Sarcos Technology and Robotics Corporation (NASDAQ:STRC) Q3 2023 Earnings Call Transcript

Sarcos Technology and Robotics Corporation (NASDAQ:STRC) Q3 2023 Earnings Call Transcript November 14, 2023

Sarcos Technology and Robotics Corporation misses on earnings expectations. Reported EPS is $-0.66 EPS, expectations were $-0.59.

Operator: Good day, and thank you for standing by. Welcome to the Q3 2023 Sarcos Technology and Robotics Corporation Earnings 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. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Julie Kegley, with Financial Profiles, for Sarcos. Please go ahead.

Julie Kegley: Thank you, operator. Good afternoon, everyone, and welcome to the Sarcos 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, product usage, features, capabilities and value propositions; target markets and market trends, size and expectations, strategic direction, company facilities, customer demand and future financial results, conditions and cash flows, including future costs and cost trends, cash usage, restructuring charges and liquidity.

These statements represent management’s beliefs and expectations as to the 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 sarcos.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 14, 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 Sarcos. Laura?

Laura Peterson: 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 Sarcos, a 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. As 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 and 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 our rigorous data-driven review of our products and 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 midterm market need and customer value proposition for the capabilities our software platform will provide. Our AI/ML software platform is being developed to greatly reduce the time to program and train robotic 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 in 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 robots being 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, determine reasonable behavior in unforeseen situations and quickly apply them to the task at hand. Each newly learned task will then be incorporated and used to perform future tasks. 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 the 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 headcount. 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 facility as well. We are confident about the future of our advanced software and technology focus, and see tremendous potential for a 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 systems.

We can provide customers with the solutions they need through the intellectual capital that Sarcos brings to the table, but without requiring significant investment in hardware development and production. One of the reasons I am confident 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 robotics systems. We progressed to our first CYTAR government proposal, which stands for Cybernetic Training for Autonomous Robots in 2019. We began significant development work in 2020 when we hired Dr. Denis Garagic, 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, Denis is an internationally recognized leader who has written more than 40 academic papers and holds several patents in applied controls for autonomous robotics and machine learning.

With years of Department of Defense-funded AI software development programs under our belt as well as ongoing DoD-funded contracts and one of the foremost authorities in the field leading our technology vision, we are well positioned to excel in redefining the use of software in the programming, 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 advance 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, determine reasonable behavior in unforeseen situations, and quickly change 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 gap. 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 Sarcos’s own 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 Ben 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, improve 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 Sarcos. AI and ML aren’t shining 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.

Drew Hamer: 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 are 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, offset slightly by an increase in product revenue related to the sale of two Guardian Sea 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 to product development contracts during the quarter.

Third quarter 2023 total operating expenses, including cost of revenues, were $32.6 million, an increase from the third quarter 2022 operating expenses of $31.9 million. I’ll 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 $0.5 million 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 $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 in 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 $0.89 per share in the third quarter of the prior year. Third quarter non-GAAP net loss was $17 million or a non-GAAP loss of $0.66 per share compared to a non-GAAP net loss of $18.6 million or non-GAAP loss of $0.74 per share in 2022.

Please note, on July 5th we effected a 1-for-6 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. I am 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, or 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 16, 2024. This will leave approximately 65 employees in the Company, which we currently expect will be the approximate headcount 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 of 2024. These expenses include approximately $4 million in personnel expenses, such as salaries, wages, benefits and severance related to the eliminated headcount.

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, I will 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 of 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 that is more efficient in 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?

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Q&A Session

Operator: [Operator Instructions] And our first question comes from Rob Mason with Baird. Your line is open.

Rob Mason: Yes. Good afternoon. Hi Laura. Hi Drew. I wanted to touch real quick just around your projected cash burn rate for next year, averaging $1.6 million a month. Do you expect much volatility around that embedded in that estimate?

Drew Hamer: No. The only volatility I’d 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 starts to materialize, they might bring that use down.

Rob Mason: Okay. So the presumption would be once we get past mid-January, say, you should roughly be at that level?

Drew Hamer: That’s right. With all the alignments of the teams, we get down to the 65 people that we are talking about in the press release, that’s right.

Rob Mason: Sure. Okay. Could you just elaborate a little bit on this effort? You’re pivoting to the software model, but your channels to market, how you plan to — once it’s 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 channels to market?

Drew Hamer: The expectation is you as launch the new service that it will primarily be the direct model. We have 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 at least for the early days of selling the solution. And then, as we move forward, then we’ll consider other channels as they present themselves.

Rob Mason: Just as a follow-up on that. Should I envision — as you take this out to existing robotics players, are we mainly talking about traditional robotics? Are these collaborative robotics? Is there a bias one way or another where you think you can find value easier to be realized early on?

Drew Hamer: So, the beauty of the software as it’s been developed is that it allows people to train their arms. As we mentioned, we’ve done it in the lab in a couple of minutes, whereas now it could take potentially weeks or more to train a line and bring it up. And that is just the initial product that would be available. Then the real solutions, Rob, it’s complicated, but the real solutions will allow these systems to train themselves. Sorry, give me one second. I’d like to give you some of the technical words. The platform enables — the robots learn how to work around unforeseen changes or obstacles by building on their initial programming, and the robots incorporate internal and external inputs that allow them to understand their environment, determine reasonable behavior in unforeseen situations and quickly apply them to a task at hand.

And then each newly learned task that the robot has trained itself to do will then be incorporated and used to perform future tasks. And then, it goes to even more sophisticated environment, and then does it in a closed-loop autonomy approach so that the software will help reduce costly workflow stoppages and prevent unnecessary downtimes 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, with the vision to use these technologies to greatly enhance capabilities in the robotic systems we were developing. And I think as you’re aware, if you look back kind of at our history, we progressed at this stage with our first CYTAR government proposal in 2019.

And then we were fortunate enough to have Denis join the company in 2020. He’s 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 AI/ML efforts. And then so, with his more than 40 years of experience and everything, we’re in a very good position to capitalize on this opportunity.

Rob Mason: Just around — maybe last question, and I’ll hop back in the queue. But just around the business model itself. How should we get comfortable on the ability to scale this relative to what is a price point? I guess, it will be sold on a per seat basis per arm basis subscription. But just is there any detail you can provide there?

Drew Hamer: Yes. So, there are a couple of things that will enable scaling of the solution. The first — the very simplest access point for one of our customers will be the ability to do it on a per arm basis. So, they want to be able to train their arm in a few minutes, whereas right now, it could take them weeks or months or longer. And — so they’ll buy it on a per arm basis. And then there’s all kinds of other modules in the system that they’ll be able to utilize to take on the various tasks that I was just describing a moment ago. And those will be incremental upsells and cross-sells that 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 and start getting more sophisticated. We’re going to talk about internal and external sources. It could be the camera that’s on — around the various arm or part of it or it could be external cameras that are not even connected to the arm part of it. So the sophistication of the product and its interpretation of the information is being generated, will then be used by the robot and software to modify the behaviors of the robot for the various needs that customers have designed it for. So, it will be SaaS. There’ll be term licenses. There will be a number of different modules that customers can buy into based upon their various needs and 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.

Operator: [Operator Instructions] And this concludes today’s question-and-answer session. I would now like to turn the conference back to Laura Peterson for closing remarks.

Laura Peterson: Thank you. We are confident about the decision to focus on our AI/ML software and excited to build on the strong foundation that we’ve laid over many years, as we shared at our earnings call today. Thank you for joining us, and have a great evening.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.