Q3 2023 Sarcos Technology and Robotics Corp Earnings Call

November 14, 2023

Yeah.

Good day and thank you for standing by welcome to the Q3 2023 circles Technology and Robotics Corporation earnings Conference call at.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session. Josh. Good question. During this session you will need to press star one one on your telephone.

You will then hear an automated message advisory hand is raised to draw. Your question. Please press star one again, please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your speaker today, Julie casually with financial profiles for circles.

Please go ahead.

Thank you operator, good afternoon, everyone and welcome to the Barclays Technology, and Robotics Corporation third quarter 2023 earnings call.

Joining us on the call. This afternoon are Sarcos, President and Chief Executive Officer, Laura Peterson, and Chief Financial Officer Drew Hamer, Laura will start the call with a discussion of highlights from the third quarter and recent events and drew will then talk in more detail about the financial results before they take analyst questions.

Before we begin we must state that today's call will contain forward looking statements, including statements concerning future commercial production release and availability of our products.

Alex usage features capabilities and value proposition target markets and market trends and expectations strategic direction company facilities.

So our demand and future financial results condition, and cash flows, including future costs and cost trends cash usage restructuring charges and liquidity.

Statements represent managements beliefs and expectations as to future events as of today, but there are many risks and uncertainties that could cause actual results to differ from what we have projected.

Among those risks and uncertainties are those described in our report on Form 10-Q filed today with the SEC and those mentioned in today's earnings press release, both of which are available on the Sec's website and in the investors section of our website at <unk> Dot com.

We encourage you to review the risks and uncertainties described in the press release and 10-Q and in our other filings with the SEC for further information regarding these actual potential risks and uncertainties.

We also encourage you to review the special notes regarding forward looking statements included in the earnings release and 10-Q.

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 description limitations and rationale for such measures are included in the earnings release.

A recording of this call will be available on our website until December 14th 2023, the information that we're giving on the call is as of today's date and we undertake no obligation to update the information subsequently, except as may be required by law.

Now I would like to turn the call over to Laura Peterson, President and CEO of Asarco Laura.

Thank you Julie and good afternoon to all of you joining us on today's call.

I am pleased to be speaking to you as the recently appointed President and CEO of Sarcode.

Role for which I am sure. Many of you remember I said I was not a candidate.

However, much has changed in a short time and I was honored to be asked by the board to accept the permanent role.

So I began leading the company in May it was apparent that we needed to focus the business on clearly defined end markets.

With 18 products and solutions, we did not have the capacity to commercialize each one of those with our available resources.

It was important that we rigorously prioritize our products.

After significant analysis, we identified subsea aviation solar in software as the four markets with the most potential for near term revenue growth and acute customer need and the greatest traction in evolving markets.

We define the products and product concepts for those end markets initially narrowing 18 product areas to four.

But our work did not stop there.

We continued a rigorous data driven review of our products in development programs, leading to a deeper understanding of the risks and work necessary to bring all of these products to market.

With the consideration of our cash position as well as third party dependencies customer decision timing and the cost and time to achieve a significant and steady revenue stream from our hardware products. It was clear that we should adjust course rapidly to rightsize the company and get our cash.

Usage down to a level that we believe will provide the best opportunity for success with our available resources.

We made the decision to suspend our hardware commercialization efforts implement a significant reduction in force and focus our resources on our AI platform.

We believe this is the right thing to do.

The common key differentiator of our robotic systems has been our advanced software, including our performance enhancing artificial intelligence and machine learning capabilities.

We believe that there is a significant near and mid term market need and customer value proposition for the capabilities are software platform will provide.

Our AI ml software platform is being developed to greatly reduce the time to program and trained robotics systems, which we believe will accelerate implementation to a small fraction of the current approach providing customers with significant increased productivity at a lower cost and at a more efficient manner.

By design the success based learning approach used by our software will enable robotic systems to perceive their environment and quickly adapt to changing circumstances by generalizing from their past experience.

This ability to continually learn and apply their learnings to new situations and challenges will enable these robotic systems to quickly adapt and continue to perform the desired task.

We believe that our AI software platform, which is applicable to the majority of the industrial robot speak sold around the world will enable a dramatic reduction in robotic training times, while also making industrial robots far more agile, meaning they can perform more tasks with greater variability.

Similar to how humans can perform a wide variety of tasks.

In our lab environment, we have trained robotic arms to do simple tasks in minutes.

Our software platform enables the robots to learn how to work around unforeseen changes or obstacles by building on their initial programming.

The robots incorporate internal and external environmental inputs that allow them to understand their environment.

Chairman reasonable behavior, and unforeseen situations and quickly apply them to the task at hand.

Each newly learned task will then be incorporated and used to perform future task.

This closed loop autonomy approach is the key to how our software will help reduce costly workflow stoppages and prevent unnecessary downtime.

We expect to bring their product to market in the first half of 2024 with revenue being recognized beginning in the second half of 2024.

Our decision to suspend commercialization efforts of our hardware products and focus on our software platform will result in significant cash savings and increased efficiencies throughout the organization in large part by drastically reducing head count.

We will continue some hardware system R&D efforts on a substantially reduced scale in part to support our software platform development efforts.

We will be closing, our Pittsburgh facilities as well.

We are confident about the future of our advanced software and technology focus and see tremendous potential for our SaaS business.

By decoupling, our advanced AI ml software from our own robotic systems. We believe we have the opportunity to reach a much broader market more quickly by targeting existing deployed robotic systems and new sales of third party system.

We can provide customers with the solutions they need through the intellectual capital that circles brings to the table.

But without requiring significant investment in hardware development and production.

One of the reasons I am confidence in taking the path of a SaaS model company is the advanced state of our AI ml program that began in 2017 with a vision to use these technologies to greatly enhance the capabilities of our robotic system.

We progressed through our first site tower government proposal, which stands for cybernetic training for autonomous robots in 2019.

We began significant development work in 2020, when we hired Dr. Dennis <unk>, our Chief Technology Officer, who heads our AI ml software development efforts.

With more than 25 years of experience in the AI and ml technology space.

Dennis is an internationally recognized leader who has written more than 40 academic papers and holds several patents and applied controls for autonomous robotics and machine learning.

With years of Department of Defense funded AI software development program under our belt as well as ongoing Dod funded contracts and one of the foremost authority in the field, leading our technology vision, we are well positioned to excel in redefining the use of software in the.

Cramming training and management of industrial and other advanced robots in complex and dynamic environments.

Throughout this time of organizational change, we have continued to build momentum through customer wins.

In addition to the expanded AI contract with the Air Force Research Laboratory that I mentioned last quarter. We recently reported an additional important achievement.

We've received a $13 8 million four year contract from the U S Air Force to advanced artificial intelligence and machine learning software.

The contract supports the development integration and validation of our AI and ml software framework for success based learning, which will allow robots to perceive their environment.

Some unreasonable behavior in unforeseen situations and quickly changed their actions.

We are striving to teach robots to emulate what humans do to adapt to new situations.

Leverage existing knowledge, and then generalize for limited data to fill in the gaps.

Our goal is to outperform current AI approaches in both effectiveness and efficiency to create greater synergy between human workers and AI technology to enhance productivity and workflow agility.

We believe we offer a compelling and differentiated value proposition with our software.

It has been and will continue to be tested on both existing third party robotic platforms as well as start closest owned development platforms to mitigate risks associated with deploying our advanced software in a commercial setting.

As we move forward, Ben Wolff founder Board member and former CEO of the company has rejoined the executive team as executive Vice Chairman.

I asked them to be a part of my team to leverage his extensive experience with the company potential customers and the industries and markets we are targeting.

He will support our efforts to bring our AI software platform to market as well as help evaluate and pursue strategic business opportunities support our commercialization efforts improved speed to market and accelerate revenue.

Ben and I, along with the rest of the board are United in our belief that robotic AI and ml software is the future for sarcoma.

AI and ml arent shiny new objects or buzzwords for us. They are an integral part of the years of work and millions of dollars, we've invested and we see potential applications in the majority of the robotic arms being sold in the market today.

I am pleased with the progress the team has made and I am optimistic about our future as we move forward to serve customers with our robotics AI ml software platform.

I'll now turn the call over to drew to report on the financials.

Thank you Laura to everyone on the line it is a pleasure to be here today speaking with you.

As I review, our financial results today, all comparisons I will use our year over year.

For the third quarter of 2023 revenue was $1 8 million compared to $4 $7 million during the third quarter of 2022.

The lower revenue in Q3 was primarily due to the completion of certain product development contracts. During 2023 that had not yet been replaced with new contracts.

<unk> slightly by an increase in product revenue related to the sale of two Guardians G class units.

Cost of revenue decreased to $1 2 million in Q3, 2023 as compared to $3 6 million in Q3 2022.

Mainly due to decreased labor and material expenses charged product development contracts during the quarter.

Third quarter 2023, total operating expenses, including cost of revenues was $32 $6 million, an increase from the third quarter of 2022 operating expenses $31 9 million.

I will now discuss the operating expenses in more detail.

In connection with the July and November restructurings, as previously announced the company incurred charges of $11 $2 million in the third quarter of 2023.

Including $5 5 million in employee and employee related charges.

$5 2 million for the write down of inventory.

And half a million dollars related to the impairment of certain fixed assets.

Research and development expenses were $10 million in the third quarter down slightly from $10 $5 million in the third quarter of 2022.

This decrease was driven primarily by reduced third party professional service expenses during the current year period as part of our prioritization efforts on development and commercialization of our focused products.

General and administrative expenses were down 48% to.

To $7 6 million in the third quarter, primarily due to reduced stock based compensation expense of $6 $8 million.

Due to certain awards vesting in the prior year and reduced outstanding Unvested Awards due to employee terminations during the current year period.

Sales and marketing expenses were $1 8 million, a decrease of 27% compared to the third quarter of 2022 due to a decrease in professional service fees related to third party platform expenses utilized data management of our products and services.

Third quarter 2023, net loss was $29 million or a loss of $1 13 per share.

Compared to a net loss of $22 5 million or a loss of 89 per share in the third quarter of the prior year.

Third quarter non-GAAP net loss was $17 million or non-GAAP loss of 66 per share.

Compared to a non-GAAP net loss of $18 6 million or.

Our non-GAAP loss of <unk> 74 per share in 2022.

Please note on July 5th we affected a one for six reverse stock split of the company's outstanding shares of common stock.

All share and per share amounts have been retroactively adjusted for all periods presented to reflect the reverse stock split.

We ended the quarter with $55 $1 million in unrestricted cash cash equivalents and marketable securities.

And now going to turn to our financial guidance.

For the fourth quarter of 2023.

As Laura discussed and I Hope you saw in our other announcements today, we are pivoting the business to focus on the larger opportunity of a robotic artificial intelligence or AI.

And machine learning, where ml software platform.

With the need to ensure we have sufficient financial resources to pursue that opportunity.

We have made the difficult decision to suspend for the foreseeable future, our subsea aviation and solar robotics hardware commercial efforts.

Some small R&D hardware efforts will continue in part to support our software platform development efforts.

However, we intend to address these markets through our AI ml software platform.

As a result of the decision to streamline our business approximately 150 employees were notified today that their positions in the company will be eliminated on January 16th 2024.

This will leave approximately 65 employees in the company, which.

Which we currently expect will be the approximate head count throughout most of 2024.

We anticipate incurring additional restructuring expenses related to restructuring actions taken during 2023 in the range of $22 million to $24 million during the fourth quarter of 2023, and the first quarter 2024.

These expenses include approximately $4 million in personnel expenses, such as salaries wages benefits and severance related to the eliminated head count.

The remainder will be noncash expenses related to expected accelerated amortization of intangible and other assets due to the strategic shift initiated during the fourth quarter.

Due to many variables associated with the organizational and business changes announced today.

We'll not be providing revenue guidance for the fourth quarter.

I can tell you that we expect our cash to be approximately $39 million at the end of the fourth quarter.

Cash usage from ongoing operations should average approximately $1 $6 million per month in 2024.

With the launch of the software platform in the second half of the year the cash usage could be reduced further by customer purchases of the service.

Reflecting our new business model quarterly research and development expenses are expected to decrease in the first quarter of 2024 by approximately 80% when compared to the third quarter of 2023.

After adjusting for stock based compensation expense. We also expect the implementation of our business realignment will result in general and administrative expenses trending down on a quarterly basis for the next two quarters.

We expect general and administrative expenses for the first quarter of 2024 will decrease by approximately 35% when compared to the third quarter of 2023.

Our SaaS business model is expected to result in sales and marketing decreasing by approximately 60% in the first quarter 2024 from what it was in the third quarter of 2023.

Looking at our balance sheet.

We are significantly reducing our cash usage to provide us the runway to continue developing our AI ml software platform to capitalize on anticipated demand.

We intend to manage our average monthly cash usage to approximately $1 $6 million in 2024.

We believe that we have sufficient liquidity to operate well into 2025 without additional financing.

In conclusion by running a leaner business it is more efficient and reducing cash usage. The company is in a stronger position to reach profitability.

We believe this should lead to long term stockholder value creation.

Now I'd like to turn the call over to the operator.

Operator would you kindly repeat the instructions to ask a question.

As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.

To withdraw your question. Please press star one again please.

Please standby will be compile the Q&A roster.

And our first question comes from Rob Mason with Baird. Your line is open.

Yes, good afternoon Hello.

Hi, Robert.

To touch real quick just around your projected.

Cash burn rate for next year, averaging one $6 million a month.

Do you expect much volatility around that embedded in that estimate.

No the only volatility I would add to anticipate around that is if the sales come in faster than we thought right. Now that's mostly just the cost of getting the platform up and running and then as sales start to materialize they might bring that.

Houston.

Okay. So the presumption would be once we get past mid January say roughly.

Roughly be at that level.

That's right.

When all of the alignment of the teams can we get down to the 65 people that were talking about in the press release that's right.

Sure Okay.

Can you just elaborate a little bit on.

This effort.

Pivoting to the software model, but your channels to market. How do you plan to once it is ready to be commercialized take to market.

In the first half of next year is this going to be more of a direct model.

Or do you envision some indirect <unk>.

<unk> market.

The expectation is as you launched a new service that will primarily be the direct model.

A lot of very strong relationships with existing customers on the commercial side and on the government side.

And we anticipate being able to enhance those with this new solution.

And we'll use them furnished or at least for the early days of selling solution.

And then as we move forward then we will consider other channels as they present themselves.

Okay.

As a follow up on that should I envision.

You take this out too.

Yes existing robotics players are we mainly talking about traditional robotics or these collaborative robotics is there sort of a bias one way or another where you think you can.

Value easier to be realized early on.

Sure.

The beauty of the software is it's been developed is that it allows people to train their arms as we mentioned we've done it in a lab in a couple of minutes, whereas now could take potential.

Essentially weeks or more to train line and bring it up.

And that is just the initial.

Product that will be available then.

Real solutions, Robyn, it's complicated, but the real solutions will allow the systems to train themselves.

Sorry give me one second I would like to give you some of the technical words.

But.

<unk>.

Okay.

The platform enables the robust learn how to work around unforeseen changes or obstacles by building on the initial programming.

And the robots incorporate internal and external inputs that allow them to understand their environment determined reasonable behavior and unforeseen situations and quickly apply them to a task at hand.

And then each newly learned tasks that the robot is trained itself to do will then be incorporated and used to perform future tasks.

And then it goes to even more sophisticated environment and that it does it in a closed loop autonomy approach.

So that the software will help reduce costly workflow stoppages and prevent unnecessary downtime for customers.

So.

These are really strong reasons for us feeling confident about taking a path of a SaaS business model.

Using this advanced state of our AI ml program that began in 2017.

The division to use these technologies to greatly enhance capabilities with robotics systems, we are developing.

And I think as you're aware if you look back kind of at our history, we have.

Progress at this stage with our first sites are government proposal in 2019.

We are fortunate enough to have Dennis joined the company in 2020, and he has been able to really refine the vision for the products and develop them to the state that they're at right now.

And he will continue to head our AML efforts.

And then so is this more than 40 years of experience and everything.

We're in a very good position to capitalize on this opportunity.

Sure.

Just around maybe the last question I'll hop back in the queue, but just around the business model itself.

<unk>.

What should we get comfortable on the ability to scale. This.

Relative to what is a price point.

I guess it would be sold on a per seat basis per arm basis subscription, but yes.

Is there any.

Any detail you can provide there yes. So there are a couple of things enabled.

Enabled scaling of the solution the first.

It's very simple.

Access point for one of our customers will be the ability to do it on a per hour basis. So they don't want to be able to train their arm in a few minutes, whereas right now it may could take them take some weeks or months or longer.

And.

So the buy it on a per hour basis, and then there is all kinds of other modules in the system that there'll be able to utilize too.

Take on the various tests that I was just describing a moment ago.

And those will be incremental up sells and cross sell so we'll be able to provide to them.

So that they can take full advantage of the system to the extent that they need it.

Without requiring it upfront so they can advance as they go through the various stages.

Getting more sophisticated we're going to talk about internal and external.

Sources it could be the camera that's on the around the various armored part of it or it could be external cameras that are not even connected to the arm a part of it so.

The sophistication of the product and its interpretation of the information is being generated.

We will then be used by the robot and software too.

Modify the behaviors of the robot for the various thesis customers have decided for.

So it'll be it'll be SaaS there'll be term licenses there'll be a number of different modules that customers can buy into based upon their various needs.

Based on the various solutions that they're trying to put together.

And it will be available.

In a number of different forms so that we can ensure their success.

Sure.

Thank you.

As a reminder to ask a question. Please press star one one on your phone.

Again that is star one one on your phone.

One moment please.

One more moment for our next question.

Yes.

And this concludes today's question and answer session I would now like to turn the conference back to Laura Peterson for closing remarks.

Thank you.

We are confident about the decision to focus on our AI ml software and excited to build on our strong foundation that we've laid over many years as we shared in our earnings call today.

For joining us and have a great evening.

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

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Yes.

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Good day and thank you for standing by welcome to the Q3 2023 circles Technology and Robotics Corporation earnings Conference call at.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.

You will then hear an automated message advisory hand is raised to draw. Your question. Please press star one again, please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your speaker today, Julie casually with financial profiles for Sarcos.

Please go ahead.

Thank you operator, good afternoon, everyone and welcome to the Barclays Technology, and Robotics Corporation third quarter 2023 earnings call.

Joining us on the call. This afternoon are Sarcos, President and Chief Executive Officer, Laura Peterson, and Chief Financial Officer Drew Hamer, Laura will start the call with a discussion of business highlights from the third quarter and recent events and drew will then talk in more detail about the financial results before they take analyst questions.

Before we begin we must state that today's call will contain forward looking statements, including statements concerning future commercial production release and availability of our products.

Alex usage features capabilities and value proposition target markets and market trends and expectations strategic direction company facilities.

Tumor demand and future financial results condition, and cash flows, including future costs and cost trends cash usage restructuring charges and liquidity. These.

These statements represent managements beliefs and expectations as to future events as of today, but there are many risks and uncertainties that could cause actual results to differ from what we have projected.