UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): September 24, 2021

SARCOS TECHNOLOGY AND ROBOTICS CORPORATION

(Exact name of registrant as specified in its charter)

(888) 927-7296

Registrant’s telephone number, including area code

ROTOR ACQUISITION CORP.
The Chrysler Building
405 Lexington Avenue
New York, New York, 10174

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation to the registrant under any of the following provisions:

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Introductory Note

On September 24, 2021 (the “Closing Date”), Sarcos Technology and Robotics Corporation, a Delaware corporation (f/k/a Rotor Acquisition Corp.) (unless specified otherwise, the “Company,” “Sarcos,” or “New Sarcos”), 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 the Company, Rotor Merger Sub Corp., a Delaware corporation and a direct, wholly-owned subsidiary of the Company (“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 by the Amendment, the “Merger Agreement”), by and among the Company Merger Sub and Old Sarcos.  Pursuant to the terms of the Merger Agreement, the Business Combination between the Company and Old Sarcos was effected through the merger of Merger Sub with and into Old Sarcos, with Old Sarcos continuing as the surviving corporation (the “Merger”) and a wholly-owned subsidiary of the Company.  On the Closing Date, the registrant changed its name from Rotor Acquisition Corp. to Sarcos Technology and Robotics Corporation.

Immediately prior to the effective time of the Merger (the “Effective Time”), all issued and outstanding warrants to purchase shares of Class A Common Stock of Old Sarcos were net exercised and all issued and outstanding shares of preferred stock of Old Sarcos were converted into common stock of Old Sarcos (collectively, the “Old Sarcos Common Stock”). Pursuant to the terms of the Merger Agreement, at the Effective Time:

In addition, each holder of Old Sarcos capital stock (including any Old Sarcos RSAs) will be entitled to a right to receive additional Contingent Merger Consideration following the Closing in the form of an earn-out. This earn-out will become payable as follows:

As of the open of trading on September 27, 2021, the Common Stock and warrants of Sarcos Technology and Robotics Corporation (formerly those of Rotor Acquisition Corp.), ceased trading on the New York Stock Exchange and began trading on The Nasdaq Global Market (“Nasdaq”) under the ticker symbols “STRC” and “STRCW”, respectively.

As used in this Current Report on Form 8-K henceforward, unless otherwise stated or the context otherwise clearly requires, “we,” “us,” “our,” “Registrant” and the “Company” refer to the parent entity formerly named Rotor Acquisition Corp., after giving effect to the Business Combination, and as renamed Sarcos Technology and Robotics Corporation. As used in this Current Report on Form 8-K, all references herein to the “Board” refer to the board of directors of such entity.

A description of the Business Combination and the terms of the Merger Agreement are included in the definitive proxy statement filed with the Securities and Exchange Commission (the “SEC”) on August 6, 2021 (as supplemented by the proxy supplement filed on August 30, 2021, the “Proxy Statement”), under the section titled “Proposal No. 1 – Approval of the Business Combination” in the subsection titled “The Merger Agreement” beginning on page 105 of the Proxy Statement. A description of the terms of Amendment No. 1 to the Merger Agreement is included in the Supplement to the Proxy Statement, filed on August 30, 2021, in the section titled “Amendment No. 1 to the Merger Agreement.”

On the Closing Date, certain investors (the “PIPE Investors”) purchased from the Company an aggregate of 22,000,000 shares (the “PIPE Shares”) of Common Stock at a price of $10.00 per share, for an aggregate purchase price of $220,000,000 (the “PIPE Financing”), pursuant to separate subscription agreements (each, a “Subscription Agreement”) entered into effective as of April 5, 2021.  The sale of PIPE Shares was consummated concurrently with the closing of the Business Combination (the “Closing”).  A description of the Subscription Agreements is included in the Proxy Statement in the section entitled “Proposal No. 1 – Approval of the Business Combination” in the subsection titled “Merger Agreement – Other Agreements – Subscription Agreements” beginning on page 113 of the Proxy Statement.

The foregoing descriptions of each of the Merger Agreement and the Subscription Agreements are summaries only and are qualified in their entirety by the full text of the Original Merger Agreement, a copy of which is attached hereto as Exhibit 2.1 and incorporated herein by reference, Amendment No. 1 to the Merger Agreement, a copy of which is attached hereto as Exhibit 2.2 and incorporated herein by reference, and the Subscription Agreements, a form of which is attached hereto as Exhibit 10.3 and incorporated herein by reference.

Item 1.01. Entry Into A Material Definitive Agreement.

Indemnification Agreements

Effective as of the Closing Date, the Company entered into indemnification agreements with each of its directors and executive officers. Each indemnification agreement provides for indemnification and advancements by the Company of certain expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of their service as a director or executive officer of the Company or as a director or executive officer of any other company or enterprise to which such person provides services at the Company’s request.

The foregoing description of the indemnification agreements does not purport to be complete and is qualified in its entirety by the terms and conditions thereof, a form of which is filed herewith as Exhibit 10.16 and is incorporated herein by reference.

Registration Rights Agreement

Effective as of the Closing Date, the Company, Rotor Sponsor LLC (the “Sponsor”), and certain Old Sarcos stockholders entered into the Registration Rights Agreement pursuant to which, among other things, the Company agreed to undertake certain shelf registration obligations in accordance with the Securities Act of 1933, as amended (the “Securities Act”), and certain subsequent related transactions and obligations, including, among other things, undertaking certain registration obligations and the preparation and filing of required documents.

The foregoing description of the registration rights agreement does not purport to be complete and is qualified in its entirety by the terms and conditions thereof, a form of which is filed herewith as Exhibit 10.7 and is incorporated herein by reference.

Stockholder Lock-up Agreements

Sarcos Stockholders Lock-up Agreements

Pursuant to lock-up agreements (each, a “Lock-up Agreement”) between certain security holders of Old Sarcos (the “Old Sarcos Holders”) and the Company, the Old Sarcos Holders agreed, among other things, to the following transfer restrictions following the Closing:

The foregoing description of the Lock-up Agreements does not purport to be complete and is qualified in its entirety by the terms and conditions thereof, a form of which is attached herewith as Exhibit 10.4 and is incorporated herein by reference.

Other Lock-up Agreement

Rotor Acquisition Corp.’s chief executive officer and a director prior to the Closing and a director of the Company following the Closing and certain members of the Sponsor (collectively, the “Rotor Sarcos Holders”), entered into lock-up agreements (the “Other Lock-up Agreements”) with the Company. Pursuant to the Other Lock-up Agreements, such stockholders agreed, among other things, to certain transfer restrictions for a period of one year following the Closing.

The foregoing description of the Other Lock-up Agreements does not purport to be complete and is qualified in its entirety by the terms and conditions thereof, a form of which is attached herewith as Exhibit 10.5 and is incorporated herein by reference.

Item 2.01. Completion of Acquisition or Disposition of Assets.

The disclosure set forth in the “Introductory Note” above is incorporated by reference into this Item 2.01.

As previously reported, on September 15, 2021, Rotor held a special meeting of stockholders in lieu of its 2021 annual meeting of stockholders (the “Special Meeting”) at which the Rotor stockholders approved the Business Combination. On September 24, 2021, the parties to the Merger Agreement consummated the Business Combination.

Prior to the Special Meeting, holders of 23,479,970 shares of Class A Common Stock of Rotor exercised their right to redeem such shares for cash at a price of approximately $10.00 per share. At the Closing, (i) an aggregate of 110,192,507 shares of Common Stock of the Company were issued in exchange for shares of Old Sarcos outstanding immediately prior to the Effective Time and (ii) an aggregate of 22,000,000 shares of Common Stock of the Company were issued to the PIPE Investors in the PIPE Financing. Moreover, at the Closing, all Old Sarcos RSAs, Old Sarcos Options and Old Sarcos RSUs were assumed by the Company and converted into New Sarcos RSAs, New Sarcos Options and New Sarcos RSUs pursuant to the terms and subject to the conditions of the Merger Agreement. Immediately after giving effect to the transactions contemplated by the Merger Agreement (the “Transactions”), there were approximately:

FORM 10 INFORMATION

Forward-Looking Statements

This Current Report on Form 8-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for the business of the Company. Specifically, forward-looking statements may include statements relating to:

These forward-looking statements are based on information available as of the date of this Current Report on Form 8-K and our management’s current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

You should not place undue reliance on these forward-looking statements. As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:

These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in the section of the Proxy Statement entitled “Risk Factors,” beginning on page 55 of the Proxy Statement. Should one or more of these risks or uncertainties materialize, or should any of the assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

Business

Reference is made to the disclosure contained in the Proxy Statement in the section titled “Information About Sarcos” beginning on page 179 of the Proxy Statement, which is incorporated herein by reference.

Risk Factors

The risk factors related to the Company’s business and operations and the Transactions are set forth in the Proxy Statement in the section titled “Risk Factors” beginning on page 55 of the Proxy Statement and that information is incorporated herein by reference.

Selected Historical Information

Rotor

The following table contains summary historical financial data for Rotor for the three and six months ended June 30, 2021 and balance sheet data as of June 30, 2021 and December 31, 2020.  Such data as of December 31, 2020 and for the period from August 27, 2020 (inception) through December 31, 2020 have been derived from the audited financial statements of the Company included in the Proxy Statement.  The selected historical financial information as of and for the three and six months ended June 30, 2021 are derived from the unaudited condensed consolidated statements of operations and unaudited condensed consolidated balance sheet of Rotor, which are included in the Proxy Statement and that information is incorporated herein by reference.  The information below is only a summary and should be read in conjunction with the financial statements and notes thereto, and the section entitled “Rotor’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Rotor’s financial statements, and the notes and schedules related thereto, which are incorporated by reference in this Current Report on Form 8-K.

STATEMENTS OF OPERATIONS DATA

CONSOLIDATED BALANCE SHEET

Old Sarcos

The following table contains summary historical financial data for Old Sarcos as of and for the years ended December 31, 2020 and 2019 and as of and for the six months ended June 30, 2021 and 2020.  Such data as of and for the years ended December 31, 2020 and 2019 has been derived from the audited financial statements of Old Sarcos, which are included in the Proxy Statement, and that information is incorporated by reference herein. The data for the six months ended June 30, 2021 and 2020 has been derived from the unaudited condensed consolidated financial statements of Old Sarcos included in Exhibit 99.1 and that information is incorporated herein by reference. The information below is only a summary and should be read in conjunction with the sections entitled “Old Sarcos’ Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and in Old Sarcos’ financial statements, and the notes and schedules related thereto, which are included in the Proxy Statement and that information is incorporated herein by reference. The selected historical financial information in this section is not intended to replace Old Sarcos’ consolidated financial statements and the related notes.  Old Sarcos’ historical results are not necessarily indicative of the results that may be expected in the future.

The financial information contained in this section relates to Old Sarcos, prior to and without giving pro forma effect to the impact of the Business Combination.  The results reflected in this section may not be indicative of the results of the post-combination company going forward. See “Unaudited Pro Forma Condensed Combined Financial Information.”

Sarcos is providing the following selected historical financial information to assist you in your analysis of the financial aspects of the Business Combination.

Unaudited Condensed Financial Statements

The unaudited condensed financial statements as of and for the six months ended June 30, 2021 and 2020 of Old Sarcos set forth in Exhibit 99.1 hereto have been prepared in accordance with U.S. generally accepted accounting principles and pursuant to the regulations of the SEC. In the opinion of management, such unaudited condensed consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results reported for the interim period presented are not necessarily indicative of results that may be expected for the full year.

These unaudited condensed financial statements should be read in conjunction with the historical audited consolidated financial statements of Old Sarcos as of and for the years ended December 31, 2020 and 2019, the historical audited financial statements of Rotor and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein.

Unaudited Pro Forma Condensed Combined Financial Information

The unaudited pro forma condensed combined financial information of the Company for the year ended December 31, 2020 and as of and for the six months ended June 30, 2021, is set forth in Exhibit 99.2 hereto and is incorporated herein by reference.

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

Reference is made to the disclosure contained in the Proxy Statement in the sections titled “Sarcos’ Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 193 of the Proxy Statement and “The Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 176 of the Proxy Statement, each of which is incorporated herein by reference.

Reference is made to the disclosure contained in Rotor’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 that was filed with the SEC on August 16, 2021, in the section titled “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 18 of such report, which disclosure is incorporated herein by reference.

Management’s discussion and analysis of the financial condition and results of operation of Old Sarcos as of and for the six months ended June 30, 2021 is set forth below. Unless the context otherwise requires, references in the below management’s discussion and analysis of the financial condition and results of operation to “Sarcos,” “the Company,” “we,” “us” and “our” refer to the business and operations of Old Sarcos prior to the Business Combination and to New Sarcos and its consolidated subsidiary following the Closing.

Overview

Sarcos is a global 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.  

To date we have primarily focused our efforts on the development of the technology and design of our Guardian products which include: the Guardian XO, designed to be a full-body, battery powered, highly dexterous exoskeleton; the Guardian XT, designed to be an augmented or virtual reality enabled, highly dexterous, remote controlled robotic system; and the Guardian S, a remote controlled, visual inspection and surveillance robotic system.  The Guardian S is currently our only commercially available robotic system.  We expect beta units of Guardian XO and Guardian XT to be available for customer pilots in the first half of 2022 and the Guardian XO and the Guardian XT to be commercially available by the end of 2022. Such 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 “Commercial launch of Sarcos’ core products, the Guardian XO and Guardian XT, may be delayed beyond the end of 2022” of the Proxy Statement under the section entitled “Risk Factors,” beginning on page 55 of the Proxy Statement.  Such challenges may result in delay of the anticipated commercial launch of one or more of our products, which would adversely affect our financial and operating results.  Our research and development expenses were $14.1 million and $12.9 million during 2020 and 2019, respectively, and $6.9 million and $6.6 million for the first six months of 2021 and 2020, respectively.  We expect our research and development expenses to grow in the future.

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. However, upon commercialization of our Guardian XO and Guardian XT products, we anticipate that the Guardian XO subscription will be priced starting at approximately $9,000 per month per unit, depending on number of units deployed at a single location and the duration of the subscription, and that the Guardian XT subscription will be priced starting at approximately $5,000 per month per unit, excluding the cost of the base to which the Guardian XT is mounted.

To date, we have financed our operations through private placements of our redeemable convertible preferred stock, through research and development services derived mainly from Small Business Innovation Research (“SBIR”) contracts, which are further described below in the sections titled “—Components of Results of Operations—Revenues” and “Critical Accounting Policies & Estimates—Revenue from Contracts with Customers—Research and Development Services,” by the sale of Guardian S product and by providing services as a subcontractor for prime contractors working with the U.S. Department of Defense. From the date of incorporation through March 31, 2021, we raised aggregate gross proceeds in private placements of approximately $86.8 million.  In the year ended December 31, 2020, we incurred a net loss of $20.9 million. In the six months ended June 30, 2021, we incurred a net loss of $10.5 million. We have an accumulated deficit of $74.4 million since our formation on February 5, 2015, following the acquisition of assets from Raytheon. Based upon our current forecasts, we estimate that our existing cash, cash equivalents and investments following the consummation of the Business Combination and the PIPE Financing will be sufficient to fund our operating expenses and capital expenditure requirements for at least 12 months from the date of this Current Report on Form 8-K.

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

Response to COVID-19

On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. 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. We have implemented, among other measures, a temporary work from home policy, new operating guidelines for our office based on local governmental requirements and restrictions on work-related travel. 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. The conditions caused by the pandemic have adversely affected or 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 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. To the extent that physical distancing among workers continues to be required as a result of the COVID-19 pandemic, we believe that our products will be well-suited to the new working environment.

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. We do not yet know the full extent of potential impacts on our business or operations. 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 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 the section of the Proxy Statement entitled “Risk Factors,” beginning on page 55 of the Proxy Statement.

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

We currently expect to derive commercial revenue from the commercial launch of our Guardian XO and Guardian XT products beginning by the end of 2022.  Such 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 “Commercial launch of Sarcos’ core products, the Guardian XO and Guardian XT, may be delayed beyond the end of 2022” of the Proxy Statement under the section entitled “Risk Factors,” beginning on page 55 of the Proxy Statement.  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 with respect to these products. As a result, we will require substantial additional capital to develop our products and fund operations for the foreseeable future. Until we can generate sufficient revenue from our Guardian XO and Guardian XT products, we expect to finance our operations through a combination of proceeds from the Business Combination, PIPE Financing, and continuing research and development services.  The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our development efforts.  Any delays in the successful completion of the development of our Guardian XO and Guardian XT products will impact our ability to generate revenue, our profitability and our overall operating performance.

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 demonstrated 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 cannot 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 has yet to be tested 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.

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. 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. 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.

Basis of Presentation

Currently, we conduct business through one operating segment. All long-lived assets are maintained in, and all losses are attributable to, the United States of America. See Note 11 in the accompanying audited consolidated financial statements and Note 11 in the accompanying unaudited interim condensed consolidated financial statements for more information about our operating segment.

Components of Results of Operations

Revenues

The Company derives its revenue primarily from sale of research and development services in the development of its robots and robot products. The research and development services revenue includes revenue from providing services through different types of arrangements, including cost-type contracts and fixed-price contracts. Revenue from the sales of robot products includes sales of the Company’s Guardian S and Guardian HLS products.

Research and Development Services

Cost-type contracts – Research and development service contracts, including cost-plus-fixed-fee and time and material contracts, relate primarily to the development of technology in the areas of robotics or counter-unmanned aircraft systems.  Cost-type contracts are generally entered into with the U.S. government. These contracts are billed at cost plus a margin as defined by the contract and Federal Acquisition Regulation (“FAR”). The FAR establishes regulations around procurement by the government and provides guidance on the types of costs that are allowable in establishing prices for goods and services delivered under government contracts. Revenue on cost-type contracts is recognized over time as goods and services are provided.    

Fixed-price contracts – Fixed-price development contracts relate primarily to the development of technology in the area of robotics. 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.  The Company has not experienced a loss on a fixed-price contract.  To the extent our actual costs vary from the fixed fee, we will generate more or less profit or could incur a loss.  In accordance with ASC 606, for the fixed price contracts, the Company will recognize losses at the contract level in earnings in the period in which they are incurred.

Robotic Product

Robotic product revenues relate to sales of the Company’s Guardian S, Guardian HLS products, and certain miscellaneous parts or accessories. The Company provides a standard 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 a point in time when goods are shipped 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.

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 SBIR contracts or subcontract support.  Direct expenses may 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.  Overhead expenses may 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. Overhead expenses not allocated to cost of revenue are expensed across research and development, general and administrative, and sales and marketing expenses as applicable.

Research and Development

Research and development expenses are mainly comprised of costs from the continuing development and refinement of our existing robotic systems and the continuing research and development costs associated with our future products.  These expenses include labor and related benefit expenses, materials and supplies used in our laboratories, patent expenses, and related overhead expenses. 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 products. 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.

General and Administrative

Our general and administrative expenses consist primarily of employee-related costs for our finance, legal, people operations, 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 cost of revenue, stock-based compensation expense, and related overhead expense.

We expect to incur additional general and administrative expenses to support our growth as well as our transition to being a publicly traded company. Excluding the impact of equity expense, we expect that general and administrative expenses will increase 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.

Sales and Marketing

Our sales and marketing expenses relate to our direct sales activities, as well as expansion efforts with our current and potential customers. The expenses consist primarily of labor, benefits and employee-related costs, marketing programs and events, lead generation fees, product marketing expense, public relations fees and travel associated with sales generation and marketing support, and related overhead expense.  Our sales team may be eligible for bonuses based upon achieving certain sales goals.  We may accrue for these bonuses and the related payroll taxes on a monthly basis based upon estimated success in achievement of annual sales goals.

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 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.

Interest Income, net

Interest income, net consists primarily of interest received or earned on our cash balances.  Portions of our cash reside in money market investments in U.S. Treasury securities.  Interest expense is primarily due to interest paid on leased equipment used for our software platforms.

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

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. The deferred income taxes represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.

Results of Operations

Comparison of the Three and Six Months Ended June 30, 2021, and 2020

The following table presents our consolidated statement of operations for the three months and six months ended June 30, 2021, and 2020:

Revenue, net

Revenue decreased by $0.6 million, or 33%, from $1.7 million in the three months ended June 30, 2020, to $1.1 million in the three months ended June 30, 2021.

Revenue decreased by $0.9 million, or 24%, from $3.9 million in the six months ended June 30, 2020, to $2.9 million in the six months ended June 30, 2021.

Research and Development Services

Revenue derived from research and development services decreased by $0.4 million, or 27%, from $1.4 million for the three months ended June 30, 2020 to $1.0 million for the three months ended June 30, 2021.  The decrease was a result of a net change in work on projects as new projects that began after the first quarter of 2020 and continued through the first quarter of 2021 were offset against projects that existed during the first quarter of 2020 and declined in work as they were near completion or competed prior to the first quarter of 2021.

Revenue derived from research and development services decreased by $0.8 million, or 23%, from $3.4 million for the six months ended June 30, 2020 to $2.6 million for the six months ended June 30, 2021.  The decrease was a result of a net change in work on projects as new projects that began after the first half of 2020 and continued through the first half of 2021 were offset against projects that existed during the first half of 2020 and declined in work as they were near completion or competed prior to the first half of 2021.

Robotic Product

Revenue derived from robotic product sales decreased by less than $0.2 million, or 63%, going from just over $0.3 million during the three months ended June 30, 2020 to just over $0.1 million for the three months ended June 30, 2021.  The decrease was a result in a net decline in sales of our Guardian S product offset with the sale of our Guardian HLS product.

Revenue derived from robotic product sales decreased by $0.1 million, or 30%, going from just over $0.4 million during the first six months ended June 30, 2020 to just over $0.3 million for the six months ended June 30, 2021.  The decrease was a result in a net decline in sales of our Guardian S product.

Operating Expenses

The following table presents our operating expenses for the three months and six months ended June 30, 2021, and 2020:

Cost of Revenue

Cost of revenue decreased by $0.4 million, or 38%, from $1.1 million for the three months ended June 30, 2020, to $0.7 million for the three months ended June 30, 2021, driven by a decrease in the use of direct labor, materials, overhead expense and third-party contract costs as a result of lower revenue.

Cost of revenue decreased by $0.6 million, or 25%, from $2.5 million for the six months ended June 30, 2020, to $1.9 million for the six months ended June 30, 2021, driven by a decrease in the use of direct labor, materials, overhead expense and third-party contract costs as a result of lower revenue.

Research and Development

Research and development expenses increased by $0.7 million, or 21% from $3.3 million for the three months ended June 30, 2020, to $4.1 million for the three months ended June 30, 2021. The increase was due to an increase of $0.3 million in labor and associated overhead costs, a $0.3 million in the use of third-party services, and an increase of $0.1 million in materials to support the continued development of our Guardian products.

Research and development expenses increased by $0.2 million, or 3% from $6.6 million for the six months ended June 30, 2020, to $6.9 million for the six months ended June 30, 2021. The increase was due to an increase of $0.7 million in the use of third-party services, a $0.3 million increase labor and associated overhead costs, offset by a decrease of $0.8 million in materials and other direct costs to support the continued development of our Guardian products.

General and Administrative

General and administrative expenses increased by $1.0 million, or 52%, from $1.9 million for the three months ended June 30, 2020, to $2.9 million for the three months ended June 30, 2021, due to an increase in professional services of $0.9 million related to an increase in audit expenses and other professional fees associated with the Business Combination, an increase in facilities expense of $0.4 million related to rent from our new facility, and an increase of $0.2 million in labor and recruiting fees to support our growth.  These expense increases were offset by a decrease in stock compensation expense of $0.5 million as a performance measurement agreement expired in the fourth quarter of 2020 related to our founders’ shares with a repurchase option.

General and administrative expenses increased by $1.5 million, or 41%, from $3.7 million for six months ended June 30, 2020, to $5.2 million for the six months ended June 30, 2021, due to an increase in professional services of $1.7 million related to an increase in audit and other professional fees associated with the Business Combination, an increase in facilities expense of $0.6 million related to rent from our new facility, and an increase of $0.2 million in labor and recruiting fees to support our growth. These expense increases were offset by a decrease in stock compensation expense of $1.0 million as a performance measurement agreement expired in the fourth quarter of 2020 related to our founders’ shares with a repurchase option.

Sales and Marketing

Sales and marketing expenses increased by $0.6 million, or 96%, from $0.6 million for the three months ended June 30, 2020, to just under $1.2 million for the three months ended June 30, 2021. An increased spend of just over $0.6 million in marketing, professional services used in promoting our business, and travel expense was offset by a decrease in labor expense related to a one-time incentive compensation payment made in 2020.

Sales and marketing expenses increased by $0.5 million, or 42%, from 1.3 million for the six months ended June 30, 2020 to $1.8 million for the six months ended June 30, 2021. This increase was driven by $0.6 million of professional fees associated with the setup of a data-driven customer support system as well as other professional services. This increase was offset by a decrease in event fees and associated travel costs of $0.1 million.

Other Income

The following table presents other income for the three and six months ended June 30, 2021 and 2020:

Gain on forgiveness of notes payable increased by $2.4 million for the three months ended and six months ended June 30, 2021, as compared to the same periods during 2020 as a result of forgiveness of our first draw Paycheck Protection Program loan with the Small Business Administration.

Comparison of the Years Ended December 31, 2020 and 2019

The following table presents our consolidated statement of operations for the years ended December 31, 2020 and 2019, and the dollar and percentage change between the two periods:

Revenue, net

Revenue decreased by $1.3 million, or 13%, from $10.2 million for the year ended December 31, 2019 to $8.8 million for the year ended December 31, 2020.

Research and Development Services

Revenue derived from research and development services decreased by $2.4 million, or 26%, from $9.4 million for 2020 to $7.0 million for 2020.  The decrease was a result of certain projects being completed during 2019 and not continuing into 2020.

Robotic Product

Revenue derived from robotic product sales increased by $1.1 million, or 143%, going from $0.8 million during 2019 to $1.9 million for 2020.

Operating Expenses

The following table presents our operating expenses for the years ended December 31, 2020 and 2019, and the dollar and percentage change between the two periods:

Cost of Revenue

Cost of revenue decreased by $0.1 million, or 3%, from $5.7 million in 2019 to $5.6 million in 2020, as a result of the completion of certain projects during 2020 that resulted in an overall decrease in costs as compared to 2019.

Direct labor, direct materials, and other expenses consisting mainly of overhead expense and third-party contractor costs make up our cost of revenue, with the mix between the three expense categories varying due to timing throughout the project lifecycle. As a percentage of revenue, our direct labor increased from 26% to 35%, our direct materials decreased from 15% to 11%, and our overhead expense and third-party contractor costs increased from 16% to 18% for the comparable years of 2019 and 2020, respectively. During 2019, a greater amount of materials were purchased for projects that continued into 2020, driving down the direct materials as a percentage of revenue as compared to the prior year. In 2020, a greater portion of projects costs were comprised of direct labor, driving up direct labor as a percentage of revenue as compared to 2019.  Overhead and third-party contractor costs increased as a percentage of revenue driven by labor expense and allocated facilities and IT expense remaining flat year over year while revenue decreased overall.

Research and Development

Research and development expenses increased by $1.2 million, or 9% from $12.9 million in 2019 to $14.1 million in 2020. The increase was primarily due to an increase of $0.7 million in personnel expenses and a $1.6 million increase in professional fees and subcontract support, partially offset by a $0.8 million decrease in materials expense and a $0.3 million decrease in overhead expense.

The increase in personnel costs was primarily driven by our increased engineering and technician headcount as compared to 2019 as we continue to advance the development and design of our Guardian XO and

Guardian XT and the continued development of CYTAR program.  Our increased spending on professional fees and subcontract work was driven by our need to use third party expertise and labor for certain parts of our product development for which expertise or resources were not feasible or available in-house.

Our materials expense decreased in 2020 as compared to 2019 primarily because materials needed for the development of our Guardian XO and Guardian XT products were purchased and recorded as an expense in 2019. In addition, reduction in overhead supplies due to decreased needs, certain overhead supervisory personnel leaving the company, and reduced travel allocated to overhead due to COVID reduced the overall overhead expenses.

General and Administrative

General and administrative expenses decreased by $0.2 million, or 3%, from $7.5 million in 2019 to $7.3 million in 2020, primarily due to a decrease in professional fees and travel expense of $0.2 million and a decrease in other expense of $0.1 million, partially offset by an increase in labor expenses of $0.1 million.

The decrease in travel was a result of restrictions associated with the COVID-19 pandemic.  The decrease in professional fees were driven mainly by a reduction in expense associated maintaining our patents.  The decrease in other expense was mainly driven by lower facility and IT spending.

Our labor expenses increased in 2020 as we increased headcount in administrative positions to support our business growth initiatives.  Partially offsetting this increase was a reduction in stock compensation expense driven by the expiration of a performance measurement agreement that expired in the fourth quarter of 2020 related to our founders’ shares with a repurchase option.

Sales and Marketing

Sales and marketing expenses increased by $0.5 million, or 20%, from $2.3 million in 2019 to $2.8 million in 2020, due to increases in labor costs and consulting fees of $0.4 million, demonstration expense of $0.2 million, and general marketing of $0.1 million, partially offset by a reduction in travel expense of just under $0.2 million.

Labor costs increased overall in 2020 as we continued to build our organization to support the future commercialization of our Guardian XO and Guardian XT products.  We supplemented some of our labor with contract resources that drove additional expense in consulting fees.

Our demonstration and general marketing expenses increased driven by an adjustment to the carrying value of our Guardian S demonstration units, and an increase in lead generation and brand support.

The increase in sales and marketing expenses was partially offset by a reduction in travel costs as a result of the restrictions from the COVID-19 pandemic.

Other Income

The following table presents other income for the years ended December 31, 2020 and 2019, and the dollar and percentage change between the two periods:

Interest Income, net

Interest income, net decreased by approximately $0.3 million or 87%, from $0.3 million in 2019 to a de minimis amount in 2020.  The decrease was primarily driven by a decline in short term interest rates that affected cash balances in our money market investment accounts.  In addition, we incurred interest expense in 2020 of less than $0.1 million as a result of the entry into a long-term lease for equipment supporting one of our software platforms that had not been incurred in 2019.

Other Income, net

Other income, net increased by less than $0.1 million in 2020, or 750%, from a de minimis amount in 2019.  The increase was primarily due to the cash back rewards program from our business credit card and from the sale of equipment no longer in use.

Provision for Income Taxes

Provision for income taxes was de minimis for both 2019 and 2020 due to the losses we incurred.

Liquidity and Capital Resources

Since inception, we have financed our operations through private placements of our redeemable convertible preferred stock, through research and development services derived mainly from SBIR contracts, from the limited sale of our Guardian S units and other commercially available products and by providing services as a subcontractor for prime contractors working with the U.S. Department of Defense. Our ability to successfully develop our products, invest in our sales, marketing and customer service operations and expand our business will depend on many factors, including our working capital needs, the availability of equity or debt financing and, over time, our ability to generate cash flows from operations.

We currently use cash to fund operations and capital expenditures and meet working capital requirements.  As of June 30, 2021, we had $19.5 million in cash and cash equivalents, primarily invested in money market funds and the remaining balance in bank operating accounts.  On a pro forma basis, assuming the closing of the Business Combination and related matters, including the closings of the PIPE Financing, our cash and cash equivalents would have amounted to $252.2 million on June 30, 2021. We believe that our cash and cash equivalents on hand following the consummation of the Business Combination, including the proceeds from the PIPE Financing, will be sufficient to support working capital and capital expenditure requirements for at least 12 months from the date of this Current Report on Form 8-K.

Our future capital requirements will depend on many factors, including our revenue growth rate, the timing and extent of commercializing our Guardian XO and Guardian XT products, our decision to outsource manufacturing of our robotic systems or develop high production manufacturing capabilities in-house, unanticipated delays or supply chain challenges in obtaining materials and components, spending to support further infrastructure development and research and development efforts, the timing and extent of additional capital expenditures to invest in existing and new office spaces, the expansion of sales and marketing efforts, and the introduction of new product capabilities and the financial and operating impact of potential acquisitions.

In addition, we may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be materially and adversely affected.

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 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.

Cash Flows

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

Net Cash Used in Operating Activities

Our cash flows from operating activities are significantly affected by the growth of our business primarily related to research and development, sales and marketing, and general and administrative activities. Our operating cash flows are also affected by our working capital needs to support growth in personnel-related expenditures and fluctuations in accounts payable and other current assets and liabilities.

Net cash used in operating activities for the six months ended June 30, 2021, was $13.7 million, which was a result from a net loss of $10.5 million, adjustments for non-cash expenses of depreciation and amortization of $0.2 million, stock-based compensation of $0.4 million, and forgiveness of our first draw Paycheck Protection Program loan of $2.4 million.  In addition, our changes in operating assets and liabilities netted a use of cash of $1.4 million.

The net cash used from changes in operating assets and liabilities was driven by a net decrease of $0.7 million in receivables and uncompleted contracts, an increase of $2.8 million in expenditures related to the Business Combination, an increase of $0.6 million spent on inventory for use in our Guardian S and HLS products, and an increase of $0.7 million related to prepaid goods and services.  In addition, we experienced an increase of $1.0 million in our accounts payable due to the timing of payments and reduction in expenses for third party providers used in our research and development of our products, and a net increase of $1.0 million on accrued and other liabilities as a result of timing of payments for professional fees associated with the business as well as expense associated with the leasing of our new facility.

Net cash used in operating activities for the six months ended June 30, 2020, was $7.6 million, which was a result from a net loss of $10.2 million, adjustments for non-cash expenses of depreciation and amortization of $0.2 million and stock-based compensation of $1.4 million.  In addition, our changes in operating assets and liabilities netted a contribution of cash of $0.9 million.

The net cash used from changes in operating assets and liabilities was driven by a net decrease of $0.8 million in receivables and uncompleted contracts, and a decrease of $0.2 million spent on inventory for use in our Guardian S and HLS products.  In addition, we experienced a decrease of $0.3 million in our accounts payable due to the timing of payments and reduction in expenses for third party providers used in our research and development of our products, and a net decrease of $0.2 million on accrued and other liabilities as result of timing of payments for professional fees associated with the business as well as expense associated with the leasing of our new facility.

Net Cash Used in Investing Activities

Our net cash used in investing activities is primarily impacted by the purchase of machinery and equipment, particularly in the use of the development of our Guardian XO and Guardian XT products, new and existing office space, and computer equipment.  

Net cash used in investing activities was $2.3 million and $0.3 million for the six months ended June 30, 2021 and 2020, respectively.  The majority of cash outflows for the first six of 2021 went towards the expense for tenant improvements, furniture, and equipment we made for our new facility.  For the first six months of 2020, cash used in investment activities went towards software used in the ongoing support of our business operations and for the construction of a marketing booth used in promoting the company.

Net Cash Used in Financing Activities

Net cash provided by financing activities during the six months ended June 30, 2021, and 2020, was $1.8 million and $42.3 million, respectively. During the first six months of 2021, we received cash of $2.0 million from a Second Draw Paycheck Protection loan.  This was offset with the purchase of the non-controlling interest in our subsidiary ZeptoVision, Inc. (“ZVI”) for $0.2 million.  During the first six months of 2020, we received cash of $39.9 million in net proceeds from the issuance of redeemable convertible Series C preferred stock.  We also received cash of $2.4 million from a First Draw Paycheck Protection Program loan with the U.S. Small Business Administration.

Related Party Transactions

During the years ended December 31, 2020 and 2019, we entered into agreements with Delta Air Lines, Inc. and Microsoft Corporation to provide products and services.  During the three months ended March 31, 2020, we recognized $0.1 million of revenue related to demonstration services provided to Delta Air Lines, Inc.  Additionally, during 2019, we recognized $0.2 million of revenue related to the sale of a Guardian S robot to Microsoft Corporation, along with customer-specific development services.  Both Delta Air Lines, Inc. and Microsoft Corporation are shareholders of Sarcos.

During the years ended December 31, 2020 and 2019, we paid a de minimis amount for both years for rent to the Company’s Chief Innovation Officer, who was the owner of an apartment that was used for temporary employee lodging.

As of December 31, 2020 the Company held controlling interests of 79% in ZVI. The Chief Legal Officer of the Company was the beneficial owner of 21% of ZVI. On February 16, 2021, the Company acquired the non-controlling interest’s shares in ZVI for a purchase price of $200,000 making ZVI a wholly owned subsidiary of the Company.

Emerging Growth Company Status

Section 102(b)(1) of the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable.

The Company is 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. The Company 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 the Company has total annual gross revenue of $1.07 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which the Company has issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) December 31, 2025, and the Company expects to continue to take advantage of the benefits of the extended transition period, although it may decide to early adopt such new or revised accounting standards to the extent permitted by such standards. This may make it difficult or impossible to compare the Company’s financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and estimates include those related to:

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 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.  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, no less than annually. 

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. Changes in judgments with respect to these assumptions and estimates could impact the timing or amount of revenue recognition.

Revenues from Contracts with Customers

The Company derives revenue for research and development services, mainly with U.S. government entities under the Department of Defense, that support the development of its robots and robot products. Our research and development services are provided by SBIR contracts through different types of arrangements, including cost-type contracts and fixed-price contracts. Revenue from the sales of robot products includes sales of the Company’s Guardian S and Guardian HLS products.

Research and Development Services

Cost-type contracts – Research and development service contracts, including cost-plus-fixed-fee and time and material contracts, relate primarily to the development of technology in the areas of robotics or counter-unmanned aircraft systems.  Cost-type contracts are generally entered into with the U.S. government. These contracts are billed at cost plus a margin as defined by the contract and the 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 robotics. 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.  The Company has not experienced a loss on a fixed-price contract.  To the extent our actual costs vary from the fixed fee, we will generate more or less profit or could incur a loss.  In accordance with ASC 606, for the fixed price contracts, the Company will recognize losses at the contract level in earnings in the period in which they are incurred.

Robotic product

Robotic product revenues relate to sales of the Company’s Guardian S, Guardian HLS products, and certain miscellaneous parts, accessories and repair service. The Company provides a standard 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 a point in time when goods are shipped 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.

Stock-based compensation

We calculate the fair value of all stock-based awards, including stock options and restricted stock awards (“RSU”) on the date of grant using the Black-Scholes option-pricing model for stock options, which is impacted by the fair value of the Company’s common stock, as well as changes in assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected common stock price volatility over the term of the stock options, the expected term of the stock options, risk-free interest rates, and the expected dividend yield.

Off-Balance Sheet Arrangements; Commitments and contractual obligations

We did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K, as of June 30, 2021. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.

Recent Accounting Pronouncements

See notes to our interim condensed consolidated financial statements included elsewhere in this Current Report on Form 8-K for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Current Report on Form 8-K.

Properties

We operate in a corporate and manufacturing facility in Salt Lake City, Utah. We currently occupy a facility that has approximately 27,000 square feet of office, development and manufacturing space pursuant to a lease that, under options to extend, expired in July 2021 and has continued on a month-to-month basis until our move to a new facility is completed. In the third quarter of 2021, we expect to begin our move to a facility consisting of approximately 62,156 square feet, with a 12-year lease from the commencement date and two options to extend the lease for a three-year period each. We believe that this new facility, which includes office, development, testing and light manufacturing space, will adequately serve our current needs. Should we need additional space, we believe we will be able to obtain additional space on commercially reasonable terms.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information known to the Company regarding the actual beneficial ownership of Common Stock as of September 24, 2021, by:

Beneficial ownership is determined according to SEC rules, which generally provide that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power over that security, including options and warrants that are currently exercisable or exercisable within 60 days. Except as described in the footnotes below and subject to applicable community property laws and similar laws, we believe that each person listed below has sole voting and investment power with respect to such shares.

The beneficial ownership of Common Stock is based on 142,718,497 shares of Common Stock issued and outstanding as of the record date. For purposes of calculating the ownership percentages in the table below, the number of shares outstanding for each person assumes full exercise of only such person’s outstanding options and warrants that are exercisable within 60 days of September 24, 2021.

* Represents less than 1%

Please see the sections titled “Executive Compensation” and “Certain Relationships and Related Person Transactions” appearing elsewhere in this Current Report on Form 8-K for information regarding material relationships with our principal securityholders within the past two years.

Directors and Executive Officers

The following table sets forth information regarding our executive officers and directors following the consummation of the Business Combination:

(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

(3) Member of the Nominating and Governance Committee.

Additional information regarding the Company’s directors and executive officers after the consummation of the Transactions is included in the Proxy Statement in the section titled “Management After the Business Combination” beginning on page 218 of the Proxy Statement and that information is incorporated herein by reference.

Independence of our Board of Directors

Nasdaq listing standards require that a majority of our Board be independent.  An “independent director” is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which in the opinion of the company’s board of directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. The Board undertook a review of the independence of each director. Based on information provided by each director concerning his or her background, employment and affiliations, the Board determined that Mr. Finn, Mr. Klein, Ms. Peterson, Admiral Olson, Mr. Weibling, Mr. Muta, and Ms. Balasubramaniam, representing seven of the Company’s eight directors, do not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is an “independent director” as defined under the listing standards of Nasdaq. The majority of our audit committee is composed of independent directors meeting Nasdaq’s additional requirements applicable to members of the audit committee.

Committees of the Board of Directors

Audit Committee

The members of our audit committee are Brian D. Finn, Laura J. Peterson and Dennis Weibling, with Dennis Weibling serving as chairperson.  Our Board has determined that each of Ms. Peterson and Mr. Weibling meets the requirements for independence under the rules and regulations of the SEC and the listing standards of Nasdaq applicable to audit committee members and will also meet the financial literacy requirements of the listing standards of Nasdaq.  Mr. Finn is not independent under the listing standard of Nasdaq applicable to audit committee members.

Under applicable Nasdaq rules, we are permitted to phase in our compliance with the independence requirements for our audit committee. The phase-in periods with respect to director independence allow us to have only one independent member on our audit committee upon the listing date of our common stock in connection with our predecessor’s IPO, a majority of independent members on our audit committee within 90 days of such date and a fully independent audit committee within one year of such date. We are taking advantage of these phase-in rules with respect to Mr. Finn’s service on our audit committee, and we expect that by the first anniversary of our predecessor’s listing in connection with its IPO, our audit committee will comply with the applicable independence requirements.

In addition, our Board has determined that Mr. Finn is an audit committee financial expert within the meaning of Item 407(d) of Regulation S-K under the Securities Act. Our audit committee, among other things: