Palladyne AI Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 6 speakers on the call.

Operator

Day, and thank you for standing by. Welcome to the Q2 2023 Sarkos Technology and Robotics Corporation Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Moriah Shilton.

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome to the Sarcos Technology and Robotics Corporation's Q2 2023 earnings call. Joining us on the call this afternoon are Sarcos Interim 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 Q2 and recent events. And Dhruv 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 future revenues, costs and cost trends, cash usage, restructuring charges and liquidity. 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 on 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 10 Q and in our other filings with the SEC for further information regarding these actual and potential risks and uncertainties. We also encourage you to review the special notes regarding forward looking statements included in our earnings release and 10 Q for the Q2 2023 filed with the SEC this afternoon and which will be posted in the Investors section of our website at sarcos.com and on the SEC's website.

Speaker 1

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 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 available on our website until September 9, 2023. The information that we're giving on the call is as of today's date, We undertake no obligation to update the information subsequently except as may be required by law.

Speaker 1

At this point, I'd like to turn the call over to Laura Peterson, Interim President and CEO of Sarco. Laura?

Speaker 2

Thank you, Mariah, and good afternoon to all of you joining us on today's call. I am pleased to be participating on my first call as Interim CEO of Sarkos. I am honored to serve the company during this transitional period from being primarily an R and D organization to manufacturing and commercialization. As a member of the Board of Directors, Since Sarkos became a public company, I've had the opportunity to gain insight into the business. I have spent the past few months applying that knowledge along with my breadth of experience to analyze and evaluate the business, which in turn has led to decisions about the direction of the company.

Speaker 2

We have realigned our business and refined our sales strategy to focus on products that show the most potential for near term revenue growth and on strategic opportunities that show the greatest market traction and meet an acute customer need through tailored solutions. As a result of our actions, we have substantially lowered our cash usage through a 25% workforce reduction and by significantly lowering our discretionary expenses. Ultimately, we expect this to result in an average cash usage rate of $3,000,000 per month in the Q1 of 2024, down from $6,500,000 in the Q2 of 2023. Now that we have taken these important steps, We are focused on continued optimization of our operations and execution of solutions delivery for our customers. We are narrowing our focus to robotics solutions for the subsea, aviation and solar end markets, in addition to commercializing our AI software platform through a new software These four businesses are where we see the most immediate customer demand and strategic opportunity.

Speaker 2

Further, The energy and aviation industries are experiencing significant macroeconomic forces creating opportunities in those markets. I'd like to take a look at each of these four areas, beginning with subsea, which is the end market for our C Class robotics solution. Currently, there was a deficit in shipbuilding repair that threatens global security and supply chains. Our solution is a fully integrated C Class With a video ray remote operated vehicle, which offers one of the most advanced underwater inspection capabilities on the market today. The next end market we're focused on is aviation.

Speaker 2

High passenger and cargo volumes coupled with labor shortages are putting pressure on the aviation industry. Since the Aviation and Robotics Summit in Pittsburgh in April, there has been a steady pipeline of activity, which is a validation of the potential of this market. We are in discussions with airports and major air carriers for our solutions to labor challenges in baggage handling and exterior aircraft maintenance. Additional field trials are planned this year and early next year in anticipation of commercial production expected to begin in late 2024. Turning to the solar end market, as we have previously pointed out, solar installations will need to increase 50% over the next 7 years to meet climate targets, which would require more than 800,000 new workers to meet this goal.

Speaker 2

Robotics hold the promise of increasing worker productivity to mitigate labor pressures in this market, while simultaneously improving safety on the job. We completed field trials with 2 of the largest engineering procurement companies. The trials validated the capabilities of our solution and were used to gain valuable input from subject matter experts to optimize the efficiency and workflow of solar panel installation. We are proud to say we exceeded milestone requirements in both trials. We are collaborating with Blattner Company, an industry leading provider and installer of renewable energy to focus on the developments and refinement of our autonomous mobile robotic system designed to optimize worker safety and improve the efficiency of solar panel installation and utility scale projects.

Speaker 2

Working with Blattner, we intend to test the system through varying environmental conditions across different sites in preparation for commercial launch of the system currently estimated for late 2024. Our 4th area of focus is our new advanced technology software division, which will drive revenue from AI software solutions. The division's goal is to progress the development and production of our artificial intelligence and machine learning software platform for generalizable autonomy. The AI and ML software platform will be designed to be usable across a variety of autonomous systems, including factory robots and drones. We are collaborating with industry partners and leveraging their knowledge and expertise of market specific needs to address those challenges.

Speaker 2

Our work is bolstered by multiple multimillion dollar multi year Department of Defense contracts. Just a few weeks ago, we announced the award of an expanded contract with the Air Force Research Laboratory for continued development of AI driven methods and techniques to control autonomous vehicles. The methods we are developing We'll harness the power of disparate sensor data to enable accurate autonomous operations in dynamic unstructured environments. We anticipate commercial opportunities for our AI software solutions in addition to more government funding for this type of technology in the future. Our AI technology builds on years of work developing AI autonomy software And the beauty of our solution is that we are designing it to be hardware agnostic, meaning it is relevant not only across our robotic systems, but also those manufactured by others.

Speaker 2

This opens up a tremendous market opportunity with a strong recurring SaaS revenue model. In closing, I know many of you have asked if I'm a candidate to become the permanent I am not. I was brought in to evaluate the business and make some tough decisions to move the company forward toward commercialization of our products. Coming from the aerospace industry, I understand the possibilities that our solutions enable and the challenges of working in a continually evolving strategic landscape. These past months have involved intensive data driven analysis with the team in weighing our most compelling opportunities and leveraging the knowledge and the foundational technology built over many years.

Speaker 2

I have told the Board that I will serve in this role until we are firmly on the right path. I am encouraged by the progress we've made in a short time and we will continue to focus on execution and taking our solutions to commercialization. I'll now turn the call over to Drew to report on the financials.

Speaker 3

Thank you, Laura. To everyone on the line, it is a pleasure to be here today speaking with you. Please note And our results for last year include the financial performance of RE2 from the close of the transaction on April 25, 2022. Now turning to the financial results. All comparisons I will use are year over year.

Speaker 3

For the Q2 of 2023, revenue was $1,300,000 compared to $3,000,000 during the Q2 of 2022. The lower revenue in Q2 was due to various factors including customer budget constraints, the impact of macroeconomic factors on potential customers and customers' requests for additional features beyond the general purpose products we had available for sale. With the exception of the C Class system, Our potential customers have indicated a near term need for solutions tailored to address their specific pain points and use cases. Also impacting Q2, one customer's budget for product sale that we were expecting was pushed out into next year. Cost of revenue decreased to $900,000 in Q2 2023 as compared to $3,100,000 in Q2 2022, mainly due to decreased labor and material expenses charged to product development contracts.

Speaker 3

2nd quarter 2023 total operating expenses, Including cost of revenues were $31,200,000 a slight decrease from the Q2 2022 operating expenses of $32,000,000 I'll now discuss the operating expenses in more detail. In connection with the July 12 announced reduction in workforce, we incurred charges of $5,100,000 in the 2nd quarter, including $4,400,000 due to the write down of inventory and $700,000 related to the impairment of certain fixed assets. Research and development expenses increased by $4,100,000 to $11,700,000 in the 2nd 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.

Speaker 3

General and administrative expenses were down $9,900,000 to $8,300,000 in the 2nd quarter, primarily due to decreased stock based compensation expense. Sales and marketing expenses were $4,400,000 an increase of $1,800,000 compared to the Q2 of 2022 due to increased costs from a 3rd party data management platform and increased promotional event expenses. 2nd quarter 2023 net loss was $28,700,000 or a loss of $1.12 per share, compared to a net loss of $23,100,000 or a loss of $0.95 per share in the Q2 of the prior year. 2nd quarter non GAAP net loss was $21,900,000 or non GAAP loss of $0.86 per share, compared to a non GAAP loss of $17,500,000 or non GAAP loss of $0.72 per share in 2022. Please note, on July 5, we effected 1 for 6 reverse stock split of the company's outstanding shares of common stock.

Speaker 3

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 $75,100,000 in unrestricted cash, cash equivalents and marketable securities. I am now going to turn to our financial guidance. For the Q3 headcount of approximately $6,000,000 net, which includes approximately $1,500,000 in cash severance and benefit payments. Balance is primarily non cash items.

Speaker 3

The restructuring is expected to reduce personnel related cash usage by approximately 14 $600,000 annually beginning in 2024. Reflecting the narrowing of our robotics solutions focus, Quarterly research and development expenses are expected to decrease by approximately 1 third in the Q3 when compared to the Q2 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 until being approximately 50% of the Q2 of 2023 in the Q1 of 2024. Our refined sales strategy is expected to result in sales and marketing decreasing by approximately 50% in the Q3 of 2023 and remaining that way for the rest of the year. We estimate cash usage will be approximately $5,500,000 per month in the Q3.

Speaker 3

As of June 30, 2023, we had an unconditional purchase commitment of $2,000,000 related to operational expenses. We paid the full amount in July. Looking at our balance sheet, we are significantly reducing our cash usage to provide us the runway to continue developing our products and capitalize on anticipated demand. We intend to manage our average monthly Cash usage to approximately $3,000,000 in 2024. We believe we have sufficient liquidity to operate in 2025 without additional financing.

Speaker 3

Before I close, I wanted to touch upon our manufacturing services agreement with Jabil. We continue to work with Jabil and expect to maintain our relationship with them in anticipation of future needs. In the near term, we believe the capacity of our Salt Lake City facility is adequate to deliver the products our customers will need. Now, I'd like to turn the call over to the operator. Would you kindly repeat the instructions to ask a question?

Operator

Absolutely, thank you. We will now conduct the question and answer session. Please standby while we compile the Q and A roster. Our first question comes from Rob Mason of Baird.

Speaker 4

Yes. Good afternoon. Hi, Laura. Hi, Drew. Hi, Rob.

Speaker 4

I guess my question is, I know you retracted your calendar 23 guidance and you gave the Q3. So, I guess my question is, is there any expectation that you would ship commercialized product This year or in the Q4?

Speaker 3

So there are a couple of things there. First of all, we do have Right now, we're focusing on the markets that we believe have the most potential for near term revenue growth and strategic opportunities that are showing us the greatest Market traction and meet an acute customer needs. So we do have a product that's in the market now that we're offering for sale. We expect that that will ramp for deliveries over the second half of this year. However, the other products which are solution based for specific needs, We expect those to launch more in late 2024.

Speaker 3

So there is going to be some sales of products here in the second half, but not at the level that we previously Anticipated because we're just narrowing the focus.

Speaker 4

And just to be clear, Drew, what product is that that you're referencing is in the market will ramp?

Speaker 3

Yes. We're anticipating we'll see some C class opportunities here in the second half of the year.

Speaker 4

And then a question around the just the thought process in the inventory write down. Is that a timing, kind of accounting timing definition that triggered that? Or Are you redesigning the product such that the components that you have not applicable going forward?

Speaker 3

Yes. So I think originally based on our prior customer interest and feedback, we plan to offer I think of them as kind of Swiss Army knife products that could take on multiple jobs. And after additional collaboration and analysis of the customers' needs, We've determined that the near term adoption is really customers prefer the specialized solutions that require these incremental development to provide greater value And higher ROI for their operations. The impact of that is this narrowing of our focus to These other opportunities, so as a result, effectively, we have an inventory that it's advisable under accounting literature. We should be Writing off the balance sheet until we're ready to really move products into the market.

Speaker 3

So right now, we're focused on the More immediate market opportunities that are and giving our customers the specialized tools that they need versus the Swiss Army and ICE products that we had anticipated building a lot

Speaker 4

I see. And just last question, I'll hop back in the queue. But around your Expectations for cash burn rate, you mentioned a $2,000,000 expense that was paid in July. Should I View that as a one time cash item and that's baked into your monthly burn rate for the Q3 that wouldn't repeat or does that continue?

Speaker 3

That's accurate. It was included in the $5,500,000 as were charges associated with the Reorganization of the company. So it's all in. Everything is in that 5.5 Very good. And then as we go through the rest of the year, we're expecting the cash usage will ramp down even further in Q4.

Speaker 3

And then we'll get to that $3,000,000 in Q1, Which approximately could be up or down, but we're going to be pretty focused on maintaining and managing the business to that 3,000,000 Yes, depending upon what happens with the business. So great opportunities present themselves. We may have to change our direction. But right now, the focus for 2024 is to Stay in a pocket that's averaging $3,000,000 of cash usage a month.

Speaker 4

Understood. Thank you.

Operator

Thank you. We'll move for our next question. Our next question comes from Chirag Patel of Jefferies.

Speaker 5

Thanks for taking the question. Just wanted to kind of hit a little bit on the existing order book, if there is one. Just what you can kind of give us from a framework for what we have currently out there, what we can see and actually touch and put out there in the market And any sort of visibility that we have into each of these 3 focus markets that we have? Are there orders out there? Are there customers that already have the Product, just a little bit more to get us a little comfortable about the trajectory that we can map out here at some point.

Speaker 3

Yes, great question. Very fair question. So let's just start with C Class. I will follow-up on the comment I just shared with Rob. We are in final stages of negotiations with potential Subsea customers.

Speaker 3

So there are very real opportunities there for us to have these So, units here in the second half of the year. When we look at The aviation space, where we have a lot of activity there. We've already announced to you about what we're doing with Changi. There's been press releases released on that. And the work is continuing as well as additional discussions around expanding on that work with them.

Speaker 3

So we do have these contracts that are I think in Laura's prepared remarks, when you get a chance to review those, she commented how we had Effectively a trade show out here in Pittsburgh, I'm happy to be in Pittsburgh today, sorry. And we have an enormous pipeline of discussions going on with A broad audience of both airports and airlines about the various products that we had demonstrated to them as part of that trade Just off the cuff, I mean, one of the interesting comments was from one of them was why didn't we know that you had this? This is a really important event for us. So aviation is a really important space. And we have other activities going on with other airlines around other technologies that we'll share with you as those become a little more mature.

Speaker 3

But there's very active conversations around other use cases for our products in the aviation space. When I move over to the solar space, we're really happy that we're able to announce the Blattner deal and shared that with everybody A couple of weeks ago, the Blattner is just a good example. We've previously talked about how we had investments from or not investments, but had kind of well, I think of it as product development contract revenue contracts that we've done with DOE previously to get this product closer to market. We have a number of conversations going on that should lead to contract opportunities with the other ECG. So that is very, very busy with us right now.

Speaker 3

It's an interesting space because if one gets it now that they know the flattener is working on it, The pipeline opened up for us there even more broadly because everybody else wants to have one. So there is some great activity there, which It's the reason why we selected that opportunity as well as well as the advanced stage of where our technologies and products are in each of those spaces. And lastly, in AI and ML, the software platform, There are 2 things here that are really important for us. First of all, the old robot as a service model had the company investing in a platform that would allow it to deliver effectively a SaaS style business where we would be monitoring the computers and understanding what's going on with each of them while they were Being used by a customer, now that customers are interested in buying perpetual model or paying a perpetual license for the purchase of the robots, We have been able to stand up that system and make it so that it can be used more broadly in more of a SaaS Term license kind of a model, so that we can get that up and running.

Speaker 3

The impact of that is the work that is being contracted with the government, which we announced 2 weeks ago, will be part of that platform. And it will be something that it will be designed so that it could be Generalizably available to other customers, and it will also be designed so that it's agnostic to the computer. It won't just be Sarcos to robots that can use it. There'll be other computers as well as other devices. So it could be an HOV or it could be all kinds of not HOV, I'm sorry, the UAV and other technologies like that, that will be connecting into the system.

Speaker 3

So The various opportunities that are presenting themselves are behind each of the decisions that were made around the four areas of focus that we're focused on right now. And it is interesting, I will share that we're very confident around the announcement of the AI deal. We believe there will be other contracts going to come from the government related to the work we're doing there, and we're looking forward to sharing those when those opportunities are something we can share with you. So really long answer, Chirag, but I'm hoping it captured a bunch of it and certainly looking for follow ups if there are any.

Speaker 5

No, that's definitely super helpful. And it's great to be able Kind of highlight again, the various contracts that you have, Cohen, and various conversations that have been happening, I think it Just highlights the opportunity longer term that we're kind of looking at. The one other thing I had just on my list here was With the move from Pittsburgh to Salt Lake, any changes to the potential capacity? Are we still looking at the idea that depending on the type of unit and whatnot, there's still the ability to have 300 to 500 units of being manufactured at once things kind of fully ramp here?

Speaker 3

Yes. So we actually are very confident in the capacity that we'll have Out of our Salt Lake City facility, with the narrower product focus, we really believe that we'll be comfortable meeting the demands of the customers. If we get to look if We happen to get a larger contract. We still have our relationship with Jabil, and we can kind of scale that up, as appropriate To meet the customers' demands if they're beyond what we have in our factory. So we do believe that we have the manufacturing Capacity to cover all the demands of customers going forward.

Speaker 5

I appreciate that. Thank you. Okay.

Operator

All right. Thank you for your questions. We'll give it one moment. Turn the conference back to Laura Peterson for closing remarks.

Speaker 2

Thank you, Stephen. Before we go, I want to reemphasize that we have Taken important steps to realign our cost structure, refine our business plan and reduce our cash usage. I am confident in our ability to execute as we work toward commercialization and revenue realization. Thank you for joining us and have a great evening.

Speaker 4

Thank you very much.

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