Palladyne AI Corp. Q3 FY2022 earnings call

• Celebrated one-year anniversary of public listing on NASDAQ global market, with Kiva Allgood ringing the NASDAQ opening bell. - Participated in Navy's Repair Technology Exercise (REPTX) at Port Hueneme, CA, with Sarcos robotic systems demonstrating capabilities in various jobs. - Expanded product line includes teleoperated robotics systems (Sapien 6M and Guardian XT), powered full-body exoskeleton (Guardian XO), and supervised autonomy software-as-a-service. - Completed final build of pre-commercial Guardian XT system, allocated units for customer engagement; began production of commercial 6M units ahead of schedule. - Implemented new control architecture in Guardian XO software for improved accuracy and responsiveness. - RE2 made progress in developing system to deliver and install PV modules autonomously as part of DOE's O-AMPP program. - Completed six-month anniversary as combined company, with integration of IT and infra systems and standard operating procedures.

For the third quarter of 2022, quarterly revenue was $4.7 million compared to $1.1 million in the third quarter of 2021. The increase was mainly due to revenues from RE2 following acquisition. Research and development services revenue was $4.5 million in the third quarter, an increase of $3.8 million compared to the third quarter of 2021. Product sales revenue in the third quarter was $179,000, down from $435,000 in the equivalent period of 2021. Product sales in current and prior years were related to Guardian S and HLS products, which are not expected to be a material part of future revenue as the focus is on commercial launch of other product lines.

• Full year 2022 revenue expected to be between $13 million and $15 million, slightly lower than previous guidance due to some service delivery moving from fourth quarter to Q1 2023. - Anticipate monthly cash burn from operations to average approximately $7 million in the fourth quarter, including lump-sum payments and additional tax obligations related to equity awards vesting. - Confident in having sufficient cash to enable initial production of commercial systems for at least the next 12 months, but key technical staff availability remains a concern affecting revenue generation in the near term.

• Supply chain constraints which could impact product development and commercialization timelines. - Availability of skilled employees, both in-house and at development partners, which is a risk to revenue generation in the near term. - Volatility in earnings due to changes in the value of warrant liability as it is driven by changes in stock price.

Q: A quick question around the supply chain. In prior quarters, you mentioned the lack of component availability delayed the development of the XO and XT units. Is that largely behind you? And do you have a clean path to commercialization now?

A: Great question. Thanks, and also appreciate you joining. As we have also mentioned in previous calls, we have done a lot of prepurchasing, which is also noted by Drew. So we do have nice solid line of sight to commercialization and product production for the two targeted products XT and Sapien 6M. That doesn't mean -- clearly don't have a crystal ball. But as of right now, we really have put a lot of effort into making sure that we have all the preproduction parts required.

Q: You laid out a variety of end markets and industries that could benefit from Sarcos' products. How many of these industries have customers that are currently testing either the XO or XT? And have we seen any orders from them?

A: Yes. Great question. So we're very focused, as you know, laser-focused on the aviation market. So as we communicated earlier, we've been in-field and testing the trials which is part of our development cycle. So if you remember, as you walk through that process, typical first step is making sure that we have proof of concept and then that drives to commercial trials. So in the segments that we've highlighted, vegetation management at height, the port and construction and aviation, those are where we're really focused right now getting to those commercial trials.

Q: Could you expound a little bit on the comments regarding the contract manufacturer and how that kind of tallies with the kind of long-term gross margin guidance? I imagine that a ramp in the contract manufacturer has some impact on the profile of gross margin.

A: Exactly, yes. So we have identified our contract manufacturing partner. They've been on site. We've been ramping. They've had their technicians on. They were actually really helping us, providing some great input and insights on how we can scale more quickly. But you are correct in the sense that as we manufacture on prem, that does have an impact on gross margin. But as we grow in scale, our hope is that with the contract manufacturing partner we'll be able to see increased scalability which clearly will impact gross margin.

Q: Could you expound a little bit on the comments regarding the contract manufacturer and how that kind of tallies with the kind of long-term gross margin guidance? I imagine that a ramp in the contract manufacturer has some impact on the profile of gross margin.

A: Exactly, yes. So we have identified our contract manufacturing partner. They've been on site. We've been ramping. They've had their technicians on. They were actually really helping us, providing some great input and insights on how we can scale more quickly. But you are correct in the sense that as we manufacture on prem, that does have an impact on gross margin. But as we grow in scale, our hope is that with the contract manufacturing partner we'll be able to see increased scalability which clearly will impact gross margin.

Q: And just as a follow-up, obviously, you've begun commercial production of the Sapien 6M. So in terms of numbers of units, are you building an inventory there? And that suggests you have confidence in making sales in at least the next month, a few months, surely? I'm understanding that correctly?

A: This is Drew. I'll take a stab at this one. So as Kiva mentioned earlier, there is a sales process that we go through, which leads up to and includes what we call field trials. Field trials is one of those kind of last two, three steps before we get to that commercial contract with the customers. As those -- the pipeline has formed in a number of these different industries, as Kiva alluded to earlier, and so the production of these units is now in anticipation that we should see some contracts closing, but we can't announce anything until we've got them signed and in hand. So we'll continue down this road. We are advance purchasing the components. We are building the units, and we're looking forward to some successes and the pipeline continues to fill at the back end of the funnel as well as on the front end of the funnel.