Palladyne AI Corp. 10-K

Item 8. Financial Statements and Supplementary Da ta. Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB: 42 ) 65 Consolidated Balance Sheets 66 Consolidated Statements of Operations and Comprehensive Loss 67 Consolidated Statements of Cash Flows 68 Consolidated Statements of Stockholders’ Equity 69 Notes to Consolidated Financial Statements 70 64 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Sarcos Corp. and Subsidiaries Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Sarcos Technology and Robotics Corp. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021 in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2020. Salt Lake City, Utah March 29, 2022 65 SARCOS TECHNOLOGY AND ROBOTICS CORPORATION CONSOLIDATED BALANCE SHEETS ( in thousands, except share data ) As of December 31, 2021 December 31, 2020 (Notes 1 & 5) Assets Current assets: Cash and cash equivalents $ 217,114 $ 33,664 Accounts receivable 788 1,051 Unbilled receivables 221 219 Inventories, net 1,006 707 Prepaid expenses and other current assets 9,202 693 Total current assets 228,331 36,334 Property and equipment, net 7,051 1,425 Other non-current assets 441 292 Total assets $ 235,823 $ 38,051 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 1,681 $ 972 Accrued liabilities 4,480 1,255 Notes payable, current — 1,328 Total current liabilities 6,161 3,555 Notes payable, net of current — 1,066 Warrant liabilities 13,701 — Other non-current liabilities 1,999 526 Total liabilities 21,861 5,147 Commitments and contingencies (Note 11) Stockholders’ equity: Common stock, $ 0.0001 par value, 990,000,000 and 133,312,415 shares authorized as of December 31, 2021, and December 31, 2020; 137,722,658 and 104,039,354 shares issued and outstanding as of December 31, 2021, and December 31, 2020, respectively 14 10 Additional paid-in capital 359,439 96,880 Accumulated deficit ( 145,491 ) ( 63,983 ) Total Sarcos Technology and Robotics Corporation stockholders’ equity 213,962 32,907 Noncontrolling interests — ( 3 ) Total stockholders’ equity 213,962 32,904 Total liabilities and stockholders’ equity $ 235,823 $ 38,051 See accompanying notes to the consolidated financial statements. 66 SARCOS TECHNOLOGY AND ROBOTICS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS ( in thousands, except share and per share data )   Year Ended December 31, ​ ​ 2021 2020 Revenue, net ​ $ 5,075 $ 8,813 Operating expenses:​ ​ Cost of revenue  3,867 5,602 Research and development ​ 17,516 14,117 General and administrative ​ 58,059 7,297 Sales and marketing ​ 6,624 2,796 Total operating expenses ​ 86,066 29,812 Loss from operations  ( 80,991 ) ( 20,999 ) Interest (expense) income, net  ( 34 ) 40 Loss on warrant liability ( 4,927 ) — Gain on forgiveness of notes payable  4,394 — Other income, net  51 34 Loss before provision for income taxes  ( 81,507 ) ( 20,925 ) Provision for income taxes  ( 1 ) ( 1 ) Net loss and comprehensive loss ​ ( 81,508 ) ( 20,926 ) Net loss attributable to common stockholders  $ ( 81,508 ) $ ( 20,926 ) Net loss per share attributable to common stockholders: ​ Basic and diluted ​ $ ( 0.72 ) $ ( 0.21 ) Weighted-average shares used in computing net loss per share attributable to common stockholders ​ Basic and diluted ​ 113,184,357 100,114,664 ​ See accompanying notes to the consolidated financial statements. 67 SARCOS TECHNOLOGY AND ROBOTICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2021 2020 Cash flows from operating activities: Net loss $ ( 81,508 ) $ ( 20,926 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 43,118 2,291 Depreciation 531 458 Change in fair value of warrant liability 4,927 — Gain on forgiveness of notes payable ( 4,394 ) — Changes in operating assets and liabilities Accounts receivable 263 ( 135 ) Unbilled receivable ( 2 ) 649 Inventories ( 299 ) 441 Prepaid expenses and other current assets ( 8,082 ) ( 144 ) Other non-current assets ( 148 ) ( 163 ) Accounts payable 244 ( 320 ) Accrued liabilities 2,646 592 Deferred revenue ( 27 ) ( 143 ) Deferred rent 1,004 — Other non-current liabilities ( 376 ) 518 Net cash used in operating activities ( 42,103 ) ( 16,882 ) Cash flows from investing activities: Purchases of property and equipment ( 4,688 ) ( 950 ) Net cash used in investing activities ( 4,688 ) ( 950 ) Cash flows from financing activities: Proceeds from issuance of common stock and warrants — 39,867 Proceeds from notes payable 2,000 2,394 Proceeds from exercise of stock options 26 124 Acquisition of common stock for tax withholding obligations ( 284 ) — Purchase of non-controlling interest ( 200 ) — Payment of obligations under capital leases ( 89 ) ( 84 ) Proceeds from PIPE 220,000 — Proceeds from Merger 25,359 — Payments for transaction costs ( 16,571 ) — Net cash provided by financing activities 230,241 42,301 Net increase in cash, cash equivalents 183,450 24,469 Cash, cash equivalents at beginning of period 33,664 9,195 Cash, cash equivalents at end of period $ 217,114 $ 33,664 Supplemental disclosure of cash flow information: Cash paid for interest $ 11 $ 1 Cash paid for income taxes $ 2 $ 1 Supplemental disclosure of non-cash financing and investing activities: Issuance of common stock warrants $ — $ 1,220 Purchases of property and equipment included in accounts payable at period-end $ 605 $ 28 Purchase of property and equipment under capital leases $ — $ 303 Vesting of founder shares subject to repurchase $ — $ 75 Leasehold improvements paid by lessor $ 988 $ — Unpaid transaction costs $ 148 $ — Assumption of warrant liabilities $ 8,774 $ — See accompanying notes to the consolidated financial statements. 68 SARCOS TECHNOLOGY AND ROBOTICS CORPORATION CONSOLIDATED S TATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share data) Convertible Preferred Stock Common Stock Additional Total Series A Series B Class A Class B Paid-In Accumulated Noncontrolling Stockholders’ Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit Interests Equity Balance at December 31, 2019 5,421,446 $ 5 3,158,338 $ 3 109,536 $ — 7,250,001 $ 7 $ 54,518 $ ( 43,057 ) $ ( 3 ) $ 11,473 Retroactive application of reverse recapitalization ( 5,421,446 ) ( 5 ) ( 3,158,338 ) ( 3 ) 81,646,769 8 ( 7,250,001 ) ( 7 ) 7 — — — Balance, December 31, 2019, as adjusted — — — — 81,756,305 8 — — 54,525 ( 43,057 ) ( 3 ) 11,473 Vesting of founder shares subject to repurchase — — — — 3,846,917 — — — 75 — — 75 Issuance of common stock, net of issuance cost — — — — 18,117,573 2 — — 38,645 — — 38,647 Issuance of common stock warrants — — — — — — — — 1,220 — — 1,220 Stock-based compensation — — — — — — — — 2,291 — — 2,291 Exercise of stock options — — — — 318,559 — — — 124 — — 124 Net loss — — — — — — — — — ( 20,926 ) — ( 20,926 ) Balance at December 31, 2020 — — — — 104,039,354 10 — — 96,880 ( 63,983 ) ( 3 ) 32,904 Purchase of non-controlling interest — — — — — — — — ( 203 ) — 3 ( 200 ) Cashless exercise of common stock and warrants — — — — 999,185 — — — — — — — Issuance of common stock upon Merger, net of transaction costs — — — — 10,525,990 1 — — ( 95 ) — — ( 94 ) Issuance of PIPE shares — — — — 22,000,000 2 — — 219,998 — — 220,000 Shares withheld on vesting of restricted stock — — — — — — — — ( 284 ) ( 284 ) Stock-based compensation — — — — — — — — 43,118 — — 43,118 Exercise of stock options — — — — 158,129 1 — — 25 — — 26 Net loss — — — — — — — — — ( 81,508 ) — ( 81,508 ) Balance at December 31, 2021 — $ — — $ — 137,722,658 $ 14 — $ — $ 359,439 $ ( 145,491 ) $ — $ 213,962 See accompanying notes to the consolidated financial statements. 69 SARCOS TECHNOLOGY AND ROBOTICS CORPORTATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Pr esentation and Summary of Significant Accounting Policies ​ Description of the Business Sarcos Technology and Robotics Corporation (the “Company” or “Sarcos”) formerly known as Rotor Acquisition Corp. (“Rotor”), designs and produces highly-dexterous mobile robotic systems for use in dynamic environments. Business Combination On September 24, 2021 (the “Closing Date”), the Company consummated a business combination (the “Business Combination”) pursuant to the terms of the Agreement and Plan of Merger, dated as of April 5, 2021, by and among Rotor Acquisition Corp. (“Rotor”), Rotor Merger Sub Corp., a Delaware corporation, and a direct, wholly-owned subsidiary of Rotor (“Merger Sub”), and Sarcos Corp., a Utah corporation (“Old Sarcos”) and Amendment No. 1 to the Agreement and Plan of Merger, dated as of August 28, 2021 (the “Amendment” and the Original Merger Agreement, as amended, the “Merger Agreement”), by and among the Company, Merger Sub and Old Sarcos. Pursuant to the terms of the Merger Agreement, the Business Combination between the Company and Old Sarcos was effected through the merger of Merger Sub with and into Old Sarcos, with Old Sarcos continuing as the surviving corporation (the “Merger”) and a wholly-owned subsidiary of the Company. On the Closing Date, Rotor changed its name to Sarcos Technology and Robotics Corporation. Immediately prior to the effective time of the Merger (the “Effective Time”), all issued and outstanding warrants to purchase shares of Class A common stock of Old Sarcos were net exercised and all issued and outstanding shares of preferred stock of Old Sarcos were converted into common stock of Old Sarcos (collectively, the “Old Sarcos Common Stock”). Pursuant to the terms of the Merger Agreement, at the Effective Time: • Each outstanding share of Old Sarcos Common Stock, after giving effect to the conversion described above, was cancelled and converted into and became (i) the right to receive approximately 5.129222424 shares (the “Exchange Ratio”) of Common Stock of the Company, par value $ 0.0001 per share (the “Common Stock”), rounded down to the nearest whole share plus (ii) the contingent right to receive a portion of additional shares of Common Stock upon achievement of certain milestones (the “Contingent Merger Consideration”), as described below; • All outstanding options, restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) of Old Sarcos, whether vested or unvested, were assumed by the Company and converted into options, RSUs and RSAs of the Company; In addition, each holder of Old Sarcos capital stock (including any Old Sarcos RSAs) was entitled to a right to Contingent Merger Consideration at the Closing Date in the form of earn-outs, up to an aggregate of 28,125,000 shares of Common Stock. On the Closing Date, certain investors (the “PIPE Investors”) purchased from the Company an aggregate of 22,000,000 shares (the “PIPE Shares”) of Common Stock at a price of $ 10.00 per share, for an aggregate purchase price of $ 220.0 million (the “PIPE Financing”), in a private placement pursuant to separate subscription agreements (each, a “Subscription Agreement”) entered into effective as of April 5, 2021. On September 27, 2021, the Common Stock and warrants of Sarcos Technology and Robotics Corporation (formerly those of Rotor Acquisition Corp.), ceased trading on the New York Stock Exchange and began trading on The Nasdaq Global Market (“Nasdaq”) as “STRC” and “STRCW”, respectively. Basis of Presentation and Consolidation The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to current year presentation. The Company’s fiscal year begins on January 1 and ends on December 31. 70 COVID-19 Pandemic In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. Modifications continue to be made to the Company’s normal operations because of the COVID-19 pandemic and the Company continues to monitor its operations and government recommendations. Travel restrictions and capacity limits at customer locations imposed in response to the COVID-19 pandemic continue to cause delays in the assessment and deployment of the Company’s products. Although it is widely expected that the impact of the pandemic will subside over time, the Company cannot predict the future extent or duration of the impact that the COVID-19 pandemic will have on its financial condition and operations. The impact of the COVID-19 pandemic on the Company’s financial performance will depend on future developments, including the duration and spread of the outbreak and related governmental advisories and restrictions. If the financial markets and/or the overall economy continue to be impacted for an extended period, the Company’s operations and financial results may be adversely affected. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of revenue and expenses during the reporting period. The Company’s most significant estimates and judgments involve contract revenue recognized based on estimates of total contract costs and cost to complete uncompleted contracts, estimates of potential losses on uncompleted contracts, impairment evaluation of contract assets and property and equipment, useful lives of property and equipment, valuation allowance for net deferred income taxes and valuation of the Company’ s stock-based compensation and warrants. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates. Liquidity and Capital Resources Cash and cash equivalents were $ 217.1 million as of December 31, 2021, compared to $ 33.7 million as of December 31, 2020. The Company has historically incurred losses and negative cash flows from operations. As of December 31, 2021, the Company also had an accumulated deficit of approximately $ 145.5 million and working capital of $ 222.2 million . These financial statements have been prepared in accordance with GAAP and this basis assumes the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company’s main sources of liquidity are cash generated by equity offerings and debt. The Company’s primary use of cash is for operations and administrative activities including employee-related expenses, and general, operating and overhead expenses. Future capital requirements will depend on many factors, including the Company’s customer growth rate, customer retention, timing and extent of development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings and market acceptance of the Company’s products. On September 24, 2021, the Company completed the Business Combination and raised net cash proceeds of $ 228.8 million , net of transaction costs. The Company believes it has sufficient financial resources for at least the next 12 months from the date of this Report. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents, accounts receivable and unbilled receivables. The Company’s cash is placed with high-credit-quality financial institutions and issuers, and at times exceed federally insured limits. The Company has not experienced any losses relating to its cash equivalents. The Company’s accounts receivable and unbilled receivables are derived from customers located in the United States. The Company performs periodic credit evaluations of its customers. The Company does not require collateral. Accounts receivable As of December 31, 2021, one of our customers accounted for more than 10% of the Company’s accounts receivable, which in total represented 81 % of the accounts receivable as of the end of the year . As of December 31, 2020 , five customers each accounted for more than 10% of the Company’s accounts receivable, which in total represented 97 % of the accounts receivable as of the end of the year. 71 Revenue Five and three customers accounted for more than 10% of the Company’s revenue for each of the years ended December 31, 2021 and 2020 , respectively. These concentrations accounted for 87 % and 64 % of revenue for the years ended December 31, 2021 and 2020 , respectively. The total amount of revenue for each such customer was as follows: (In thousands) 2021 2020 Customer A $ 1,685 $ 2,222 Customer B 630 2,156 Customer C *NM 1,066 Customer D 928 *NM Customer E 602 *NM Customer F 555 *NM *NM - Not meaningful as the customer’s related revenue was less than 10% of the Company’ s revenue for the respective year. Cash and Cash Equivalents The Company considers cash as deposits held in bank accounts and undeposited funds. All highly liquid investments with an original maturity of three months or less at the time of purchase are considered to be cash equivalents. The Company’s cash equivalents may be comprised of money market funds, certificates of deposit of major financial institutions and U.S. Treasury bills. Accounts Receivable Receivables are recorded at the amount the Company expects to collect. Management determines the need for an allowance for doubtful receivables using a specific identification method after taking into account all of its remedies for collection. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Recoveries of receivables previously written off are recorded when payment is received as other income. Management determined no allowance for doubtful receivables was necessary as of December 31, 2021 and 2020. Receivables are comprised of amounts invoiced for completed contracts and contracts in progress. As of December 31, 2021 and 2020 , no amounts have been written off or provided for recoverability. Inventories Inventories primarily consist of raw materials, work-in-process and finished goods. Inventories are stated at the lower of cost or estimated net realizable value. Costs are computed on the first-in, first-out basis and include material, labor and manufacturing overhead. Adjustments are also made to reduce the cost of inventory for estimated excess or obsolete balance by evaluating inventory against forecasted revenue and production requirements. Property and Equipment Property and equipment is carried at acquisition cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets. The estimated useful lives by asset classification are generally as follows: Useful life Robotics and manufacturing equipment 1 – 10 years Computer equipment 3 – 5 years Software 3 years Furniture and fixtures 3 years Leasehold improvements Lesser of the useful life or the remaining term of the lease Expenditures for maintenance and repairs are expensed when incurred and betterments that extend the useful lives of property and equipment are capitalized. When assets are retired or disposed, the asset’s original cost and related accumulated depreciation are eliminated, and any gain or loss is reflected in the statements of operations. 72 Impairment of Property and Equipment The Company evaluates on an annual basis its property and equipment for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Impairment exists if the carrying amounts of such assets exceed the estimates of future net undiscounted cash flows expected to be generated by such assets. No impairment loss was recognized during the years ended December 31, 2021 and 2020 . Revenue Recognition The Company recognizes revenue from the sale of its products and from the delivery of goods and services arising out of its contractual arrangements to provide research and development services that are fully funded by the customer. The Company recognizes revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services by following a five-step process: 1) Identify the contract with a customer: A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights and obligations regarding the products and services to be transferred and identifies the payment terms related to these products and services, (ii) the contract has commercial substance and (iii) the Company determines that collection of substantially all consideration for products and services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. Contract modifications may include changes in scope of work, and/or the period of completion of the project. The Company analyzes contract modifications to determine if they should be accounted for as a modification to an existing contract or a new stand-alone contract. 2) Identify the performance obligations in the contract: The Company enters into contracts that can include combinations of products and services, which are either capable of being distinct and accounted for as separate performance obligations or as one performance obligation if the majority of tasks and services form a single project or capability. However, determining whether products or services are considered distinct performance obligations that should be accounted for separately may require significant judgment. 3) Determine the transaction price: The transaction price is determined based on the consideration to which the Company will be entitled to in exchange for transferring goods or services to the customer. Such amounts are typically stated in the customer contract. However, to the extent that the Company identifies variable consideration, the Company will estimate the variable consideration at the onset of the arrangement as long as it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company’s current contracts do not include any significant financing components because the timing of the transfer of the underlying products and services under contract are at the customers’ discretion. Additionally, the Company does not adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Taxes collected from customers and remitted to governmental authorities are not included in revenue. 4) Allocate the transaction price to performance obligations in the contract: Once the Company has determined the transaction price, the total transaction price is allocated to each performance obligation in a manner depicting the amount of consideration to which the Company expects to be entitled in exchange for transferring the good(s) or service(s) to the customer. If applicable, the Company allocates the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis. The standalone selling price represents the amount we would sell the good(s) or service(s) to a customer on a standalone basis. For the government contracts, the Company uses expected cost plus a margin as standalone selling price. Because our contract pricing with the government customer is based on expected cost plus margin the standalone selling price of the good(s) or service(s) in our contracts with the government customer are typically equal to the selling price stated in the contract. When we sell standard good(s) or service(s) with observable standalone sale transactions, the observable standalone sales transactions are used to determine the standalone selling price. 5) Recognize revenue when or as the Company satisfies a performance obligation : For each performance obligation identified, we determine at contract inception whether we satisfy the performance obligation over time or at a point in time. For performance obligations satisfied over time, revenue is recognized as work progresses when the Company is entitled to the reimbursement of costs plus a reasonable profit for work performed for which the Company has no alternate use. For these performance obligations, the Company generally recognizes revenue using an input method with revenue amounts being recognized proportionately as costs are incurred relative to the total expected costs to satisfy the performance obligation. The Company believes that costs incurred as a portion of total estimated costs is an appropriate measure of progress towards 73 satisfaction of the performance obligation since this measure reasonably depicts the progress of the work effort. Revenue for performance obligations that are not recognized over time are recognized at the point in time when control transfers to the customer (which is generally upon delivery). For performance obligations that are satisfied at a point in time, the Company evaluates the point in time when the customer can direct the use of, and obtain the benefits from, the products and services. Shipping and handling costs are recorded at the time of product shipment to the customer and are included within revenue. Revenues from Contracts with Customers The Company derives its revenue from two sources. First, the Company enters into research and development agreements primarily relating to the commercialization of the Company’s core products. Second, the Company sells its products and related parts and repair services. The research and development services revenue includes revenue arising from different types of contractual arrangements, including cost-type contracts and fixed-price contracts. Revenue from the sales of the Company’s products primarily includes sales of the Company’s Guardian S remote-controlled visual inspection and surveillance robotic system and its Guardian Heavy-Lift System (“HLS”). Research and Development Services Cost-type contracts – Research, development and/or testing service contracts, including cost-plus-fixed-fee and time and material contracts, relate primarily to the development of technology in the areas of robotics, artificial intelligence and unmanned systems. Cost-type contracts are generally entered into with the U.S. government. These contracts are billed at cost plus a margin as defined by the contract and Federal Acquisition Regulation (“FAR”). The FAR establishes regulations around procurement by the government and provides guidance on the types of costs that are allowable in establishing prices for goods and services delivered under government contracts. Revenue on cost-type contracts is recognized over time as goods and services are provided. Fixed-price contracts – Fixed-price development contracts relate primarily to the development of technology in the area of robotic platforms. Fixed-price development contracts generally require a significant service of integrating a complex set of tasks and components into a single deliverable. Revenue on fixed-price contracts is generally recognized over time as goods and services are provided. To the extent the Company’s actual costs vary from the fixed fee, we will generate more or less profit or could incur a loss. The Company will recognize losses at the contract level in earnings in the period in which they are incurred. Product Revenue Product revenues relate to sales of the Company’s Guardian S and Guardian HLS products, and certain miscellaneous parts, accessories and repair services. The Company provides a limited one-year warranty on product sales. Product warranties are considered assurance-type warranties and are not considered to be separate performance obligations. Revenue on product sales is recognized at the point in time when ownership of the goods is transferred, generally at the time of shipment to the customer. At the time revenue is recognized, an accrual is established for estimated warranty expenses based on historical experience as well as anticipated product performance. The revenue recognized for Research and Development Services and Product Revenue were as follows: December 31, (In thousands) 2021 2020 Research and Development Services $ 3,584 $ 6,811 Product Revenue 1,491 2,002 Revenue, net $ 5,075 $ 8,813 Contract Balances The timing of revenue recognition, billing, and cash collection results in the recognition of accounts receivable, unbilled receivables, contract assets, and deferred revenue in the Company’s consolidated balance sheets. Cash funds received in excess of revenues recognized that is contingent upon the satisfaction of performance obligations is accounted for as deferred revenue. 74 Contract assets include unbilled amounts resulting from contracts in which revenue is recognized over time, revenue recognized exceeds the amount billed, and right to payment is not only subject to the passage of time and further performance. The opening and closing balances of our accounts receivable, unbilled receivables, contract assets and deferred revenues are as follows: (In thousands) Accounts receivable Unbilled receivable Contract assets (current) Contract assets (long-term) Deferred revenue (current) Opening Balance as of December 31, 2019 $ 916 $ 868 $ 195 $ 110 $ 200 Increase/(decrease), net 135 ( 649 ) ( 102 ) ( 17 ) ( 143 ) Ending Balance as of December 31, 2020 1,051 219 93 93 57 Increase/(decrease), net ( 263 ) 2 1 ( 57 ) ( 27 ) Ending Balance as of December 31, 2021 $ 788 $ 221 $ 94 $ 36 $ 30 The Company recorded its current contract assets, long-term contract assets and current deferred revenue within prepaid expenses and other current assets, other non-current assets, and accrued liabilities, respectively. For the deferred revenue balance, during the years ended December 31, 2021 and 2020 , the Company recognized revenue of $ 0.1 million and $ 0.2 million, respectively, in the consolidated statements of operations and comprehensive loss. Remaining performance obligations As of December 31, 2021 , the Company had backlog, or revenue related to remaining performance obligations, of $ 1.8 million. We expect that all of this backlog will be recognized in 2022. Research and Development Costs Research and development expenses consist of costs incurred for experimentation, design, and testing that are expensed as incurred. Sales and Marketing Costs The Company expenses advertising costs as incurred. Marketing costs include product demonstration, customer service, lead generation, public relations, market research and internal labor in the consolidated statements of operations and comprehensive loss. Stock-Based Compensation The Company calculates the fair value of all stock-based awards, including stock options and restricted stock awards on the date of grant. The Company values stock options using the Black-Scholes option-pricing model, which requires the use of a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. The stock-based compensation expense is recognized on a straight-line basis over the requisite service periods of the awards, which is generally four years. The Company records forfeitures as they occur. Income Taxes Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred income taxes related primarily to differences between the tax bases and financial reporting bases of assets and liabilities. Deferred income taxes represent future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. The Company determines its valuation allowance on deferred tax assets by considering both positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis, to ascertain whether it is more likely than not that deferred tax assets will be realized. In the event the Company determines that it would be able to realize its deferred income tax assets in the future in excess of their net recorded amount, it would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. Conversely, in the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. 75 Recently Issued Accounting Standard Pronouncements As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act until such time as the Company is no longer considered to be an EGC. The adoption dates discussed below reflect this election. In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02 regarding Accounting Standards Codification (“ASC”) 842 Leases. The amendments in this guidance require balance sheet recognition of lease assets and lease liabilities by lessees for leases classified as operating leases, with an optional policy election to not recognize lease assets and lease liabilities for leases with a term of 12 months or less. The amendments also require new disclosures, including qualitative and quantitative requirements, providing additional information about the amounts recorded in the consolidated financial statements. The amendments require a modified retrospective approach with optional practical expedients. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. ASU 2018-11 provides entities another option for transition, allowing entities to not apply the new standard in the comparative periods they present in their consolidated financial statements in the year of adoption. In June 2020, the FASB Issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities (“ASU 2020-05”). The update defers the initial effective date of ASU 2016-02 by one year for private companies and private non-for-profits. For these entities, the effective date is for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company will present the impact of the new guidance in its annual statements as of December 31, 2022 and its interim statements thereafter. The Company is currently in the process of evaluating the impact adopting ASC 842 will have on its consolidated financial statements and related disclosures. In June 2016, the FASB Issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard requires financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The standard will be effective for the Company beginning January 1, 2023, with early application permitted. The Company does not expect adoption of this new guidance to have a material impact on its results of operations, financial condition and financial statement disclosures. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles and to simplify areas such as franchise taxes, step up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The ASU is effective for the Company beginning January 1, 2022. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements. 2. Fair Value Measurements ASC Topic 820, Fair Value Measurement, defines fair value as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows: Level 1—Fair value is based on observable inputs such as quoted prices for identical assets or liabilities in active markets. Level 2—Fair value is determined using quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active or are directly or indirectly observable. Level 3—Fair value is determined using one or more significant inputs that are unobservable in active markets at the measurement date, such as an option pricing model, discounted cash flow, or similar technique. 76 Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis On a recurring basis, the Company measures certain of its financial assets and liabilities, namely its warrant liabilities and cash equivalents, at fair value. The fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis was determined using the following inputs: As of December 31, 2021 (In thousands) Level 1 Level 2 Level 3 Fair Value Liabilities: Warrant liability $ — $ — $ 13,701 $ 13,701 Total liabilities $ — $ — $ 13,701 $ 13,701  As of December 31, 2020 (In thousands) Level 1 Level 2 Level 3 Fair Value Assets: Cash equivalents: Money market funds $ 31,726 $ — $ — $ 31,726 Total assets $ 31,726 $ — $ — $ 31,726 Cash equivalents consist primarily of money market funds with original maturities of three months or less at the time of purchase, and the carrying amount is a reasonable estimate of fair value. There were no transfers between fair value measurements levels during the years ended December 31, 2021 and 2020. The table below sets forth a summary of changes in the fair value of the Company’s Level 3 warrants for the year ended December 31, 2021: (In thousands) Balance at December 31, 2020 $ — Initial recognition of warrants 8,774 Increase in fair value of warrants 4,927 Balance at December 31, 2021 $ 13,701 The carrying amounts of accounts payable, accrued expenses and notes payable approximate their fair values because of the relatively short periods until they mature or are required to be settled. 3. Balance Sheet Components Inventories, net Inventories, net consist of the following: (In thousands) December 31, 2021 December 31, 2020 Raw materials $ 458 $ 516 Work-in-process 41 100 Finished goods, net 507 91 Total inventories $ 1,006 $ 707 77 The Company had inventory reserves of $ 0.3 million and $ 0.1 million for t he years ended December 31, 2021 and 2020, respectively. Prepaid expenses and other current assets Prepaid expenses and other current assets consist of the following: (In thousands) December 31, 2021 December 31, 2020 Prepaid insurance $ 4,786 $ 34 Software 4,144 287 Other prepaid expense 171 279 Other assets 101 93 Total prepaid expenses and other current assets $ 9,202 $ 693 Property and equipment, net Property and equipment, net consist of the following: (In thousands) December 31, 2021 December 31, 2020 Robotics and manufacturing equipment $ 876 $ 659 Leasehold improvements 3,890 154 Computer equipment 1,270 568 Capital leased computer equipment 271 386 Software 355 359 Other fixed assets 753 147 Construction in progress 872 141 Property and equipment, gross 8,287 2,414 Accumulated depreciation and amortization ( 1,236 ) ( 989 ) Property and equipment, net $ 7,051 $ 1,425 Depreciation expenses were $ 0.5 million and $ 0.5 million for the years ended December 31, 2021 and 2020 , respectively. Amortization of assets under capital leases is included as part of depreciation expense. Accrued liabilities Accrued liabilities consist of the following: (In thousands) December 31, 2021 December 31, 2020 Payroll and related costs $ 2,511 $ 934 Consulting and professional services 406 125 Legal accrual 520 — Other current liabilities 1,043 196 Total accrued liabilities $ 4,480 $ 1,255 Other non-current liabilities Other non-current liabilities consist of the following: (In thousands) December 31, 2021 December 31, 2020 Payroll and related costs $ — $ 286 Capital leases and other 7 240 Deferred rent 1,992 — Total other non-current liabilities $ 1,999 $ 526 78 4. Notes Payable Paycheck Protection Program Loan Old Sarcos received two unsecured loans under the Paycheck Protection Program (“PPP”) administered by the Small Business Administration, pursuant to the Coronavirus Aid, Relief, and Economic Security Act. The first loan, with a principal amount of $ 2.4 million , was received in April 2020, and the second loan, with a principal amount of $ 2.0 million , was received in March 2021. These PPP loans had an interest rate of 1.00 % per year. The first PPP loan of $ 2.4 million was forgiven during June 2021, and the second PPP loan of $ 2.0 million was forgiven during November 2021. The forgiveness of these PPP loans resulted in gains of $ 4.4 million during the year ended December 31, 2021 , which were recorded as gain on forgiveness of notes payable within the consolidated statements of operations and comprehensive loss. Notes payable consisted of the following: (In thousands) December 31, 2021 December 31, 2020 First PPP loan $ — $ 2,394 Total Notes payable — 2,394 Less: Notes payable, current portion — 1,328 Notes payable, net of current portion $ — $ 1,066 5. Reverse Recapitalization Pursuant to ASC 805, Business Combinations , the Business Combination was accounted for as a reverse recapitalization, rather than a business combination, for financial accounting and reporting purposes. Accordingly, Old Sarcos was deemed the accounting acquirer (and legal acquiree) and Rotor was treated as the accounting acquiree (and legal acquirer). Under this method of accounting, the reverse recapitalization was treated as the equivalent of Old Sarcos issuing stock for the net assets of Rotor, accompanied by a recapitalization. The net assets of Rotor are stated at historical cost, with no goodwill or other intangible assets recorded. The consolidated assets, liabilities, and results of operations prior to the Merger are those of Old Sarcos. The shares and corresponding capital amounts and earnings per share available for common stockholders, prior to the Merger, have been retroactively restated as shares reflecting the Exchange Ratio. Earn-Out Shares Each holder of Old Sarcos capital stock (including any Old Sarcos RSAs) is entitled to a right to Contingent Merger Consideration in the form of earn-outs, up to an aggregate of 28,125,000 shares of Common Stock. The earn-outs will become payable as follows: • 14,062,500 shares of Common Stock of the Company in the aggregate if the closing share price of a share of Common Stock of the Company is equal to or exceeds $ 15.00 for 20 trading days in any 30 consecutive trading day period at any time during the period beginning on the first anniversary of the Closing Date and ending on the fourth anniversary of the Closing Date. • 14,062,500 shares of Common Stock of the Company if the closing share price of a share of Common Stock of the Company is equal to or exceeds $ 20.00 for 20 trading days in any 30 consecutive trading day period at any time during the period beginning on the first anniversary of the Closing Date and ending on the fifth anniversary of the Closing Date. The Earn-Out Shares issuable to holders of Old Sarcos capital stock are accounted for as equity-linked instruments and recorded in additional paid-in capital , and the Earn-Out Shares issuable to holders of Old Sarcos capital stock subject to restricted stock awards are accounted for as share-based compensation. The earn-out shares are treated as equity-linked instruments as opposed to shares outstanding, and as such are not included in shares outstanding on the Company’s consolidated balance sheets. 79 Upon the closing of the Business Combination and the PIPE Financing, the Company received net cash proceeds of $ 228.8 million. The following table reconciles the elements of the Merger to the consolidated statements of cash flows and the consolidated statements of stockholders’ equity for the year ended December 31, 2021 : (In thousands) Recapitalization Cash proceeds from Rotor, net of redemptions and transaction expenses $ 25,359 Cash proceeds from PIPE Financing 220,000 Less: Cash payment of transaction expenses - Sarcos ( 16,571 ) Net Cash proceeds from Merger and PIPE financing 228,788 Less: Warrant liabilities assumed ( 8,774 ) Less: Other non-cash net assets assumed 40 Less: Unpaid and previously expensed Merger transaction costs ( 148 ) Net contributions from recapitalization $ 219,906 Immediately following closing of the Merger, the Company had 137,589,275 shares issued and outstanding of Common Stock. The following table present the number of shares of the Company’s Common Stock outstanding immediately following the consummation of the Merger: Number of Shares Rotor Class A Common Stock, outstanding prior to Merger 27,600,000 Rotor Class B Common Stock, outstanding prior to Merger 6,405,960 Class A common stock issued to PIPE Investors 22,000,000 Less: redemption of Rotor Common Stock ( 23,479,970 ) Total shares from Merger and PIPE financing 32,525,990 Recapitalization of Old Sarcos common stock into Class A common stock 1 105,063,285 Total shares of Common Stock immediately after the Effective Time 137,589,275 1 The number of Old Sarcos shares was determined from the 21,483,286 shares of Old Sarcos Common Stock warrants, Common Stock and preferred stock outstanding immediately prior to the closing of the Business Combination, which are presented net of the Common and Preferred Stock redeemed, converted at the Exchange Ratio of 5.129222424 . This excludes a restricted stock award for 5,129,222 shares that was unvested as of the date of the Merger. All fractional shares were rounded down. In connection with the Merger, the Company incurred direct and incremental costs of approximately $ 32.9 million r elated to legal, accounting and other professional fees, which were deducted from the Company’s additional paid-in capital as a reduction of cash proceeds rather than expensed as incurred and $ 1.1 million of transaction costs that were recorded to operating expenses within the consolidated statements of operations and comprehensive loss. 6. Equity Common Stock On September 27, 2021, the Company’s Common Stock and Warrants began trading on the Nasdaq Global Market under the ticker symbols “STRC” and “STRCW”, respectively. As of December 31, 2021, the Company had authorized a total of 990,000,000 shares for issuance as Common Stock. As of December 31, 2021, 137,722,658 shares of Common Stock were issued and outstanding. In September 2016, the founders of Old Sarcos granted Old Sarcos a purchase right for 4,000,000 shares of Class B common stock of Old Sarcos originally purchased by the founders in 2015. Old Sarcos had an exclusive option to repurchase unvested shares of Class B common stock at a price per share equal to the original issue price per share in the event that the founder’s relationship with Old Sarcos was terminated. The repurchase right for the 4,000,000 shares lapsed in equal monthly amounts over 48 months ending in September 2020 . The fair value of the repurchase rights were categorized as Class B common stock options at the date the repurchase rights were granted, based on the fair market value on the grant date. These repurchase rights were recorded as stock-based compensation expense on a straight-line basis over the vesting period and were recorded to general and administrative expense within the consolidated statements of operations and comprehensive loss. For the year ended December 31, 2020, the amount of stock-based compensation recognized related to the founder stock options was $ 1.5 million. For the year ended December 31, 2021, no shares of Class B Common Stock were subject to the repurchase option and there was no unrecognized amount of stock-based compensation remaining. Upon the closing of the Merger, holders of 80 outstanding Class B common stock of Old Sarcos received shares of the Company’s Common Stock in an amount determined by application of the Exchange Ratio, as discussed in Note 1, Basis of Presentation and Summary of Significant Accounting Policies . Preferred Stock As of December 31, 2021, the Company had authorized a total of 10,000,000 shares for issuance as preferred stock. The Company’s board of directors has the authority to issue preferred stock and to determine the rights, privileges, preferences, restrictions and voting rights of those shares. As of December 31, 2021, the Company had no shares of preferred stock outstanding as all preferred stock of Old Sarcos had been converted to Common Stock as part of the Business Combination. Non-controlling Interest The non-controlling interest represents the membership interest in ZeptoVision, Inc., (“Zepto”) that was held by a holder other than the Company. Zepto was formed in April 2016 and the formation of Zepto was accounted for as a common control transaction at the time of formation. As of December 31, 2020, the Company’s ownership percentage in Zepto was 79 %. The Company has consolidated the financial position and results of operations of Zepto and reflected the 21 % interest as a non-controlling interest for the year ended December 31, 2020. The carrying amount of the non-controlling interest was adjusted to reflect the change in its ownership interest in the subsidiary, with the offset to equity attributable to the Company. On February 16, 2021, the Company acquired the non-controlling interest’s shares in Zepto for a purchase price of $ 0.2 million making Zepto a wholly owned subsidiary of the Company. The acquisition of the remaining shares of Zepto resulted in the decrease of non-controlling interest to zero and adjustment to additional paid-in capital to reflect the Company’s increased ownership in Zepto. 7. Warrants On January 31, 2020, Old Sarcos issued 250,000 Class A Common Stock warrants to one of its investors, at an exercise price of $ 11.3243 per share with an expiration date of January 31, 2030 . The Company generally accounts for warrants to purchase Common Stock as a component of equity at its issued cost unless the warrants include a conditional obligation to issue a variable number of shares or there is a deemed possibility that the Company may need to settle the warrants in cash. Old Sarcos estimated the fair value of these warrants using the Black-Scholes option valuation model based on the estimated fair value of the underlying Common Stock, with the following assumptions: remaining contractual term of ten years , risk-free interest rate of 3.05 %, volatility of 85 % and no dividend yield. These estimates, especially the market value of the underlying Common Stock and the related expected volatility, are judgmental and could differ materially in the future. Old Sarcos estimated the fair value of warrants exercisable for Class A Common Stock using the Black-Scholes option valuation model based on the estimated fair value of the underlying Common Stock. Immediately prior to the effective time of the Merger, all the issued and outstanding warrants to purchase 250,000 shares of Class A Stock of Old Sarcos warrants were net exercised and upon the Closing were exchanged for shares of the Company’s Common Stock in an amount determined by application of the Exchange Ratio, as discussed in Note 1. On January 20, 2021, Rotor consummated the initial public offering (“IPO”) of 27,600,000 units (the “Units”), including the full exercise by the underwriters of their over-allotment option. Each Unit included one share of Class A Common Stock and one half of one warrant (the “Public Warrants”). Simultaneously with the closing of the IPO, Rotor consummated the sale of 7,270,000 warrants (the “Private Placement Warrants”) in a private placement to Rotor Sponsor LLC (the “Sponsor”), an affiliate of Rotor’s officers and directors, and certain funds and accounts managed by two qualified institutional buyers. At the Closing Date, Old Sarcos acquired the net liabilities from Rotor, including the Public Warrants, that were recorded as equity instruments, and the Private Placement Warrants, that were recorded as warrant liabilities (together the “Warrants”). The Company estimated the fair value of the Private Placement Warrants exercisable for Common Stock measured at fair value on a recurring basis at the respective dates using the binomial lattice valuation model. The binomial lattice valuation model inputs are based on the estimated fair value of the underlying Common Stock at the valuation measurement date, the remaining contractual term of the warrant, the risk-free interest rates, the expected dividends and the implied volatility of the price of the Company’s underlying stock. These estimates, especially the expected volatility, are highly judgmental and could differ materially in the future. The Company recognized a loss of $ 4.9 million related to the change in fair value of the Private 81 Placement Warrants during the year ended December 31, 2021, recorded as a loss on warranty liability within the consolidated statements of operations and comprehensive loss. The following table provides quantitative information regarding assumptions used in the binomial lattice model to determine the fair value of the Private Placement Warrants: December 31, 2021 September 24, 2021 (Closing Date) Stock price $ 9.98 $ 10.05 Term (in years) 0.06 0.32 Implied volatility 30.3 % 18.9 % Risk-free rate 1.22 % 1.0 % Dividend yield 0.0 % 0.0 % Each whole Warrant entitles the registered holder to purchase one share of our Common Stock at a price of $ 11.50 per share, subject to adjustment as discussed below, at any time commencing on January 20, 2022, provided that we have an effective registration statement under the Securities Act covering the shares of the Common Stock issuable upon exercise of the Warrants and a current prospectus relating to them is available (or we permit holders to exercise their Warrants on a cashless basis under the circumstances specified in the warrant agreement entered into between Continental Stock Transfer & Trust Company and Rotor (the “Warrant Agreement”)) and such shares are registered, qualified or exempt from registration under the securities laws of the state of residence of the holder. Pursuant to the Warrant Agreement, a Warrant holder may exercise its Warrants only for a whole number of shares of our Common Stock. This means only a whole Warrant may be exercised at a given time by a Warrant holder. The Warrants will expire five years after the completion of the Business Combination, or September 24, 2026 , at 5:00 p.m., New York City time, or earlier upon redemption or liquidation. We will not be obligated to deliver any Common Stock pursuant to the exercise of a Warrant and will have no obligation to settle such Warrant exercise unless a registration statement under the Securities Act with respect to the shares of our Common Stock underlying the Warrants is then effective and a prospectus relating thereto is current, subject to our satisfying our obligations described below with respect to registration, or a valid exemption from registration is available. No Warrant will be exercisable, and we will not be obligated to issue a share of our Common Stock upon exercise of a Warrant unless the share of our Common Stock issuable upon such Warrant exercise has been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the registered holder of the Warrants. In the event the conditions in the two immediately preceding sentences are not satisfied with respect to a Warrant, the holder of such Warrant will not be entitled to exercise such Warrant and such Warrant may have no value and expire worthless. In no event will we be required to net cash settle any Warrant. In the event a registration statement is not effective for the exercised Warrants, the purchaser in the Rotor IPO of a Unit containing such Warrant will have paid the full purchase price for the Unit solely for the share of our Common Stock underlying such Unit. Except as described herein, the Private Placement Warrants have terms and provisions that are identical to those of the Public Warrants. If the Private Placement Warrants are held by holders other than the Sponsor or its permitted transferees, the Private Placement Warrants will be redeemable by us in all redemption scenarios and exercisable by the holders on the same basis as the Public Warrants. The Private Placement Warrants will not be redeemable by us so long as they are held by the initial purchasers or its permitted transferees, subject to certain exceptions. The Sponsor, or its permitted transferees, have the option to exercise the Private Placement Warrants on a cashless basis. Redemption of Warrants When the Price per Share of Our Common Stock Equals or Exceeds $ 18.00 . Once the Warrants become exercisable, we may call the Warrants for redemption: • in whole and not in part; • at a price of $ 0.01 per Warrant; • upon not less than 30 days ’ prior written notice of redemption (the “30-day redemption period”) to each Warrant holder; and • if, and only if, the last reported sale price of the shares of our Common Stock for any 20 trading days within a 30 -trading day period commencing after the Warrants become exercisable and ending three business days before we send the notice of redemption to the Warrant holders (which we refer to as the “Reference Value”) equals or exceeds $ 18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like). 82 If and when the Warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. However, we will not redeem the Warrants unless an effective registration statement under the Securities Act covering the shares of our Common Stock issuable upon exercise of the Warrants is effective and a current prospectus relating to those shares of our Common Stock is available throughout the 30-day redemption period. Redemption of Warrants When the Price per Share of Our Common Stock Equals or Exceeds $ 10.00 . Once the Warrants become exercisable, we may redeem the outstanding Warrant s (except as described herein with respect to the Private Placement Warrants if we do not utilize this redemption provision): • in whole and not in part; • at $ 0.10 per Warrant upon a minimum of 30 days ’ prior written notice of redemption; provided that holders will be able to exercise their Warrants on a cashless basis prior to redemption and receive that number of shares determined by reference to an agreed table based on the redemption date and the “fair market value” of our Common Stock; • if, and only if, the Reference Value (as defined above) equals or exceeds $ 10.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like); and • if the Reference Value is less than $ 18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) the Private Placement Warrants must also be concurrently called for redemption on the same terms (except as described above with respect to a holder’s ability to cashless exercise its Warrants) as the outstanding Public Warrants, as described above. 8. Stock-based Compensation Equity Incentive Plan 2015 Stock Plan The Old Sarcos 2015 Equity Incentive Plan (the “2015 Plan”) provided stock option awards, RSUs and RSAs for issuance to Company employees, officers, directors, non-employee agents and consultants. These awards vest over three to five years and are exercisable up to 10 years from the date of grant. Unvested options are forfeited upon termination. Following the closing of the Merger, no further awards will be made under the 2015 Plan. Any forfeited awards will be added to the 2021 Plan. 2021 Stock Plan On September 15, 2021, the stockholders of the Company approved the Sarcos Technology and Robotics Corporation 2021 Equity Incentive Plan (the “2021 Plan”), and on the Closing Date, the 2021 Plan was approved by the board of directors. The 2021 Plan provides stock option awards, RSUs and RSAs for issuance to Company employees, officers, directors, non-employee agents and consultants. In general, these awards vest over one to four years and are exercisable up to 10 years from the date of grant. The maximum number of shares of Common Stock that may be issued pursuant to the 2021 Plan is (i) 30,000,000 shares of Common Stock of the Company plus (ii) any shares of Common Stock subject to stock options and other awards that were assumed in the Business Commination and expire or otherwise terminate without having been exercised in full, are tendered to or withheld by the Company for payment of an exercise price or for tax withholding obligations, or are forfeited to or repurchased by the Company due to failure to vest, with the maximum number of shares to be added to the 2021 Plan pursuant to clause (ii) equal to 12,760,600 shares of Common Stock. As of December 31, 2021 , 27,842,561 shares were available to grant under the 2021 Plan. 83 The following summarizes the Company’s stock option activity for the years ended December 31, 2021 and 2020: Options Outstanding Number of Shares Weighted Average Exercise Price Weighted-Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding – December 31, 2019 7,738,866 $ 0.49 7.36 $ 5,848 Granted 1,993,969 1.24 Exercised ( 318,564 ) 0.40 Cancelled ( 1,531,184 ) 0.93 Outstanding – December 31, 2020 7,883,087 0.59 6.83 $ 5,058 Granted 3,761,109 7.93   Exercised ( 158,129 ) 0.16   Cancelled ( 1,458,973 ) 1.11   Outstanding – December 31, 2021 10,027,094 $ 3.28 7.23 $ 67,173 Exercisable – December 31, 2020 5,063,856 $ 0.33 5.78 $ 4,592 Exercisable – December 31, 2021 5,176,464 $ 0.46 5.33 $ 49,268 The aggregate intrinsic value is the fair market value on the reporting date less the exercise price for each option. The aggregate intrinsic value of the options exercised was $ 0.8 million an d $ 0.3 million du ring the years ended December 31, 2021 and 2020, respectively. For options granted during the years ended December 31, 2021, and 2020, the weighted average estimated fair value was $ 4.79 and $ 0.72 per option, respectively. The Company utilizes the Black-Scholes option pricing model for estimating the fair value of options granted, which requires the input of subjective assumptions. The Company calculates the fair value of each option grant on the grant date using the following assumptions: Expected Term— Options granted generally vest over a period of 48 months and expire 10 years from date of grant. The Company uses the simplified method when calculating expected term due to insufficient historical information. Expected Volatility—Due to insufficient historical information the Company uses a blended approach when calculating expected volatility. The Company uses its historic data for the periods it has been publicly-traded and a benchmark of other comparable public companies’ volatility rates. Expected Dividend Yield—The dividend yield used is zero as the Company does not have a history of paying dividends on its Common Stock and does not anticipate doing so in the foreseeable future. Risk-Free Interest Rate—The interest rates used are based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. The Company calculated the fair value of option grants on the respective dates of grant using the following weighted average assumptions: Years ended December 31, December 31, 2021 2020 Options Risk-free interest rate 1.19 % 0.51 % Expected term (in years) 6.08 6.06 Expected dividend yield — % — % Expected volatility 66.56 % 64.98 % 84 The following summarizes the Company’s employee RSU activity for the years ended December 31, 2021 and 2020: Restricted Stock Units Outstanding Number of Shares Weighted-Average Grant-Date Fair Value(1) Outstanding – December 31, 2019 1,454,642 $ 8.78 Granted 384,692 3.25 Cancelled ( 938,117 ) 6.51 Outstanding – December 31, 2020 901,217 $ 8.78 Granted 932,123 7.93 Released ( 28,982 ) 8.78 Cancelled ( 6,884 ) 8.78 Outstanding – December 31, 2021 1,797,474 $ 8.34 (1) W eighted average grant-date fair values have been u pdated to reflect the impact of the modification to the RSUs discussed below. RSUs granted generally include service vesting periods of one to four years . Certain awards granted under the 2015 Plan included vesting conditions related to the completion of a qualifying liquidity event and/or requirements related to the forfeiture of cash compensation . In April 2021, the Board of Directors of the Company appro ved a modification that updated the terms of the awards such that the Business Combination would satisfy the liquidity event vesting condition for eight award recipients. T otal incremental compensation costs resulting from the modification of these RSUs was $ 9.7 million, of which $ 8.4 million was recognized during the year ended December 31, 2021. The following summarizes the Company’s employee RSAs activity for the year ended December 31, 2021: Restricted Stock Awards Outstanding Number of Shares Weighted-Average Grant-Date Fair Value Outstanding – December 31, 2020  — $ — Granted  5,129,222 8.78 Outstanding – December 31, 2021 5,129,222 $ 8.78 As of December 31, 2021 , the only holder of RSAs was Mr. Wolff, the Company’s Executive Chairman. The RSAs held by Mr. Wolff vest over a 15-month period following the consummation of a qualifying transaction. For the five-year period prior to the grant of the RSAs, Mr. Wolff had not received any equity compensation from the Company other than RSUs issued in lieu of cash compensation. The RSAs include vesting acceleration provisions which would result in the award becoming fully vested following a change in control event or upon death of the grantee. The Business Combination was determined to be the qualifying transaction that triggered the commencement of the 15-month vesting period, resulting in the recognition of compensation expense for RSAs o f $ 26.2 million f or the year ended December 31, 2021. Mr. Wolff is eligible to receive additional shares upon achievement of earn-out targets as discussed in Note 5 above. The Company recognized compensation expe nse of $ 5.1 million f or these earn-out shares during the year ended December 31, 2021. The Company recognized stock-based compensation expense in the consolidated statement of operations and comprehensive loss as follows: December 31, December 31, (In thousands) 2021 2020 Cost of revenue $ 92 $ 109 Research and development 446 249 Sales and marketing 814 45 General and administrative 41,766 1,888 Total stock-based compensation expense $ 43,118 $ 2,291 85 As of December 31, 2021 , there was approximately $ 47.8 million of unrecognized stock-based compensation cost, which is expected to be recognized over an average period of 1.9 years. 9. Net loss per Share The following table sets forth the computation of the basic and diluted net loss per share attributable to common stockholders for the twelve months ended December 31, 2021 and 2020:  Year ended December 31, (In thousands, except share and per share data) 2021 2020 Numerator:   Net loss attributable to common stockholders $ ( 81,508 ) $ ( 20,926 ) Denominator:   Weighted average shares outstanding, basic and diluted 113,184,357 100,114,664 Basic and diluted net loss per share $ ( 0.72 ) $ ( 0.21 ) The basic and diluted net loss per share for the twelve months ended December 31, 2021, which has been computed to give effect to the conversion of the Old Sarcos Class B common stock and all convertible preferred shares into Old Sarcos Class A common stock as though the conversion had occurred as of the beginning of the period or the original date of issuance, if later. Basic and diluted net loss per share attributable to common stockholders is the same for the twelve months ended December 31, 2021 and 2020, as the inclusion of potential shares of Common Stock would have been anti‑dilutive for the periods presented. The following table discloses securities that could potentially dilute basic net loss per share in the future that were not included in the computation of diluted net loss per share: As of December 31,  2021 2020 Outstanding warrants 20,549,468 1,282,306 Outstanding restricted stock awards 5,129,222 — Outstanding stock options and restricted stock units 11,824,568 8,784,304 Outstanding earnout shares 28,125,000 — Total anti-dilutive securities 65,628,258 10,066,610 10. Income taxes Loss before provision for income taxes was $ 81.5 million and $ 20.9 million for the years ended December 31, 2021 and 2020 , respectively, all of which was generated in the United States. The Company's provision for income taxes consists of the following: Years Ended December 31, (In thousands) 2021 2020 Current: Federal $ — $ — State ( 1 ) ( 1 ) Total current ( 1 ) ( 1 ) Deferred: Federal ( 16,377 ) ( 4,142 ) State ( 3,948 ) ( 1,144 ) Change in valuation allowance 20,325 5,286 Total deferred — — Total provision for income taxes $ ( 1 ) $ ( 1 ) The Company's provision for income tax differs from the amount computed by applying the statutory federal income tax rate to income before taxes as follows: 86 Years Ended December 31, (In thousands) 2021 2020 Statutory federal income tax rate 21.0 % 21.0 % State tax provision 3.7 3.7 Change in valuation allowance ( 24.9 ) ( 25.3 ) Research credits 0.7 3.0 Permanent differences ( 0.3 ) ( 2.4 ) Other ( 0.2 ) — Total provision for income taxes 0.0 % 0.0 % As of December 31, 2021 and 2020, the net deferred tax asset consisted of the following: December 31, (In thousands) 2021 2020 Deferred tax assets: Accrued expenses $ 1,050 $ 192 Stock compensation 11,094 479 Research credits 2,486 1,939 Net operating loss carryforwards 22,393 12,838 Total gross deferred tax assets 37,023 15,448 Less valuation allowance ( 35,476 ) ( 15,151 ) Total deferred tax assets 1,547 297 Deferred tax liabilities: Property and equipment ( 1,547 ) ( 297 ) Total deferred tax liabilities ( 1,547 ) ( 297 ) Net deferred tax asset $ — $ — Valuation allowances are established when necessary to reduce deferred tax assets, including temporary differences and net operating loss carryforwards, to the amount expected to be realized in the future. FASB guidance indicates that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. The Company had cumulative losses from continuing operations in the United States for the three-year period ended December 31, 2021. The Company considered this negative evidence along with all other available positive and negative evidence and concluded that, at December 31, 2021, it is more likely than not that the Company’s U.S. deferred tax assets will not be realized. As of December 31, 2021, a valuation allowance has been recorded on the Company’s deferred tax assets to recognize only the proportion of the deferred tax asset that is more likely than not to be recognized. The Company’s total valuation allowance was $ 35.5 million at December 31, 2021 and $ 15.2 million at December 31, 2020. The Company’s valuation allowance increased $ 20.3 million and $ 5.3 million during the fiscal years ended December 31, 2021 and 2020 , respectively. A reconciliation of the beginning and ending amount of the valuation allowance is as follows: December 31, (In thousands) 2021 2020 Valuation allowance at beginning of year $ 15,151 $ 9,865 Change in valuation allowance 20,325 5,286 Valuation allowance at end of year $ 35,476 $ 15,151 As of December 31, 2021, the Company had cumulative federal net operating losses of approximately $ 90.1 million. Of these losses, $ 5.9 million were generated in 2015 through 2017, prior to the Tax Cuts and Jobs Act enactment, and will begin expiring from 2035 to 2037 if not utilized. The remaining net operating losses have an indefinite carryforward period. As of December 31, 2020, the Company had cumulative federal net operating losses of approximately $ 51.2 million . As of December 31, 2021, the Company had a $ 3.9 million deferred tax asset related to a federal research and development credit carryforward. This credit has been offset by a liability for unrecognized tax benefits of $ 1.9 million. If not utilized, the credits will expire beginning in 2035 through 2041. As of December 31, 2020, the Company had a $ 3.0 million deferred tax asset related to a federal research and development credit carryforward. As of December 31, 2021, the Company had cumulative state net operating losses of approximately $ 89.1 million. Of the total state net operating losses, approximately $ 88.8 million is attributable to Utah. Utah law allows unused net operating losses arising in tax years beginning after December 31, 2017 to be carried forward indefinitely. Of the total $ 88.8 million of Utah net operating losses, $ 82.5 million are carried forward indefinitely, and the remaining net operating losses will expire beginning in 2035 through 2037. The remaining state net operating loss carryforwards are attributable to various other states with varying 87 expiration periods. As of December 31, 2020, the Company had cumulative state net operating losses of approximately $ 53.6 million . Of the total state net operating losses, approximately $ 53.5 million is attributable to Utah. As of December 31, 2021, the Company had a $ 1.4 million deferred tax asset related to Utah research and development credits carryforward. This credit has been offset by a liability for unrecognized tax benefits of $ 0.7 million. If not utilized, the credits will expire beginning in 2029 through 2035. As of December 31, 2020, the Company had a $ 1.1 million deferred tax asset related to a Utah research and development credit carryforward. This credit has been offset by a liability for unrecognized tax benefits of $ 0.6 million. ASC Topic 740-10-05 requires that the impact of a tax position be recognized in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. As of December 31, 2021, the Company had a $ 2.6 million liability for unrecognized tax benefits, all of which is netted against deferred tax assets for related carryforward credits. As of December 31, 2020, the Company had a $ 2.1 million liability for unrecognized tax benefits, all of which is netted against deferred tax assets for related carryforward credits. The Company expects no material changes to the liability for unrecognized tax benefits in the next 12 months. Interest and penalties associated with uncertain tax positions are recorded as a component of income tax expense. There would be no impact to the Company’s effective rate if the unrecognized tax benefits were recognized. A reconciliation of the beginning and ending amounts of unrecognized benefits is as follows: Years ended December 31, (In thousands) 2021 2020 Unrecognized tax benefits at the beginning of year $ 2,054 $ 1,388 Gross increases – current year tax positions 580 666 Unrecognized tax benefits at end of year $ 2,634 $ 2,054 Interest and penalties in year-end balance $ — $ — The Company files U.S. and various state tax returns in jurisdictions with various statutes of limitation. As of December 31, 2021, the tax returns for fiscal year 2016 through fiscal year 2020 remain subject to examination. Annual tax provisions include amounts considered necessary to pay assessments that may result from examination of prior year tax returns; however, the amount ultimately paid upon resolution of issues may differ materially from the amount accrued. As of December 31, 2021, there are no income tax returns currently under audit. 11. Commitments and Contingencies Legal Proceedings The Company may be involved in various claims, lawsuits, investigations, and other proceedings, in the normal course of business. The Company accrues a liability when management believes information available prior to the issuance of the consolidated financial statements indicates it is probable a loss has been incurred as of the date of the financial statements and the amount of loss can be reasonably estimated. The Company adjusts its accruals to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Legal costs are expensed as incurred. The Company has recorded an accrual of $ 0.5 million as of December 31, 2021, related to estimated settlements for ongoing legal claims. The Company did not record any material loss contingency in the balance sheet as of December 31, 2020. Indemnifications In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to investors, directors, officers, employees, customers or vendors with respect to certain matters, including losses arising out of the Company’s breach of such agreements, services to be provided by the Company or from intellectual property infringement claims made by third parties. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions may not be subject to maximum loss clauses. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is indeterminable. The Company has never paid a material claim, nor has the Company been involved in litigation in connection with these indemnification arrangements. As of December 31, 2021 and 2020, the Company has not accrued a liability for these indemnifications as the likelihood of incurring a payment obligation, if any, in connection with these indemnifications is not probable or reasonably estimable due to the unique facts and circumstances involved. 88 Operating Leases The Company leases facilities under noncancelable operating lease agreements. Future minimum rental payments under the noncancelable operating leases, subsequent to December 31, 2021, are as follows: (In thousands) Operating Leases 2022 $ 1,279 2023 970 2024 1,323 2025 1,360 2026 1,397 2027 and thereafter 9,919 Total $ 16,248 Rent expense related to noncancelable operating leases totaled $ 1.4 million and $ 0.3 million for the years ended December 31, 2021 and 2020, respectively. One of the operating leases includes two three-year renewal options. Capital Leases The Company leases equipment under agreements expiring at various times during the next three years. The Company has recorded the capital lease obligation within its consolidated balance sheets. Future minimum rental payments under the noncancelable capital leases, subsequent to December 31, 2021, are as follows: (In thousands) Capital Leases 2022 $ 98 2023 4 2024 4 Minimum lease payment including interest 106 Amount representing interest ( 4 ) Minimum lease payments excluding interest $ 102 Unconditional purchase commitments On April 4, 2021, the Company entered into an agreement with Palantir Technologies (“Palantir”). Pursuant to that agreement, the Company committed to purchase licenses to access software products and utilize services from Palantir over a six year period for a total cost to the Company of $ 42.0 million. As of December 31, 2021, the Company has an unconditional purchase commitment with Palantir as detailed in the table below: (In thousands) Annual Service Payments 2022 $ — 2023 8,000 2024 8,000 2025 10,000 2026 10,000 Total $ 36,000 89 12. Segment information The Company’s Chief Executive Officer (“CEO”) is the Chief Operating Decision Maker (“CODM”). The CODM allocates resources and makes operating decisions based on financial information presented on a consolidated basis. The profitability of the Company’s product group is not a determining factor in allocating resources and the CODM does not evaluate profitability below the level of the consolidated company. Accordingly, the Company has determined that it has a single reportable segment and operating segment structure. The Company’s revenue is derived primarily from U.S. customers. During the year ended December 31, 2021 and 2020 , the Company had no material revenue earned from customers located outside the United States. All long-lived assets are maintained in the United States. All losses are attributable to operations within the United States. 13. Related Party Transactions As of December 31, 2020 , the Company held a controlling interest of 79 % in Zepto. The remaining 21 % of Zepto was held by MLC 401k Trust for the benefit of the Company’s Chief Legal Officer. On February 16, 2021, Old Sarcos acquired the non-controlling interest’s shares in Zepto for a purchase price of $ 0.2 million making Zepto a wholly-owned subsidiary of the Company. During the year ended December 31, 2020 , the Company entered into an agreement with one of its investors, Delta Air Lines, Inc., to provide demonstration services. The Company recognized $ 0.1 million of revenue related to these services during the year ended December 31, 2020 . No revenue was recognized for the year ended December 31, 2021. On April 4, 2021, the Company entered into an agreement with Palantir as described above. Pursuant to that agreement, the Company committed to access software products and utilize services from Palantir over the next six years for a total cost of $ 42.0 million. The software and services are an integral part of the Company’s plans to provide Robots as a Service upon commercialization of the Company’s Guardian XO and XT robotic systems. Palantir was an investor in the PIPE Financing. The Company recognized $ 2.2 million in sales and marketing expenses, related to services provided by Palantir during the year ended December 31, 2021 . The Company had a prepaid expense balance of $ 3.6 million related to the Palantir contract as of December 31, 2021. On May 16, 2021, the Company entered into an agreement with Sparks Marketing Corp. to begin the construction of an experiential marketing mobile display to be used for demonstrations of Company products at prospective customer locations as well as other marketing and demonstration events. Negotiations of this agreement involved an account executive at Sparks Marketing Corp. who is the brother-in-law of Mr. Wolff, our former CEO and current Executive Chairman of the Board. The Company recognized $ 0.8 million related to costs capitalized to construction in progress for the experiential mobile display for the period ended December 31, 2021 . 14. Employee Benefits The Company has a defined contribution 401(k) plan covering substantially all employees. The plan allows employees to defer up to 100 % of their employment income (subject to annual contribution limits imposed by the I.R.S.) after all taxes and applicable benefit deductions. The Company did not provide matching contributions for the employee contributions to the plan during the years ended December 31, 2021 and 2020; and no amounts have been accrued as of December 31, 2021 and 2020 . 90 ​ 15. Subsequent events On March 28, 2022, the Company filed a current report on form 8-K and press release announcing that the Company had reached a definitive agreement to acquire RE2, Inc., a Pittsburgh, PA based developer of manipulator arms with human-like performance, intuitive robot interfaces, and advanced autonomy capabilities for use in any environment. T he aggregate consideration for the acquisition of RE2 will be approximately $ 100.0 million, subject to customary purchase price adjustments for cash, net working capital and indebtedness. The consideration for the acquisition of RE2 will be comprised of approximately $ 30.0 million in cash, which the Company expects to fund with cash on hand, and approximately $ 70.0 million in shares of the Company's common stock. The number of shares of common stock to be issued in the acquisition of RE2 will be based on the volume weighted-average price per share over a 10-day trading period ending on the third business day prior to the closing and is subject to a collar, with a floor of $ 5.00 per share and a ceiling of $ 9.00 per share. The acquisition of RE2 is subject to certain customary and other closing conditions, and is expected to close during the second quarter of 2022. 91 Item 9. Changes in and Disagreements w ith Accountants on Accounting and Financial Disclosure. None.