Palladyne AI Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 10, 2023

There are 8 speakers on the call.

Operator

And thank you for standing by. Welcome to the Sarcos First Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mariah Chilton. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome to the Sarcoast Technology and Robotics Corporation 1st Quarter 2023 Earnings Call. Joining us on the call this afternoon are Surface President and Chief Executive Officer, Kiva Allgood And Chief Financial Officer, Drew Hamer. Kiva will start the call with a discussion of business highlights from the Q1 and recent events. And Drew will then talk in more detail about the financial results before management takes questions from analysts.

Speaker 1

Before we begin, We must state that today's call will contain forward looking statements, including statements concerning future commercial production and availability of our products, Product features and capabilities target markets and market trends, size and expectations customer demand and future financial results, condition and cash flows, including revenues, costs and liquidity. In addition, any statements about future performance related to our acquisition of RS2, Including our expectations regarding the benefits to be achieved, the financial performance of the combined company, 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 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. We encourage you to review the risks and uncertainties described in this press release and in our filings with the SEC for further information regarding these actual and potential risks and uncertainties.

Speaker 1

We also encourage you to review the special notes regarding forward looking statements, including in our earnings release and 10 Q for the Q1 of 2023 filed with the SEC this afternoon and which will be posted in the Investors section of our website atclarcoast.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 the most directly comparable GAAP measures, as well as the description, limitations and rationale to such measures are included in the earnings release filed with the SEC this afternoon, which is available on our website and on the SEC's website. A recording of this call will also be available on our website until June 9, 2023.

Speaker 1

The information that we're giving on this call is as of today's date, and we undertake no obligation to update the information subsequently. At this point, I'd like to turn the call over to Kiva Allgood, President and CEO of Therco. Kiva?

Speaker 2

Thank you, Mariah. Good afternoon and welcome to everyone joining us on the call today. As you saw in our press We are gaining revenue momentum from our product development contracts as we push toward initial commercial production sales in the coming quarters. Now that some of the Guardian family of products are available for sale, we have been able to get products working out in the real world and we expect commercial product sales to ramp up in the second half of the year and grow from there. We're excited about our recent manufacturing agreement with Table And as demand for the Guardian family of products grows, this relationship will allow us to grow beyond our initial production capacity of 300 to 500 units per year.

Speaker 2

In March, we attended ConExpo, the largest construction equipment trade show in North America. There was tremendous interest and traction at our booth as we began engagement with more than 70 companies who are speaking with us about how our robotic solutions could help improve their productivity and safety. And they could see firsthand how impactful our Guardian product can be as we perform demos of the XM and XT T, doing semi autonomous and teleoperated work at height, such as laser ablation, grinding and cutting, all tasks required in surface preparation, Shipbuilding and Construction, which we believe represents a large market opportunity for Sarkos. Over the week long event, we demonstrated how our solutions, which include hardware, software and components, improve productivity while keeping workers safe from dangerous working conditions. Seeing is believing when it comes to surface solutions and even in the rain, the team executed and performed well.

Speaker 2

Now that our products have come to life, we have been actively on the road at industry shows and events in our focused verticals. In April, Sarco took part in the Aviation and Robotics Summit, a 3 day invitation only series of workshops, site tours, Networking that brought together aviation and robotics industry professionals and experts from around the world. The goal of the summit was to solve aviation business and operational challenges with robotic solutions and advanced the industry's focus on improving the travel experience. Jorgen Pedersen, our Chief Operating Officer participated in a panel with Delta Air Lines and the CEO of Pittsburgh International to discuss how robotics are critical for the growth of the aviation industry. And we were thrilled to host more than 60 summit attendees at our Pittsburgh headquarters, where we conducted demonstrations of our robotic systems and solutions and spoke about the many aviation specific solutions we have to offer.

Speaker 2

All attendees were able to see our baggage handling solution as well as the Guardian XT inspecting an airplane fuselage and we received very positive feedback from the Aviation Industry Leaders. We had another opportunity to demonstrate our robotics solutions last week In Houston, at the Offshore Technology Conference and Exhibition, where energy professionals exchange ideas on offshore resources and environmental matters. We formally announced our partnership with VideoRay at the OTC show and we demonstrated how our Guardian C Class can be retrofitted onto their underwater Remote operated vehicle. We bring human like dexterity to video ray's market leading inspection class ROV by adding arms and hands. Now it can do complex subsea jobs such as ship maintenance and salvage.

Speaker 2

It was a great opportunity to promote the Guardian C Class as well as our important new agreement with VideoRay. The underwater robotics market is growing 13% a year and is expected to be 2,400,000,000 Serviceable adjustable market globally in 2024. In addition to industry events, we have been doing on-site customer testing to ensure our system performs as intended, are durable and that our software solutions meet the customer's specific needs, putting us at a critical step closer to product sales. And as I mentioned on our last call, we completed the final validation in our product development contract for our robotic solar field construction solution to help an industry facing labor shortages, increase productivity, while reducing installation costs. We're also on track to achieve ISO 9,001 compliance by the end of the year, which will put us on our way to achieving certification in early 2024.

Speaker 2

We are proactively applying quality standards throughout the business to ensure that we meet the reliability and quality requirements our customers demand. These events I've talked about today are important steps toward commercialization as we introduce Sarco's robotics solutions to potential customers and generate sales momentum. The The excitement that comes from witnessing in person how revolutionary our technologies are can't be duplicated without a sales with a sales brochure or even a video. The Garden Inn family of products are bringing advanced technologies such as machine learning, artificial intelligence, physics based modeling and simulation to unstructured This is groundbreaking work and sets a solid foundation for surface to leverage our IP as we launch into industry specific solutions like the ones we are developing for solar panel installation and baggage handling. These foundational technologies are available now and will enable Sarcoast to bring new solutions to market with greater speed at a lower development cost.

Speaker 2

With this strategy and the market momentum we created at ConExpo, the Aviation and Robotics Summit and the Offshore Technology Conference, We're confident in our ability to achieve our $23,000,000 to $25,000,000 revenue target this year as we commercialize our existing lineup, gain sales momentum and develop new technologies for the future. Our participation in these events reinforces our commitment The opportunities we continue to pursue in the aerospace, construction and underwater industries, which collectively represent a global TAM opportunity of approximately $185,000,000,000 in 2025. After only recently announcing the commercial availability of product, We are proactively increasing sales while working to reduce operating expenses by refining our business model and reducing third party R and D costs, all with a goal to be on pace to be cash flow positive in 2025 when we exit 2024. And now, I'll turn it over to Drew to report on the financials.

Speaker 3

Thank you, Kiva. To everyone on the line, it is a pleasure to be here today speaking with you. Please note that our results for last year include the financial performance of RE2 from the close of the transaction on April 25, 2022. Also please note that as we discussed on our last earnings call, what was formerly called research and development services revenue is now called product development contract revenue. Product development contract revenue comes from the different types of contractual research and development agreements, primarily relating to the development and commercialization of our products, including cost type and fixed price agreements.

Speaker 3

Now turning to the financial results. All comparisons I will use are year over year. For the Q1 of 2023, revenue was $2,300,000 compared to $700,000 during the Q1 of 2022. The increase was due to increased revenue from product development contracts. Cost of revenue increased by $1,300,000 to $1,800,000 as compared to $500,000 in 2022, mainly due to the costs associated with the product development contracts I just mentioned.

Speaker 3

Q1 2023 total operating expenses, including cost of revenues, were $25,500,000 A decrease from the Q1 2022 operating expenses were $26,400,000 I'll now discuss the operating expenses in more detail. Research and development expenses increased by $3,500,000 to $9,400,000 in the 1st quarter. This increase was driven primarily by increased headcount from the acquisition of RE2. Part of this increase was also related to increased Direct materials charges. General and administrative expenses were down $8,100,000 to $9,700,000 in the 1st quarter, primarily due to decreased stock based compensation expense.

Speaker 3

Sales and marketing expenses were $3,700,000 An increase of $1,500,000 compared to the Q1 of 2022 due to increased costs from a third party data management platform and increased costs from our attendance at ConExpo, the largest construction equipment trade show in North America. Q1 2023 net loss was $21,500,000 or a loss of $0.14 per share compared to a net loss of $19,200,000

Speaker 4

or loss

Speaker 3

of $0.14 per share in the Q1 of the prior year. 1st quarter non GAAP net loss was $19,400,000 or a loss of $0.13 per share compared to a net loss of $13,300,000 or loss of $0.10 per share in 2022. We ended the quarter with $94,700,000 in unrestricted cash, cash equivalents and marketable securities. I'm now going to turn to our financial guidance. For the Q2 of 2023, we expect total revenue to be approximately $2,100,000 Approximately $400,000 of the revenue in the quarter will be revenue from product sales.

Speaker 3

Reflecting our work to reduce operating expenses, We estimate cash used in the operating activities will average approximately $5,000,000 per month. As of March 31, 2023, We have an unconditional purchase commitment of $4,000,000 which is related to operational expenses and all of which is expected to be During the year ended December 31, 2023. We expect to pay this amount in 2 equal installments, one during each of the second and third quarters of 2023. Now for the full year 2023, We are reaffirming our full year 2023 financial guidance. Full year total revenue guidance is expected to range between $23,000,000 25 $1,000,000 Product development contract revenue is expected to be approximately 80% of the mix and will be weighted toward the second half of the year.

Speaker 3

Product sales are expected to be approximately 20% of our full year 2023 sales and will ramp up in the second half of the year. Turning to our operating expenses. Research and development expenses are expected to decrease in 2023 as compared to 2022 as we reduce our engagement with 3rd party service providers as we continue to develop and refine our existing products and further enhance efforts on our future products and software. With the exception of stock based compensation expense, we expect Our general and administrative expenses in 2023 to increase slightly as the company works on its commercialization pathway and maintains public company compliance requirements. Sales and marketing will increase slightly in 2023 in line with the expected revenue growth in the future.

Speaker 3

Looking at our balance sheet, we are satisfied with our liquidity and currently have no plans to do an equity financing in 2020 trading. Furthermore, We have taken numerous steps to manage our use of cash and believe we have sufficient capital to fund our business for at least the next 12 months without seeking additional capital. As Kiva previously mentioned, we are proactively increasing sales while working to reduce operating expenses, all with a goal to be on a pace to be cash flow positive in 2025 when we exit 2024. Operator, that is the end of my prepared remarks. I'd like to turn the call over to you now.

Speaker 3

Would you kindly repeat the instructions to ask a question?

Operator

Thank you. At this time, we will conduct a question and answer session. Please standby while we compile the Q and A roster. Our first question comes from the line of Steven Volkmann with Jefferies. Steven, your line is open.

Operator

Hi, Steven.

Speaker 5

Yes. Can you hear me now?

Speaker 4

Yes, sir.

Speaker 5

All right. It's only been what 4 years of COVID and we still can't I still can't figure out how to unmute myself.

Speaker 2

Yes. Join the club. I say it daily.

Speaker 5

Slow, slow learner. Sorry about that. So Drew, can I just start with you with a quick one? You talked about the cash rate that you expected in the second quarter, is that a reasonable rate as the year sort of for the rest The year as well or is there any sort of inflection there that we should know about?

Speaker 4

Yes. So for me, it's really kind of 2 things.

Speaker 3

The I think the rate that The $5,000,000 a

Speaker 4

month, which we talk about here, which ends up being $15,000,000 for the quarter includes these $2,000,000 other adjustments that I mentioned in my prepared remarks. So we honestly think that

Speaker 3

if you're looking at it

Speaker 4

in 2 layers, there's this kind of exceptional charge $2,000,000 that has to be paid out this Quarter in Q3 or Q4. But if you take that out, that is probably an acceptable run rate for the rest of the year. So it ends up

Speaker 5

Okay. Good. Can you just say that again because I Stepped on here, I think.

Speaker 4

You take that $2,000,000 is up being about $666,000 a month. So if you take that out, it brings the run rate down to about 4.3

Speaker 5

Super. That's what I thought. Cool. And then I don't know maybe a Kiva question, but obviously you have customers sort of Funding the development here, is there anything more you can tell us about what it is you're spending your time developing, which types of applications We should expect to be kind of first out of the gate here?

Speaker 2

Yes. Great question. I think for us this quarter has been super exciting, in part because getting our products in the field and getting customers utilizing, this is the first time we can say Available for sale and here you go. So, the fact that we've been able to really hit the segments that we're super focused on, If you remember, this last year has been all about really figuring out where can we scale the fastest. We Are doubling down on the aviation side of the house, that's work at height, that from a de icing to cleaning, Think of anything where you've got a person in the basket or you're doing something at height.

Speaker 2

So that's an area, Again, doubling down on aviation, underwater. So we were just at the OTC events, which is the Ocean Technology event in Texas. And again, Those are all use cases where currently you have a dive team that goes down and performs a task. Now you don't have to put a diver in dangerous spaces and places. Our product can perform that task now.

Speaker 2

So I'd say those are the areas where aviation, underwater And then on the construction side, it's work at height. So we're definitely focused there. And then on construction, solar construction, we executed the demos. So those were taking that foundational technology and then we're really creating these solutions to solve these very critical pain points in each of those segments.

Speaker 5

And is it should we expect those applications to be sort of remotely operated at first? Or are you working on sort of fully automated solutions already?

Speaker 2

We call it semi autonomy. So again, You've got a human in the loop the first go around, it can train the robot and then it can perform in some cases, it can perform that In a semi autonomous way. So you say, hey, I need you to clean this side of an airplane. It says From point A to the human says from point A to point B and then the robot actually performs the tasks afterwards. So, if you remember, Last time we had a conversation around use cases and where we're getting a lot of that pull is the fact that we can perform in a semi autonomous way And actually take the human as the trainer, but then they could be managing a suite of robots based off of The labor shortage that almost every industry we're talking to is seeing.

Speaker 5

Super. Okay. Appreciate it. I'll pass it on. Thank you.

Speaker 2

You bet. Thanks for joining.

Operator

Thank you very much. Our next please wait for our next call. Our next question comes from the line of Guy Hardwick at Credit Suisse Securities Research. Guy, your line is open.

Speaker 6

Hi, good afternoon.

Speaker 4

Thanks for joining us.

Speaker 2

Yes. Thank you for joining us.

Speaker 6

So So it looks like your Q2 guidance includes 400,000 of product sales. I guess that's anywhere between 13 robotic systems. So can you tell If that's the case, which products and who's the customer?

Speaker 4

Yes. So we can't go into the details of the customer. The use case now that we're producing units that are available for sale in our factories, there are people who are Kind of anxiously waiting in line to get them so that they can start evaluating these units and providing them with the potential customers getting initial units. So some cases, they're evaluating robots for additional clients where they'd like to use robot To support existing employees or fill a void created by worker shortages or in other instances, there's scenario where we've talked about and they're really just testing it For its various strengths to make sure it's meeting the requirements, which we previously discussed with them. So we're buying it's just kind of buying that initial unit.

Speaker 4

And as we go out here in the second half of the year, we're looking for robust sales to expand. In this particular instance, It's just one unit. So it's full system. So it's not just again, just want to remind you, we're selling And with the arms and the old software and everything related to it, and it's an initial sale to a team that's testing out the unit. I believe they're playing Is this Nick Sam?

Speaker 4

Is this

Speaker 5

Nick Sam with XT?

Speaker 4

Adam, Kim, do you want to disclose out a little detail?

Speaker 3

It's your call.

Speaker 2

Yes. No, we're not disclosing a level of detail at this Our focus now is as we've transitioned from really R and D to having product sales, the revenue number to your point, I know you have to update your modeling, It's really going to speak to where we're getting traction. So in this specific area, it's It's likely to be in one of the use cases that I just outlined and highlighted.

Speaker 6

Okay. And do you have an order book, which is Going to be materialized over the second half or not yet?

Speaker 4

We have seen an order book that's been materializing as a result of the OTC Conferences as well as ConExpo in addition to the orders that we'd already been in discussions with the customers previously. So There is an order book for me. It's very exciting for us right now.

Speaker 6

And these are contracted orders with a purchase order?

Speaker 4

Sorry, it's more pipeline right now. They should convert as we get these units available. As you go from this transition where you've never manufactured anything before, it's People want to buy those first units and just test them out and make sure that the durability and everything else is there and the software works and it meets Specific needs, and then they'll move to that larger order. So really getting these first orders in place is the first step. And then as we get bigger deals done, we'll We're excited to announce them for sure.

Speaker 6

Just a final one for me. On the inventory stepped up by $2,500,000 $3,000,000 sequentially. Is that finished product or is it

Speaker 4

It's a combination of raw materials and finished products. So we do have both in place now.

Speaker 6

I think you said in previous quarter, you had 10 XMs in inventory. Have you built any additional inventory of units?

Speaker 4

So in Q2 sorry, Q1 here, we were focused on just there's a completion. So the arms were the first big step for us in XMs And then also building these first preproduction units for XT were also being produced in Q1. And then so the full systems for XMs are The XTs are moving to a stage where they're in evaluation. And as it is, I think we also talked previously, the C Class units Have also started into a preproduction stage where we're building them out and testing them, making sure that we have all

Speaker 3

the steps in place so

Speaker 4

that we can move to more of a

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Rob Mason at Baird. Rob, your line is open.

Speaker 7

Yes, good afternoon. Maybe just to follow-up on the last topic there around your inventory. Do you have the raw material I'm just curious how your supply chain has been trending for you around components. Do you have the raw material components in inventory today to be able to support product sales That your forecast for 2023 or in the back half of the year or is there still components that you need to acquire?

Speaker 2

Yes. As we communicated in earlier calls, Lisa Johnson, who is the VP of Supply Chain for Sarcos, Has done a tremendous job securing and making sure that we've got the components to be able to meet the build schedule. So Yes. As you know, we have communicated around a $3,000,000,000 prepurchase throughout last year to ensure that we had the key components in hand to be able to meet our orders.

Speaker 4

Great.

Speaker 7

To reference your press release that you issued during the quarter around the video ray agreement, Could you just give a little background there working with VideoRay? My impression was there might There have been some work there in the past, maybe with RE2. So to the extent you're starting off starting to sell those units, Yes. How readily can they be integrated into VideoRay's product? And there was also reference to Navy contract of video ray had won, I guess, or hadn't been awarded.

Speaker 7

Just what's the relationship with that Navy contract and Sarkos' current, but I guess current status or potential there?

Speaker 2

Yes, great, great, great question. So you are 100% correct. Our and team has been working with Videoray on the my neutralization work For many, many years, really tight relationship. I had the pleasure actually to see it in action here In San Diego, about a month and a month and a half ago and talk firsthand with the folks leveraging the defenders. We're excited about the VideoRay partnership in part because they are the best of the best, the best vehicle out there.

Speaker 2

They have a very strong relationship and contract With the Navy and we're basically, in a very short period of time, you can retrofit the current installed base and all new units with the Sarco's technology. And that also includes the ability to do things in a semi autonomous way. So grabbing A piece of equipment, off the ROV so that you can cut something. All of those things now, because it's hard to navigate underwater, We've really been partnering with them to make those semi autonomous as well to make that an easier task for the people that are above water. And we strongly believe in the undersea space.

Speaker 2

It's a large target market. We've also seen good momentum on the commercial side outside of the Navy. Again, this is where you currently today, there's a lot of tasks, whether that's inspection, whether that's line maintenance for People are getting in the water and now they don't have to. So but the partnership, we're just building on that and we're excited. OTC went Really well for us last week, and it was nice to see the first splash of the product as well And it working the team is a really tight team too.

Speaker 2

So it's fun to celebrate with them. But Vire is a good partner. We're looking forward to a lot of growth with them.

Speaker 4

And so Rob, if I could just add to that and add on,

Speaker 6

nature of the relationship is such that it can we can be selling they can be selling our

Speaker 4

They can be selling our system. They can so that the arms can be added to existing systems that are in the field. And they could take it on the if they have a customer that comes to them and wants to do that, they could do that sale. Or alternatively, we can also be reaching out to their existing Customers and selling to them to sell our arms so that they can be cash through existing systems or if we individually identify somebody who wants a whole system both the ROV and our arms. We're trying to structure it so that it's kind of a one stop shop for the customers.

Speaker 4

On either side, we could sell the whole solution, even though our real focus is just selling the technology we've developed and That will make it available to you. So it's a really nicely structured relationship, but it's good relationship there It looks like we'll be selling both sides.

Speaker 7

Understood. Thank you, Drew.

Speaker 3

Thank you

Operator

very much. At this time, I would like to turn the call back to Kiva Allgood for closing remarks.

Speaker 2

Well, thank you. Great questions. Really appreciate you guys joining us Today, we're super excited and optimistic about where the company is headed, especially as we gain market momentum and customer feedback. We're on track to achieve our targets for the year as we push onward towards commercialization. So thank you for joining us.

Speaker 2

Keep the questions coming and have a great evening.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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