What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2023-03-16 compared with 2022-03-29 · 188 added, 142 removed, 163 unchanged (67% of the section changed)

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respectively.

As of February 15, 2022, there were 117 stockholders of record of our Common Stock and 13 holders of record of our warrants.

Such numbers do not include DTC participants or beneficial owners holding shares through nominee names.

As of March 1, 2023, there were 275 stockholders of record of our Common Stock and 31 holders of record of our warrants.

Dividend Policy

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Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

Securities Authorized for Issuance Under Equity Compensation Plans

See Part III, Item 11 of this Annual Report for the required information.

Recent Sales of Unregistered Securities

In addition to sales of unregistered securities as previously included in our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K filed with the SEC during the fiscal year ended December 31, 2021, the following list sets forth information regarding all unregistered securities sold by us during the quarterly period ended December 31, 2021:

On October 13, 2021, we issued and sold an aggregate of 130,283 shares of our Common Stock pursuant to the exercise of outstanding options to purchase shares of our Common Stock at exercise prices ranging from $0.02 to $0.43 per share pursuant to exercises of options granted under our 2015 Equity Incentive Plan.

The offers, sales and issuances of the securities described above were exempt from registration under the Securities Act under Section 4(a)(2) of the Securities Act in that such sales did not involve a public offering or under Rule 701 in that the transactions were under compensatory benefit plans and contracts relating to compensation as provided under Rule 701.

The recipients of such securities were the registrant’s employees, consultants or directors and received the securities under our 2015 Equity Incentive Plan.

The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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See also Part I Special Note Regarding Forward-Looking Statements in this Annual Report.

We are a technology leader for industrial highly-dexterous mobile robotic systems for use in dynamic environments.

Our mission is to save lives and prevent injury while helping humans accomplish more than ever before.

The robotic systems we are developing are designed to combine human intelligence, instinct, and judgment with the strength, endurance, and precision of machines.

This technologically advanced line of products augments, rather than replaces, humans.

We plan to offer our Guardian XO and Guardian XT primarily through a Robot-as-a-Service, or RaaS, subscription-based service model that will give customers the convenience of on-going maintenance, support, remote monitoring and software upgrades in addition to use of our products.

We currently do not have any RaaS subscription agreements.

We expect that both our capital and operating expenditures will increase significantly in connection with our ongoing activities, as we:

continue to develop and begin to commercialize our Guardian XO and XT products;

develop and collaborate on production systems for manufacturing efforts in-house and by third-parties;

continue to invest in our technology, research and development efforts and our product development efforts;

obtain, maintain, and improve our operational, financial and management information systems;

recruit, hire and retain additional personnel to support and sustain our needs in commercializing our products, producing them and delivering them to our customers;

establish a sales, marketing, and distribution infrastructure for commercial distribution and placement of our robotic systems;

implement and administer our maintenance and servicing infrastructure;

obtain, maintain and expand our intellectual property portfolio;

operate as a public company.

We are a technology leader in the design, development and manufacture of advanced robotic systems and solutions that redefine human possibilities.

Our mission is to increase worker productivity and longevity and prevent injuries through robotics.

Our robotic systems are designed to augment and increase human productivity, rather than replace humans, by combining human intelligence, instinct and judgment with the strength, endurance and precision of machines.

Our core systems consist of the Guardian XM, Guardian XT and Guardian Sea Class teleoperated/semi-autonomous systems and the Guardian XO exoskeleton.

We adapt these core systems for specific use-cases based on the capabilities and characteristics of each system to create solutions.

We may also combine aspects of multiple systems or create a specific system for a particular solution.

Based on feedback from our development customers and potential commercial customers, we have decided to offer our systems and solutions primarily through a sales business model where the customer purchases a system or solution for a one-time, upfront amount.

We also plan to offer software upgrades and additional capabilities and to offer for sale add-on hardware components (such as additional interchangeable end-effectors).

Business Combination

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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.

and the Original Merger Agreement, as amended, the “Merger Agreement”), by and among Rotor, Merger Sub and Old Sarcos.

Pursuant to the terms of the Merger Agreement, the Business Combination between Rotor 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.

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company for financial reporting purposes.

Accordingly, for accounting purposes, the financial statements of the combined entity will represent a continuation of the financial statements of Old Sarcos with the Business Combination being treated as the equivalent of Old

Sarcos issuing stock for the net assets of Rotor, accompanied by a recapitalization.

Accordingly, for accounting purposes, the financial statements of the combined entity represent a continuation of the financial statements of Old Sarcos with the Business Combination being treated as the equivalent of Old Sarcos issuing stock for the net assets of Rotor, accompanied by a recapitalization.

The net assets of Old Sarcos and Rotor are stated at historical cost, with no goodwill or other intangible assets recorded.

Operations prior to the Business Combination are those of Old Sarcos.

Financial statement information, including results of operations prior to the Business Combination are those of Old Sarcos.

Response to COVID-19

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Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas and forced closures for certain types of public places and businesses.

COVID-19 and actions taken to mitigate its spread have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which Sarcos operates.

We have taken several actions in response to the COVID-19 pandemic which have the potential to result in a significant disruption to how we operate our business.

Our customers and partners have adopted similar policies.

We have experienced, and may continue to experience, an adverse impact on certain parts of our business as a result of measures to mitigate the COVID-19 pandemic and their resulting economic effects.

We are currently experiencing disruptions in our supply chain, due in part to the global impact of the COVID-19 pandemic.

COVID-19 and actions taken to mitigate its spread have had and may continue to have an adverse impact on the economies and financial markets of many countries, including the geographies in which Sarcos operates.

We took several actions in response to the COVID-19 pandemic that resulted in significant disruptions to how we operate our business.

Our customers and partners adopted similar policies.

These actions and policies of ours and our customers and partners are evolving as laws, regulations and recommendations evolve.

Although many of these measures are no longer in effect, we have experienced, and may continue to experience, an adverse impact on certain parts of our business as a result of

measures to mitigate the COVID-19 pandemic and their resulting economic effects.

Further, discontinued measures could be reinstituted, for example as a result of government requirements or in response to new variants of COVID-19.

We have experienced and may continue to experience disruptions in our supply chain, due in part to the global impact of the COVID-19 pandemic.

Depending upon the duration of the ongoing COVID-19 pandemic and the associated business interruptions, our customers, suppliers, manufacturers and partners may suspend or delay their engagements with us, which could result in a material adverse effect on our financial condition and ability to meet current timelines.

In an effort to manage potential supply chain risks, in particular increasing and unpredictable lead-times, we have accelerated and expect to continue to accelerate purchases of various materials, parts and components for the foreseeable future to support product development and current and future production of our commercial units, which has and will likely continue to increase our use of cash.

In addition, the COVID-19 pandemic has affected and may continue to affect our ability to recruit skilled employees to join our team.

The conditions caused by the pandemic have adversely affected and may in the future adversely affect, among other things, demand for our products, the ability to test and assess our robotic systems with our potential customers, our IT and other expenses, our ability to recruit and the ability of our employees to travel, all of which could adversely affect our business, results of operations and financial condition.

The ultimate duration and extent of the COVID-19 pandemic cannot be accurately predicted at this time, and the direct or indirect impact on our business, results of operations and financial condition will depend on future developments that are highly uncertain.

We have also experienced, and may continue to experience, certain positive financial impacts on other aspects of our business, including a reduction in certain operating expenses due to reduced business travel, deferred hiring for some positions, and the virtualization or cancellation of customer and employee events.

Additionally, we believe that the COVID-19 pandemic could also enhance customer interest in our Guardian products as a means to assist and protect the current labor force and that our products are well suited to the new working environment as a result of the pandemic.

The conditions caused by the pandemic have adversely affected and may continue to adversely affect, among other things, demand for our products and the ability to test and assess our robotic systems with potential customers any of which adversely affects our business, results of operations and financial condition.

The duration and extent of the COVID-19 pandemic and its impacts cannot be accurately predicted at this time, and the ultimate direct and indirect impacts on our business, results of operations and financial condition will depend on future developments that are highly uncertain.

The global impact of COVID-19 continues to rapidly evolve, and we will continue to monitor the situation and the effects on our business and operations closely.

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In particular, the effect of the COVID-19 pandemic may not be fully reflected in our operating results until future periods.

Given the uncertainty, we cannot reasonably estimate the impact of the COVID-19 pandemic on our future results of operations, cash flows, or financial condition.

Recent Developments

Acquisition of RE2, Inc.

On March 28, 2022, we filed a current report on form 8-K and press release announcing that we 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 we expect to fund with cash on hand, and approximately $70.0 million in shares of our 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.

The results presented below are those of the Company alone and do not include any pro-forma results of RE2.

Given this uncertainty, we cannot reasonably estimate the impact of the COVID-19 pandemic on our future results of operations, cash flows, or financial condition.

Key Factors Affecting Operating Results

We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in Part I Item 1A Risk Factors of this Annual Report on Form 10-K.

Development, Testing and Commercial Launch of the Guardian XO and Guardian XT products

We currently expect to derive revenue from the commercial launch of our Guardian XO and Guardian XT products, with initial production of commercial units beginning at the end of 2022 for delivery to customers in early 2023.

Suc h timeline may be delayed, including due to challenges in recruiting skilled employees, difficulties in securing components and materials, development delays, difficulties relating to manufacturing of the units and other factors discussed under Part I Item 1A Risk Factors “

Initial production of commercial units of our core products, the Guardian XO and Guardian XT, may be delayed beyond the end of 2022 and therefore initial delivery to customers could be beyond early 2023 .

Such challenges may result in further delay of the anticipated commercial launch of one or more of our products, which would adversely affect our financial and operating results.

Prior to commercialization, we must complete the development, testing and manufacturing requirements of these products.

Development, Testing and Commercial Launch of our Core Products

We expect that revenue from the commercial launch of three of our core products, the Guardian XT, Guardian XM and Guardian Sea Class, will determine our near-term financial success.

We began initial production of commercial units of the Guardian XM during September 2022 and initial production of commercial units of the Guardian XT during December 2022.

We expect that we will have units of both of these systems available for delivery to customers in the first half of 2023.

In large part due to significant supply chain disruptions that have limited our supply of parts common to both the Guardian XO and Guardian XT and certain parts pertaining to the Guardian XO, we have prioritized the commercialization of the Guardian XT and Guardian XM and delayed the commercial launch of the Guardian XO.

We chose to prioritize the Guardian XT and Guardian XM as we were closer to completing development of commercial units for those products and initial demand for those products appears strong, and our ongoing re-design of the Guardian XO in order to decrease its weight and integrate customer feedback will require additional time to complete.

Timelines may be delayed, including due to challenges in recruiting skilled employees, difficulties in securing components and materials, development delays, difficulties relating to manufacturing of the units and other factors discussed under Part I Item 1A Risk Factors “

Risks Related to Our Business and Industry.

Such challenges may result in further delay of the anticipated commercial launch of one or more of our products, which would adversely affect our financial condition and operating results.

Financing of Operations

Prior to commercialization, we must complete the development, testing and manufacturing requirements of our products.

As a result, we will spend a material portion of our cash on hand to develop our products and fund operations for the foreseeable future.

The amount and timing of our future funding requirements, if any, will depend on many factors, including the pace and results of our product development efforts.

Any delays in the successful completion of the commercialization of our Guardian XO and Guardian XT products will impact our ability to generate revenue, our profitability and our overall operating performance.

The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our product development efforts, our ability to manufacture, sell and deliver commercial products and thereby recognize associated revenue, capital requirements to build commercial products prior to receiving payments sufficient to cover our costs and our ability to lower product costs as volumes increase.

We currently expect to obtain outside financing to help cover production costs for product orders.

In addition, although we believe we have sufficient capital to fund our business for at least the next 12 months, we expect to seek additional financing during that time to bolster our cash reserves and ensure our ability to continue to pursue our business objectives.

Any delays in the successful completion of the commercialization of our Guardian XT, Guardian XM, Guardian Sea Class and Guardian XO products will negatively impact our ability to generate revenue, our profitability and our overall operating performance.

Acquisition and Integration of RE2

On April 25, 2022, we acquired 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.

At closing, we paid approximately $30 million in cash, net of cash acquired, issued approximately 10.8 million shares of Common Stock and assumed certain outstanding options to acquire RE2 common stock which, following such assumption, represent rights to acquire 3.9 million shares of Common Stock.

The results presented and discussed below include the activity for RE2 from the acquisition date through December 31, 2022.

Our results do not include RE2’s financial information prior to the acquisition.

Customer Demand

Although our Guardian XO and Guardian XT units are not yet commercially available, we have received interest from potential customers that have tested or witnessed demonstrations of our prototypes and alpha units.

However, because our robotic systems represent a new product category in markets that currently rely on conventional, manual systems, the market demand for our products is unproven, and important assumptions about the characteristics of targeted markets, pricing and sales cycle may be inaccurate.

If customer demand does not develop as expected or we do not accurately forecast pricing, adoption rates and sales cycle for our products, our business, results of operations and financial condition will be adversely affected.

We expect to offer our Guardian XO and Guardian XT primarily through a RaaS subscription model, which we believe will drive accelerated adoption of our product offerings following their commercial launch.

We believe the RaaS subscription model will be attractive to our customers and accelerate market adoption of our robotic systems because it will lower the upfront costs of deployment, shift customers’

capital expenditures to operating expenditures, allow customers to more nimbly scale deployments up or down in response to market conditions and make our products more accessible to customers of all sizes.

However, our RaaS subscription model is unproven and may fail to gain commercial acceptance.

Going forward, we expect the volume of our committed RaaS contracts to be an important indicator of our future performance.

Although our Guardian XT and Guardian XM units are not yet commercially available and we have only recently begun production of commercial units in limited quantities, we have received interest from potential customers that have tested or witnessed demonstrations of our pre-commercial units.

However, because our robotic systems represent a new product category in markets that currently rely generally on conventional, manual systems, the market demand for our products is unproven, and important assumptions about the characteristics of targeted markets, pricing and sales cycles may be inaccurate.

If customer demand does not develop as expected or we do not accurately forecast pricing, adoption rates and sales cycles for our products, our business, results of operations and financial condition will be adversely affected.

Manufacturing of Our Products

To the extent we obtain commercial orders for our products, we will need to manufacture and deliver them to our customers.

We have recently entered into an agreement with a third-party contract manufacturer and expect to generally outsource manufacturing of our products over time.

However, engaging with a manufacturing partner will likely require significant time, ramp-up, testing and coordination before high-volume production capability by the partner is achieved.

We currently do not anticipate high-volume production by a contract manufacturing partner to be in place until at least the end of 2023.

We expect that this contract manufacturing partner will initially focus on helping us produce sub-systems for the Guardian XT.

We expect that in 2023 we will have the internal capability to manufacture a total of between 300 –

500 systems, depending on the mix.

However, we do not believe that we will use all of that capacity in 2023.

For additional information around the risks associated with contract manufacturing see Part I Item 1A Risk Factors “

Our expected transition to an outsourced manufacturing business model may not be successful, which could harm our ability to deliver products and recognize revenue.

Continued Investment and Innovation

We are a pioneer in the robotic systems industry and benefit from lessons learned over 30 years and more than $300 million in research and development investment in our proprietary technologies and our extensive patent portfolio.

We are a pioneer in the robotic systems industry and benefit from lessons learned over 30 years and significant investment in research and development in our proprietary technologies and our extensive patent portfolio.

However, our financial performance is significantly dependent on our ability to maintain this leading position and further dependent on the investments we make in research and development.

It is essential that we continually identify and respond to rapidly evolving customer requirements, develop and introduce innovative new products, enhance and service existing products and generate active market demand for our robotic systems.

It is important that we continually identify and respond to rapidly evolving customer requirements, develop and introduce innovative new products, enhance and service existing products and generate active market demand for our robotic systems.

If we fail to do this, our market position and revenue may be adversely affected, and our investments into these technologies will not be recovered.

Geopolitical and Macro-economic Environment

Geopolitical and macro-economic factors, such as inflation, rising interest rates, oil prices, unemployment rates, the war in Ukraine, volatility in the stock market and political or social unrest, can have significant impacts on economic activity, which in turn could affect demand for our products or our ability to cost-effectively develop, sell and manufacture our products.

Among other things, these and similar factors can affect our supply chain, our ability to hire qualified personnel, our labor and materials costs, the prices we charge for our products and the budgets of our customers and their expected return-on-investment from the purchase of or subscription for our products.

Many of these factors are outside of our control but can have a significant impact on our business success and operating results.

If we are unable to manage our business successfully in response to any such factors, our business and results of operations would be adversely affected.

Basis of Presentation

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Components of Results of Operations

Revenues, net

We derive our revenue from two sources.

First, we enter into research and development agreements primarily relating to the commercialization of our core products.

First, we enter into research and development agreements primarily relating to the commercialization of our products.

Second, we sell our products and related parts and repair services.

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 our products primarily includes sales of our Guardian S remote-controlled visual inspection and surveillance robotic system and our Guardian Heavy-Lift System (“HLS”).

Research and Development Services

Product development contract revenue consists of revenue arising from different types of contractual arrangements, including cost-type contracts and fixed-price contracts.

Product revenue primarily consists of sales of the Company’s products.

Product Development Contract Revenue

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.

Research, development and/or testing service contracts, including cost-plus-fixed-fee and time and material contracts, relate primarily to the development of our robotics systems and related technology.

Cost-type contracts are generally entered into with the U.S.

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Fixed-price contracts –

Fixed-price development contracts relate primarily to the development of technology in the area of robotic platforms.

Fixed-price development contracts relate primarily to the development of technology in the area of robotic systems.

Fixed-price development contracts generally require a significant service of integrating a complex set of tasks and components into a single deliverable.

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Product Revenue

Product revenues relate to sales of our Guardian S and Guardian HLS products and certain miscellaneous parts, accessories and repair services.

Product revenue relates to sales of our products, and certain miscellaneous parts, accessories and repair services.

We provide 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.

Product revenue 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 product revenue is recognized, an accrual is established for estimated warranty expenses based on historical experience as well as anticipated product performance.

Operating Expenses

Cost of Revenue

Our cost of revenue consists of direct and overhead expenses related to either the sale of our products or our research and development services related to Small Business Innovation Research (“SBIR”) contracts or subcontract support.

Direct expenses include direct labor used in the production of a product or in our research and development services, benefits expense associated with direct labor and materials directly tied to our product sale or research and development services.

Our cost of revenue consists of direct and overhead expenses related to either the sale of our products or our product development contract revenue.

Direct expenses include direct labor used in the production of a product or in our product development contracts, benefits expense associated with direct labor and materials directly tied to our product sale or product development contracts.

Overhead expenses include allocable supervisory labor, benefits expense associated with supervisory labor, allocation of facilities expense including rent and utilities and allocation of IT labor support and equipment.

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Our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

We expect research and development expenses to increase for the foreseeable future as we continue to develop and refine our existing products and further enhance our efforts on our future products, including the Guardian XO and Guardian XT and our CYTAR artificial intelligence platform.

General and Administrative

Our general and administrative expenses consist primarily of employee-related costs for our finance, legal, people success and other administrative teams, as well as certain executives.

In addition, general and administrative expenses include outside legal,

accounting and other professional fees, facilities and IT expense not allocated to other operating expense categories, and related overhead expense.

We expect to incur additional general and administrative expenses to support our growth and support the requirements of being a publicly-traded company.

Excluding the impact of stock-based compensation expense, we expect that general and administrative expenses will increase substantially in absolute dollars in future periods.

Our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

In addition, general and administrative expenses include insurance,

public company compliance related costs, including outside legal and accounting expenses, other professional fees, facilities and IT expense not allocated to other operating expense categories, and related overhead expense.

Sales and Marketing

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We plan to continue to invest in sales and marketing to grow our customer base and increase our brand awareness.

The trend and timing of sales and marketing expenses will depend in part on the timing and launch of our RaaS offerings.

As our RaaS deployments grow, we expect that sales and marketing expenses will increase substantially in absolute dollars in future periods;

The trend and timing of sales and marketing expenses will depend in part on the timing of the commercial launch of our products and their reception by the market.

As our product sales grow, we expect that sales and marketing expenses will increase in absolute dollars in future periods;

however, we expect our sales and marketing expenses to decrease as a percentage of our revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

Intangible Amortization Expense

Amortization of intangible assets primarily consists of amortization of identified finite-lived trade name and trademarks, developed technology, and customer relationship assets that were allocated a portion of the purchase price from the acquisition of RE2.

These costs are amortized on a straight-line basis over 5 to 9 year useful lives and, as a result, amortization expense on these assets is expected to increase slightly next year and then remain stable over the coming years.

Goodwill Impairment

Goodwill represents the excess of consideration transferred over the fair value of tangible and identifiable intangible net assets acquired and the liabilities assumed in a business combination.

All of our goodwill was recognized from the acquisition of RE2.

Goodwill is tested for impairment at the reporting unit level annually or more frequently if events or changes in circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount.

We currently operate as a single reporting unit.

When testing goodwill for impairment, we have the option of first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount.

If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that carrying value exceeds its fair value, we perform a quantitative goodwill impairment test.

Under the quantitative goodwill impairment test, if our reporting unit’s carrying amount exceeds its fair value, we will record an impairment charge based on that difference.

During the fourth quarter of 2022, due to the sustained decreases in our publicly quoted share price and market capitalization, we performed a quantitative goodwill impairment test.

Based on the results of the quantitative goodwill impairment assessment we concluded that the carrying value of the single reporting unit exceeded its fair value and that our goodwill was fully impaired as of December 31, 2022.

We recorded a $70.2 million non-cash goodwill impairment charge during the twelve months ended December 31, 2022.

Other Income (Loss)

Interest Income (Expense), net

Interest income consists primarily of interest received or earned on our cash balances.

Portions of our cash resided in money market investments in U.S.

Interest income consists primarily of interest received or earned on our cash and marketable securities balances.

Portions of our cash resided in money market investments and in U.S.

Treasury securities at various points during the year.

Interest expense is primarily due to interest paid on leased equipment used for our software platforms.

Gain (Loss) Warrant Liability

Gain (loss) on warrant liability consists of the change in fair value of the private placement warrants we assumed as part of the Business Combination.

Gain on Forgiveness of Notes Payable

Gain on forgiveness of notes payable consists of gains recognized as a result of the forgiveness of our loans received under the Paycheck Protection Program (“PPP”).

Loss on Warrant Liability

Loss on warrant liability consists of the periodic change in fair value of the private placement warrants we assumed as part of the Business Combination.

Other Income, net

Other income, net consists primarily of other miscellaneous non-operating items such as the sale or disposal of equipment no longer needed for the business.

Provision for Income Taxes

Other income, net consists primarily of other miscellaneous non-operating items such as proceeds from the CARES Act employee retention credit.

Income Tax Benefit (Expense )

Income taxes 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.

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Results of Operations

The discussion below regarding our results of operations for the twelve months ended December 31, 2022, includes the financial results of RE2 beginning on the acquisition date of April 25, 2022 through December 31, 2022.

Our results do not include RE2’s financial information prior to the acquisition.

Comparison of the Year Ended December 31, 2022, and 2021

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(In thousands)

Research and Development Services

Product Development Contract Revenue

Product Revenue

Revenue decreased by $3.7 million, or 42%, from $8.8 million in the twelve months ended December 31, 2020, to $5.1 million in the twelve months ended December 31, 2021, as explained below.

Research and Development Services

Revenue derived from research and development services decreased by $3.2 million, or 47%, from $6.8 million for the twelve months ended December 31, 2020 to $3.6 million for the twelve months ended December 31, 2021.

The decrease was a result of a net change in work efforts for various projects during the comparable periods and a decision to focus only on projects fully aligned with our product commercialization efforts.

We expect future revenues from research and development services to fluctuate as we develop our products and narrow our focus to accepting only those development contracts that are fully aligned with our product commercialization efforts.

Revenue increased by $9.5 million, or 187%, from $5.1 million in the twelve months ended December 31, 2021, to $14.6 million in the twelve months ended December 31, 2022, as explained below.

Product Development Contract Revenue

Revenue derived from product development contracts increased by $10.7 million, or 297%, from $3.6 million for the twelve months ended December 31, 2021 to $14.2 million for the twelve months ended December 31, 2022.

The increase was primarily due to revenue recognized by RE2 from the acquisition date through December 31, 2022 pertaining to ongoing product development contracts.

We expect future revenue from product development contracts to increase on a year over year basis due to the inclusion of RE2 product development contract revenue for the full year and as we bring on additional development contracts that support our commercialization efforts.

As we focus on initial commercial product sales of our core product portfolio, our product development contract revenue will decrease as a percentage of total revenue.

Product Revenue

Revenue derived from product sales decreased by $1.2 million, or 78%, from $1.5 million for the twelve months ended December 31, 2021 to $0.3 million for the twelve months ended December 31, 2022.

The decrease in revenue derived from product sales was primarily related to lower sales of our Guardian S product during 2021 partially offset by higher sales of our Guardian HLS product during 2021.

The decrease was a result of reduced sales of our legacy products to focus on the commercialization of our core product portfolio.

Operating Expenses

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Sales and marketing

Intangible amortization expense

Goodwill impairment

Total operating expenses

*NM - Not Meaningful

Cost of Revenue

Cost of revenue decreased by $1.7 million, or 31%, from $5.6 million for the twelve months ended December 31, 2020, to $3.9 million for the twelve months ended December 31, 2021, driven by a decrease in expense related to the use of direct labor and third-party contractors as a result of lower revenue during 2021.

The decrease in cost of revenue was partially offset by an increase in material costs due to increased sales of our Guardian HLS product and increased applied overhead.

Cost of revenue increased by $7.7 million, or 200%, from $3.9 million for the twelve months ended December 31, 2021, to $11.6 million for the twelve months ended December 31, 2022.

Cost of revenue increased significantly mainly due to the increase in revenue from the inclusion of RE2's product development contract revenue and the costs associated with that revenue beginning April 25, 2022.

Research and Development

Research and development expenses increased by $16.6 million, or 95%, from $17.5 million for the twelve months ended December 31, 2021, to $34.1 million for the twelve months ended December 31, 2022.

The increase was driven by labor and overhead expense as a result of additional headcount added during 2021 and increased third-party contractors and professional services expense.

We expect our research and development expenses to grow in the future as we continue to develop and commercialize the Guardian XO and XT product lines.

The increase was driven primarily by an increase in labor and overhead expense as a result of increased headcount (due in part to the RE2 acquisition) and third-party service provider costs as we focused on the development and commercialization of our Guardian XT, Guardian XM, Guardian Sea Class and Guardian XO products.

We expect research and development expenses to decrease slightly during 2023 on a year-over-year basis as we continue to develop and refine our existing products and further enhance our efforts on our future products and software.

General and Administrative

General and administrative expenses increased by $5.4 million, or 9%, from $58.1 million for the twelve months ended December 31, 2021, to $63.5 million for the twelve months ended December 31, 2022.

The largest portion of the increase, $41.8 million, is related to stock-based compensation expense recognized mainly for RSA and RSU grants that either vested or began vesting upon the closing of the Business Combination.

While most of the expenses relating to the Business Combination were treated as a reduction to paid-in capital, general and administrative expenses increased by $1.1 million due to certain professional fees that were not capitalized and were associated with the Business Combination and subsequent public company compliance.

Additionally, general and administrative expense increased due to increased business insurance expense, patent and trademark filings expense, rent expense related to our new facility, and increased labor and recruiting expense from additional headcount.

General and administrative expenses increased due to increased legal expenses, business insurance expenses, increased headcount (due in part to the acquisition of RE2) and related expenses.

With the exception of stock-based compensation expense, we expect our general and administrative expenses to increase slightly during 2023 on a year-over-year basis as we work on our commercialization pathway and maintain public-company compliance requirements, but to decrease as a percentage of revenue.

Sales and Marketing

Sales and marketing expenses increased by $3.3 million, or 50%, from $6.6 million for the twelve months ended December 31, 2021, to $9.9 million for the twelve months ended December 31, 2022.

This increase was driven by professional service fees from a third-party vendor utilized in data management of our products and services, from stock-based compensation expense for RSU grants that vested upon the closing of the Business Combination and from increased branding, public relations and marketing activities.

Other (Loss) Income

The following table presents other (loss) income for the twelve months ended December 31, 2021 and 2020:

This increase was driven by an increase in professional service fees due to the engagement of a third-party vendor utilized in data management of our products and services, and increased headcount expenses, including increased stock-based compensation expense and increased expenses related to additional headcount due in part to our RE2 acquisition.

We expect our sales and marketing expenses to increase during 2023 on a year-over-year basis as our revenue increases.

Intangible Amortization Expense

Intangible amortization expenses increased by $2.2 million, from $0.0 million for the twelve months ended December 31, 2021, to $2.2 million for the twelve months ended December 31, 2022.

The increase in intangible amortization expense is due to the recognition of amortization expenses for the identified intangible assets recorded as part of the RE2 acquisition.

Goodwill Impairment

We fully impaired our goodwill and recorded a non-cash goodwill impairment of $70.2 million for the twelve months ended December 31, 2022 compared to no impairment for the twelve months ended December 31, 2021.

The non-cash goodwill impairment was primarily driven by the sustained decrease in the Company’s publicly quoted share price and market capitalization.

Other Income (Loss)

The following table presents other income (loss) for the twelve months ended December 31, 2022 and 2021:

Year Ended December 31,

(In thousands)

Other (loss) income

Other income (loss)

Interest income (expense), net

Loss on warrant liability

Gain (loss) on warrant liability

Gain on forgiveness of notes payable

Other income, net

Total other (loss) income

*NM - Not Meaningful

Other (loss) income decreased by $0.6 million for the twelve months ended December 31, 2021 as compared to the prior year, as a result of the $4.9 million in unrealized mark-to-market loss on warrants partially offset by a $4.4 million gain from the forgiveness of our PPP loans.

Total other income (loss)

Other income was $16.0 million for the twelve months ended December 31, 2022, as compared to other loss of $0.5 million for the twelve months ended December 31, 2021, as a result of the increase in unrealized mark-to-market gain on our outstanding private placement warrants and increased interest income, partially offset by the gain on forgiveness of notes payable recorded in the prior year period in connection with the forgiveness of our PPP loans.

Income Tax Benefit (Expense)

Income tax benefit increased to $3.9 million for the twelve months ended December 31, 2022, compared to $0.0 million in income tax expense for the twelve months ended December 31, 2021.

The income tax benefit recorded during the twelve months ended December 31, 2022 is due to the removal of a portion of our previously recorded valuation allowance on our net deferred tax assets associated with net deferred tax liabilities recorded as part of the acquisition of RE2, resulting in an income tax benefit recognized during the period.

The future reversal of the net deferred tax liabilities is a source of taxable income to be considered by us when determining whether a valuation allowance is needed for our existing net deferred tax assets.

Liquidity and Capital Resources

Prior to the closing of the Business Combination, Old Sarcos financed its operations through private placements of redeemable convertible preferred stock, from the limited sale of Guardian S units and other commercially available products and by providing research and development services under SBIR contracts and as a subcontractor for prime contractors working with the U.S.

Prior to the closing of the Business Combination, Old Sarcos financed its operations through private placements of redeemable convertible preferred stock, from the limited sale of Guardian S units and other commercially available products and by providing product development contract services and as a subcontractor for prime contractors working with the U.S.

Department of Defense.

As a result of the Business Combination, we obtained approximately $228.8 million in cash proceeds, net of fees and expenses related to the Business Combination, including $220.0 million from the PIPE Financing.

Upon the closing of the Business Combination, we retained approximately $228.8 million in cash proceeds, net of fees and expenses related to the Business Combination, including $220 million from the PIPE Financing.

We currently use cash to fund operations and capital expenditures and meet working capital requirements.

As of December 31, 2021, we had $217.1 million in cash and cash equivalents.

We believe that our cash and cash equivalents on hand will be sufficient to support operations, working capital and capital expenditure requirements for at least the next 12 months.

Our future capital requirements will depend on many factors, including our revenue growth rate, our ability to commercialize and deploy in the market our Guardian XO and Guardian XT products, our decision to outsource manufacturing of our robotic systems or develop high volume production manufacturing capabilities in-house, unanticipated supply chain delays, availability of required materials and components, the extent to which we use capital to support further infrastructure development and research and development efforts, additional capital expenditures required for existing and new facilities, the expansion of

sales, marketing, service and maintenance efforts, and the development expenses related to designing and developing of new product capabilities.

In addition, we may, in the future, enter into arrangements to acquire or invest in complementary businesses, services, and technologies, which may require acquisition capital as well as operational capital for these acquisitions or arrangements.

As of December 31, 2022, we had $114.5 million in cash, cash equivalents and marketable securities.

We believe that our cash, cash equivalents and marketable securities on hand will be sufficient to support operations, working capital and capital expenditure requirements for at least the next 12 months from the date of this report;

however, we may need to secure additional financing prior to achieving positive operating cash flows, which we do not expect to occur until 2025 at the earliest.

The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our product development efforts, our ability to manufacture and deliver commercial products and thereby recognize associated revenue, capital requirements to build commercial products prior to receiving payments sufficient to cover our costs and our ability to lower product costs as volumes increase.

Any delays in the successful completion of the commercialization of our products will negatively impact our ability to generate revenue, our profitability and our overall operating performance.

In addition, we may enter into arrangements to acquire or invest in complementary businesses, services and technologies, which may require acquisition capital as well as operational capital for these acquisitions or arrangements.

We may be required to seek additional equity or debt financing to facilitate these arrangements.

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We expect our operating and capital expenditures to increase as we increase headcount, expand our operations and grow our customer base.

If additional funds are required to support our working capital requirements, acquisitions, or other purposes, we may seek to raise funds through additional debt or equity financings or from other sources.

If additional funds are required to support our working capital requirements, for acquisitions or for other purposes, we may seek to raise funds through additional debt or equity financings or from other sources.

We currently expect to obtain outside financing to help cover production costs for product orders.

In addition, although we believe we have sufficient capital to fund our business for at least the next 12 months, we may seek additional financing during that time to bolster our cash reserves and ensure our ability to continue to pursue our business objectives.

We are satisfied with our liquidity and currently have no plans to do an equity financing in 2023.

We will continue monitoring our liquidity, financial and business results and outlook and market conditions, and could change our plans if we determine it to be necessary or advisable.

If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our equity holders could be significantly diluted and these newly issued securities may have rights, preferences or privileges senior to those of existing equity holders.

If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility and would also require us to incur additional interest expense.

We can provide no assurance that additional financing will be available at all or, if available, that we would be able to obtain additional financing on terms favorable to us.

Additional financing may not be available at all or, if available, may not be available on terms favorable to us or that we find acceptable.

As of December 31, 2022, our total minimum lease payments are $17.2 million, of which $1.5 million are due in the next 12 months.

Additionally, as of December 31, 2021, we had unconditional purchase commitments of $36.0 million, of which none is due in the next twelve months.

For detail regarding our lease obligations and unconditional purchase commitments refer to Note 11, Commitments and Contingencies, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Additionally, as of December 31, 2022, we had unconditional purchase commitments of $36.0 million, of which $8.0 million is due in the next twelve months.

For detail regarding our lease obligations and unconditional purchase commitments refer to Note 4 Leases and Note 13, Commitments and Contingencies, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

The following table summarizes our cash flow data for the periods presented:

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Net cash used in investing activities

Net cash provided by financing activities

Net increase in cash and cash equivalents

Net cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net Cash Used in Operating Activities

Cash flows used in operating activities during the twelve months ended December 31, 2022, increased by $23.3 million to $65.4 million from $42.1 million during the same period in 2021.

The increase to net cash used in operating activities was primarily attributable to a $60.6 million increase to net loss, partially offset by increases in stock-based compensation expense and other non-cash expenses.

Additionally, net cash used in operating activities related to changes in operating assets and liabilities increased by $6.1 million, driven mainly by increases in prepaid expenses, partially offset by increases in operating liabilities.

The increase to net cash used in operating activities was primarily attributable to a $75.6 million increase to net loss, an $18.4 million increase to gains on warrant liability revaluation and a $7.5 million decrease in stock-based compensation, partially offset by goodwill impairment of $70.2 million and $6.0 million of other non-cash expenses.

Additionally, net cash used in operating activities related to changes in operating assets and liabilities decreased by $2.0 million, driven mainly by decreases prepaid expenses, partially offset by decreases in accrued liabilities and other non-current liabilities and increases in inventory and billed and unbilled receivables.

Net Cash Used in Investing Activities

Our net cash used in investing activities increased by $3.7 million and is primarily driven by expenditures for the tenant improvements made for our new facility.

Net Cash Provided by Financing Activities

Our overall cash provided by financing activities increased by $187.9 million.

We received approximately $228.8 million, net of expenses and fees in cash proceeds from the Business Combination and PIPE Financing.

In comparison Old Sarcos received $39.9 million during 2020 from its stock offering.

In addition, Old Sarcos received $2.0 million in March 2021 from our second

PPP loan and received $2.4 million in April 2020 from our first PPP loan.

In February 2021, we purchased the non-controlling interest in our subsidiary, ZeptoVision, Inc., for $0.2 million.

Our net cash used in investing activities increased by $104.4 million.

The increase in cash used in investing activities is due to the purchase of marketable securities during the twelve months ended December 31, 2022 of $77.9 million, net of maturities, and $29.7 million of net cash used as part of the purchase consideration for the RE2 acquisition.

Net Cash (Used In) Provided by Financing Activities

Our overall cash provided by financing activities decreased by $237.8 million.

The decrease was due mainly to the cash proceeds from the Business Combination and PIPE Financing of approximately $228.8 million, net of expenses and fees, which was completed during the third quarter of 2021 and $2.0 million of proceeds from loans received under the PPP for the twelve months ended December 31, 2021.

During the twelve months ended December 31, 2022, $8.1 million was used to repurchase shares of common stock that were withheld for payment of tax withholding obligations upon the vesting of equity awards, partially offset by proceeds from the exercise of stock options.

Emerging Growth Company Status

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We are an “emerging growth company”

as defined in Section 2(a) of the Securities Act, and has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards.

as defined in Section 2(a) of the Securities Act, and have elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards.

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of Common Stock that is held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter, (ii) the last day of the fiscal year in which we have total annual gross revenue of $1.235 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which we have issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) December 31, 2025, and we expect to continue to take advantage of the benefits of the extended transition period, although we may decide to early adopt such new or revised accounting standards to the extent permitted by such standards.

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Revenue Recognition

We recognize revenue from the sale of our robotic systems and from contractual arrangements to perform research and development services that are fully funded by our customers.

We recognize revenue from the sale of our robotic systems and from contractual arrangements to perform product development contract services that are fully funded by our customers.

We recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services.

Revenue from research and development services is recognized over time as products and services are provided.

Revenue from product development contracts is recognized over time as products and services are provided.

For fixed priced contracts we measure progress toward satisfaction of performance obligations using costs incurred to date relative to total estimated costs (“cost-to-cost”).

Research and development contracts may last multiple years and estimation of the total transaction price and expected cost requires management’s judgment.

Based on the nature of the Company’s research and development contracts, the work to be performed is often complex and may involve new processes, procedures, and tasks which creates uncertainty in estimating contract costs.

All estimates impacting revenue recognition, including estimates of total expected costs, or Estimates at Completion (“EACs”), are reviewed on a periodic basis, at least quarterly.

Based on the nature of the Company’s research and development contracts, the work to be performed is often complex and may involve new processes, procedures, and tasks which

creates uncertainty in estimating contract costs.

All estimates impacting revenue recognition, including estimates of total expected costs, or Estimates at Completion, are reviewed on a periodic basis, at least quarterly.

For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made.

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As we accumulate additional employee stock-based awards data over time and as we incorporate market data related to our common stock, we may calculate significantly different volatilities and expected lives, which could materially impact the valuation of our stock-based awards and the stock-based compensation expense that we will recognize in future periods.

Valuation of Goodwill and Acquired Intangible Assets

Goodwill is initially recorded when the purchase price paid for a business acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired.

The allocation of the purchase price of the acquired businesses to goodwill and intangible assets requires us to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the appropriate discount rate for those cash flows.

Should conditions differ from management’s estimates at the time of the acquisition, material write-downs of goodwill and/or intangible assets may be required.

We evaluate goodwill for impairment at least annually or whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

The evaluation includes consideration of qualitative factors including industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit.

If we determine that a quantitative analysis is necessary, we perform a quantitative analysis which consists of a comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit.

We determine the fair value of our reporting unit based on an income approach.

The income approach is based on the present value of estimated future cash flows of the reporting units.

If the carrying amount of the reporting unit is in excess of its fair value, the difference between the fair value and carrying amount is recorded as an impairment loss.

An impairment loss on intangible assets with definite useful lives exists when the estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount.

If the carrying amount exceeds the sum of the undiscounted cash flows, an impairment charge is recognized based on the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.

During the fourth quarter of 2022, due to the sustained decrease in our publicly quoted share price and market capitalization, we performed a quantitative goodwill impairment test.

We recorded a $70.2 million non-cash goodwill impairment charge for the twelve months ended December 31, 2022.

During the fourth quarter of 2022 we also tested our intangible assets with definite lives for impairment and found no impairment.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity