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 ) 59 Consolidated Balance Sheets 60 Consolidated Statements of Operations 61 Consolidated Statements of Comprehensive Loss 62 Consolidated Statements of Cash Flows 63 Consolidated Statements of Stockholders’ Equity 64 Notes to Consolidated Financial Statements 65 58 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Sarcos Technology and Robotics Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Sarcos Technology and Robotics Corporation (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023 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 February 28, 2024 59 SARCOS TECHNOLOGY AND ROBOTICS CORPORATION CONSOLIDATED BALANCE SHEETS ( in thousands, except share data ) As of December 31, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 23,139 $ 35,159 Marketable securities 15,947 79,337 Accounts receivable 555 1,866 Unbilled receivables 2,034 4,160 Inventories 1,065 3,562 Prepaid expenses and other current assets 2,323 5,015 Total current assets 45,063 129,099 Property and equipment, net 4,842 7,640 Intangible assets, net — 19,116 Operating lease assets 10,092 11,283 Other non-current assets 429 487 Total assets $ 60,426 $ 167,625 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 1,291 $ 3,620 Accrued liabilities 5,805 6,025 Current operating lease liabilities 1,360 887 Total current liabilities 8,456 10,532 Operating lease liabilities 11,036 12,387 Other non-current liabilities 29 256 Total liabilities 19,521 23,175 Commitments and contingencies (Note 12) Stockholders’ equity: Common stock, $ 0.0001 par value, 165,000,000 shares authorized as of December 31, 2023, and December 31, 2022; 25,877,865 and 25,708,519 shares issued and outstanding as of December 31, 2023, and December 31, 2022, respectively 3 3 Additional paid-in capital 459,113 447,085 Accumulated other comprehensive income (loss) 3 ( 17 ) Accumulated deficit ( 418,214 ) ( 302,621 ) Total stockholders’ equity 40,905 144,450 Total liabilities and stockholders’ equity $ 60,426 $ 167,625 See accompanying notes to the consolidated financial statements. 60 SARCOS TECHNOLOGY AND ROBOTICS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS ( in thousands, except share and per share data )  Year Ended December 31, ​ ​ 2023 2022 Revenue, net ​ $ 6,146 $ 14,569 Operating expenses:​ ​ Cost of revenue (exclusive of items shown separately below)  5,041 11,614 Research and development ​ 39,012 34,144 General and administrative ​ 31,454 63,480 Sales and marketing ​ 10,828 9,949 Intangible amortization expense 2,821 2,184 Asset write-down and restructuring 37,946 — Goodwill impairment — 70,236 Total operating expenses ​ 127,102 191,607 Loss from operations  ( 120,956 ) ( 177,038 ) Interest income, net  3,294 1,831 Gain on warrant liability 162 13,442 Other income, net  1,914 743 Loss before income tax (expense) benefit  ( 115,586 ) ( 161,022 ) Income tax (expense) benefit  ( 7 ) 3,892 Net loss  $ ( 115,593 ) $ ( 157,130 ) Net loss per share ​ Basic and diluted ​ $ ( 4.51 ) $ ( 6.42 ) Weighted-average shares used in computing net loss per share ​ Basic and diluted ​ 25,639,270 24,473,212 ​ See accompanying notes to the consolidated financial statements. 61 SARCOS TECHNOLOGY AND ROBOTICS CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS ( in thousands )   Year Ended December 31, ​ ​ 2023 2022 Net loss ​ $ ( 115,593 ) $ ( 157,130 ) Other comprehensive income (loss): ​ Change in unrealized gain (loss) on available-for-sale investments ​ 20 ( 17 ) Total other comprehensive income (loss) 20 ( 17 ) Comprehensive loss $ ( 115,573 ) $ ( 157,147 ) ​ See accompanying notes to the consolidated financial statements. 62 SARCOS TECHNOLOGY AND ROBOTICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2023 2022 Cash flows from operating activities: Net loss $ ( 115,593 ) $ ( 157,130 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation 12,043 35,645 Depreciation of property and equipment 1,554 1,409 Amortization of intangible assets 2,821 2,184 Change in fair value of warrant liability ( 162 ) ( 13,442 ) Amortization of investment discount ( 2,055 ) ( 1,494 ) Asset write-down 30,101 — Goodwill impairment — 70,236 Changes in operating assets and liabilities Accounts receivable 1,311 ( 257 ) Unbilled receivable 2,126 ( 1,972 ) Inventories ( 8,759 ) ( 2,090 ) Prepaid expenses and other current assets 2,167 4,440 Other non-current assets 1,249 960 Accounts payable ( 2,326 ) 1,539 Accrued liabilities 253 ( 798 ) Other non-current liabilities ( 1,350 ) ( 4,621 ) Net cash used in operating activities ( 76,620 ) ( 65,391 ) Cash flows from investing activities: Purchases of property and equipment ( 782 ) ( 1,498 ) Acquisition of a business, net of cash acquired — ( 29,687 ) Purchases of marketable securities ( 64,536 ) ( 177,860 ) Maturities of marketable securities 130,000 100,000 Net cash provided by (used in) investing activities 64,682 ( 109,045 ) Cash flows from financing activities: Proceeds from exercise of stock options — 683 Shares repurchased for payment of tax withholdings ( 78 ) ( 8,107 ) Payment of obligations under capital leases ( 4 ) ( 95 ) Net cash used in financing activities ( 82 ) ( 7,519 ) Net decrease in cash, cash equivalents ( 12,020 ) ( 181,955 ) Cash and cash equivalents at beginning of period 35,159 217,114 Cash and cash equivalents at end of period $ 23,139 $ 35,159 Supplemental disclosure of cash flow information: Cash paid for interest $ — $ 6 Cash paid for income taxes $ 7 $ — Supplemental disclosure of non-cash activities: Common stock and assumed equity awards in connection with a business acquisition $ — $ 59,410 Purchases of property and equipment included in accounts payable at period-end $ — $ 33 See accompanying notes to the consolidated financial statements. 63 SARCOS TECHNOLOGY AND ROBOTICS CORPORATION CONSOLIDATED S TATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share data) Common Stock Additional Accumulated Other Total Class A Paid-In Comprehensive Accumulated Stockholders’ Shares Amount Capital Loss Deficit Equity Balance, December 31, 2021 22,953,510 2 359,451 — ( 145,491 ) 213,962 Stock-based compensation — — 35,645 — — 35,645 Common stock issued upon vesting of restricted stock awards and restricted stock units 1,047,406 1 ( 1 ) — — — Shares repurchased for payment of tax withholdings and other ( 403,546 ) — ( 8,103 ) — — ( 8,103 ) Exercise of stock options 315,703 — 683 — — 683 Common stock and assumed equity awards in connection with a business acquisition 1,795,446 — 59,410 — — 59,410 Other comprehensive loss — — — ( 17 ) — ( 17 ) Net loss — — — — ( 157,130 ) ( 157,130 ) Balance at December 31, 2022 25,708,519 $ 3 $ 447,085 $ ( 17 ) $ ( 302,621 ) $ 144,450 Stock-based compensation — — 12,043 — — 12,043 Common stock issued upon vesting of restricted stock awards and restricted stock units 219,175 — — — — — Shares repurchased for payment of tax withholdings and other ( 49,829 ) — ( 15 ) — — ( 15 ) Other comprehensive loss — — — 20 — 20 Net loss — — — — ( 115,593 ) ( 115,593 ) Balance at December 31, 2023 25,877,865 $ 3 $ 459,113 $ 3 $ ( 418,214 ) $ 40,905 See accompanying notes to the consolidated financial statements. 64 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”), is a pioneer in the robotic systems industry. The Company’s mission is to deliver software to its customers that enhances the utility and functionality of third-party stationary and mobile robotic systems by enabling these systems to quickly observe, learn, reason and act in structured and unstructured environments. The Company’s full-stack, closed-loop autonomy software platform (“AI/ML Software Platform”) is being designed with artificial intelligence (“AI”) and machine learning (“ML”) techniques to enable robotic systems to perceive their environment and quickly adapt to changing circumstances by generalizing (i.e., learning) from their past experience using dynamic real-time operations "on the edge" (i.e., on the robotic system) without extensive programming and with minimal robot training. . 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. Business Combination On September 24, 2021 (the “Closing Date”), Rotor Acquisition Corp. (“Rotor”), a Delaware corporation, consummated the previously announced business combination (the “Business Combination”) pursuant to the terms of the Agreement and Plan of Merger, dated as of April 5, 2021 (the “Original Merger Agreement”), by and among 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 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 Rotor. On the Closing Date, Rotor changed its name to Sarcos Technology and Robotics Corporation. On April 25, 2022, the Company acquired RE2, Inc., (“RE2”) a Pittsburgh, PA based developer of autonomous and teleoperated mobile robotic systems. The results presented herein include the activity of RE2 from the acquisition date through December 31, 2023 . The Company's results do not include RE2’s financial information prior to the acquisition. For further detail see Note 5. Reverse Stock Split On July 5, 2023, the Company effected a 1-for- 6 reverse stock split (“Reverse Stock Split”) of the Company's outstanding shares of common stock, as approved by the Company's stockholders at the Company’s Annual Meeting of Stockholders held on June 14, 2023. All share and per share amounts of common stock, options , warrants, restricted stock and restricted stock units in the accompanying condensed consolidated financial statements and notes thereto have been retroactively adjusted for all periods presented to reflect the reverse stock split. Asset Write-Down and Restructuring On July 12, 2023, the Company announced that it had refined its sales strategy to focus on products that have the most potential for near-term revenue growth and strategic opportunities. At the time, these products included our Guardian Sea Class system, certain aviation (baggage handling and exterior aircraft maintenance), solar (solar field panel installation) solutions, and our commercial AI/ML Software Platform. In connection with the restructuring effort announced in July, during the twelve months ended December 31, 2023, the Company incurred total charges of $ 10.6 million , w hich includes a write-down of inventory of $ 4.4 million, a $ 0.7 million write-down for certain assets as a result our product development reprioritization, $ 1.1 million in severance and benefit payments, and $ 4.4 million due to the acceleration of stock-based compensation expense resulting from the early termination of the Company's redemption right over certain shares held by the Company's former Chief Operating Officer in connection with the termination of his employment. 65 On November 14, 2023, the Company announced its decision to suspend for the foreseeable future commercialization efforts on its hardware programs and focus on the development of its commercial AI/ML Software Platform. The Company will continue some de minimis hardware system research and development efforts on a substantially reduced scale, in part to support its software platform development efforts. As a result of the Company's refined strategy it is optimizing its organization in pursuit of this product opportunity and will reduce costs, including reducing headcount and shifting all operations to its Salt Lake City, Utah location and will shut down its facilities in Pittsburgh, Pennsylvania. In connection with the restructuring efforts announced in November 2023, the Company incurred charges of $ 27.3 million during the t welve months ended December 31, 2023 , which includes a write-down of inventory of $ 6.9 million, a $ 16.9 million charge for the accelerated amortization of intangible assets and write-off of certain other assets as a result our product development reprioritization, $ 1.2 million of accelerated depreciation related to the shutting down our facilities in Pittsburgh, Pennsylvania, $ 0.5 million for contract restructuring accruals, and $ 1.8 million in severance and benefit payments. 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, long lived assets, assumptions used for leases, 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, cash equivalents and marketable securities were $ 39.1 million as of December 31, 2023, compared to $ 114.5 million as of December 31, 2022. The Company has historically incurred losses and negative cash flows from operations. As of December 31, 2023, the Company also had an accumulated deficit of approximately $ 418.2 million and working capital of $ 36.6 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 have been cash generated by equity offerings. 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 timing and extent of development efforts, the expansion of sales and marketing activities, customer growth rate, customer retention, the introduction of new and enhanced product offerings and market acceptance of the Company’s products. 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, marketable securities, accounts receivable and unbilled receivables. The Company’s cash is placed with high-credit-quality financial institutions and issuers, and generally exceeds federally insured limits. The Company's cash equivalents and marketable securities are money market funds or U.S. Treasury bills with maturity dates within one year. The Company has not realized any losses relating to its cash, cash equivalents or marketable securities. Accounts receivable As of December 31, 2023 , three of our customers accounted for more than 10% of the Company’s accounts receivable, which in total represented 90 % of the accounts receivable as of December 31, 2023. As of December 31, 2022 , three 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 December 31, 2022. Revenue 66 Five and three cust omers accounted for more than 10% of the Company’s revenue for each of the years ended December 31, 2023 and 2022 , respectively. These concentrations accounted for 85 % and 74 % of revenue for the years ended December 31, 2023 and 2022 , respectively. The total amount of revenue for each such customer was as follows: (In thousands) 2023 2022 Customer A $ 1,618 $ 1,884 Customer B 1,116 2,848 Customer C 883 * Customer D 815 5,988 Customer E 808 * * 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 credit losses using a specific identification method after taking into account all of its remedies for collection. Management determined no allowance for credit losses was necessary as of December 31, 2023 and 2022 . Receivables are comprised of amounts invoiced for completed contracts and contracts in progress. 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 3 – 10 years Computer equipment 3 – 5 years Software 3 years Furniture and fixtures 3 – 5 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 statement of operations. Leases In accordance with ASC 842, the Company, at the inception of the contract, determines whether a contract is or contains a lease. For leases with terms greater than 12 months, the Company records the related operating or finance right of use asset and lease liability at the present value of lease payments over the lease term. The Company is generally not able to readily determine the implicit rate in the lease and therefore uses the determined incremental borrowing rate at lease commencement to determine the present value of lease payments. The incremental borrowing rate represents an estimate of the market interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over 67 the term of a lease. Renewal options are not included in the measurement of the right of use assets and lease liabilities unless the Company is reasonably certain to exercise the optional renewal periods. Some of the Company's leases contain rent escalations over the lease term. The Company recognizes expense for operating leases on a straight-line basis over the lease term. The Company’s lease agreements contain variable lease payments for common area maintenance, utility, insurance, and tax. The Company has elected the practical expedient to combine lease and non-lease components for all asset categories. Therefore, the lease payments used to measure the lease liability for these leases include fixed minimum rentals along with fixed non-lease component charges. The Company does not have significant residual value guarantees or restrictive covenants in the lease portfolio. Impairment of Long-Lived Assets The Company evaluates its long-lived asset 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. Goodwil l 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 Company evaluates goodwill at the reporting unit level for impairment annually, or when an indicator of potential impairment exists. The Company has one reporting unit. 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 product development contract services that are 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. 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 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 customer's 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 68 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 the Company would sell the good(s) or service(s) to a customer on a standalone basis. For government contracts, the Company uses expected cost plus a margin as the standalone selling price. Because the Company's contract pricing with government customers is generally based on expected cost plus a margin, the standalone selling price of the good(s) or service(s) in the Company's contracts with government customers 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, the Company determines at contract inception whether it satisfies 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 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. Revenue 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 products. Second, the Company sells its products and related parts and repair services. Product development contract revenue includes 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 the Company's products and related technology. 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 the 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 revenue relates to sales of the Company’s commercially available 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. 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. 69 The revenue recognized for Product Development Contract Revenue and Product Revenue were as follows: For the year ended December 31, (In thousands) 2023 2022 Product Development Contract Revenue $ 5,256 $ 14,239 Product Revenue 890 330 Revenue, net $ 6,146 $ 14,569 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 revenue recognized that is contingent upon the satisfaction of performance obligations is accounted for as deferred revenue. Contract assets include unbilled receivables which are amounts resulting from timing differences between revenue recognition and billing in accordance with agreed-upon contractual terms, which typically occur subsequent to revenue being recognized. The opening and closing balances of our accounts receivable, unbilled receivables, contract assets and deferred revenue 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, 2021 $ 788 $ 221 $ 94 $ 36 $ 30 Increase/(decrease), net 1,078 3,939 ( 32 ) ( 25 ) ( 30 ) Ending Balance as of December 31, 2022 $ 1,866 $ 4,160 $ 62 $ 11 $ — Increase/(decrease), net ( 1,311 ) ( 2,126 ) ( 12 ) ( 10 ) 75 Ending Balance as of December 31, 2023 $ 555 $ 2,034 $ 50 $ 1 $ 75 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. During the year ended December 31, 2023 , the Company did no t recognize any revenue related to deferred revenue which existed at December 31, 2022. During the year ended December 31, 2022, the Company recognized all of the deferred revenue which existed at December 31, 2021. Remaining performance obligations As of December 31, 2023, the C ompany had backlog, or revenue related to remaining performance obligations, of $ 8.1 million. The Company expects most of this backlog to be recognized over the next 12 mo nths . The Company’s backlog represents the expected value of exercised contracts, both funded and unfunded, less revenue recognized to date. Research and Development Costs Research and development expenses consist of costs incurred for experimentation, design and testing and are expensed as incurred. Sales and Marketing Costs Marketing costs include product demonstration, customer service, lead generation, public relations, market research and internal labor, and are expensed as incurred. Stock-Based Compensation The Company calculates the fair value of all stock-based awards, including stock options, restricted stock units 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 70 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. Recently Adopted Accounting 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 June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 to 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 Company adopted ASU 2016-13 on January 1, 2023 . The adoption of ASU 2016-13 did no t have a material impact on the Company's condensed consolidated financial statements and related disclosures. Recently Issued Accounting Standard Pronouncements In December 2023, the FASB issued ASU No. 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 requires companies to disclose, on an annual basis, specific categories in the effective tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. In addition, ASU 2023-09 requires companies to disclose additional information about income taxes paid. ASU 2023-09 will be effective for annual periods beginning January 1, 2026 and will be applied on a prospective basis with the option to apply the standard retrospectively. The Company does not expect a material impact on its consolidated financial statements related to ASU 2023-09. 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. 71 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 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, 2023 (In thousands) Level 1 Level 2 Level 3 Total Assets: Cash equivalents: U.S. Treasury securities $ 4,973 $ — $ — $ 4,973 Marketable securities: U.S. treasury securities 15,947 — — 15,947 Total assets $ 20,920 $ — $ — $ 20,920 Liabilities: Warrant liability $ — $ 29 $ — $ 29 Total liabilities $ — $ 29 $ — $ 29  As of December 31, 2022 (In thousands) Level 1 Level 2 Level 3 Total Assets: Marketable securities: U.S. treasury securities $ 79,337 $ — $ — $ 79,337 Total assets $ 79,337 $ — $ — $ 79,337 Liabilities: Warrant liability $ — $ 253 $ — $ 253 Total liabilities $ — $ 253 $ — $ 253 As of December 31, 2023 , the Company held $ 20.9 million of available-for-sale debt securities with maturity dates within one year. The fair value of the Company's available-for-sale debt securities approximates their amortized cost basis. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying amounts of accounts payable and accrued expenses approximate their fair values because of the relatively short periods until they are required to be settled. The following table sets forth a reconciliation from the opening balances to the closing balances for Level 3 values: (In thousands) Balance at December 31, 2021 $ 13,701 Warrant liability transferred out of Level 3 ( 13,701 ) Balance at December 31, 2022 $ — Transfers to/from Levels 1, 2 and 3 are recognized at the beginning of the reporting period in which a change in valuation technique or methodology occurs. During the first quarter of 2022 the trading price of our public warrants was used to value our private placement warrants, and a third-party valuation was no longer deemed necessary resulting in the estimated fair value of our private placement warrants being transferred from a Level 3 fair value measurement to a Level 2 fair value measurement. 72 3. Balance Sheet Components Inventories Inventories, net consist of the following: (In thousands) December 31, 2023 December 31, 2022 Raw materials $ — $ 2,081 Work-in-process — 180 Finished goods, net 1,065 1,301 Total inventories $ 1,065 $ 3,562 Prepaid expenses and other current assets Prepaid expenses and other current assets consist of the following: (In thousands) December 31, 2023 December 31, 2022 Prepaid insurance $ 873 $ 3,420 Software 1,028 1,191 Other prepaid expenses and assets 422 404 Total prepaid expenses and other current assets $ 2,323 $ 5,015 Property and equipment, net Property and equipment, net consist of the following: (In thousands) December 31, 2023 December 31, 2022 Robotics and manufacturing equipment $ 1,841 $ 1,610 Leasehold improvements 4,458 4,442 Computer equipment 1,729 1,719 Financed leased computer equipment 19 271 Software 44 389 Furniture and fixtures, and other fixed assets 1,018 1,835 Property and equipment, gross 9,109 10,266 Accumulated depreciation ( 4,267 ) ( 2,626 ) Property and equipment, net $ 4,842 $ 7,640 Depreciation expenses were $ 2.8 million for the year ended December 31, 2023 , $ 1.2 million of which was accelerated depreciation related to shutting down our facilities in Pittsburgh, Pennsylvania, which is included in asset write-down and restructuring on the consolidated statements of operations. Depreciation expenses were $ 1.4 million for the year ended December 31, 2022. Amortization of assets under finance leases is included as part of depreciation expense. Accrued liabilities Accrued liabilities consist of the following: (In thousands) December 31, 2023 December 31, 2022 Payroll and related costs $ 3,913 $ 4,271 Contract restructuring accrual 506 — Legal accrual 547 234 Other accrued expenses and current liabilities 839 1,520 Total accrued liabilities $ 5,805 $ 6,025 73 Other non-current liabilities Other non-current liabilities consist of the following: (In thousands) December 31, 2023 December 31, 2022 Finance leases $ — $ 3 Warrant liabilities 29 253 Total other non-current liabilities $ 29 $ 256 4. Leases The Company leases real estate for office space under operating leases with varying expiration dates through 2033 . Leases are categorized at their commencement date , which is the date the Company takes possession or control of the underlying asset. Certain of the operating leases include renewal options ranging from three to five years , which are not recognized as part of the right-of-use assets as the Company is not reasonably certain that the options will be exercised. Lease costs for operating leases are as follows: Year ended (In thousands) December 31, 2023 December 31, 2022 Operating lease cost $ 1,859 $ 1,640 Variable lease cost 773 786 Total lease cost $ 2,632 $ 2,426 The following table summarizes the Company’s lease term and discount rate assumptions: Year ended December 31, 2023 December 31, 2022 Operating leases Weighted-average remaining lease term (years) 9.0 9.7 Weighted-average discount rate: 5.4 % 5.4 % Supplemental cash flow and other information related to leases: Year ended (In thousands) December 31, 2023 December 31, 2022 Cash paid for amounts included in measurement of liabilities: Operating cash flows from operating leases $ 1,546 $ 1,674 Right-of-use assets obtained in a noncash exchange for new lease liabilities: Operating leases $ — $ 633 74 Undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year, as of December 31, 2022 are as follows: (In thousands) Operating Leases 2024 $ 1,968 2025 1,619 2026 1,488 2027 1,529 2028 1,571 2029 and thereafter 7,465 Total lease payments 15,640 Less interest 3,244 Present value of lease liabilities $ 12,396 5. Acquisition On April 25, 2022, the Company acquired RE2, Inc. a Pittsburgh, PA based developer of manipulator arms with human-like performance, intuitive robot interfaces and advanced autonomy capabilities. The aggregate consideration transferred was $ 90.1 million, of which $ 30.7 million was paid in cash, $ 44.0 million was comprised of 1,562,112 shares of common stock and $ 15.4 million was comprised of assumed options to purchase 646,173 shares of common stock. Additionally, 233,333 shares of common stock were issued with a fair value of $ 6.6 million that were subject to risk of forfeiture. These shares were excluded from the consideration transferred and have been recorded as stock-based compensation expense. The acquisition was accounted for as a business combination and the total purchase consideration was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date and the excess was recorded as goodwill. The Company recorded the assets acquired and liabilities assumed at their fair values as of the acquisition date. The following table presents the final purchase consideration allocation recorded in the Company’s consolidated balance sheet as of the acquisition date: (in thousands) Amount Cash and cash equivalents $ 981 Accounts receivable 821 Unbilled receivables 1,968 Inventories 465 Prepaid expenses and other current assets 253 Property and equipment 1,084 Intangible assets 21,300 Goodwill 70,236 Operating lease assets 1,486 Other non-current assets 21 Accounts payable ( 822 ) Accrued liabilities ( 2,334 ) Current operating lease liabilities ( 458 ) Operating lease liabilities ( 1,028 ) Deferred tax liabilities ( 3,895 ) Total acquisition consideration $ 90,078 The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in thousands): (in thousands) Amounts Weighted Average Useful Life (in years) Trade name and trademarks $ 1,000 6 Developed technology 9,600 5 Customer relationships 10,700 9 Total intangible assets $ 21,300 7 75 Goodwill represents the future economic benefits arising from other assets that could not be individually identified and separately recognized, such as the acquired assembled workforce and synergies expected to be achieved from the integration of RE2. Goodwill is not deductible for tax purposes. The results of operations of RE2 from the date of acquisition have been included in the Company’s consolidated financial statements. Pro forma revenue and results of operations have not been presented because the historical results of RE2 are not material to the Company’s consolidated financial statements in any period presented. 6. Goodwill and Intangible Assets Goodwill As a result of sustained decreases in the Company’s publicly quoted share price during the fourth quarter of 2022, the Company conducted an analysis of its goodwill as of December 31, 2022, and performed a quantitative goodwill impairment assessment. The Company estimated the reporting unit's fair value under an income approach using a discounted cash flow model. The income approach used the reporting unit's projections of estimated operating results and cash flows that were discounted using a market participant discount rate based on the weighted-average cost of capital. The main assumptions supporting the cash flow projections include, but are not limited to, revenue growth, margins, discount rate, and terminal growth rate. The financial projections reflect management's best estimate of economic and market conditions over the projected period, including forecasted revenue growth, margins, capital expenditures, depreciation and amortization. Based on the Company’s quantitative goodwill impairment assessment, it concluded that the carrying value of its reporting unit exceeded its fair value and that all of its goodwill was fully impaired as of December 31, 2022. Acquired Intangible Assets Acquired intangible assets, net consisted of the following: December 31, 2023 (In thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Remaining Useful Life (in years) Trade name and trademarks $ 1,000 $ 1,000 $ — — Developed technology 9,600 9,600 — — Customer relationships 10,700 10,700 — — Total $ 21,300 $ 21,300 $ — December 31, 2022 (In thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted Average Remaining Useful Life (in years) Trade name and trademarks $ 1,000 $ 111 $ 889 5 Developed technology 9,600 1,280 8,320 4 Customer relationships 10,700 793 9,907 8 Total $ 21,300 $ 2,184 $ 19,116 The Company recorded $ 2.8 million and $ 2.2 million of amortization expense during the years ended December 31, 2023 and 2022, respectively, which was recorded as intangible amortization expense in the consolidated statement of operations. As a result of the Company’s product development reprioritization announced in November 2023, the Company reassessed the remaining useful-lives of its intangible assets. The Company recorded $ 16.3 million of accelerated amortization expense during the year ended December 31, 2023, which is included in asset write-down and restructuring in the consolidated statements of operations. 76 7. Earn-Out Shares As a result of the Business Combination each holder of Old Sarcos capital stock is entitled to Contingent Merger Consideration following the closing of the Business Combination in the form of earn-outs, up to an aggregate of 4,687,500 shares of Common Stock (the “Earn-Out Shares”). The Earn-Out Shares will become payable as follows: • 2,343,750 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 $ 90.00 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. • 2,343,750 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 $ 120.00 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 are treated as equity-linked instruments as opposed to shares outstanding, and as such are not included in shares outstanding on the Company’s condensed consolidated balance sheets. As of December 31, 2023 , there remained 4,687,500 Earn-Out Shares potentially issuable . 8. Warrants 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 sixth of a 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”). Each whole Warrant entitles the registered holder to purchase one sixth of a share of the Company’s Common Stock at a price of $ 11.50 per warrant, subject to adjustment as discussed below, at any time commencing on Janu ary 20, 2022, provided that the Company has an effective registration statement under the Securities Act of 1933, as amended (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 the Company permits holders to exercise their Warrants on a cashless basis under the circumstances specified in the warrant agreement (the “Warrant Agreement”) entered into between Continental Stock Transfer & Trust Company and Rotor 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 the Company’s Common Stock. 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. As of December 31, 2023 , there were 20,549,453 Warrants outstanding. The Company 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 Common Stock underlying the Warrants is then effective and a prospectus relating thereto is current, subject to the Company satisfying its obligations described below with respect to registration, or a valid exemption from registration is available. No Warrant will be exercisable, and the Company will not be obligated to issue a share of Common Stock upon exercise of a Warrant unless the share of the Company’s 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. If 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 the Company 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 the Company’s 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 initial purchasers or their permitted transferees, 77 the Private Placement Warrants will be redeemable by the Company 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 the Company so long as they are held by the initial purchasers or their permitted transferees, subject to certain exceptions. The initial purchasers or their permitted transferees, have the option to exercise the Private Placement Warrants on a cashless basis. Redemption of Warrants When the Price per Share of the Company’s Common Stock Equals or Exceeds $ 108.00 . Once the Warrants become exercisable, the Company 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 the Company’s 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 the Company sends the notice of redemption to the Warrant holders (which is referred to as the “Reference Value”) equals or exceeds $ 108.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like). If and when the Warrants become redeemable by the Company, the Company may exercise its redemption right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws. However, the Company will not redeem the Warrants unless an effective registration statement under the Securities Act covering the shares of the Company’s Common Stock issuable upon exercise of the Warrants is effective and a current prospectus relating to those shares of the Company’s 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 $ 60.00 . Once the Warrants become exercisable, the Company may redeem the outstanding Warrants (except as described herein with respect to the Private Placement Warrants if the Company does 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 the Company’s Common Stock; • if, and only if, the Reference Value (as defined above) equals or exceeds $6 0.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like); and • if the Reference Value is less than $ 108.00 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. 9. Stock-based Compensation 2021 Stock Plan Sarcos Technology and Robotics Corporation 2021 Equity Incentive Plan (the “2021 Plan”) provides stock options, restricted stock units (“RSUs”), restricted stock awards (“RSAs”), stock appreciation rights (“SARS”) and performance awards for issuance to Company employees, officers, directors, non-employee agents and consultants. In general, outstanding awards granted under the 2021 Plan vest over one to four years and, in the case of options, 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) 5.0 million 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 Combination 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 78 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 2.1 million shares of Common Stock. As of December 31, 2023 , 2.7 million sh ares were available for grant under the 2021 Plan. 2015 Stock Plan The Old Sarcos 2015 Equity Incentive Plan (the “2015 Plan”) provided stock options, RSUs, RSAs, SARS and performance awards for issuance to Company employees, officers, directors, non-employee agents and consultants. Outstanding awards under the 2015 Plan generally vest over three to five years and are exercisable up to 10 years from the date of grant. Unvested options are forfeited upon termination. No further awards may be made under the 2015 Plan. Any forfeited awards will be added to the 2021 Plan as described above . RE2 Stock Plans In connection with the acquisition of RE2, the Company assumed the outstanding stock plans and certain outstanding stock options of RE2. These stock options are governed by the plans and agreements under which they were originally issued, but are now exercisable for shares of Common Stock. Stock Option Activity The following summarizes the Company’s stock option activity for the years ended December 31, 2023 and 2022: Options Outstanding Number of Shares Weighted Average Exercise Price Weighted-Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding – December 31, 2021 1,671,282 $ 19.68 7.2 $ 67,173 Granted (a) 1,255,904 12.31  Exercised ( 315,730 ) 2.16 6,050 Cancelled ( 233,953 ) 33.08  Outstanding – December 31, 2022 2,377,503 $ 16.80 7.1 $ 698 Granted 1,859,200 2.78  Cancelled ( 1,391,619 ) 12.35  Outstanding – December 31, 2023 2,845,084 $ 9.82 7.2 $ 91 Exercisable – December 31, 2022 1,415,219 $ 9.51 5.8 $ 698 Exercisable – December 31, 2023 1,250,104 $ 11.62 5.0 $ 91 (a) In connection with the acquisition of RE2, the Company assumed certain outstanding options to acquire RE2 common stock which, following such assumption, were converted to options to acquire 0.6 million shares of the Company’s Common Stock at a we ighted-average exercise price of $ 6.30 per share. For options granted during the years ended December 31, 2023 and 2022, the weighted-average grant-date fair value was $ 1.81 and $ 5.76 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. 79 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 options granted under the 2021 Plan on the respective dates of grant using the following weighted average assumptions: Years ended December 31, 2023 December 31, 2022 Options Risk-free interest rate 3.61 % 3.19 % Expected term (in years) 6.08 6.09 Expected dividend yield — % — % Expected volatility 69.96 % 68.52 % The following summarizes the Company’s employee RSU activity for the years ended December 31, 2023 and 2022: Restricted Stock Units Outstanding Number of Shares Weighted-Average Grant-Date Fair Value Outstanding – December 31, 2021 299,597 $ 28.25 Granted 551,529 19.51 Released ( 188,067 ) 18.30 Cancelled ( 60,498 ) 41.58 Outstanding – December 31, 2022 602,561 $ 22.01 Granted 1,383,938 2.56 Released ( 219,175 ) 18.36 Cancelled ( 587,209 ) 12.76 Outstanding – December 31, 2023 1,180,115 $ 4.49 RSUs granted generally include service vesting periods of one to four years . The following summarizes the Company’s employee RSA activity for the year ended December 31, 2022: Restricted Stock Awards Outstanding Number of Shares Weighted-Average Grant-Date Fair Value Outstanding – December 31, 2021  854,871 $ 52.70 Granted 4,479 34.98 Released  ( 859,350 ) 52.62 Outstanding – December 31, 2022 — $ — The Company did not have any RSA activity for the year ended December 31, 2023. The Company recognized stock-based compensation expense in the consolidated statement of operations and comprehensive loss as follows: For the year ended December 31, (In thousands) 2023 2022 Cost of revenue $ 107 $ 87 Research and development 1,127 712 Sales and marketing 808 863 General and administrative 5,606 33,983 Asset write-down and restructuring 4,395 — Total stock-based compensation expense $ 12,043 $ 35,645 80 As of December 31, 2023 , there was approximately $ 10.4 million of unrecognized stock-based compensation cost, which is expected to be recognized over a weighted average period of 2.5 years. 10. 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, 2023 and 2022, respectively:  For the twelve months ended December 31, (In thousands, except share and per share data) 2023 2022 Numerator:   Net loss $ ( 115,593 ) $ ( 157,130 ) Denominator:   Weighted average shares outstanding, basic and diluted 25,639,270 24,473,212 Basic and diluted net loss per share $ ( 4.51 ) $ ( 6.42 ) Anti-dilutive securities, excluded 12,137,608 11,325,388 Basic and diluted net loss per share attributable to common stockholders is the same for the twelve months ended December 31, 2023 and 2022 , as the inclusion of potential shares of Common Stock would have been anti‑dilutive for the periods presented. 11. Income taxes Loss before provision for income taxes was $ 115.6 million and $ 161.0 million for the years ended December 31, 2023 and 2022 , respectively, all of which was generated in the United States. The Company’s provision for income taxes consists of the following: For the twelve months ended December 31, (In thousands) 2023 2022 Current: Federal $ — $ — State ( 7 ) ( 3 ) Total current ( 7 ) ( 3 ) Deferred: Federal 24,972 9,005 State 9,109 2,064 Change in valuation allowance ( 34,081 ) ( 7,174 ) Total deferred — 3,895 Total income tax benefit (expense) $ ( 7 ) $ 3,892 81 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: For the twelve months ended December 31, (In thousands) 2023 2022 Statutory federal income tax rate 21.0 % 21.0 % State tax provision 5.0 1.6 Change in valuation allowance ( 29.5 ) ( 6.9 ) Change in valuation allowance - acquisition — 2.4 Research credits 2.0 1.2 Change in effective tax rate 0.4 0.6 Goodwill impairment — ( 9.2 ) Warrant revaluation — 1.8 Disallowed executive compensation ( 0.3 ) ( 9.7 ) Stock compensation ( 1.8 ) 0.5 Unrecognized tax benefits 1.2 ( 0.6 ) Other 2.0 ( 0.3 ) Total provision for income taxes 0.0 % 2.4 % As of December 31, 2023 and 2022, the net deferred tax assets consisted of the following: December 31, (In thousands) 2023 2022 Deferred tax assets: Accrued expenses $ 283 $ 656 Stock compensation 3,293 2,969 Research credits 8,527 4,787 Research and experimental capitalization 18,238 8,713 Lease liability 3,592 3,626 Intangibles 308 — Net operating loss carryforwards 48,496 34,205 Other 3 34 Total gross deferred tax assets 82,740 54,990 Less valuation allowance ( 78,615 ) ( 44,540 ) Total deferred tax assets 4,125 10,450 Deferred tax liabilities: Property and equipment ( 1,201 ) ( 1,978 ) Intangibles — ( 5,389 ) Right-of-use-asset ( 2,924 ) ( 3,083 ) Total deferred tax liabilities ( 4,125 ) ( 10,450 ) Net deferred tax assets $ — $ — 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 for the three-year period ended December 31, 2023, all of which were in the United States. The Company considered this negative evidence along with all other available positive and negative evidence and concluded that, at December 31, 2023, it is more likely than not that the Company’s U.S. deferred tax assets will not be realized. As of December 31, 2023, a valuation allowance has been recorded on the Company’s deferred tax assets to recognize only the portion of the deferred tax asset that is more likely than not to be recognized. The Company’s total valuation allowance was $ 78.6 million at December 31, 2023 and $ 44.5 million at December 31, 2022. The Company’s valuation allowance increased $ 34.1 million and $ 9.1 million during the fiscal years ended December 31, 2023 and 2022 , respectively. A reconciliation of the beginning and ending amount of the valuation allowance is as follows: December 31, (In thousands) 2023 2022 Valuation allowance at beginning of year $ 44,540 $ 35,476 Change in valuation allowance 34,075 9,064 Valuation allowance at end of year $ 78,615 $ 44,540 82 As of December 31, 2023 , the Company had cumulative federal net operating losses of approximately $ 201.5 million. Of these losses, $ 7.6 million were generated in 2015 through 2017, prior to the Tax Cuts and Jobs Act enactment, and will expire between 2035 to 2037 if not utilized. The remaining net operating losses have an indefinite carryforward period. As of December 31, 2022, the Company had cumulative federal net operating losses of approximately $ 141.3 million. As of December 31, 2023 , the Company had a $ 8.4 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 $ 1.8 million. If not utilized, the credits will expire between 2034 through 2043. As of December 31, 2022, the Company had a $ 6.6 million deferred tax asset related to a federal research and development credit carryforward. As of December 31, 2023 , the Company had state net operating losses of approximately $ 145.5 million. Of the total state net operating losses, approximately $ 116.2 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 $ 116.2 million of Utah net operating losses, $ 109.9 million are carried forward indefinitely, and the remaining net operating losses will expire beginning in 2035 through 2037. Of the total state net operating losses, approximately $ 27.0 million is attributable to Pennsylvania. Pennsylvania net operating losses will expire between 2034 through 2043. The remaining state net operating loss carryforwards are attributable to various other states with varying expiration periods. As of December 31, 2022, the Company had cumulative state net operating losses of approximately $ 107.8 million. Of the total state net operation losses as of December 31, 2022, approximately $ 96.8 million is attributable to Utah. As of December 31, 2023 , the Company had a $ 3.1 million deferred tax asset related to state research and development credits carryforward. Of the total state research and development credits, approximately $ 1.8 million is attributable to Utah. This credit has been offset by a liability for unrecognized tax benefits of $ 0.3 million. If not utilized, the credits will expire between 2029 through 2037. Of the total state research and development credits, approximately $ 1.3 million is attributable to Pennsylvania. This credit has been offset by a liability for unrecognized tax benefits of $ 0.3 million. If not utilized, the credits will expire between 2033 through 2036. As of December 31, 2022, the Company had a $ 2.0 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 $ 1.0 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, 2023, the Company had a $ 2.4 million liability for unrecognized tax benefits, all of which is netted against deferred tax assets for related carryforward credits. As of December 31, 2022, the Company had a $ 3.9 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) 2023 2022 Unrecognized tax benefits at the beginning of year $ 3,898 $ 2,634 Gross increases – current year tax positions 1,170 1,264 Gross decreases – prior year tax positions ( 2,622 ) — Unrecognized tax benefits at end of year $ 2,446 $ 3,898 The Company files U.S. and various state tax returns in jurisdictions with various statutes of limitation. As of December 31, 2023, the tax returns for fiscal year 2015 through fiscal year 2022 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, 2023, there are no income tax returns currently under audit. On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law by President Biden. The IRA includes a corporate minimum tax of 15 % on certain large corporations with greater than $ 1 billion in average adjusted financial statement income and an excise tax on certain stock repurchases executed after December 31, 2022. There are no impacts to the Company in 2023, and the Company does not expect a material impact on its consolidated financial statements in the future for the IRA. 83 12. Commitments and Contingencies Legal Proceedings The Company has been and may in the future 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 its 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 negotiation, 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 not recorded any material loss contingency related to legal proceedings in the balance sheets as of December 31, 2023 and 2022. Indemnifications In the ordinary course of business, the Company provides or 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. As of December 31, 2023 and 2022, the Company has not accrued a liability for these indemnification obligations as the likelihood of incurring a material payment obligation in connection with these indemnification obligations is either not probable or not reasonably estimable due to the unique facts and circumstances involved. 13. 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 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, 2023, the Company ha d $ 1.9 million of revenue earned from customers located outside the United States. During the year ended December 31, 2022 , the Company had $ 2.8 million of 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. 14. Employee Benefits The Company has defined contribution 401(k) plans covering substantially all employees as of December 31, 2023 . The plans allow 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. In April 2022 the Company began providing employees with 401(k) matching contributions. The Company recognized $ 1.5 million and $ 0.9 million of expense for 401(k) matching contributions during the twelve months ended December 31, 2023 and 2022, respectively. 84 Item 9. Changes in and Disagreements w ith Accountants on Accounting and Financial Disclosure. None.