has improved over the past few months. In summary, we have responded dynamically to mitigate the challenges associated with workforce and supply chain challenges. We have welcomed new leaders focused on both supply chain and recruitment amongst 10 new team members hired since our merger with Rotor was closed. We have also grown our sales team bringing in a new Senior Vice President of Sales, who has substantial experience in sales to the types of industrial customers that represent our largest opportunities. Expect to see us grow our sales team and ramp up our sales and marketing efforts substantially over the course of next year as we approach the commercial launch of our flagship products. Once our initial Beta units are complete and we are satisfied with their performance, we will manufacture more units for pilots by our prospective customers, which depending on pandemic related limitations we currently expect will begin mid next year. With successful product pilots that demonstrate the value proposition for our customers, we expect to then be able to start booking orders. Following the feedback from our Beta tests and pilots, we will incorporate our learnings into the commercial product design while simultaneously incorporating design for excellence principles and complete value engineering work to bring down the cost of production. Despite the current staffing and supply chain challenges, we continue to expect to commence initial production of both the XO and the XT at the end of next year. Over the past few months, we've revealed a number of significant milestones in the development of our product line. In August, we announced a collaboration with T-Mobile to integrate 5G technology into the Guardian XT. 5G integration could enable the XT to be operated remotely without reliance on a communications torque, which has the potential to materially expand the potential use cases for this groundbreaking product. We continue to work closely with our partners in the military and DoD. In the third quarter, we announced that several U.S. government agencies have purchased our Guardian HLS, heavy lift system, a first of its kind human portable system able to lift objects weighing 45,000 pounds during asset recovery and emergency response missions. Sarcos' strong relationships with its defense customers are set to continue as we continue work – to work closely with the Navy to develop our Guardian DX product, a defense derivative of the Guardian XT. And longer term, we expect to continue our relationship with the Air Force Research Laboratory to develop advanced perception and sensing capabilities for our robotic systems, enabling us to move towards semi-autonomous functionality. While our primary focus remains the development of our flagship Guardian XO and XT products, we continue to receive interest in the award winning Guardian S, a remote visual inspection robot, which was Sarcos' first commercial product. In August, we named Pine Environmental services and official distribution partner for the Guardian S. Pine makes the Guardian S available through a rental program throughout the U.S. and Canada, which provides another channel through which customers can access this versatile mobile inspection robot. Looking for the future, I believe the success of our business is dependent on three primary factors. The first of these is ensuring we have sufficient liquidity to develop our products and deliver them to market. At the time of the initial announcement of our business combination in April, we estimated that we would need approximately $140 million of cash to develop the XO and XT and to bring them to market at scale. While our labor costs and cost of initial components may be somewhat higher than expected, our merger transaction has given us ample liquidity to achieve our objectives. The second factor relates to demand and customer adoption of these new category creating robotic systems. Our view and that of many of our partners is that the current shortage of skilled workers is real and is only likely to get worse as the worker population in our target markets continue to age. We believe strong demand for our XO and XT products exist today and will continue to increase going forward. The final factor on which our success is dependent is our ability to develop and deploy products that meet the expectations and needs of our customers. I believe that those of you who have viewed our demonstrate in person watch the videos on our website or for those lucky if you have actually operated our Alpha units, understand that the key technical innovations required to meet our customers' needs are on track to be achieved based on the past 20 years plus of R&D and the hundreds of millions of dollars that have been invested to date. Now, our focus is taking the feedback we received from our development partners and customers on our early prototypes and incorporating it into our Beta units and ultimately our commercial products. With that, I would once again like to thank all of the members of the Sarcos team, who have worked tirelessly this year to advance the development of our cutting edge dexterous mobile robotic products, complete our merger and manage our move into a new facility, which was completed this week and from which we are hosting this call today. Thank you all once again for rising to the challenge. With that I'll hand the call over to Steve, who will take you through our financials.

Thanks, Ben, and good morning to everyone listening today. As Ben said, this is a very exciting time for Sarcos and I'm very happy to share our first result as a public company with you today. This morning, we have reported third quarter 2021 revenue of $1.1 million down from $1.5 million in the corresponding period of 2020 for Sarcos Corp, driven by the timing of our product development contract revenue. As Sarcos develops its products and narrows its focus to accepting only those development contracts that are fully aligned with our commercialization efforts, the company anticipates that development revenue may continue to be lower on a year-over-year basis during 2022. The other component of our revenue product sales, which includes our Guardian S, Guardian HLS and parts and accessories was up 69% to $0.4 million during the quarter of 2021, compared to the third quarter of 2020 for Sarcos Corp. Our third quarter of 2021 total operating expenses were $41.6 million, up significantly from the third quarter of 2020 due primarily to a non-cash stock-based compensation expense, one-time cost associated with a business combination and increased ongoing expenses associated with requirements of being a publicly traded company. As a result of these increased costs, general and administrative expense increased from $2 million in the third quarter of 2020 for Sarcos Corp to $33.9 million in the third quarter of this year, while sales and marketing expense rose to $2.3 million as compared to $0.7 million for Sarcos Corp during the same period last year. These expenses, many of which are non-recurring drove a third quarter GAAP net loss of $37 million, or $0.35 per share – diluted per share, which is an increase from the Sarcos Corp net loss of $6.9 million in the third quarter of 2020. Excluding the non-recurring expenses I just mentioned, our non-GAAP net loss was $8.8 million for the quarter. Going forward we anticipate that certain G&A and sales and marketing expenses will remain high in comparison to 2020 due to our stock compensation expense and the increased requirements of being a public company. Because our warrants are accounted for as debt, we are required to report the change in value of our warrant liability on our statement of operations and comprehensive loss. Since this liability is governed by the change in our stock price, it will be difficult for us to forecast the effective warrant accounting on our statement of operations and comprehensive loss, which may introduce volatility into our earnings each quarter until the warrants are fully expired or exercised. Capital expenses year-to-date are $2.1 million associated largely with a build out of our new facility, including the acquisition of computer equipment, furniture and fixtures and other 10 improvements. The fully diluted weighted average number of shares for the third quarter of 2021 was $100.6 million. Our outstanding share count currently stands at 142.8 million as of today, resulting from shares issued in the merger with Rotor and the PIPE Financing, as well as some stock option exercises. Turning to the balance sheet. Sarcos has a healthy liquidity position. At the end of the third quarter of 2021, our unrestricted cash and cash equivalents stood at more than $239 million, up from just under $34 million for Sarcos Corp at the end of 2020. This cash increase is a result of the business combination with Rotor and the PIPE Financing, which generated net proceeds after transaction expenses of $229.6 million. As Ben mentioned, we believe as cash we have on hand today will be sufficient to enable us to bring our Guardian XO full-body exoskeleton robot and our Guardian XT teleoperated robot scale to commercial production. In April, we announced a proposed business combination with Rotor. We released financial projections for the next five years, forecasting our past of 43,000 cumulative units in the field by the end of 2026. As Ben mentioned earlier on the call because of the labor and supply chain headwinds we discussed back in August, we were forced to delay completion of our Beta units and the commencement of initial commercial production by approximately six months. To be clear, we continued to believe the long-term projections are still valid, but the delay in the world of commercial units of the Guardian XO and Guardian XT announced in August affects the financial projections for 2022 and 2023. At this time, we are still working through the impact of this robot delay on our financial projections. With that I too would like to join Ben for thanking the entire Sarcos' team for their hard work this year. We are making significant progress on and are excited to continue to work to bring our cutting edge dexterous robotic products to markets. This concludes our prepared remarks. We will now open the line for questions. Operator, we please instruct you to give instructions out to ask questions.

[Operator Instructions] Our first question comes from Rob Mason of Baird. Please proceed.

Yes, good morning and congratulations to getting to this point, Ben and team. I wanted to know, as you go about the – the Beta trials and assembling the new features into the model, does the – all of the safety functionality that you plan for the unit, does that get assembled during the Beta process? Or is that follow the Beta process as you – in between that and commercialization, I am just curious where those features get added as well?

Good morning, Rob, and thanks for the question. This is Ben Wolff. The answer is both. We are building a significant amount of safety and functionality into the Beta design. But as we test the Beta, we will learn more about what additional enhancements need to be built in, if any, between the Beta version and the commercialization or the MVP products. So a significant amount of work is underway right now on the safety testing, safety analysis and safety planning that is a big part of the work that is being done to get to the Beta prototype.

I see. Yes. Ben, can you give us any feel for how many Beta customers may be enrolled right now? Or when you would start to enroll those?

So we do have some contracts for Beta pilots now. We have others in negotiation. I'm not going to give you a specific number because I can't tell you how many of those will actually come to fruition, but we have strong interest right now. I think it's fair to say if we have Beta units available today, we would be doing pilots today.

Would – what percent of those that you currently have were also Alpha, Alpha trials customers?

I think our Alpha trial customers and those that have been with us through the design and development process for years are all still focused on the Betas and we've obviously added more to the queue since the time of the Alpha. So it is a bit of both.

Okay, fantastic. Just a couple more real quick. And what is your expectation in terms of how long the Beta unit will reside at the customer? What the trial period would be for the XO, for the XT, I'm not sure if they would – to the extent they differ any distinction there?

I think – yes, the beta period will likely be the same from what we're seeing from our customers on both the XO and the XT and we're anticipating two to four weeks of each – for each trial and then we will move the Beta unit onto the next customer, so we can rotate as many as we can through and get as much information from different perspectives, different use cases, different industries as possible. We've had a couple of customers express a desire for an extended Beta period, meaning a couple or three months in duration and how we slot those in will be dependent on just where we are with the queue and magnitude of the opportunity.

I see. Just last question maybe for Steve. Steve, could you give us an idea of what the – I'll just say the cash operating expense run rate recur on a recurring basis would be as we go forward – and basically I'm trying to get at excluding stock compensation, what the operating expense run rate would look like.

You bet. So right now, with our development, with our development focus, we're running about 2.5 [indiscernible] right now in cash until we get to that the Beta trials and some of our projections for use of customer.

Very good. Okay. I'll hop back into queue. Thanks for taking the question.

Thanks for your questions, Rob.

[Operator Instructions] One moment. I'm showing no further questions. I would now like to turn the call back to Ben Mimmack for closing remarks.

Thank you, Judy. That concludes our earnings call for the third quarter. If anyone has any questions, please follow up with Investor Relations. With that we would say goodbye.

This concludes today's conference call. Thank you for participating and you may now disconnect.