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spk02: Good afternoon and thank you for standing by. Welcome to the Sarcos Technology and Robotics Second Quarter 2022 Earnings Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1-1 on your telephone. You will then hear an automated message advising you that your hand is raised. Please be also advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ben Mimak, Head of Investors Relations. Please go ahead, Ben.
spk06: Thanks, Denise. Good afternoon, everyone, and welcome to the South Coast Second Quarter Earnings Call. Joining us on the call this afternoon are Sarko's President and Chief Executive Officer Kiva Allgood and Chief Financial Officer Steve Hansen. Kiva will start the call with an overview of the second quarter and recent events, 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. In addition, any statements about future performance related to our acquisition of Barry Squared including our expectations regarding the benefits to be achieved, the financial performance of the combined company, future market or revenue opportunities, integration plans, and other statements regarding the combination of the two companies are forward-looking statements. These statements represent management's beliefs and expectations as to future events as of today, but there are many risks and uncertainties that could cause the actual results to differ from what we have projected. Among those risks and uncertainties are those described in our quarterly report on Form 10Q filed today with the SEC and those mentioned in today's earnings press release. We encourage you to review the risks and uncertainties described in this release and in our filings with the SEC for further information regarding potential risks and uncertainties. We also encourage you to review the special note regarding forward-looking statements included in our earnings release and 10Q for the second quarter. 2022, in each case filed with the SEC this afternoon, and which will be posted in the investor section of our website at ClarkeCoach.com and on the SEC's website. In addition, we will be discussing certain non-GAAP financial measures on our call today. Throughout this call, all financial measures will be GAAP, unless otherwise noted. A reconciliation of any non-GAAP measures to the most directly comparable GAAP measures, as well as the descriptions and rationale for such measures, are included in the earnings release filed with the SEC this afternoon, and which is available on our website and on the SEC's website. A recording of this call will also be archived on our website. The information that we're giving you on the call is up to date, and we undertake no obligation to update the information subsequently. So, thanks again for joining us. At this point, I'd like to turn the call over to our President and CEO, Kiva Allgood.
spk03: Thank you, Ben, and welcome, everyone joining the call today. This afternoon, I will give you an update on the second quarter, as well as our expectations for the rest of 2022. After that, I will hand the to Steve Hansen, our CFO, who will give you a financial update on the company, then I'll open it up for questions from our analysts. The second quarter has been extremely productive and one of significant adjustment for everyone at Sarkoz. We started the quarter working to close the acquisition of RE Squared that we announced at the end of the first quarter. Thanks to the hard work of the teams across both companies, we closed the acquisition as scheduled on April 25th. While the closing of the transaction and integration has been a large part of the focus for the quarter, we've had some other notable successes since our last earnings call. I am particularly delighted to be able to host many of you at the Capital Markets Day back in May in Salt Lake City. I've always maintained that the best way to truly understand the potential of Starco's technology is to experience it firsthand. So it was great to be able to demonstrate the latest iteration of our Guardian XT, as well as our Guardian 6M and C-Class to the group of analysts and journalists, as well as showcasing reductions and the Guardian EXO's weight and developments in the station of the Guardian EXO. The demonstrations were very well received and were a great showcase for the development work we have been doing this year. Also in May, we announced the Air Force Research Laboratory has awarded us a new contract for the development of a collaborative sensing platform. We believe this research will benefit our commercial robotics products, including our CITAR AI platform. In June, we announced the Pittsburgh team had achieved a significant technical milestone and a strong tactile maritime hand for feeling, inspecting, sensing, and handling, which you will probably be relieved to hear we usually shorten to starfish. The team successfully assembled and lab tested a complete gripper capable of grasping and holding a variety of different objects, including tweezers. With the milestone achieved, Sarkis has significantly advanced the capabilities of underwater robotics across a variety of military and commercial applications and increase the capabilities of our sapient C-Class underwater arms. The C-Class is an important project for SARCOs, and I'm very proud of the hard work the team has put into getting us this far. Look out for more news on the C-Class products here. Also in June, we were delighted to be added to the Russell 2000 Small Cap Index. This is an important recognition of the progress we have made as a public company and will improve the sustainability of Starcoast as we continue on the path towards the commercialization of our products. With all this positive momentum, it was an honor to stand on stage alongside our founder and chair, Ben Wolf, as he rang the NASDAQ opening bell two weeks ago. Starcoast has come a long way since Ben co-founded the present form of Starcoast, alongside his wife, Julie, Fraser, and Marco. We still have work to do to bring the product to market, but it was a great opportunity for on our significant achievements since then, including the closing of the acquisition of RE Squared and the execution of several integration milestones over the last three months. As part of our initial integration, we have worked aggressively to integrate the team and realize the significant value we believe this transaction will bring. RE Squared's founder and CEO, Jorgen Pedersen, has joined my senior leadership as the chief operating officer of Sarkos. So we will continue to benefit from his expertise relationships as we move into a crucial second half of the year and work toward the commercial release of our products. I think everyone on this call will know that mergers bring unique challenges along with the opportunities they present. But while our integration is still at an early stage, I have been delighted by the way our teams have pulled together and worked to develop a combined vision and culture. Our integration plan is aggressive but focused on our team members. We have already merged the teams under a new leadership structure with critical leadership positions being filled by both locations in Salt Lake and Pittsburgh. Cross-company training and sessions ensure we are performing as one unified team with shared performance metrics and quarterly goals that focus on the initial commercial release of our product portfolio. Our product line, following the acquisition, includes solutions for a broader range of challenges faced by industrial companies as they move into Industrial 4.0, offering products capable of direct control, tele-operated control, and supervised autonomy. Our teleoperative solution in the form of the Guardian XT and the Sapient 6M systems are designed to allow users to carry out dexterous tasks in complex, unstructured environments. Both systems are designed to remove the operator from dangerous situations and keep them out of harm's way. But each system offers different attributes and features. The Guardian XT is designed to have more dexterity and precision in its end effectors. with a higher lift capacity than the Sapient arm. In addition, the XT is being developed with an expectation of offering supervised autonomy in future iterations. The Sapient 6N system is an intelligent robotic arm that can come packaged with intellect and detect features that make it more suitable for supervised autonomy tasks that require less dexterity. As we have assessed our product range today, we have determined that the Guardian XT Sapient 6M system are closest to commercial release, and thus we will be focusing our commercialization efforts on these two products in the near term. I am happy to announce, in line with the timeline we guided to previously, we have started to deploy units with potential customers for field tests in aviation, shipyard, and vegetation management. We believe there are work-at-height use cases in these industries for which we can gain initial production of commercial units by the end of 2022. We are also in the process of developing solar field construction solutions for both the Sapient and the Guardian XT arm, which we anticipate will start testing later this year. Engagements with future customers for these solutions have been very productive. We hope we will be able to share more details with you soon. The Sapient line also includes a variant. The C-Class, which I mentioned earlier, is capable of teleoperation supervised autonomy and can be integrated with existing ROVs to carry out dexterous tasks at depths of up to one kilometer. The C-Class is undergoing trials currently, and in addition to its successful start to start operation, carried out a successful demonstration of its time mine neutralization system, or M2NS, for its project sponsor, the U.S. Navy Office of Naval Research earlier this year. We anticipate that trials and development of the C-Class will continue through this year and into before we start commercial production later in 2023. It's important to note that while the C-Class development is focused on defense capabilities, we will see several commercial use cases for the product, and we'll be marketing it to those commercial users. As a result, focusing our resources, both human and material, on the commercial development at the Guardian XT and the Sapient system, we have made the tough, drastic decision to delay the commercial release of the Guardian-powered exoskeleton. The Guardian XO remains core to our long-term plan. Development will continue, but as we focus the team on commercializing the Guardian XT and 6M, we do not now expect to start initial production of commercial units of the Guardian XO until the second half of 2023. This is disappointing news for us to convey, not only to our investors, but also to our customers to consistently express excitement and enthusiasm for the product. but it is a necessary step given the supply chain constraints that have delayed the shipment of crucial parts and components, increasing lead times in many cases by two, three, or four times, and driving significant price increases for hard to locate items. To give just one example, we recently received a quote for electronic components that quoted a lead time of 150 weeks for a single part. The war in Ukraine has also had an impact by making it extremely difficult to get parts anodized, for example. And it's not just the availability of components. Finding partners with the capacity to help with the development of our products is also a significant challenge. In this consuming environment, difficult decisions had to be made, and the delay of the XO was one that we didn't take lightly. I want to reassure everyone on this call that we continue to make progress on the XO, work to improve the adjustability of the legs, allows the XO to be operated by users 562 to 644, which importantly puts me in the group that's now qualified operators. The XO diet is also continuing as we work to bring the weight of the product down to the level which will be appropriate for commercial release. It's also important to note that due to the commonality between the Guardian XT and the upper body of the Guardian XO, any improvements we make on the Guardian XT as we finalize its commercial rollout would easily be transferable to the Guardian XO. Finally, before I move on from the discussion of our product line, I want to mention our Cytar AI machine learning program, which continues to make great strides in enabling task-autonomous products. I've mentioned on calls before how the Cytar program has enabled self-balancing for the Guardian XO. We have also demonstrated to customers how Cytar can help us to train robots to complete tasks such as cutting, grinding, sanding autonomously. developed a CITART program, we're also incorporating learnings from the intellect and detect systems that can be bundled with the Sapient 6M products and advanced supervised autonomy and the incorporation of machine learning and artificial intelligence into our products. In light of the new go-to-market plan I outlined earlier on the call, I want to give you some high-level projections on our manufacturing capabilities in 2023. At this stage, we believe we will have the initial capability to manufacture a total of between 300 and 500 units of a combination of Guardian P, Guardian XO, and Sapient system and our existing commercial products, depending on the mix. But we do not believe we will use all of the capacity in 2023, especially as we believe we contract manufacturing partner engaged to produce a high percentage of our commercial units. Given their relative commercialization dates, we anticipate that the Guardian XO will be a small minority of our 2023 manufacturing total. We are working to sign an agreement with a contract manufacturer we hope to bring online in 2023. And in the event that we do, we anticipate the majority of these units will be produced under arrangement. I also want to give you an update on the list pricing of each of these units. We have surveyed companies around the willingness to pay for our technology in 2019. And obviously, the world has changed significantly since then. In light of the macroeconomic impact from COVID, the war in Ukraine, inflation, the tightening labor market, and the continuing demographic changes in the developed economies, we now anticipate list prices to start at $15,000 a month for the Guardian XO and $10,000 a month for the Guardian XT on a robot-as-a-service basis. We expect the majority of the safety and robotics systems will be shipped as a direct sales basis at a volumeless price of $185,000. In addition, as part of our repricing analysis, we have updated our estimates of the cost to manufacture our initial commercial units. In his remarks, he will update you on our expectations for the margins we believe we can achieve once we are producing our products at scale. In conclusion, I'd like to pay tribute to the team for the work that they have put in order to align all the projects, products, towards a combined company goal. It has been a huge effort to integrate two teams and a high number of programs, while at the same time aligning resources, capabilities, and expectations to ensure we can continue to meet our goal of commencing the initial production of units of the Guardian XT Sapient 6M by the end of the year and start shipping to customers early in 2023. When the macroeconomic disruption that continues to impact us all, While these issues remain a concern, we will make every effort to meet the deadlines we have guided you today. Finally, a big thank you to the 280 brilliant Star Coast team members. I'm happy to be working with you on our mission to make workplaces safer and more productive. Few people get to work on cutting-edge technology every day, and I'm lucky to be doing it alongside all of you. With that, I'll turn it over to Steve to go through the financials.
spk05: Thanks, Keeva, and good afternoon to everyone listening today. This has been an extremely busy quarter for Sarcos. As Keeva mentioned, we have made great strides integrating our Salt Lake City and Pittsburgh offices, not the least of which is producing a combined long-range plan and financial model, the results of which I will talk about later in my remarks. But first, I will comment on the financial results for the second quarter. This afternoon, we released our second quarter earnings, and we will be releasing shortly our 10Q. Please note that our results for the second quarter of this year include the financial performance of RE squared from the close of the transaction on April 25th to the end of the quarter. The 2021 results do not include results for RE squared. Turning to the actual results for the second quarter of 2022, we reported quarterly revenue of $3 million compared to second quarter 2021 results of 1.1 million. This change in revenue was due to the acquisition of RE squared partially offset by reduction of work efforts and related revenues for various projects during the quarter as we continue to focus on accepting only those development contracts that are aligned with our product commercialization efforts. As a result of these factors, revenue for research and development was up by almost $2 million to $3 million in the second quarter of 2022 compared to results in the same quarter of 2021. We intend to continue to accept only those development contracts that are fully aligned with our commercialization efforts and anticipate that quarterly development revenue for the combined company may continue to be lower on a year-over-year basis in the near term for this reason. Revenue derived from the product sales in the quarter was $56,000, down from $113,000 in the second quarter of 2021, related to our guardianess and parts and accessories. As I mentioned before, sales of the Guardian S and other legacy products, including the Guardian HLS products, are not expected to form a material part of our revenue in the future as we focus on the commercial launch of our core Guardian XT, Sapien X6M, and Guardian XO lines. Total operating expenses were $32 million in the second quarter, up from $8.8 million in the second quarter of 2021. $10.1 million of this increase was related to stock-based compensation expense, mainly from stock grants that began vesting upon the closing of our business combination in September of last year and shares issued upon the closing of the RE Squared acquisition. In addition, the company incurred approximately $1.1 million of expenses related to the acquisition of RE Squared. Substantially, all these expenses were included in general and administrative expenses. Other G&A expenses, including business insurance and legal expenses, were also higher year over year as a result of compliance with listing rules and security laws another of operating as a public company. Company headcount and packing G&A expense also increased, primarily the acquisition of RE squared. Sales and marketing expenses for the second quarter increased by $1.4 million on a year-over-year basis to $2.6 million. Much of this increase was due to the engagement of our services from a third-party vendor to assist with the data management of our products and services and increased headcount as a result of the acquisition. Research and development expense was $4.6 million in the quarter of this year, compared to $4.1 million in the June quarter of 2021. We incurred additional expenses from an increase in engineering, production and supply chain headcount, including team members added as a result of our eSquared transaction, and third-party services provided costs to prepare for the development and commercialization of our products. as well as general administrative and sales and marketing expenses to be higher year-over-year for the rest of this year as we work to develop our product line for commercial release and adjust to life as a public company. The purchase account of the acquisition of A2 that was initiated during the second quarter resulted in the recognition of approximately $21 million of identified intangible assets and $21 million of goodwill. The acquisition of intangible assets triggered the recognition of deferred tax liabilities, which were then offset against some of the SARCO's pre-existing assets, which were fully valued, triggering a deferred benefit of $1.1 million recorded during the second quarter. As a result of these increased operating expenses, offset by warrant liability gains and by the deferred tax benefit, our second quarter net loss on a GAAP basis was $23.1 million, or 16 cents per share, an increase from a net loss of $5.3 million or five cents per diluted share in the same quarter of 2021. As I've mentioned previously, some of our warrants are accounted for as liability, and we are required to report the change in value of this warrant liability on our operations and comprehensive loss. Since changes in the value of this liability are driven by the changes in our stock, this obligation will introduce volatility for earnings each quarter until the warrants are fully exercised or expire, and will make it difficult for us to forecast the effect of warrant accounting of operations and comprehensive loss. Including stock-based compensation expense, warrant liability, and certain related to the closing of the acquisition of RE squared, including the deferred tax benefit, our non-GAAP net loss per share for the second quarter of this year was $0.12. Please see our earnings press release filed today for a full reconciliation non-GAAP net calculation. Fully diluted weighted average number of shares in the second quarter of 2022 was 146.3%. As of July 29th, our outstanding share count was $154.8 million. Our net cash and operating activities in the second quarter was $15.5 million, or on average, cash burn of approximately $5.2 million a month. In addition, we used $1.3 million to purchase shares as payment for tax withholding on our cash balance, and our cash balance was also reduced by $30 million as a result of the payment of the cash component of the RE squared acquisition. Expenditures during the second quarter were $0.2 million, primarily as a result of construction work and the purchase for our quarters. As a result of these expenditures, the balance of our unrestricted cash, cash equivalents, and marketable securities, approximately $153 million at the end of June. And we continue to believe that the cash we have on hand today will be easily sufficient to enable us to begin initial production of commercial units of both our Sapien 6M robotic system and Guardian XT tele-operated robot, and to meet our needs for at least the next few months. We believe it is helpful to forecast our revenue and cash burn for the rest of 2022. In our last call, I promised to update our forecast cash burn for 2022, including RE squared. Thus, we continue to anticipate that the month of cash burn from operations and capital expenditures For Sarkos, including the impact of Bari Square, we'll average approximately $5.5 million for 2022. We continue to believe that this number is likely more heavily weighted towards the latter months of the year as we focus on the commercial release of our products and continue to make investments in that process. In addition, as I mentioned in our previous call, we continue to estimate an additional impact averaging approximately $1 million per month from the purchase of stock to satisfy certain tax obligations on the vesting of employee stock awards through the end of 2022. As we mentioned on our last call, to address some of the supply chain challenges we are seeing in the market, we have decided to pre-purchase materials and components for the manufacturing of our commercial unit. As I mentioned last time, most, if not all, of this is not expected to impact the P&L until 2023, but we continue to expect the purchase will increase cash burn for the current unit by a total of up to $3 million depending on the delivery date. As a combined company, we currently anticipate our full-year revenue for 2022 will be between $15 million and $17 million. This is lower than the revenue produced by the combined company in 2021. We focus our work on pursuing opportunities in line with the commercialization of our core products. I should also highlight that while this revenue forecast is our expectation as of today, we will view the availability of technical staff in-house and third-party providers as a risk to our ability to generate revenue in the second half of this year. Finally, as Kiva mentioned in her remarks, we have been busy integrating our two teams and producing a combined roadmap and long-term plan. Taking into account the updated anticipated pricing for our product line and the latest analysis of costs resulting from conversations with our potential manufacturers and suppliers, we are targeting a long-term gross margin, which includes service revenues, between 25% and 30% once we have achieved high-volume production and sales, and can take advantage of volume manufacturing and purchasing economies of scale. However, for the next few years, until we reach volume production and sales, we expect our gross margins to be lower than this, perhaps significantly. That concludes my remarks. I, too, would also like to join Keevan in thanking the entire Marcos team for the dollars they put in during the quarter to continue to develop our products and integrate our company. We are very excited to complete the commercialization of our products and begin the process of transforming the world of physical work. We will now open the lines for questions. Operator, please repeat the instructions.
spk02: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced.
spk01: Our first question comes from
spk02: Mason with Baird.
spk04: Yes, good afternoon. Hi, all. Thanks for a lot of the color on the outlook that's helpful as we go forward for the remainder of the year. I was just curious, you know, what is your visibility on just the revenue for this year, the 15 to 17, as you're incorporating RE squared and How much of the revenue, as you look forward, is related to commercial, again, looking in the second half of the year, is related to commercial activity versus, I guess, contractual or development work?
spk05: Hey, Jason, good to hear from you. Yes, it's interesting, right? Our mix is with a lot of service revenue we have currently in our pipeline, and the work on that effort will continue throughout the balance of the year. Right now, it's roughly about a 30% commercial side, 70%, but I'll say government services side, working on these projects as we finish them out. That will roll into 2023 as well. Of course, that's all dependent upon, as I mentioned, the use of our current labor and ability to get certain labor in place, as well as the use of third-party vendors to support this.
spk04: I see. I see. And the... The cash burn guidance that you provided was effectively unchanged, I believe, and consistent with how you've thought about RE squared coming in, not really materially impacting that number. So I guess this may be an elementary question, but it's fair to assume then that RE squared is kind of break-even from an EBIT level or a cash level. There's no offset I'm missing there.
spk05: No, you're right. It's fairly neutral. As we begin to integrate the two companies, we start to blur the lines of what was distinctly RE squared or our Pittsburgh office and what Salt Lake is. So there's a combination. But as I kind of track against that, it's fairly neutral. But as we invest, like I said, to get additional headcounts to hit some of the revenue streams and some of our commercialization needs, that line gets a little bit more blurred of where the cash is being drawn from. But yes, you're right. We do continue to expect what I said last quarter in terms of going to come out on cash for the year.
spk04: Just one last question, then I'll hop back in the queue. The expectations around the gross margins, both long-term and then what potentially may transpire in the interim, you said they could be significantly below that long-term until you scale up your volumes. Would you anticipate those being just initially on the commercial volumes, initial commercial volumes being higher? being positive or negative?
spk05: Well, you know, I think it's interesting. Initially, we are obviously at the production levels. Our costs will come down, and that's built into the model forecast we have. So initially, when we come out the gates, those expenses will be higher. It's hard to say at this point whether they will be neutral or even possibly a loss, but we are anticipating the highest expense in terms of mottling this thing out for the initial term. and expect that to drop down to where we get to that 30% level in the outer terms.
spk03: And it's also product dependent.
spk01: Yes. Thanks, Rob. Thank you. One moment, please, for our next question. Our next question comes from Guy Hardwick with Credit Suisse.
spk02: Your line is now open.
spk07: Hello. Good afternoon, everyone. Thank you, Kiva, for providing the change in list pricing. Can you give us a bit of color around that, the puts and takes about how you arrived at those numbers?
spk03: Yeah, no, great. You know, the last study we did was 2019, and since then, as, you know, labor rates have gone up on average by 15%, and cost of goods on average by 5% to depending upon which component. And in discussions with our current test partners and Lighthouse customers, we increase the price as well as the service that goes along with it. So as I mentioned, we're doubling down on autonomy and the value of services that go along with that. So it's a combination of those.
spk07: Okay. And just as a follow-up, By my math, based on the cash flow, and if it continues at the same rate into 2023, you should be fine. And is there a – can you give us some clue as to what the cash flow could be in 2023? If not, could you – what are the key kind of levers which could alterate in next year versus this year?
spk05: That's a good question. You know, we currently expect to obtain financing to help cover production costs for product orders. In addition, we also believe we have sufficient capital in our business for at least the next 12 months, but we expect to see additional financing during that time to bolster our cash reserves and ensure our ability to continue. You know, we believe that our cash, our marketable securities on hand should support operations, working capital, and capital expense requirements for at least the next 12 months from the date of this report. However, we will need to secure additional financing prior to achieving positive operating cash flows. And we do not anticipate achieving positive cash flows through at least 2024. Thank you.
spk02: Does that help, Guy?
spk07: Yeah, that's great. Thank you.
spk00: Yep.
spk02: Thank you. At this point, we have no more questions. I would like to turn the session back to Sarcos Management for closing remarks.
spk03: Thank you, Denise. We're extremely excited about where we stand and find ourselves today. The combination with RE squared means Starcoast is in an even stronger position to develop products to enable the most safe, productive, and cost-effective workforce. We're excited by our mission and look forward to keeping you up to date on our progress. Thank you for your interest, your support, your questions. Any additional questions, please reach out to Ben.
spk02: Great. Thank you for your participation in today's conference. This concludes the program. You may now disconnect.
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