Core Insights - Palladyne AI Corp (NASDAQ:PDYN) is recognized as a promising AI stock priced under $20, recently announcing a partnership with Draganfly to enhance drone capabilities [1][2]. Group 1: Partnership Details - Palladyne AI Corp is collaborating with Draganfly to integrate its Pilot AI software into Draganfly's unmanned aerial vehicle (UAV) systems, allowing multiple UAVs to operate as a coordinated team [2]. - The integration of Pilot AI will expand Draganfly's mission capabilities, enabling features such as autonomous swarm operations, real-time intelligence, and improved operator efficiency [3]. Group 2: Company Overview - Palladyne AI Corp specializes in developing AI software for robots, enhancing their autonomy and real-time adaptability without the need for constant cloud connectivity [4]. - The company's platform, Palladyne IQ, enables robots to learn, reason, and act more like humans, with applications across various industries including manufacturing, logistics, defense, and aerospace [4].

Core Viewpoint - Palladyne AI and Draganfly are collaborating to enhance unmanned aerial vehicle (UAV) capabilities by integrating Palladyne Pilot AI software into Draganfly's drone systems, aiming to provide advanced aerial intelligence solutions for government, defense, and commercial sectors [1][4]. Group 1: Collaboration Details - The partnership focuses on integrating Palladyne Pilot, an intelligent swarming and collaborative AI software, into Draganfly's UAV platforms, allowing for enhanced autonomous operations and improved operator efficiency [2][3]. - Palladyne Pilot enables multiple UAVs to work collaboratively under a single operator's control, enhancing detection, tracking, classification, and identification capabilities [2][3]. Group 2: Company Background - Draganfly has over 25 years of experience in providing professional-grade UAV systems and services to various sectors, including public safety, agriculture, and industrial inspections [3][6]. - Palladyne AI specializes in developing AI and machine learning software that empowers robotic platforms to operate autonomously and adapt to dynamic environments [7][8]. Group 3: Technological Advancements - The integration of Palladyne Pilot is expected to expand Draganfly's mission capabilities, including autonomous swarm operations and real-time intelligence, surveillance, and reconnaissance (ISR) [3][4]. - Palladyne AI's software is designed to reduce programming complexity and enhance the efficiency of robotic systems, making it applicable across various industries, including defense and logistics [8][9].

Core Insights - Palladyne AI Corp. and Draganfly Inc. have announced a partnership to enhance autonomous and swarming capabilities for crewless aerial vehicles (UAVs) [1][2] - The collaboration will integrate Palladyne's Pilot AI software into Draganfly's drone systems, improving mission flexibility for defense, government, and commercial users [1][4] Company Collaboration - The partnership combines Palladyne's intelligent autonomy tools with Draganfly's modular UAV design, enabling advanced aerial coordination and data-driven operations [2] - The Palladyne Pilot platform utilizes sensor fusion from multiple inputs, allowing drones to detect, track, and identify targets in real time while operating under a single operator [3] Operational Enhancements - The integration will provide autonomy previously limited to larger, more expensive systems, thereby expanding operational capabilities [4] - The collaboration aims to deliver advanced aerial intelligence solutions that meet the operational needs of government, defense, and commercial users [4] Market Impact - Draganfly has recently secured a U.S. Army contract to develop and train FPV drone systems, further enhancing its defense portfolio [4] - Following the announcement, Draganfly's shares increased by 0.35% to $8.68, while Palladyne's shares rose by 1.5% to $8.99 in premarket trading [5]

Core Insights - The article discusses the current market trends and potential investment opportunities within specific sectors, highlighting the importance of thorough analysis before making investment decisions [2]. Group 1: Market Trends - Recent market fluctuations have shown a significant impact on investor sentiment, with a notable increase in volatility observed in the tech sector [2]. - Analysts are focusing on the performance of companies that have demonstrated resilience during economic downturns, particularly those with strong balance sheets and cash flow [2]. Group 2: Investment Opportunities - There is a growing interest in renewable energy companies, driven by government incentives and a shift towards sustainable practices [2]. - The healthcare sector is also highlighted as a potential area for investment, especially companies involved in innovative treatments and technologies [2]. Group 3: Risks and Considerations - Investors are advised to remain cautious due to potential regulatory changes that could affect various industries, particularly in technology and healthcare [2]. - The importance of diversification in investment portfolios is emphasized to mitigate risks associated with market volatility [2].

Core Viewpoint - Palladyne AI Corp. (PDYN) has experienced a significant decline in share price following its latest quarterly earnings announcement, with a 15.8% drop compared to the S&P 500's 1.3% growth during the same period [1] Financial Performance - For Q2 2025, Palladyne AI reported a loss of $0.20 per share, unchanged from the same quarter last year [2] - Revenues for Q2 2025 were $1 million, a 63% decrease from $2.7 million in the prior-year quarter, primarily due to a decline in product development contract revenue [2] - The company incurred a net loss of $7.5 million, widening from a $5.3 million loss in the prior-year period [3] - Operating expenses increased by 7% year over year to $9.1 million, with a notable 33% rise in research and development spending [3] - For the first half of 2025, revenues were $2.7 million, down 56% from $6.2 million a year earlier, driven by a 100% fall in product revenue and a 24% decrease in product development contract revenue [4] Backlog and Liquidity - As of June 30, the company's backlog stood at $1.7 million, with about half expected to be recognized within the next 12 months [5] - Liquidity remains strong, with $62.7 million in cash and equivalents, up from $40.1 million at year-end 2024 [5] Management Strategy - Management aims to commercialize its AI/ML Foundational Technology through two software products, targeting innovators and early adopters in industrial manufacturing and defense [6] - The company anticipates modest revenue growth from commercial customers in 2025, with a gradual ramp-up expected in 2026 [6] Influencing Factors - The year-over-year revenue decline is attributed to the timing and funding of government product development contracts and the absence of hardware sales seen in 2024 [7] - Increased R&D spending aligns with the focus on refining AI-driven software platforms ahead of broader market deployment [7] Future Guidance - Palladyne AI expects continued near-term losses as it invests in commercialization, with sufficient liquidity for at least the next 12 months [8] - Management indicated potential opportunistic capital raises to bolster reserves if favorable market conditions arise [8] Recent Developments - In July 2025, Palladyne AI sold 77,960 shares under its at-the-market equity program for gross proceeds of approximately $0.7 million [10]

[PART I. FINANCIAL INFORMATION](index=7&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements (Unaudited)](index=7&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) Presents Palladyne AI Corp.'s unaudited consolidated financial statements, including balance sheets, operations, and cash flows [Condensed Consolidated Balance Sheets](index=7&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Condensed%20Consolidated%20Balance%20Sheets) | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | | Total Assets | $78,309 | $56,253 | +$22,056 | | Total Liabilities | $24,477 | $65,786 | -$41,309 | | Total Stockholders' Equity (Deficit) | $53,832 | $(9,533) | +$63,365 | | Cash and Cash Equivalents | $20,148 | $31,188 | -$11,040 | | Marketable Securities | $42,554 | $8,883 | +$33,671 | | Warrant Liabilities | $11,161 | $51,396 | -$40,235 | [Condensed Consolidated Statements of Operations](index=8&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Condensed%20Consolidated%20Statements%20of%20Operations) | Metric | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :------------------------------------ | :------------------------------------ | :-------------------- | :--------- | | Revenue, net | $2,725 | $6,154 | $(3,429) | (56)% | | Total Operating Expenses | $17,750 | $19,294 | $(1,544) | (8)% | | Loss from Operations | $(15,025) | $(13,140) | $(1,885) | (14)% | | Net Income (Loss) | $15,272 | $(12,552) | +$27,824 | *NM | | Basic EPS | $0.42 | $(0.48) | +$0.90 | *NM | | Diluted EPS | $0.39 | $(0.48) | +$0.87 | *NM | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=9&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :---------------------------------------- | :---------------------------------------- | | Net (loss) income | $(7,487) | $(5,323) | $15,272 | $(12,552) | | Change in unrealized (loss) income on available-for-sale investments | $(3) | $1 | $(12) | $(3) | | **Comprehensive (loss) income** | **$(7,490)** | **$(5,322)** | **$15,260** | **$(12,555)** | [Condensed Consolidated Statements of Stockholders' Equity (Deficit)](index=10&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity%20(Deficit)) | Metric | December 31, 2024 (in thousands) | June 30, 2025 (in thousands) | | :-------------------------------- | :------------------------------- | :----------------------------- | | Common Stock (Amount) | $3 | $4 | | Additional Paid-In Capital | $481,289 | $529,393 | | Accumulated Other Comprehensive Income (Loss) | $6 | $(6) | | Accumulated Deficit | $(490,831) | $(475,559) | | **Total Stockholders' Equity (Deficit)** | **$(9,533)** | **$53,832** | [Condensed Consolidated Statements of Cash Flows](index=11&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) | Metric | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :------------------------------------------ | :------------------------------------ | :------------------------------------ | | Net cash used in operating activities | $(12,842) | $(13,033) | | Net cash (used in) provided by investing activities | $(33,129) | $15,795 | | Net cash provided by (used in) financing activities | $34,931 | $(70) | | **Net (decrease) increase in cash and cash equivalents** | **$(11,040)** | **$2,692** | | Cash and cash equivalents at end of period | $20,148 | $25,831 | [Notes to Unaudited Condensed Consolidated Financial Statements](index=12&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) [Note 1. Basis of Presentation and Summary of Significant Accounting Policies](index=12&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%201.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies) [Description of the Business](index=12&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%201.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies_Description%20of%20the%20Business) - Palladyne AI Corp. develops full-stack, closed-loop autonomy software ("AI/ML Foundational Technology") using AI and ML to enable robotic systems in industrial and defense sectors to perceive, learn, reason, and adapt in dynamic real-time operations "on the edge" without extensive programming or cloud processing latency[25](index=25&type=chunk) [Basis of Presentation and Consolidation](index=12&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%201.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies_Basis%20of%20Presentation%20and%20Consolidation) - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP and include the accounts of the Company and its wholly owned subsidiaries, with all intercompany accounts and transactions eliminated[26](index=26&type=chunk)[28](index=28&type=chunk) - Interim results are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending December 31, 2025[29](index=29&type=chunk) [Summary of Significant Accounting Policies and Use of Estimates](index=12&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%201.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies_Summary%20of%20Significant%20Accounting%20Policies%20and%20Use%20of%20Estimates) - There have been no material changes to the Company's significant accounting policies and use of estimates and assumptions described in the annual consolidated financial statements for the year ended December 31, 2024[30](index=30&type=chunk) [Liquidity and Capital Resources](index=12&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%201.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies_Liquidity%20and%20Capital%20Resources%20(Note%201)) - Cash, cash equivalents and marketable securities increased to **$62.7 million** as of June 30, 2025, from **$40.1 million** as of December 31, 2024[31](index=31&type=chunk) - The Company has incurred losses from operations and negative cash flows from operations since inception and expects to continue to incur losses and negative cash flows in the near term[31](index=31&type=chunk) - As of June 30, 2025, the Company had an accumulated deficit of approximately **$475.6 million** and working capital of **$62.0 million**[31](index=31&type=chunk) - Management believes it has sufficient financial resources for at least the next **12 months** from the date of this report[32](index=32&type=chunk) [Revenue Recognition](index=13&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%201.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies_Revenue%20Recognition) - The Company recognizes revenue from product sales and product development contract services by following a five-step process, transferring goods or services to customers in an amount reflecting expected consideration[33](index=33&type=chunk) [Revenue from Contracts with Customers](index=15&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%201.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies_Revenue%20from%20Contracts%20with%20Customers) - Revenue is derived from product development agreements (primarily U.S. government, cost-type and fixed-price contracts) and sales of commercially available products and related services[34](index=34&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk)[37](index=37&type=chunk) - Historically, product revenue primarily consisted of sales of legacy hardware products; the Company has not yet generated product revenue from its Palladyne IQ and Palladyne Pilot products[34](index=34&type=chunk) Revenue by Source (Three Months Ended June 30) | (In thousands) | 2025 | 2024 | | :----------------------------- | :----- | :----- | | Product Development Contract Revenue | $1,012 | $2,713 | | Product Revenue | $3 | — | | **Revenue, net** | **$1,015** | **$2,713** | Revenue by Source (Six Months Ended June 30) | (In thousands) | 2025 | 2024 | | :----------------------------- | :----- | :----- | | Product Development Contract Revenue | $2,722 | $3,595 | | Product Revenue | $3 | $2,559 | | **Revenue, net** | **$2,725** | **$6,154** | [Contract Balances](index=15&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%201.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies_Contract%20Balances) - Deferred revenue decreased from **$248 thousand** at December 31, 2024, to **$0** at June 30, 2025, as all deferred revenue was recognized[41](index=41&type=chunk) Contract Balances (in thousands) | (In thousands) | Accounts Receivable | Unbilled Receivable | Contract Assets (Current) | Deferred Revenue (Current) | | :----------------------------- | :------------------ | :------------------ | :------------------------ | :------------------------- | | Ending Balance as of December 31, 2024 | $134 | $1,179 | $28 | $248 | | (Decrease)/increase, net | $103 | $318 | $1 | $(248) | | Ending Balance as of June 30, 2025 | $237 | $1,497 | $29 | — | [Remaining Performance Obligations](index=16&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%201.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies_Remaining%20Performance%20Obligations) - As of June 30, 2025, the Company had a backlog of **$1.7 million**, with approximately half expected to be recognized over the next **12 months**[42](index=42&type=chunk) [Recently Issued Accounting Standard Pronouncements](index=16&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%201.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies_Recently%20Issued%20Accounting%20Standard%20Pronouncements) - ASU No. 2023-09 (Income Taxes) is effective for annual periods beginning January 1, 2026, and is not expected to have a material impact[44](index=44&type=chunk) - ASU No. 2024-03 (Expense Disaggregation Disclosures) is effective for fiscal years beginning after December 15, 2026, and its impact is currently being evaluated[45](index=45&type=chunk) [Note 2. Fair Value Measurements](index=16&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%202.%20Fair%20Value%20Measurements) - Warrant liabilities decreased significantly from **$51.4 million** at December 31, 2024, to **$11.2 million** at June 30, 2025[47](index=47&type=chunk) - The decrease in Level 3 warrant fair value was primarily due to a **$21.4 million** decrease in fair value and **$10.9 million** from warrant exercises[48](index=48&type=chunk) Financial Assets and Liabilities Measured at Fair Value (in thousands) | (In thousands) | Level 1 | Level 2 | Level 3 | Total | | :----------------------------- | :------ | :------ | :------ | :------ | | **As of June 30, 2025:** | | | | | | U.S. Treasury securities (Cash equivalents) | $4,962 | — | — | $4,962 | | U.S. Treasury securities (Marketable securities) | $42,554 | — | — | $42,554 | | **Total Assets** | **$47,516** | **—** | **—** | **$47,516** | | Warrant liabilities | $5,771 | $2,048 | $3,342 | $11,161 | | **Total Liabilities** | **$5,771** | **$2,048** | **$3,342** | **$11,161** | | **As of December 31, 2024:** | | | | | | U.S. Treasury securities (Cash equivalents) | $12,927 | — | — | $12,927 | | U.S. Treasury securities (Marketable securities) | $8,883 | — | — | $8,883 | | **Total Assets** | **$21,810** | **—** | **—** | **$21,810** | | Warrant liabilities | $11,630 | $4,128 | $35,638 | $51,396 | | **Total Liabilities** | **$11,630** | **$4,128** | **$35,638** | **$51,396** | [Note 3. Balance Sheet Components](index=17&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%203.%20Balance%20Sheet%20Components) [Inventories, Net](index=17&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%203.%20Balance%20Sheet%20Components_Inventories,%20Net) Inventories, Net (in thousands) | (In thousands) | June 30, 2025 | December 31, 2024 | | :------------- | :------------ | :---------------- | | Raw materials | $1 | $71 | | Finished goods, net | $75 | — | | **Total inventories** | **$76** | **$71** | [Prepaid Expenses and Other Current Assets](index=18&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%203.%20Balance%20Sheet%20Components_Prepaid%20Expenses%20and%20Other%20Current%20Assets) Prepaid Expenses and Other Current Assets (in thousands) | (In thousands) | June 30, 2025 | December 31, 2024 | | :----------------------------- | :------------ | :---------------- | | Prepaid insurance | $357 | $367 | | Software | $511 | $647 | | Other prepaid expenses and assets | $433 | $261 | | **Total prepaid expenses and other current assets** | **$1,301** | **$1,275** | [Property and Equipment, Net](index=18&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%203.%20Balance%20Sheet%20Components_Property%20and%20Equipment,%20Net) Property and Equipment, Net (in thousands) | (In thousands) | June 30, 2025 | December 31, 2024 | | :----------------------------- | :------------ | :---------------- | | Robotics and manufacturing equipment | $1,170 | $1,128 | | Leasehold improvements | $3,927 | $3,927 | | Computer equipment | $1,304 | $1,251 | | Software | — | $1 | | Furniture and fixtures, and other fixed assets | $951 | $951 | | Property and equipment, gross | $7,352 | $7,258 | | Accumulated depreciation | $(3,451) | $(3,014) | | **Property and equipment, net** | **$3,901** | **$4,244** | - Depreciation expenses were **$0.2 million** for the three months ended June 30, 2025 and 2024, and **$0.4 million** for the six months ended June 30, 2025 and 2024[51](index=51&type=chunk) [Accrued Liabilities](index=18&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%203.%20Balance%20Sheet%20Components_Accrued%20Liabilities) Accrued Liabilities (in thousands) | (In thousands) | June 30, 2025 | December 31, 2024 | | :----------------------------- | :------------ | :---------------- | | Payroll and related costs | $1,709 | $1,811 | | Legal services accrual | $130 | $230 | | Deferred revenue | — | $248 | | Other contract liabilities | $496 | $496 | | Other accrued expenses and current liabilities | $240 | $134 | | **Total accrued liabilities** | **$2,575** | **$2,919** | [Note 4. Earn-Out Shares](index=18&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%204.%20Earn-Out%20Shares) - As of June 30, 2025, **4,687,500** Earn-Out Shares remained potentially issuable, contingent on the Company's common stock closing share price reaching **$90.00** and **$120.00** for **20 trading days** within specified periods[54](index=54&type=chunk)[55](index=55&type=chunk) - The Company changed its name from Sarcos Technology and Robotics Corporation to Palladyne AI Corp. in March 2024 to reflect its transition to an AI software-focused company[53](index=53&type=chunk) [Note 5. DeSPAC Warrants](index=20&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%205.%20DeSPAC%20Warrants) - As of June 30, 2025, there were **20,549,453** DeSPAC Warrants outstanding, exercisable for **one sixth of a share** of Common Stock at **$11.50 per warrant**, expiring September 24, 2026[57](index=57&type=chunk) - The Company recognized gains of **$7.9 million** related to the change in fair value of the deSPAC Warrants during the six months ended June 30, 2025, compared to losses of **$0.1 million** in the prior year[63](index=63&type=chunk) - DeSPAC Public Warrants are Level 1 fair value measurements, while deSPAC Private Placement Warrants are Level 2[62](index=62&type=chunk) [Note 6. 2024 Warrants](index=22&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%206.%202024%20Warrants) - On May 9, 2025, **2,790,700** of the 2024 Warrants were exercised. As of June 30, 2025, **430,105** 2024 Warrants remained outstanding[70](index=70&type=chunk) - The Company recognized gains of **$2.2 million** and **$21.4 million** related to the change in fair value of the 2024 Warrants during the three and six months ended June 30, 2025, respectively[70](index=70&type=chunk) 2024 Warrants Valuation Model Assumptions (June 30, 2025) | Metric | Value | | :---------------- | :------ | | Stock price | $8.66 | | Term (in years) | 4.8 | | Expected volatility | 105.5% | | Risk-free rate | 3.8% | | Dividend yield | 0.0% | [Note 7. Stock-based Compensation](index=24&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%207.%20Stock-based%20Compensation) [2021 Stock Plan](index=24&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%207.%20Stock-based%20Compensation_2021%20Stock%20Plan) - As of June 30, 2025, **2.0 million** shares were available to grant under the 2021 Equity Incentive Plan[72](index=72&type=chunk) [2015 Stock Plan](index=24&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%207.%20Stock-based%20Compensation_2015%20Stock%20Plan) - No further awards may be made under the Old Sarcos 2015 Equity Incentive Plan, with any forfeited awards added to the 2021 Plan[73](index=73&type=chunk) [2024 Inducement Plan](index=24&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%207.%20Stock-based%20Compensation_2024%20Inducement%20Plan) - As of June 30, 2025, **475,000** shares were available to grant under the 2024 Inducement Equity Incentive Plan, used for new or returning employees as an inducement[74](index=74&type=chunk) [2021 Employee Stock Purchase Plan](index=24&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%207.%20Stock-based%20Compensation_2021%20Employee%20Stock%20Purchase%20Plan) - As of June 30, 2025, **0.5 million** shares were available for sale under the 2021 Employee Stock Purchase Plan (ESPP), with offerings commencing in December 2024[75](index=75&type=chunk) [Stock Option Activity](index=26&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%207.%20Stock-based%20Compensation_Stock%20Option%20Activity) Stock Option Activity (Six Months Ended June 30, 2025) | Metric | Number of Shares | Weighted Average Exercise Price (Per share) | | :-------------------------- | :--------------- | :---------------------------------------- | | Outstanding – December 31, 2024 | 1,396,957 | $1.88 | | Granted | 41,667 | $6.43 | | Exercised | (44,056) | $1.22 | | Cancelled | (190,161) | $1.57 | | **Outstanding – June 30, 2025** | **1,204,407** | **$2.11** | | Exercisable – December 31, 2024 | 443,045 | $2.05 | | Exercisable – June 30, 2025 | 766,033 | $2.15 | [Option Repricing](index=26&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%207.%20Stock-based%20Compensation_Option%20Repricing) - On April 17, 2024, the Company amended options to purchase **773,551** shares, reducing the exercise price to **$1.59** and, for senior employees, restarting the vesting schedule[78](index=78&type=chunk)[79](index=79&type=chunk)[80](index=80&type=chunk) - These amendments resulted in an incremental fair value of **$0.2 million**, with **$0.1 million** recognized as stock-based compensation expense on the amendment date[81](index=81&type=chunk) [Restricted Stock Units Activity](index=26&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%207.%20Stock-based%20Compensation_Restricted%20Stock%20Units%20Activity) Restricted Stock Units Activity (Six Months Ended June 30, 2025) | Metric | Number of Shares | Weighted-Average Grant-Date Fair Value (Per share) | | :-------------------------- | :--------------- | :----------------------------------------------- | | Outstanding – December 31, 2024 | 1,457,281 | $1.62 | | Granted | 670,682 | $6.69 | | Vested | (580,938) | $1.46 | | Cancelled | (166,988) | $3.95 | | **Outstanding – June 30, 2025** | **1,380,037** | **$3.82** | [Restricted Stock Awards Activity](index=27&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%207.%20Stock-based%20Compensation_Restricted%20Stock%20Awards%20Activity) Restricted Stock Awards Activity (Six Months Ended June 30, 2025) | Metric | Number of Shares | Weighted-Average Grant-Date Fair Value (Per share) | | :-------------------------- | :--------------- | :----------------------------------------------- | | Outstanding – December 31, 2024 | 625,000 | $0.59 | | Vested | (625,000) | $0.59 | | **Outstanding – June 30, 2025** | **—** | **—** | [Phantom Equity Award](index=27&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%207.%20Stock-based%20Compensation_Phantom%20Equity%20Award) - A phantom equity award for **1.8 million shares** (common stock equivalent of **1.5 million shares**) was outstanding for the CEO, subject to cliff vesting through October 31, 2027[84](index=84&type=chunk)[85](index=85&type=chunk) - On July 2, 2025, the Company granted the CEO a restricted stock award of **1.5 million shares**, which reduced the phantom equity award to zero[85](index=85&type=chunk) [Stock-Based Compensation Expense](index=27&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%207.%20Stock-based%20Compensation_Stock-Based%20Compensation%20Expense) Stock-Based Compensation Expense (in thousands) | (In thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenue | $15 | $25 | $25 | $7 | | Research and development | $111 | $74 | $190 | $32 | | Sales and marketing | $210 | $244 | $389 | $284 | | General and administrative | $805 | $615 | $1,686 | $1,206 | | **Total stock-based compensation expense** | **$1,141** | **$958** | **$2,290** | **$1,529** | - As of June 30, 2025, there was approximately **$8.5 million** of unrecognized stock-based compensation cost, expected to be recognized over a weighted average period of **2.7 years**[86](index=86&type=chunk) [Note 8. Net Income (Loss) Per Share](index=28&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%208.%20Net%20Income%20(Loss)%20Per%20Share) Net Income (Loss) Per Share (in thousands, except share and per share data) | (In thousands, except share and per share data) | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $(7,487) | $(5,323) | $15,272 | $(12,552) | | Weighted average shares outstanding, basic | 37,746,302 | 26,622,924 | 36,231,623 | 25,938,483 | | Dilutive effect of potential common shares | — | — | 3,335,399 | — | | Weighted average shares outstanding, diluted | 37,746,302 | 26,622,924 | 39,567,022 | 25,938,483 | | Basic net income (loss) per share | $(0.20) | $(0.20) | $0.42 | $(0.48) | | Diluted net income (loss) per share | $(0.20) | $(0.20) | $0.39 | $(0.48) | - Potentially dilutive shares were excluded from diluted EPS calculation for periods with net losses as they would have been anti-dilutive[87](index=87&type=chunk) [Note 9. Income Taxes](index=28&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%209.%20Income%20Taxes) - The Company had no significant income tax expense for the three and six months ended June 30, 2025 and 2024[89](index=89&type=chunk) - The effective tax rate differs from the U.S. federal statutory rate due to net taxable losses and a corresponding full valuation allowance on net deferred tax assets[89](index=89&type=chunk) - The Company is evaluating the impact of the recently signed One Big Beautiful Bill Act on its tax position[90](index=90&type=chunk) [Note 10. Commitments and Contingencies](index=28&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%2010.%20Commitments%20and%20Contingencies) [Legal Proceedings](index=28&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%2010.%20Commitments%20and%20Contingencies_Legal%20Proceedings) - The Company has not recorded any material loss contingency related to legal proceedings as of June 30, 2025, and December 31, 2024[91](index=91&type=chunk) [Indemnifications](index=28&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%2010.%20Commitments%20and%20Contingencies_Indemnifications) - The Company provides indemnifications to various parties in the ordinary course of business, but the maximum potential amount of future payments is indeterminable[92](index=92&type=chunk)[93](index=93&type=chunk) - No liability has been accrued for these indemnification obligations as the likelihood of incurring a material payment is not probable or reasonably estimable[93](index=93&type=chunk) [Note 11. Segment Information](index=30&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%2011.%20Segment%20Information) - The Company operates as a single operating segment, with the Chief Executive Officer (CODM) allocating resources and making operating decisions based on consolidated net income[94](index=94&type=chunk)[95](index=95&type=chunk) - All revenue and losses are attributable to operations within the United States[97](index=97&type=chunk)[98](index=98&type=chunk) Segment Revenue and Net Income (Loss) (in thousands) | (In thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Segment Revenue | $1,012 | $2,713 | $2,722 | $3,595 | | Other Revenue | $3 | — | $3 | $2,559 | | **Total Revenue** | **$1,015** | **$2,713** | **$2,725** | **$6,154** | | **Net income (loss)** | **$(7,487)** | **$(5,323)** | **$15,272** | **$(12,552)** | [Note 12. Subsequent Event](index=30&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)_Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements_Note%2012.%20Subsequent%20Event) - In July 2025, the Company sold **77,960 shares** of its Common Stock for approximately **$0.7 million** under an at-the-market program[99](index=99&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Palladyne AI Corp.'s financial condition, operating results, liquidity, capital resources, and accounting policies [Special Note Regarding Forward-Looking Statements](index=31&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Special%20Note%20Regarding%20Forward-Looking%20Statements) - This report contains forward-looking statements related to future financial performance, business strategies, and expectations, which are based on current information and management's assumptions and involve risks and uncertainties[102](index=102&type=chunk)[103](index=103&type=chunk)[104](index=104&type=chunk) [Overview](index=32&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Overview) - Palladyne AI Corp. aims to deliver AI software products (Palladyne IQ for industrial robots/cobots and Palladyne Pilot for Class 1 UAVs) that enable robotic systems in industrial and defense sectors to perform complex tasks in unstructured environments[106](index=106&type=chunk) - Both Palladyne IQ and Palladyne Pilot are in early stages of commercialization, undergoing reliability testing, debugging, and improvements[106](index=106&type=chunk) - The sales cycle for products is estimated to be between **12 and 18 months** or longer, with commercial revenues expected to begin in **2025** and grow modestly throughout **2026**[107](index=107&type=chunk) [Key Factors Affecting Operating Results](index=34&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Key%20Factors%20Affecting%20Operating%20Results) [Development, Testing and Commercial Launch of our AI/ML Software Products](index=34&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Key%20Factors%20Affecting%20Operating%20Results_Development,%20Testing%20and%20Commercial%20Launch%20of%20our%20AI/ML%20Software%20Products) - Commercialization efforts, internal testing, and customer trials for both products are expected to continue throughout 2025, with potential delays impacting financial results[110](index=110&type=chunk) [Financing of Operations](index=34&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Key%20Factors%20Affecting%20Operating%20Results_Financing%20of%20Operations) - The Company believes it has sufficient liquidity to operate for at least the next **12 months** without needing to raise additional capital, but may seek financing opportunistically[112](index=112&type=chunk) - Approximately **$60.7 million** in gross proceeds were raised from the sale of Common Stock and warrants during the fourth quarter of **2024** and the first half of **2025**[112](index=112&type=chunk) [Customer Demand](index=34&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Key%20Factors%20Affecting%20Operating%20Results_Customer%20Demand) - Market demand for the Company's AI/ML software is unproven, with sales cycles likely between **12 and 18 months** or longer, and demand depends on customer willingness to adopt new technologies[113](index=113&type=chunk) [Continued Investment and Innovation](index=34&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Key%20Factors%20Affecting%20Operating%20Results_Continued%20Investment%20and%20Innovation) - Financial performance is dependent on the Company's ability to continually enhance and update products, identify evolving customer requirements, and introduce innovative products to maintain competitiveness[114](index=114&type=chunk) [Geopolitical and Macro-economic Environment](index=36&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Key%20Factors%20Affecting%20Operating%20Results_Geopolitical%20and%20Macro-economic%20Environment) - Geopolitical and macro-economic factors, such as inflation, trade policy changes, interest rates, and international conflicts, can significantly impact economic activity, product demand, costs, and the ability to attract/retain personnel[116](index=116&type=chunk) [Results of Operations](index=36&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Results%20of%20Operations) [Comparison of the Three Months Ended June 30, 2025 and 2024](index=36&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Results%20of%20Operations_Comparison%20of%20the%20Three%20Months%20Ended%20June%2030,%202025%20and%202024) [Revenue, Net](index=36&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Results%20of%20Operations_Comparison%20of%20the%20Three%20Months%20Ended%20June%2030,%202025%20and%202024_Revenue,%20Net%20(Q2%202025%20vs%20Q2%202024)) Revenue, Net (Three Months Ended June 30) | (In thousands) | 2025 | 2024 | $ Change | % Change | | :----------------------------- | :----- | :----- | :------- | :------- | | Product Development Contract Revenue | $1,012 | $2,713 | $(1,701) | (63)% | | Product Revenue | $3 | — | $3 | *NM | | **Revenue, net** | **$1,015** | **$2,713** | **$(1,698)** | **(63)%** | - Product development contract revenue decreased by **$1.7 million** (**63%**) primarily due to available funding and timing of milestone completion[119](index=119&type=chunk) [Operating Expenses](index=37&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Results%20of%20Operations_Comparison%20of%20the%20Three%20Months%20Ended%20June%2030,%202025%20and%202024_Operating%20Expenses%20(Q2%202025%20vs%20Q2%202024)) Operating Expenses (Three Months Ended June 30) | (In thousands) | 2025 | 2024 | $ Change | % Change | | :----------------------------- | :----- | :----- | :------- | :------- | | Cost of revenue | $474 | $569 | $(95) | (17)% | | Research and development | $3,125 | $2,348 | $777 | 33% | | General and administrative | $4,179 | $4,291 | $(112) | (3)% | | Sales and marketing | $1,331 | $1,380 | $(49) | (4)% | | Asset write-down and restructuring | — | $(88) | $88 | (100)% | | **Total operating expenses** | **$9,109** | **$8,500** | **$609** | **7%** | - Research and development expenses increased by **$0.8 million** (**33%**) due to labor and related expenses for product testing, debugging, stabilization, and enhancements[123](index=123&type=chunk) - General and administrative expense decreased by **$0.1 million** (**3%**) due to reduced labor and business insurance, partially offset by increased stock-based compensation[124](index=124&type=chunk) [Other Income](index=37&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Results%20of%20Operations_Comparison%20of%20the%20Three%20Months%20Ended%20June%2030,%202025%20and%202024_Other%20Income%20(Q2%202025%20vs%20Q2%202024)) Other Income (Three Months Ended June 30) | (In thousands) | 2025 | 2024 | $ Change | % Change | | :----------------------------- | :----- | :----- | :------- | :------- | | Interest income, net | $505 | $346 | $159 | 46% | | Gain on warrant liability | $102 | $116 | $(14) | (12)% | | Other income, net | — | $2 | $(2) | (100)% | | **Total other income** | **$607** | **$464** | **$143** | **31%** | - Other income increased by **$0.1 million**, primarily due to increased interest income from marketable securities[128](index=128&type=chunk) [Provision for Income Taxes](index=38&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Results%20of%20Operations_Comparison%20of%20the%20Three%20Months%20Ended%20June%2030,%202025%20and%202024_Provision%20for%20Income%20Taxes%20(Q2%202025%20vs%20Q2%202024)) - No significant income tax expense was recorded for the three months ended June 30, 2025 and 2024, due to net taxable losses and a full valuation allowance on deferred tax assets[129](index=129&type=chunk) [Comparison of the Six Months Ended June 30, 2025 and 2024](index=38&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Results%20of%20Operations_Comparison%20of%20the%20Six%20Months%20Ended%20June%2030,%202025%20and%202024) [Revenue, Net](index=38&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Results%20of%20Operations_Comparison%20of%20the%20Six%20Months%20Ended%20June%2030,%202025%20and%202024_Revenue,%20Net%20(H1%202025%20vs%20H1%202024)) Revenue, Net (Six Months Ended June 30) | (In thousands) | 2025 | 2024 | $ Change | % Change | | :----------------------------- | :----- | :----- | :------- | :------- | | Product Development Contract Revenue | $2,722 | $3,595 | $(873) | (24)% | | Product Revenue | $3 | $2,559 | $(2,556) | (100)% | | **Revenue, net** | **$2,725** | **$6,154** | **$(3,429)** | **(56)%** | - Product revenue decreased by **$2.6 million** (**100%**) due to non-recurring legacy hardware product sales in the prior year[132](index=132&type=chunk) - Product development contract revenue decreased by **$0.9 million** (**24%**) due to available funding and timing of milestone completion[131](index=131&type=chunk) [Operating Expenses](index=39&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Results%20of%20Operations_Comparison%20of%20the%20Six%20Months%20Ended%20June%2030,%202025%20and%202024_Operating%20Expenses%20(H1%202025%20vs%20H1%202024)) Operating Expenses (Six Months Ended June 30) | (In thousands) | 2025 | 2024 | $ Change | % Change | | :----------------------------- | :----- | :----- | :------- | :------- | | Cost of revenue | $827 | $2,455 | $(1,628) | (66)% | | Research and development | $5,995 | $5,243 | $752 | 14% | | General and administrative | $8,378 | $9,416 | $(1,038) | (11)% | | Sales and marketing | $2,550 | $2,185 | $365 | 17% | | Asset write-down and restructuring | — | $(5) | $5 | (100)% | | **Total operating expenses** | **$17,750** | **$19,294** | **$(1,544)** | **(8)%** | - Cost of revenue decreased by **$1.6 million** (**66%**) due to lower product costs from declining product revenue and decreased labor/material expenses on development contracts[134](index=134&type=chunk) - Sales and marketing expense increased by **$0.4 million** (**17%**) due to increased marketing program costs related to new software products[137](index=137&type=chunk) [Other Income](index=39&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Results%20of%20Operations_Comparison%20of%20the%20Six%20Months%20Ended%20June%2030,%202025%20and%202024_Other%20Income%20(H1%202025%20vs%20H1%202024)) Other Income (Six Months Ended June 30) | (In thousands) | 2025 | 2024 | $ Change | % Change | | :----------------------------- | :----- | :----- | :------- | :--------- | | Interest income, net | $946 | $718 | $228 | 32% | | Gain (loss) on warrant liabilities | $29,351 | $(132) | $29,483 | (22,336)% | | Other income, net | — | $2 | $(2) | (100)% | | **Total other income** | **$30,297** | **$588** | **$29,709** | **5,053%** | - Other income increased significantly by **$29.7 million**, almost entirely due to increased unrealized mark-to-market gains on outstanding warrants and increased interest income from marketable securities[139](index=139&type=chunk) [Provision for Income Taxes](index=39&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Results%20of%20Operations_Comparison%20of%20the%20Six%20Months%20Ended%20June%2030,%202025%20and%202024_Provision%20for%20Income%20Taxes%20(H1%202025%20vs%20H1%202024)) - No significant income tax expense was recorded for the six months ended June 30, 2025 and 2024, due to net taxable losses and a full valuation allowance on deferred tax assets[140](index=140&type=chunk) [Backlog and Total Estimated Contract Value](index=39&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Backlog%20and%20Total%20Estimated%20Contract%20Value) - As of June 30, 2025, backlog was **$1.7 million** (**$0.9 million** funded, **$0.8 million** unfunded), and total estimated remaining contract value was **$7.8 million**[141](index=141&type=chunk)[142](index=142&type=chunk) [Liquidity and Capital Resources](index=41&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Liquidity%20and%20Capital%20Resources%20(MD%26A)) - Cash, cash equivalents, and marketable securities increased to **$62.7 million** as of June 30, 2025, from **$40.1 million** at December 31, 2024[143](index=143&type=chunk) - The Company raised approximately **$7 million** in gross proceeds from stock and warrant sales in October 2024, and an additional **$29.3 million** from common stock sales under an "at-the-market" program during the six months ended June 30, 2025[144](index=144&type=chunk)[145](index=145&type=chunk) - Management believes current liquidity is sufficient for at least the next **12 months**, but additional financing may be sought opportunistically to bolster cash reserves or pursue business objectives[145](index=145&type=chunk)[150](index=150&type=chunk) [Cash Flows](index=43&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Cash%20Flows) Cash Flow Data (Six Months Ended June 30) | (In thousands) | 2025 | 2024 | $ Change | % Change | | :-------------------------------- | :----- | :----- | :------- | :------- | | Net cash used in operating activities | $(12,842) | $(13,033) | $191 | (1)% | | Net cash (used in) provided by investing activities | $(33,129) | $15,795 | $(48,924) | (310)% | | Net cash provided by (used in) financing activities | $34,931 | $(70) | $35,001 | (50,001)% | | **Net (decrease) increase in cash and cash equivalents** | **$(11,040)** | **$2,692** | **$(13,732)** | **(510)%** | - Net cash used in operating activities decreased slightly by **$0.2 million**, primarily due to changes in operating assets and liabilities[153](index=153&type=chunk) - Net cash used in investing activities increased by **$48.9 million**, mainly due to **$33.0 million** in net purchases of marketable securities[154](index=154&type=chunk) - Net cash provided by financing activities increased by **$35.0 million**, primarily from **$34.8 million** in net proceeds from common stock sales and warrant exercises[155](index=155&type=chunk) [Emerging Growth Company Status](index=43&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Emerging%20Growth%20Company%20Status) - The Company is an "emerging growth company" and has elected to use the extended transition period for new or revised financial accounting standards, which may affect comparability with other public companies[157](index=157&type=chunk) [Critical Accounting Policies and Estimates](index=45&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Critical%20Accounting%20Policies%20and%20Estimates) - There have been no material changes to the Company's critical accounting policies or estimates as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2024[159](index=159&type=chunk) [Recent Accounting Pronouncements](index=45&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations_Recent%20Accounting%20Pronouncements%20(MD%26A)) - Refer to Note 1, Basis of Presentation and Summary of Significant Accounting Policies, for information on recently adopted and recently issued accounting pronouncements[160](index=160&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=45&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, Palladyne AI Corp. is not required to provide quantitative and qualitative disclosures about market risk - The company is a smaller reporting company and is exempt from providing quantitative and qualitative disclosures about market risk[161](index=161&type=chunk) [Item 4. Controls and Procedures](index=45&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details the evaluation of Palladyne AI Corp.'s disclosure controls and procedures and reports on any changes in internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=45&type=section&id=Item%204.%20Controls%20and%20Procedures_Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2025[162](index=162&type=chunk) [Changes in Internal Control over Financial Reporting](index=45&type=section&id=Item%204.%20Controls%20and%20Procedures_Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) - No material change in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2025[164](index=164&type=chunk) [PART II. OTHER INFORMATION](index=46&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=46&type=section&id=Item%201.%20Legal%20Proceedings) Palladyne AI Corp. may be involved in various legal claims and proceedings in the normal course of business but is not currently a party to any that are believed to have a material adverse effect on its business, financial condition, or results of operations - The company is not currently a party to any legal proceedings believed to have a material adverse effect on its business, financial condition, or results of operations[166](index=166&type=chunk) [Item 1A. Risk Factors](index=46&type=section&id=Item%201A.%20Risk%20Factors) Details risks and uncertainties that could materially harm Palladyne AI Corp.'s business, operations, finances, legal, intellectual property, and securities [Risks Related to Our Business](index=46&type=section&id=Item%201A.%20Risk%20Factors_Risks%20Related%20to%20Our%20Business) - The company is an early-stage company with a history of losses (**$15.0 million** loss from operations for H1 2025, **$475.6 million** accumulated deficit as of June 30, 2025) and expects significant losses for the foreseeable future[168](index=168&type=chunk) - The company has no previous history or experience commercializing software products; prior hardware commercialization efforts were unsuccessful[173](index=173&type=chunk) - Successful commercialization of AI/ML Foundational Technology and related products may be delayed, impacting product availability, customer acquisition, and revenue[175](index=175&type=chunk) - Anticipated revenues are expected to be primarily derived from the licensing of AI/ML software products for the foreseeable future[178](index=178&type=chunk) - AI/ML Foundational Technology and related products are new technologies, and customer trials may not result in purchases; sales cycles are estimated at **12-18 months** or longer[180](index=180&type=chunk)[181](index=181&type=chunk) - The company operates in a competitive industry subject to rapid technological change, and its products may not be competitive with other alternatives[197](index=197&type=chunk) [Risks Related to Our Operations and Growth](index=56&type=section&id=Item%201A.%20Risk%20Factors_Risks%20Related%20to%20Our%20Operations%20and%20Growth) - Real or perceived design flaws, errors, defects, glitches, bugs, or malfunctions in AI/ML Foundational Technology and related products, or failure of software products to perform as expected, can result in lower than expected return on investment for customers, personal injury or property damage, and significant security or safety concerns[205](index=205&type=chunk)[206](index=206&type=chunk) - The use of "open source" software could negatively affect the ability to offer AI/ML Foundational Technology and related products and subject the company to possible litigation[211](index=211&type=chunk) - The business and prospects depend significantly on the ability to build and maintain an effective brand, which could be harmed by negative publicity[214](index=214&type=chunk) - Management's strategic decisions to execute growth plans have not always led to desired results and current/future decisions may have unintended negative consequences[216](index=216&type=chunk) - Failure to effectively manage business growth, including maintaining effective teams, hiring personnel, commercializing products, and implementing systems, could materially and adversely affect prospects[217](index=217&type=chunk) - The company may be unable to adequately control the costs associated with its operations to achieve profitability, facing significant expenses for R&D, sales, marketing, and general administration[219](index=219&type=chunk) - Substantial research and development costs are expected for AI/ML Foundational Technology, with no guarantee of reaching profitability or achieving significant licensing revenue[220](index=220&type=chunk) - Dependence on single, sole, or limited source suppliers for certain limited hardware components required for AI/ML Foundational Technology products could materially adversely affect business if suppliers fail to deliver[221](index=221&type=chunk)[224](index=224&type=chunk) - Risks related to wars, natural disasters, health epidemics, and supply chain disruptions could significantly disrupt operations and adversely affect the business[226](index=226&type=chunk)[228](index=228&type=chunk) [Risks Related to Our Finances](index=63&type=section&id=Item%201A.%20Risk%20Factors_Risks%20Related%20to%20Our%20Finances) - Business plans require a significant amount of capital; additional equity or debt securities may be sold, potentially diluting stockholders or introducing restrictive covenants[229](index=229&type=chunk)[231](index=231&type=chunk) - Financial results may vary significantly from period to period due to fluctuations in operating costs, revenues, and product demand, making quarter-to-quarter comparisons unreliable[235](index=235&type=chunk) - The company is highly dependent on senior management and other key employees; inability to attract, integrate, and retain qualified personnel (especially AI/ML software engineers) could harm development and competitiveness[236](index=236&type=chunk)[240](index=240&type=chunk) - Significant expenses and administrative burdens are incurred as a publicly-traded company, which could materially and adversely affect business, prospects, financial condition, and operating results[242](index=242&type=chunk) - The ability to use net operating loss carryforwards and other tax attributes may be limited due to certain cumulative changes in ownership or tax law changes[249](index=249&type=chunk)[250](index=250&type=chunk) - Risks are associated with strategic relationships or transactions, including potential non-performance by third parties or inability to identify suitable opportunities, which could impair growth[252](index=252&type=chunk)[253](index=253&type=chunk) [Risks Related to Legal Claims and Regulatory Compliance](index=71&type=section&id=Item%201A.%20Risk%20Factors_Risks%20Related%20to%20Legal%20Claims%20and%20Regulatory%20Compliance) - Issues in the development and use of AI/ML, combined with an uncertain regulatory environment (e.g., EU AI Act), may result in reputational harm, liability, or other adverse consequences to business operations[255](index=255&type=chunk)[256](index=256&type=chunk)[259](index=259&type=chunk) - Changes in tax laws, such as the One Big Beautiful Bill Act, could have a material adverse effect on the business, cash flows, results of operations, or financial condition[260](index=260&type=chunk) - The company may become subject to new or changing governmental regulations relating to AI/ML Foundational Technology, potentially leading to delays, increased costs, or making the business unviable[261](index=261&type=chunk) - The company may be subject to claims, lawsuits, arbitration proceedings, government investigations, and other legal proceedings, which could be time-consuming, expensive, and harmful to its reputation[262](index=262&type=chunk)[263](index=263&type=chunk) - Evolving laws, regulations, and contractual obligations related to data privacy and security (e.g., CCPA, CPRA, GDPR, CMMC) and actual or perceived failure to comply could harm reputation, subject the company to fines, and increase liability[265](index=265&type=chunk)[266](index=266&type=chunk)[269](index=269&type=chunk) - The company is subject to cybersecurity risks to its operational systems, security systems, infrastructure, and data, which could disrupt operations, lead to data loss, and harm its reputation[271](index=271&type=chunk)[272](index=272&type=chunk)[277](index=277&type=chunk) - As a government contractor or subcontractor, the company is subject to laws, regulations, and contractual provisions that may pose increased risk of potential liability and expenses[278](index=278&type=chunk) - The company is subject to U.S. and foreign anti-corruption and anti-money laundering laws, with potential for criminal liability and other serious consequences for violations[279](index=279&type=chunk)[281](index=281&type=chunk) - Governmental export and import controls and laws could subject the company to liability if not in compliance, affecting international sales and operations[282](index=282&type=chunk)[284](index=284&type=chunk) - Increased scrutiny and changing expectations from stakeholders regarding ESG practices and reporting could cause additional costs, resources, and risks[285](index=285&type=chunk) [Risks Related to Our Intellectual Property](index=81&type=section&id=Item%201A.%20Risk%20Factors_Risks%20Related%20to%20Our%20Intellectual%20Property) - Success depends on obtaining and maintaining protection for intellectual property (patents, trademarks, trade secrets); efforts to reduce operational expenses may lead to fewer new patents and reduced enforcement[286](index=286&type=chunk)[287](index=287&type=chunk) - Patent positions are highly uncertain, and litigation to establish or challenge validity can be lengthy and expensive, potentially invalidating patents or narrowing their scope[288](index=288&type=chunk) - The company may not be able to effectively protect its intellectual property rights in all target markets, especially in countries with weaker IP laws, leading to competitors using its technologies[293](index=293&type=chunk) - The company may be subject to intellectual property infringement or misappropriation claims, which can be time-consuming and expensive, potentially limiting its ability to commercialize software products[295](index=295&type=chunk)[299](index=299&type=chunk) - Intellectual property discovered through government-funded programs may be subject to federal regulations such as "march-in" rights, certain reporting requirements, and a preference for U.S.-based companies, limiting exclusive rights[300](index=300&type=chunk) - The company may be subject to damages resulting from claims that it or its employees have wrongfully used or disclosed alleged trade secrets of former employers[301](index=301&type=chunk) [Risks Related to Ownership of our Securities](index=85&type=section&id=Item%201A.%20Risk%20Factors_Risks%20Related%20to%20Ownership%20of%20our%20Securities) - The issuance or sale of additional shares of Common Stock, or rights to acquire them, could depress the trading price and dilute existing stockholders[302](index=302&type=chunk)[303](index=303&type=chunk) - The price of Common Stock could decline due to the large number of shares subject to employee equity awards, especially during concentrated vesting periods[304](index=304&type=chunk) - The markets for publicly traded securities have been volatile and may not continue, with various factors (e.g., financial results, competition, regulations) affecting stock price[306](index=306&type=chunk)[307](index=307&type=chunk) - The publicly traded securities are subject to potential delisting from the Nasdaq Global Market if continued listing requirements are not met, which would likely impair liquidity[310](index=310&type=chunk) - If securities or industry analysts cease publishing research or change their recommendations, the price and trading volume of Common Stock could decline[311](index=311&type=chunk) - The deSPAC Public Warrants and deSPAC Private Placement Warrants may expire worthless if they are not "in the money" prior to their expiration[314](index=314&type=chunk) - The company may redeem unexpired deSPAC Warrants prior to their exercise at a time that is disadvantageous to deSPAC Warrant holders[315](index=315&type=chunk) - Exercise of deSPAC Warrants and 2024 Warrants would increase the number of shares eligible for future resale and result in dilution to stockholders[316](index=316&type=chunk)[317](index=317&type=chunk) - Anti-takeover provisions contained in the Charter and Bylaws, as well as Delaware law, could impair a takeover attempt, limiting the price investors might be willing to pay for Common Stock[318](index=318&type=chunk) - Bylaws provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit stockholders' ability to obtain a favorable judicial forum[319](index=319&type=chunk)[320](index=320&type=chunk) - As an "emerging growth company," reliance on certain exemptions from reporting requirements may make Common Stock or deSPAC Public Warrants less attractive to some investors[321](index=321&type=chunk)[322](index=322&type=chunk)[324](index=324&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=96&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports on the unregistered sales of equity securities, specifically the exercise of 2024 Warrants, and the use of proceeds - On May 9, 2025, **2,790,700** 2024 Warrants were cash exercised at **$2.30 per share**, generating **$6,418,610** in aggregate proceeds[325](index=325&type=chunk) - The resulting **2,790,700 shares** of Common Stock were issued without registration under Section 4(a)(2) of the Securities Act[325](index=325&type=chunk) [Item 3. Defaults Upon Senior Securities](index=96&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable to Palladyne AI Corp. for the reporting period - Not Applicable[328](index=328&type=chunk) [Item 4. Mine Safety Disclosures](index=96&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to Palladyne AI Corp. for the reporting period - Not applicable[329](index=329&type=chunk) [Item 5. Other Information](index=96&type=section&id=Item%205.%20Other%20Information) This section reports on other information not covered elsewhere, specifically regarding Rule 10b5-1 trading arrangements - No director or officer adopted or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement" during the last fiscal quarter[331](index=331&type=chunk) [Item 6. Exhibits](index=97&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed as part of the Form 10-Q report, including corporate governance documents, certifications, and XBRL data - Includes Second Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, and various certifications (e.g., CEO/CFO certifications under Sarbanes-Oxley Act)[332](index=332&type=chunk) - XBRL Instance Document, Taxonomy Extension Schema, and Cover Page Interactive Data File are embedded[332](index=332&type=chunk) [Signatures](index=98&type=section&id=Signatures) - The report was signed by Benjamin G. Wolff (President and CEO) and Trevor Thatcher (Chief Financial Officer) on August 6, 2025[337](index=337&type=chunk)

Core Viewpoint - Mobilicom and Palladyne AI have entered a cooperation agreement to offer a bundled solution that combines Palladyne AI's autonomy software for UAVs and industrial robots with Mobilicom's OS3 cybersecurity solution, enhancing operational effectiveness and security for autonomous systems in defense and commercial sectors [1][2][3] Group 1: Partnership Details - The collaboration aims to deliver a secure, AI-driven autonomous operations solution that addresses mission success in both battlefield and manufacturing environments [2] - Mobilicom's OS3 cybersecurity software provides continuous monitoring and threat prevention, ensuring regulatory compliance and resilience during complex operations [3] Group 2: Product Features - Palladyne AI's Pilot software enhances UAV mission effectiveness through real-time multi-modal sensor fusion, enabling persistent detection and classification of objects [2] - Palladyne's IQ software for industrial robotics utilizes AI and machine learning to provide human-like reasoning, allowing robots to adapt to real-world changes and perform complex tasks [4][5] Group 3: Market Applications - Palladyne AI's software is designed for a wide range of applications, including automotive, aviation, construction, defense, and logistics, enabling various types of machines such as UAVs, UGVs, and ROVs to achieve autonomous capabilities [5][6] - The partnership is expected to elevate the return on investment for diverse robotic systems, enhancing their operational capabilities in dynamic environments [5][6]

Core Viewpoint - Zacks Investment Research has initiated coverage of Palladyne AI Corp. with a Neutral recommendation, indicating a balanced perspective on the company's emerging opportunities and ongoing operational challenges [1] Company Overview - Palladyne AI Corp. is based in Salt Lake City, UT, and is focused on developing edge-based artificial intelligence software for autonomous operation of drones and robotic systems without centralized infrastructure [1] - The company's flagship platform, Palladyne Pilot, became commercially available in Q2 2025, marking a significant milestone for validating its AI/ML technology through real-world deployments [2] Financial Performance - As of March 31, 2025, Palladyne AI held $46.6 million in cash and marketable securities, an increase from $40.1 million at the end of 2024, supported by equity raises totaling $39.4 million [3] - Revenue for Q1 2025 rose 94% year over year to $1.7 million, driven by defense-related development contracts, while operating expenses declined by 20% from the prior year [4] Market Position and Challenges - Despite the commercial availability of its software, Palladyne AI has not recorded any product revenue in 2025, relying solely on non-recurring development contracts, raising concerns about scaling licensing deals [5] - The company faces competition from large industrial players like ABB and Fanuc, which are heavily investing in AI-driven robotics, potentially limiting Palladyne AI's market exposure and growth [6] Investment Considerations - Palladyne AI's share price has shown volatility, reflecting investor interest in its AI platform but also uncertainty regarding its financial sustainability and elevated valuation metrics compared to peers [7] - The company benefits from strong government backing, solid liquidity, and a scalable software platform, but faces headwinds such as the absence of recurring revenue, persistent operating losses, and a small backlog [8]

[PART I. FINANCIAL INFORMATION](index=7&type=section&id=PART%20I.%2E%20FINANCIAL%20INFORMATION) Presents Palladyne AI Corp.'s unaudited financial statements and management's discussion for Q1 2025 [Item 1. Financial Statements (Unaudited)](index=7&type=section&id=Item%201%2E%20Financial%20Statements%20%28Unaudited%29) Presents Palladyne AI Corp.'s unaudited condensed consolidated financial statements and notes for Q1 2025 [Condensed Consolidated Balance Sheets](index=7&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Presents the company's financial position, including assets, liabilities, and equity, as of March 31, 2025, and December 31, 2024 Condensed Consolidated Balance Sheets (as of March 31, 2025 and December 31, 2024) | (in thousands) | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $10,060 | $31,188 | | Marketable securities | 36,582 | 8,883 | | Total current assets | 50,262 | 42,730 | | Total assets | $63,301 | $56,253 | | **Liabilities and Stockholders' Equity (Deficit)** | | | | Warrant liabilities | 22,148 | 51,396 | | Total liabilities | 35,002 | 65,786 | | Total stockholders' equity (deficit) | 28,299 | (9,533) | | Total liabilities and stockholders' equity (deficit) | $63,301 | $56,253 | [Condensed Consolidated Statements of Operations](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Details the company's revenues, expenses, and net income or loss for the three months ended March 31, 2025 and 2024 Condensed Consolidated Statements of Operations (Three Months Ended March 31, 2025 and 2024) | (in thousands, except share and per share data) | 2025 | 2024 | | :--- | :--- | :--- | | Revenue, net | $1,710 | $3,441 | | Total operating expenses | 8,641 | 10,794 | | Loss from operations | (6,931) | (7,353) | | Gain (loss) on warrant liabilities | 29,248 | (248) | | Net income (loss) | $22,759 | $(7,229) | | Basic Net income (loss) per share | $0.64 | $(0.28) | | Diluted Net income (loss) per share | $0.55 | $(0.28) | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20%28Loss%29) Reports net income or loss and other comprehensive income or loss for the three months ended March 31, 2025 and 2024 Condensed Consolidated Statements of Comprehensive Income (Loss) (Three Months Ended March 31, 2025 and 2024) | (in thousands) | 2025 | 2024 | | :--- | :--- | :--- | | Net income (loss) | $22,759 | $(7,229) | | Total other comprehensive loss | (9) | (4) | | Comprehensive income (loss) | $22,750 | $(7,233) | [Condensed Consolidated Statements of Stockholders' Equity (Deficit)](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20Equity%20%28Deficit%29) Outlines changes in stockholders' equity or deficit for the three months ended March 31, 2025 and 2024 Condensed Consolidated Statements of Stockholders' Equity (Deficit) (Three Months Ended March 31, 2025 and 2024) | (in thousands, except share data) | Balance at Dec 31, 2024 | Stock-based compensation | Issuance of common stock, net of cost | Other comprehensive loss | Net income | Balance at Mar 31, 2025 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Common Stock, Class A Shares | 33,883,894 | — | 1,335,807 | — | — | 35,712,516 | | Common Stock, Amount | $3 | — | $1 | — | — | $4 | | Additional Paid-In Capital | $481,289 | $1,149 | $13,932 | — | — | $496,370 | | Accumulated Other Comprehensive Income (Loss) | $6 | — | — | $(9) | — | $(3) | | Accumulated Deficit | $(490,831) | — | — | — | $22,759 | $(468,072) | | Total Stockholders' Equity (Deficit) | $(9,533) | $1,149 | $13,933 | $(9) | $22,759 | $28,299 | [Condensed Consolidated Statements of Cash Flows](index=11&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Summarizes cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2025 and 2024 Condensed Consolidated Statements of Cash Flows (Three Months Ended March 31, 2025 and 2024) | (in thousands) | 2025 | 2024 | | :--- | :--- | :--- | | Net cash used in operating activities | $(7,516) | $(7,236) | | Net cash (used in) provided by investing activities | $(27,545) | $15,938 | | Net cash provided by (used in) financing activities | $13,933 | $(43) | | Net (decrease) increase in cash and cash equivalents | $(21,128) | $8,659 | | Cash and cash equivalents at end of period | $10,060 | $31,798 | [Notes to Unaudited Condensed Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) Provides detailed explanations of accounting policies, fair value measurements, and equity transactions supporting the financial statements [Note 1. Basis of Presentation and Summary of Significant Accounting Policies](index=12&type=section&id=Note%201%2E%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies) Describes the company's business, financial position, and key accounting policies, including revenue recognition and liquidity - Palladyne AI Corp. designs full-stack, closed-loop autonomy software (AI/ML Foundational Technology) for robotic systems in industrial and defense sectors, enabling them to perceive, learn, reason, and adapt in dynamic environments without extensive programming or cloud latency[25](index=25&type=chunk) - The company had cash, cash equivalents, and marketable securities of **$46.6 million** as of March 31, 2025, up from **$40.1 million** at December 31, 2024, and believes it has sufficient financial resources for at least the next 12 months[31](index=31&type=chunk)[32](index=32&type=chunk) - Revenue is derived from product development contracts (primarily with the U.S. government) and sales of legacy hardware products; the company has not yet generated product revenue from its new Palladyne IQ and Palladyne Pilot AI/ML software products[34](index=34&type=chunk) Revenue by Source (Three Months Ended March 31, 2025 and 2024) | (In thousands) | 2025 | 2024 | | :--- | :--- | :--- | | Product Development Contract Revenue | $1,710 | $882 | | Product Revenue | — | 2,559 | | Revenue, net | $1,710 | $3,441 | - As of March 31, 2025, the company had a backlog of **$1.9 million**, with approximately half expected to be recognized over the next 12 months[42](index=42&type=chunk) [Note 2. Fair Value Measurements](index=18&type=section&id=Note%202%2E%20Fair%20Value%20Measurements) Details the fair value hierarchy and measurements for financial assets and liabilities as of March 31, 2025, and December 31, 2024 Financial Assets and Liabilities Measured at Fair Value (as of March 31, 2025) | (In thousands) | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | **Assets:** | | | | | | U.S. treasury securities | $36,582 | $— | $— | $36,582 | | **Liabilities:** | | | | | | Warrant liabilities | $4,247 | $1,507 | $16,394 | $22,148 | Financial Assets and Liabilities Measured at Fair Value (as of December 31, 2024) | (In thousands) | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | **Assets:** | | | | | | U.S. Treasury securities (Cash equivalents) | $12,927 | $— | $— | $12,927 | | U.S. treasury securities (Marketable securities) | $8,883 | $— | $— | $8,883 | | **Liabilities:** | | | | | | Warrant liabilities | $11,630 | $4,128 | $35,638 | $51,396 | [Note 3. Balance Sheet Components](index=20&type=section&id=Note%203%2E%20Balance%20Sheet%20Components) Breaks down key balance sheet items such as inventories, prepaid expenses, property and equipment, and accrued liabilities Inventories, Net (as of March 31, 2025 and December 31, 2024) | (In thousands) | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Raw materials | $30 | $71 | | Work-in-process | 43 | — | | Total inventories | $73 | $71 | Prepaid Expenses and Other Current Assets (as of March 31, 2025 and December 31, 2024) | (In thousands) | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Prepaid insurance | $352 | $367 | | Software | 431 | 647 | | Other prepaid expenses and assets | 834 | 261 | | Total prepaid expenses and other current assets | $1,617 | $1,275 | Property and Equipment, Net (as of March 31, 2025 and December 31, 2024) | (In thousands) | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Robotics and manufacturing equipment | $1,170 | $1,128 | | Leasehold improvements | 3,927 | 3,927 | | Computer equipment | 1,304 | 1,251 | | Software | — | 1 | | Furniture and fixtures, and other fixed assets | 951 | 951 | | Property and equipment, gross | 7,352 | 7,258 | | Accumulated depreciation | (3,237) | (3,014) | | Property and equipment, net | $4,115 | $4,244 | Accrued Liabilities (as of March 31, 2025 and December 31, 2024) | (In thousands) | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Payroll and related costs | $1,114 | $1,811 | | Legal services accrual | 112 | 230 | | Deferred revenue | — | 248 | | Other contract liabilities | 496 | 496 | | Other accrued expenses and current liabilities | 152 | 134 | | Total accrued liabilities | $1,874 | $2,919 | [Note 4. Earn-Out Shares](index=21&type=section&id=Note%204%2E%20Earn-Out%20Shares) Explains the contingent earn-out shares from the 2021 Business Combination and their treatment as equity-linked instruments - Following the September 2021 Business Combination, holders of Old Sarcos capital stock are entitled to up to **4,687,500 Earn-Out Shares**, contingent on the company's common stock price reaching **$90.00** and **$120.00** thresholds within specified periods[54](index=54&type=chunk)[55](index=55&type=chunk)[57](index=57&type=chunk) - As of March 31, 2025, all **4,687,500 Earn-Out Shares** remained potentially issuable and are treated as equity-linked instruments, not included in shares outstanding on the balance sheet[55](index=55&type=chunk) [Note 5. DeSPAC Warrants](index=21&type=section&id=Note%205%2E%20DeSPAC%20Warrants) Details the deSPAC Public and Private Placement Warrants, their fair value changes, and impact on net income - The company has deSPAC Public Warrants (PDYNW) and deSPAC Private Placement Warrants outstanding, totaling **20,549,453** as of March 31, 2025, which are recorded as warrant liabilities[56](index=56&type=chunk)[58](index=58&type=chunk)[63](index=63&type=chunk) - Each whole deSPAC Warrant allows the holder to purchase one-sixth of a common stock share at **$11.50** per warrant, expiring on September 24, 2026[58](index=58&type=chunk) - The company recognized a gain of **$10.0 million** related to the change in fair value of deSPAC Warrants for the three months ended March 31, 2025, compared to a loss of **$0.2 million** in the prior year[64](index=64&type=chunk) [Note 6. 2024 Warrants](index=23&type=section&id=Note%206%2E%202024%20Warrants) Describes the 2024 Private Placement Warrants, their valuation, and the gain recognized from fair value changes - In November 2024, the company issued 2024 Private Placement Warrants and 2024 Concurrent Private Placement Warrants, totaling **3,220,805 warrants**, with an exercise price of **$2.30** per share, exercisable six months from issuance and expiring five and a half years later[65](index=65&type=chunk)[66](index=66&type=chunk)[67](index=67&type=chunk)[300](index=300&type=chunk) - The 2024 Warrants are recorded as warrant liabilities, with their fair value estimated using a Monte Carlo valuation model (Level 3 fair value measurement)[68](index=68&type=chunk) - The company recognized a gain of **$19.2 million** related to the change in fair value of the 2024 Warrants for the three months ended March 31, 2025[68](index=68&type=chunk) 2024 Warrants Valuation Model Assumptions (March 31, 2025) | Assumption | Value | | :--- | :--- | | Stock price | $5.88 | | Term (in years) | 5.1 | | Expected volatility | 102.7% | | Risk-free rate | 3.86% | | Dividend yield | 0.0% | [Note 7. Stock-based Compensation](index=24&type=section&id=Note%207%2E%20Stock-based%20Compensation) Outlines the company's equity incentive plans, stock option activity, and stock-based compensation expense - The company operates under the 2021 Equity Incentive Plan (**1.9 million shares available**), the 2015 Equity Incentive Plan (no further awards), the 2024 Inducement Equity Incentive Plan (**0.5 million shares available**), and the 2021 Employee Stock Purchase Plan (offerings commenced December 2024)[71](index=71&type=chunk)[72](index=72&type=chunk)[73](index=73&type=chunk)[74](index=74&type=chunk) Stock Option Activity (Three Months Ended March 31, 2025) | | Number of Shares | Weighted Average Exercise Price (Per share) | | :--- | :--- | :--- | | Outstanding – December 31, 2024 | 1,396,957 | $1.88 | | Granted | 41,667 | $6.43 | | Cancelled | (162,570) | $1.51 | | Outstanding – March 31, 2025 | 1,276,054 | $2.07 | | Exercisable – March 31, 2025 | 543,777 | $2.00 | - In April 2024, the company repriced options for **773,551 shares**, reducing the exercise price to **$1.59** per share and restarting vesting for senior employees, resulting in an incremental fair value of **$0.2 million**[77](index=77&type=chunk)[78](index=78&type=chunk)[79](index=79&type=chunk)[80](index=80&type=chunk) Stock-Based Compensation Expense (Three Months Ended March 31, 2025 and 2024) | (In thousands) | 2025 | 2024 | | :--- | :--- | :--- | | Cost of revenue | $10 | $(18) | | Research and development | 79 | (42) | | Sales and marketing | 179 | 40 | | General and administrative | 881 | 591 | | Total stock-based compensation expense | $1,149 | $571 | [Note 8. Net Income (Loss) Per Share](index=27&type=section&id=Note%208%2E%20Net%20Income%20%28Loss%29%20Per%20Share) Presents basic and diluted net income or loss per share calculations for the three months ended March 31, 2025 and 2024 Net Income (Loss) Per Share (Three Months Ended March 31, 2025 and 2024) | (In thousands, except share and per share data) | 2025 | 2024 | | :--- | :--- | :--- | | Net income (loss) | $22,759 | $(7,229) | | Weighted average shares outstanding, basic | 35,345,672 | 25,879,043 | | Weighted average shares outstanding, diluted | 41,067,950 | 25,879,043 | | Basic net income (loss) per share | $0.64 | $(0.28) | | Diluted net income (loss) per share | $0.55 | $(0.28) | | Anti-dilutive securities, excluded | 8,227,228 | 12,237,740 | [Note 9. Income Taxes](index=27&type=section&id=Note%209%2E%20Income%20Taxes) Explains the absence of income tax expense due to net losses and a full valuation allowance on deferred tax assets - The company reported no income tax expense for the three months ended March 31, 2025 and 2024, due to net losses and a corresponding full valuation allowance on net deferred tax assets[88](index=88&type=chunk) [Note 10. Commitments and Contingencies](index=27&type=section&id=Note%2010%2E%20Commitments%20and%20Contingencies) Addresses the company's legal proceedings, indemnifications, and the absence of material loss contingencies - The company is not currently involved in any material legal proceedings and has not accrued any material loss contingency related to legal proceedings as of March 31, 2025[89](index=89&type=chunk) - The company provides indemnifications in the ordinary course of business but has not accrued a liability for these obligations due to the low likelihood of incurring a material payment[90](index=90&type=chunk) [Note 11. Segment Information](index=29&type=section&id=Note%2011%2E%20Segment%20Information) Confirms the company operates as a single segment, with all revenue and assets derived from the United States - The company operates as a single operating segment, with the CEO making resource allocation and operating decisions based on consolidated net income[91](index=91&type=chunk)[92](index=92&type=chunk) Segment Revenue and Net Income (Loss) (Three Months Ended March 31, 2025 and 2024) | (In thousands) | 2025 | 2024 | | :--- | :--- | :--- | | Segment Revenue | $1,710 | $882 | | Other Revenue (legacy product sales) | — | 2,559 | | Total Revenue | $1,710 | $3,441 | | Net income (loss) | $22,759 | $(7,229) | - All revenue and long-lived assets are derived from and maintained in the United States[93](index=93&type=chunk)[94](index=94&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=30&type=section&id=Item%202%2E%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management's analysis of Palladyne AI Corp.'s financial condition, results, liquidity, and cash flow for Q1 2025 [Special Note Regarding Forward-Looking Statements](index=30&type=section&id=Special%20Note%20Regarding%20Forward-Looking%20Statements) Highlights that the report contains forward-looking statements subject to various risks and uncertainties regarding future performance - The report contains forward-looking statements regarding future financial performance, business strategies, product development, market size, competition, and capital requirements, which are subject to risks and uncertainties[96](index=96&type=chunk)[97](index=97&type=chunk)[98](index=98&type=chunk) [Overview](index=31&type=section&id=Overview) Introduces Palladyne AI Corp.'s mission to deliver AI software for robotic systems and its early commercialization efforts - Palladyne AI Corp. aims to deliver AI software products for robotic systems in industrial and defense sectors, enabling them to perform complex tasks in unstructured environments using its hardware-agnostic AI/ML Foundational Technology[100](index=100&type=chunk) - The company has released initial commercial versions of its Palladyne IQ (for industrial robots/cobots) and Palladyne Pilot (for unmanned platforms, focusing on Class 1 UAVs) products, which are in early commercialization stages and undergoing reliability testing[100](index=100&type=chunk) - Initial customers are expected from industrial manufacturing, defense, infrastructure, energy, and aerospace, with revenue from commercial customers anticipated to begin in 2025 through term-based (Palladyne IQ) and device-based (Palladyne Pilot) licensing models[101](index=101&type=chunk) [Key Factors Affecting Operating Results](index=33&type=section&id=Key%20Factors%20Affecting%20Operating%20Results) Discusses critical elements influencing the company's financial performance, including product development, financing, and market demand [Development, Testing and Commercial Launch of our AI/ML Software Products](index=33&type=section&id=Development%2C%20Testing%20and%20Commercial%20Launch%20of%20our%20AI%2FML%20Software%20Products) Focuses on the ongoing commercialization, testing, and anticipated revenue generation from AI/ML software products in 2025 - The company expects to derive commercial licensing revenues from customers starting in 2025, with ongoing commercialization efforts, internal testing, and customer trials for Palladyne IQ and Palladyne Pilot throughout the year[104](index=104&type=chunk) [Financing of Operations](index=33&type=section&id=Financing%20of%20Operations) Outlines the company's capital strategy, including recent fundraising and plans to use existing cash for operations and growth - The company plans to use existing cash to enhance software products, conduct R&D, pursue marketing, and fund operations, having raised approximately **$39.4 million** in gross proceeds from stock and warrant sales in Q4 2024 and Q1 2025[105](index=105&type=chunk)[106](index=106&type=chunk) - Workforce reductions in 2023 helped conserve cash, and the company believes it has sufficient liquidity for at least the next 12 months, though it may seek additional financing opportunistically[106](index=106&type=chunk) [Customer Demand](index=33&type=section&id=Customer%20Demand) Addresses the unproven market demand for AI/ML software and the reliance on customer adoption of new technologies - The market demand for the company's AI/ML software is unproven, and its success depends on customers' willingness to adopt new technologies and accurate estimates of market characteristics, pricing, and sales cycles[107](index=107&type=chunk) [Continued Investment and Innovation](index=33&type=section&id=Continued%20Investment%20and%20Innovation) Emphasizes the necessity of continuous enhancement and innovation in AI/ML technology to maintain competitiveness - The company's financial performance relies on its ability to continuously enhance and update its AI/ML Foundational Technology and related products, respond to evolving customer requirements, and compete in a rapidly changing technological landscape[108](index=108&type=chunk) [Geopolitical and Macro-economic Environment](index=35&type=section&id=Geopolitical%20and%20Macro-economic%20Environment) Examines how global economic and political factors can impact demand, costs, and the company's operational stability - Geopolitical and macroeconomic factors like inflation, interest rates, and international conflicts can significantly impact economic activity, affecting demand for products, labor/material costs, and the company's ability to hire and retain personnel[109](index=109&type=chunk) [Results of Operations](index=35&type=section&id=Results%20of%20Operations) Analyzes the company's financial performance, including revenue and expense trends, for the three months ended March 31, 2025 and 2024 [Comparison of the Three Months Ended March 31, 2025 and 2024.](index=35&type=section&id=Comparison%20of%20the%20Three%20Months%20Ended%20March%2031%2C%202025%20and%202024%2E) Provides a detailed comparative analysis of financial results for the three-month periods ended March 31, 2025 and 2024 [Revenue, Net](index=35&type=section&id=Revenue%2C%20Net) Compares total net revenue for the three months ended March 31, 2025 and 2024, highlighting changes by source Revenue, Net (Three Months Ended March 31, 2025 and 2024) | (In thousands) | 2025 | 2024 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Product Development Contract Revenue | $1,710 | $882 | $828 | 94% | | Product Revenue | — | 2,559 | (2,559) | (100)% | | Revenue, net | $1,710 | $3,441 | $(1,731) | (50)% | [Product Development Contract Revenue](index=35&type=section&id=Product%20Development%20Contract%20Revenue) Discusses the increase in product development contract revenue due to progress on contract milestones - Product development contract revenue increased by **$0.8 million (94%)** to **$1.7 million** in Q1 2025, primarily due to progress and completion of certain contract milestones[111](index=111&type=chunk) [Product Revenue](index=35&type=section&id=Product%20Revenue) Explains the decrease in product revenue due to the absence of legacy hardware product sales from the prior year - Product revenue decreased by **$2.6 million (100%)** to **$0.0 million** in Q1 2025, as legacy hardware product sales from Q1 2024 did not recur[112](index=112&type=chunk) [Operating Expenses](index=37&type=section&id=Operating%20Expenses) Analyzes changes in various operating expense categories for the three months ended March 31, 2025 and 2024 Operating Expenses (Three Months Ended March 31, 2025 and 2024) | (In thousands) | 2025 | 2024 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Cost of revenue | $353 | $1,886 | $(1,533) | (81)% | | Research and development | 2,870 | 2,895 | (25) | (1)% | | General and administrative | 4,199 | 5,125 | (926) | (18)% | | Sales and marketing | 1,219 | 805 | 414 | 51% | | Asset write-down and restructuring | — | 83 | (83) | (100)% | | Total operating expenses | $8,641 | $10,794 | $(2,153) | (20)% | [Cost of Revenue](index=37&type=section&id=Cost%20of%20Revenue) Details the decrease in cost of revenue driven by lower product sales and reduced development contract expenses - Cost of revenue decreased by **$1.5 million (81%)** to **$0.4 million** in Q1 2025, primarily due to lower product costs from declining product revenue and reduced labor/material expenses on development contracts[114](index=114&type=chunk) [Research and Development](index=37&type=section&id=Research%20and%20Development) Notes the relatively flat research and development expenses, focused on commercializing AI/ML products - Research and development expenses remained essentially flat, decreasing by **1%** in Q1 2025, focusing on commercializing Palladyne Pilot and enhancing Palladyne IQ[115](index=115&type=chunk) [General and Administrative](index=37&type=section&id=General%20and%20Administrative) Explains the decrease in general and administrative expenses due to reduced labor and insurance costs - General and administrative expense decreased by **$0.9 million (18%)** to **$4.2 million** in Q1 2025, mainly due to reduced labor, labor-related expenses, and business insurance, partially offset by increased stock-based compensation[116](index=116&type=chunk) [Sales and Marketing](index=37&type=section&id=Sales%20and%20Marketing) Highlights the increase in sales and marketing expenses driven by higher labor and marketing program costs - Sales and marketing expense increased by **$0.4 million (51%)** to **$1.2 million** in Q1 2025, driven by higher labor and labor-related expenses and increased marketing program costs[117](index=117&type=chunk) [Asset Write-down and Restructuring](index=37&type=section&id=Asset%20Write-down%20and%20Restructuring) Confirms the absence of significant asset write-down and restructuring costs for the current quarter - There were no significant asset write-down and restructuring costs for the three months ended March 31, 2025[118](index=118&type=chunk) [Other Income](index=37&type=section&id=Other%20Income) Discusses the significant increase in other income, primarily from warrant fair value gains and higher interest income Other Income (Three Months Ended March 31, 2025 and 2024) | (In thousands) | 2025 | 2024 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Interest income, net | $442 | $372 | $70 | 19% | | (Loss) gain on warrant liability | 29,248 | (248) | 29,496 | (11,894)% | | Total other income | $29,690 | $124 | $29,566 | 23,844% | - Other income significantly increased by **$29.6 million** in Q1 2025, driven by increased unrealized mark-to-market gains on outstanding warrants and higher interest income from marketable securities[119](index=119&type=chunk) [Provision for Income Taxes](index=37&type=section&id=Provision%20for%20Income%20Taxes) Explains the lack of income tax expense due to net losses and a full valuation allowance on deferred tax assets - The company reported no significant income tax expense for Q1 2025 and Q1 2024, as net losses resulted in a full valuation allowance on net deferred tax assets[120](index=120&type=chunk) [Backlog and Total Estimated Contract Value](index=37&type=section&id=Backlog%20and%20Total%20Estimated%20Contract%20Value) Reports the company's backlog and total estimated contract value as of March 31, 2025, and expected recognition - As of March 31, 2025, the company's backlog was **$1.9 million** (**$1.0 million funded**, **$0.9 million unfunded**), with approximately half expected to be recognized within the next 12 months[121](index=121&type=chunk) - Total estimated contract value, including backlog and unexercised options, was **$8.8 million** as of March 31, 2025[121](index=121&type=chunk) [Liquidity and Capital Resources](index=39&type=section&id=Liquidity%20and%20Capital%20Resources) Assesses the company's cash position, working capital, financing activities, and future capital requirements - Cash, cash equivalents, and marketable securities increased to **$46.6 million** as of March 31, 2025, from **$40.1 million** at December 31, 2024, despite a history of operating losses and negative cash flows[122](index=122&type=chunk) - The company had an accumulated deficit of approximately **$468.1 million** and working capital of **$47.1 million** as of March 31, 2025[122](index=122&type=chunk) - Recent financing activities include raising **$7 million** in gross proceeds from stock and warrants in October 2024, and selling **1,335,807 shares** for **$14.4 million** in gross proceeds under an 'at-the-market' offering during Q1 2025[123](index=123&type=chunk) - The company believes current liquidity is sufficient for at least the next 12 months but may seek additional financing opportunistically to bolster cash reserves and pursue business objectives[123](index=123&type=chunk)[128](index=128&type=chunk) [Cash Flows](index=41&type=section&id=Cash%20Flows) Analyzes cash flows from operating, investing, and financing activities for the three months ended March 31, 2025 and 2024 Cash Flow Data (Three Months Ended March 31, 2025 and 2024) | (In thousands) | 2025 | 2024 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(7,516) | $(7,236) | $(280) | 4% | | Net cash (used in) provided by investing activities | $(27,545) | $15,938 | $(43,483) | (273)% | | Net cash provided by (used in) financing activities | $13,933 | $(43) | $13,976 | (32,502)% | | Net (decrease) increase in cash and cash equivalents | $(21,128) | $8,659 | $(29,787) | (344)% | - Net cash used in operating activities increased by **$0.3 million** to **$7.5 million** in Q1 2025, primarily due to a **$29.2 million** increase in non-cash gains (mainly from warrant liabilities), partially offset by a **$30.0 million** increase in net income[130](index=130&type=chunk) - Net cash used in investing activities increased by **$43.5 million** in Q1 2025, predominantly due to **$27.5 million** in purchases of marketable securities, compared to **$16.0 million** in maturities of marketable securities in Q1 2024[131](index=131&type=chunk) - Net cash provided by financing activities increased by **$14.0 million** in Q1 2025, mainly from **$13.9 million** in net proceeds from common stock sales[132](index=132&type=chunk) [Emerging Growth Company Status](index=41&type=section&id=Emerging%20Growth%20Company%20Status) Explains the company's status as an 'emerging growth company' and its election for an extended transition period - The company is an 'emerging growth company' (EGC) and has elected to use the extended transition period for new or revised financial accounting standards, which may affect comparability with other public companies[133](index=133&type=chunk)[134](index=134&type=chunk) [Critical Accounting Policies and Estimates](index=42&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) States that there have been no material changes to critical accounting policies or estimates since the last annual report - There have been no material changes to the company's critical accounting policies or estimates as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2024[136](index=136&type=chunk) [Recent Accounting Pronouncements](index=42&type=section&id=Recent%20Accounting%20Pronouncements) Refers to Note 1 for details on recently adopted and issued accounting pronouncements - Information on recently adopted and recently issued accounting pronouncements not yet adopted is provided in Note 1 to the unaudited interim condensed consolidated financial statements[137](index=137&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=42&type=section&id=Item%203%2E%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) As a smaller reporting company, Palladyne AI Corp. is not required to provide quantitative and qualitative disclosures about market risk - The company is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[138](index=138&type=chunk) [Item 4. Controls and Procedures](index=42&type=section&id=Item%204%2E%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2025, with no material changes in internal control over financial reporting during the quarter [Evaluation of Disclosure Controls and Procedures](index=42&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Confirms the effectiveness of the company's disclosure controls and procedures as of March 31, 2025 - The company's Certifying Officers concluded that disclosure controls and procedures were effective as of March 31, 2025, providing reasonable assurance that objectives are met[139](index=139&type=chunk)[140](index=140&type=chunk) [Changes in Internal Control over Financial Reporting](index=42&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) Reports no material changes in internal control over financial reporting during the fiscal quarter ended March 31, 2025 - There were no material changes in the company's internal control over financial reporting during the fiscal quarter ended March 31, 2025[141](index=141&type=chunk) [PART II. OTHER INFORMATION](index=43&type=section&id=PART%20II%2E%20OTHER%20INFORMATION) Covers legal proceedings, risk factors, equity sales, defaults, other information, exhibits, and signatures [Item 1. Legal Proceedings](index=43&type=section&id=Item%201%2E%20Legal%20Proceedings) The company is not currently a party to any legal proceedings expected to have a material adverse effect on its business, financial condition, or results of operations, though litigation can still have an impact - The company is not currently involved in any legal proceedings that are expected to have a material adverse effect on its business, financial condition, or results of operations[143](index=143&type=chunk) [Item 1A. Risk Factors](index=43&type=section&id=Item%201A%2E%20Risk%20Factors) This section details numerous risks and uncertainties facing Palladyne AI Corp., categorized into business, operations and growth, finances, legal and regulatory compliance, intellectual property, and ownership of securities, which could materially harm its business, operating results, and financial condition [Risks Related to Our Business](index=43&type=section&id=Risks%20Related%20to%20Our%20Business) Outlines risks associated with the company's early stage, operating losses, commercialization challenges, and competitive landscape - The company is an early-stage entity with a history of losses and expects significant future losses, having incurred a **$6.9 million** operating loss in Q1 2025 and an accumulated deficit of **$468.1 million**[145](index=145&type=chunk) - Operating and financial projections rely on management assumptions that have often been incorrect, leading to potential material differences in actual results[148](index=148&type=chunk) - The company has not achieved positive operating cash flow and expects to continue incurring negative cash flows, which could hinder capital raising and business objectives[149](index=149&type=chunk) - The company lacks prior experience commercializing software products and was unsuccessful with hardware technologies, posing risks to efficient and effective market entry for its AI/ML software[150](index=150&type=chunk) - Successful commercialization of AI/ML Foundational Technology and related products may be delayed, impacting product availability, customer acquisition, and software licensing revenue[152](index=152&type=chunk) - Anticipated revenues are expected to be primarily derived from AI/ML software product licensing, making the company vulnerable if these products do not meet expectations or timelines[155](index=155&type=chunk) - Issues in AI/ML Foundational Technology development or use, or in products by others, could lead to reputational harm, liability, and competitive disadvantages due to flaws, ineffectiveness, or ethical concerns[156](index=156&type=chunk) - The AI/ML Foundational Technology and related products are new, and customer trials may not result in purchases if products don't meet expected features, functionality, or return on investment, or if customers are hesitant to adopt new technologies[157](index=157&type=chunk) - Failure to attract or retain customers at sufficient rates or numbers, or to effectively implement products, could adversely affect revenue growth, reputation, and financial condition[163](index=163&type=chunk)[164](index=164&type=chunk) - The company has no prior experience with its licensing sales model, and its success depends on effectively marketing products, building a network of ongoing customers, and adapting to competitive pricing models[165](index=165&type=chunk)[166](index=166&type=chunk) - Assumptions about market demand, pricing, adoption rates, and sales cycles for software products may be inaccurate, potentially harming business, operating results, and financial condition[167](index=167&type=chunk)[168](index=168&type=chunk) - The benefits and projected return on investment of AI/ML Foundational Technology and related products have not been substantiated through commercial customer use, risking harm to reputation and financial performance if products fail to perform as expected[169](index=169&type=chunk) - Targeting large businesses with substantial negotiating power and potentially competitive internal solutions poses a risk, as failure to secure these customers could materially affect business and operating results[170](index=170&type=chunk)[172](index=172&type=chunk) - A portion of revenue from government contracts subjects the company to uncertainties, challenges, and risks, including competitive processes, changing government priorities, and potential contract terminations[173](index=173&type=chunk) - The company operates in a competitive industry with rapid technological change, and its products may not remain competitive against alternatives or new technologies developed by competitors, including large industrial robotics and technology companies[174](index=174&type=chunk)[175](index=175&type=chunk)[176](index=176&type=chunk) - Failure to successfully enhance product offerings through research and development efforts, or to effectively communicate improvements to customers, could lead to decreased marketability, competitiveness, and revenue[181](index=181&type=chunk)[182](index=182&type=chunk) [Risks Related to Our Operations and Growth](index=53&type=section&id=Risks%20Related%20to%20Our%20Operations%20and%20Growth) Addresses operational challenges including product flaws, open-source software, brand management, growth, and supply chain disruptions - Real or perceived design flaws, errors, or malfunctions in AI/ML Foundational Technology and related products, connectivity issues, or user errors can lead to lower customer ROI, personal injury, property damage, and significant security or safety concerns, adversely affecting results and reputation[183](index=183&type=chunk)[184](index=184&type=chunk)[185](index=185&type=chunk) - Even if AI/ML Foundational Technology performs properly, personal injuries occurring while operating third-party products using the software could expose the company to liability and harm its financial condition and reputation[188](index=188&type=chunk) - The use of 'open source' software in AI/ML Foundational Technology could negatively impact the ability to offer products, potentially requiring the release of proprietary source code or leading to costly litigation for noncompliance or infringement[189](index=189&type=chunk)[190](index=190&type=chunk)[191](index=191&type=chunk) - The company's business and prospects depend significantly on its ability to build, maintain, and strengthen its brand, which could be harmed by negative publicity or failure to provide high-quality software[192](index=192&type=chunk)[193](index=193&type=chunk)[194](index=194&type=chunk) - Management's strategic decisions, including the pivot to AI/ML software, may not always lead to desired results or could have unintended negative consequences, especially given limited financial and human resources[195](index=195&type=chunk) - Failure to effectively manage business growth, including maintaining effective teams, recruiting personnel, commercializing products, and expanding infrastructure, could materially and adversely affect prospects and operating results[196](index=196&type=chunk)[197](index=197&type=chunk)[198](index=198&type=chunk) - The company may be unable to adequately control operational costs to achieve profitability, facing significant expenses for R&D, sales, marketing, and administrative functions, compounded by external factors like inflation[199](index=199&type=chunk) - Substantial research and development costs are expected for AI/ML Foundational Technology, with no guarantee of profitability or significant licensing revenue, as future growth depends on market acceptance and adaptation to new applications[200](index=200&type=chunk) - Dependence on single, sole, or limited source suppliers for hardware components required by AI/ML products poses a material adverse effect risk if suppliers fail to deliver at acceptable prices, volumes, or specifications[201](index=201&type=chunk)[202](index=202&type=chunk)[203](index=203&type=chunk) - Risks related to wars, natural disasters, health epidemics, and supply chain disruptions could significantly disrupt operations, increase costs, and limit product availability, impacting financial condition and timelines[205](index=205&type=chunk)[206](index=206&type=chunk)[207](index=207&type=chunk) [Risks Related to Our Finances](index=59&type=section&id=Risks%20Related%20to%20Our%20Finances) Covers financial risks such as capital requirements, fluctuating results, dependence on key personnel, and public company expenses - The company's business plans require significant capital, and while it believes it has sufficient funds for the next 12 months, additional equity or debt securities may be sold, potentially diluting stockholders or introducing restrictive covenants[208](index=208&type=chunk)[209](index=209&type=chunk)[211](index=211&type=chunk) - Future capital requirements are uncertain and may differ from current anticipations, with additional financing potentially unavailable on favorable terms or at all, risking curtailment of operations or liquidation[211](index=211&type=chunk)[212](index=212&type=chunk)[213](index=213&type=chunk)[214](index=214&type=chunk) - Financial results are expected to vary significantly period-to-period due to fluctuations in operating costs, revenues, and product demand, making quarter-to-quarter comparisons unreliable indicators of future performance[215](index=215&type=chunk) - High dependence on senior management and key employees, particularly AI/ML software engineers, means that the loss or inability to attract and retain qualified personnel could severely harm product development, business operations, and competitiveness[216](index=216&type=chunk)[219](index=219&type=chunk)[220](index=220&type=chunk) - As a publicly-traded company, Palladyne incurs significant legal, accounting, and administrative expenses, which could materially and adversely affect its business, financial condition, and operating results[221](index=221&type=chunk) - Failure to maintain and strengthen effective disclosure controls and procedures and internal control over financial reporting could adversely affect the ability to produce timely and accurate financial statements or comply with regulations, potentially leading to investor loss of confidence or sanctions[222](index=222&type=chunk)[225](index=225&type=chunk)[226](index=226&type=chunk)[227](index=227&type=chunk) - The company's ability to use net operating loss carryforwards and other tax attributes may be limited by factors such as the **80%** deductibility limit under the Tax Act and potential ownership changes under Sections 382 and 383 of the Code[228](index=228&type=chunk)[229](index=229&type=chunk)[230](index=230&type=chunk)[232](index=232&type=chunk) - Risks associated with strategic relationships or transactions, including potential acquisitions, joint ventures, or collaborations, may not lead to anticipated benefits, could divert management resources, and expose the company to various financial and operational risks[233](index=233&type=chunk)[234](index=234&type=chunk)[235](index=235&type=chunk) [Risks Related to Legal Claims and Regulatory Compliance](index=69&type=section&id=Risks%20Related%20to%20Legal%20Claims%20and%20Regulatory%20Compliance) Details legal and regulatory risks including AI/ML regulations, tax law changes, data privacy, cybersecurity, and government contracts - Issues in AI/ML development and an uncertain regulatory environment (e.g., EU AI Act, U.S. executive orders) may result in reputational harm, liability, or adverse consequences, requiring costly compliance efforts and potentially limiting AI use[236](index=236&type=chunk)[237](index=237&type=chunk)[239](index=239&type=chunk)[240](index=240&type=chunk)[241](index=241&type=chunk) - Changes in tax laws, such as the Tax Act's R&D capitalization requirement or global minimum tax initiatives, could materially adversely affect the company's business, cash flows, results of operations, or financial condition[242](index=242&type=chunk) - New or changing governmental regulations related to AI/ML technology development, marketing, licensing, or customer service could lead to delays in product launches, market withdrawal, increased costs, or make the business unviable[243](index=243&type=chunk) - The company may face claims, lawsuits, government investigations, and other legal proceedings, which could be time-consuming, costly, harmful to reputation, and result in substantial damages or penalties[244](index=244&type=chunk)[245](index=245&type=chunk)[246](index=246&type=chunk) - Evolving laws and regulations related to data privacy and security (e.g., CCPA, CPRA, GDPR, CMMC) pose risks of non-compliance, significant fines, liability, reputational harm, and increased compliance costs, especially with international expansion[247](index=247&type=chunk)[248](index=248&type=chunk)[249](index=249&type=chunk)[251](index=251&type=chunk)[252](index=252&type=chunk)[253](index=253&type=chunk) - The company is subject to cybersecurity risks to its operational systems, security systems, infrastructure, and data, with potential for breaches, data loss, intellectual property compromise, and operational disruptions, exacerbated by remote work and AI/ML use[254](index=254&type=chunk)[255](index=255&type=chunk)[257](index=257&type=chunk)[258](index=258&type=chunk)[259](index=259&type=chunk)[260](index=260&type=chunk) - As a government contractor, the company must comply with specific laws, regulations, and contractual provisions, including cybersecurity requirements like CMMC, with non-compliance risking damages, penalties, contract termination, or debarment[261](index=261&type=chunk) - Compliance with U.S. and foreign anti-corruption and anti-money laundering laws (e.g., FCPA) is critical, as violations by employees or third parties could lead to criminal liability, substantial fines, reputational harm, and diversion of management resources[262](index=262&type=chunk)[263](index=263&type=chunk)[264](index=264&type=chunk) - Governmental export and import controls and laws could subject the company to liability if not in compliance, potentially leading to civil/criminal penalties, loss of export privileges, or delays in product introduction and sales[265](index=265&type=chunk)[266](index=266&type=chunk)[267](index=267&type=chunk) - Increased scrutiny and changing expectations regarding ESG practices and reporting could lead to additional costs, resource allocation, and risks, potentially impacting reputation, customer acquisition, capital access, and employee retention[268](index=268&type=chunk)[269](index=269&type=chunk) [Risks Related to Our Intellectual Property](index=81&type=section&id=Risks%20Related%20to%20Our%20Intellectual%20Property) Examines challenges in protecting intellectual property, potential infringement claims, and government rights over funded IP - The company's success depends on its ability to obtain and maintain intellectual property protection through patents, trademarks, copyrights, and trade secrets, but patent positions are uncertain, and enforcement can be expensive and time-consuming[270](index=270&type=chunk)[271](index=271&type=chunk)[272](index=272&type=chunk)[273](index=273&type=chunk) - Failure to effectively protect intellectual property rights in target markets, especially in countries with weaker IP laws, could allow competitors to use the company's technologies, harming its competitive position[278](index=278&type=chunk)[279](index=279&type=chunk) - The company may be subject to intellectual property infringement or misappropriation claims, which could be time-consuming, expensive, divert management attention, and potentially limit its ability to commercialize software products or require costly licenses[280](index=280&type=chunk)[281](index=281&type=chunk)[282](index=282&type=chunk)[283](index=283&type=chunk) - Intellectual property developed through government-funded programs may be subject to federal regulations like 'march-in' rights, reporting requirements, and a preference for U.S.-based manufacturing, potentially limiting exclusive rights or ability to contract with non-U.S. manufacturers[284](index=284&type=chunk) - The company may face claims of wrongful use or disclosure of trade secrets from employees' former employers, leading to litigation, loss of valuable IP or personnel, or the need for licenses[285](index=285&type=chunk) [Risks Related to Ownership of our Securities](index=85&type=section&id=Risks%20Related%20to%20Ownership%20of%20our%20Securities) Discusses risks for security holders, including stock price volatility, dilution, potential delisting, and anti-takeover provisions - The issuance or sale of additional common stock or rights to acquire it could depress the trading price of the company's common stock and dilute existing stockholders' ownership interests[286](index=286&type=chunk) - The large number of shares subject to employee equity awards, particularly through 'sell-to-cover' transactions or net settlement, could lead to concentrated sales and a decline in the common stock price[287](index=287&type=chunk)[288](index=288&type=chunk) - The markets for the company's publicly traded securities have been volatile and may continue to fluctuate significantly due to various factors, including financial results, market expectations, competition, and changes in laws, potentially leading to substantial declines[289](index=289&type=chunk)[290](index=290&type=chunk)[291](index=291&type=chunk) - Potential delisting from the Nasdaq Global Market due to failure to meet listing requirements would likely impair the liquidity, visibility, and value of the company's common stock and warrants, and could hinder capital raising[293](index=293&type=chunk) - If securities or industry analysts cease publishing research or change their recommendations, the price and trading volume of the company's common stock could decline[294](index=294&type=chunk) - There is no guarantee that the deSPAC Public Warrants or 2024 Warrants will ever be 'in the money' before their expiration, and they may expire worthless, or be redeemed by the company at a disadvantageous time[295](index=295&type=chunk)[297](index=297&type=chunk)[298](index=298&type=chunk)[300](index=300&type=chunk) - Anti-takeover provisions in the company's Charter and Bylaws, along with Delaware law, could impair takeover attempts, potentially limiting the price investors might be willing to pay for common stock[301](index=301&type=chunk)[307](index=307&type=chunk) - The Bylaws' forum selection provision designates Delaware courts as the exclusive forum for certain stockholder litigation, potentially limiting stockholders' ability to choose a favorable judicial forum[302](index=302&type=chunk)[303](index=303&type=chunk) - As an 'emerging growth company' (EGC), the company benefits from exemptions from certain reporting requirements, which may make its common stock less attractive to some investors and potentially lead to less active trading or more price volatility[304](index=304&type=chunk)[305](index=305&type=chunk)[306](index=306&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=94&type=section&id=Item%202%2E%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or use of proceeds during the last fiscal quarter - No unregistered sales of equity securities or use of proceeds were reported during the last fiscal quarter[308](index=308&type=chunk) [Item 3. Defaults Upon Senior Securities](index=94&type=section&id=Item%203%2E%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - No defaults upon senior securities were reported[309](index=309&type=chunk) [Item 4. Mine Safety Disclosures](index=94&type=section&id=Item%204%2E%20Mine%20Safety%20Disclosures) The company reported that this item is not applicable - Mine Safety Disclosures are not applicable to the company[310](index=310&type=chunk) [Item 5. Other Information](index=94&type=section&id=Item%205%2E%20Other%20Information) No other information was reported for the quarter, and no director or officer adopted or terminated a Rule 10b5-1 trading arrangement - No director or officer adopted or terminated a 'Rule 10b5-1 trading arrangement' or a 'non-Rule 10b5-1 trading arrangement' during the last fiscal quarter[312](index=312&type=chunk) [Item 6. Exhibits](index=95&type=section&id=Item%206%2E%20Exhibits) Lists all exhibits filed as part of the Form 10-Q, including certificates of incorporation, bylaws, employment agreements, and certifications - The report includes various exhibits such as the Second Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, an Employment Agreement, and certifications from the Principal Executive Officer and Principal Financial Officer[315](index=315&type=chunk) [Signatures](index=96&type=section&id=Signatures) The report is signed by Benjamin G. Wolff, President and Chief Executive Officer, and Trevor Thatcher, Chief Financial Officer, on May 7, 2025 - The report was signed by Benjamin G. Wolff, President and Chief Executive Officer, and Trevor Thatcher, Chief Financial Officer, on May 7, 2025[319](index=319&type=chunk)

Financial Performance - The company incurred a net loss of $115.6 million for the year ended December 31, 2023, and a net loss of $72.6 million for the year ended December 31, 2024, with an accumulated deficit of $490.8 million as of December 31, 2024[87]. - The net loss for 2024 was $72.617 million, compared to a net loss of $115.593 million in 2023, reflecting an improvement of about 37%[344]. - The company reported a loss from operations of $(26.923) million for 2024, a significant reduction from $(120.956) million in 2023[344]. - The accumulated deficit as of December 31, 2024, was approximately $490.831 million, compared to $418.214 million at the end of 2023[353]. - Total operating expenses for 2024 were $34.709 million, significantly reduced from $127.102 million in 2023, indicating a decrease of approximately 73%[344]. - Cash flows from operating activities showed a net cash used of $22.627 million in 2024, compared to $76.620 million in 2023, indicating a substantial decrease in cash outflow[350]. Revenue and Customer Base - The company has no commercial customers as of the report date, despite having revenue-generating contracts with U.S. government customers related to its AI/ML Foundational Technology[101]. - The anticipated revenues are expected to be primarily derived from licensing AI/ML software products, with a need to enhance products and grow the customer base to diversify revenue[99]. - Revenue concentration was high, with two customers accounting for 98% of total revenue in 2024, compared to five customers accounting for 85% in 2023[365]. Cash Flow and Capital Needs - Negative cash flow from operating activities was $76.6 million for the year ended December 31, 2023, and $22.6 million for the year ended December 31, 2024, with expectations of continued negative cash flow in the foreseeable future[91]. - The company believes it has sufficient capital to fund its business for at least the next 12 months but may seek additional financing to bolster cash reserves and pursue business objectives[149]. - The company may need to raise additional capital through equity or debt securities, which could dilute existing shareholders or impose operational restrictions[148]. Operational Challenges - The company expects to incur significant losses for the foreseeable future due to ongoing research and development, sales and marketing, and general administrative expenses[88]. - The company has begun initial customer testing for its Palladyne IQ product in June 2024, but customer testing may take longer than anticipated, potentially leading to longer sales cycles[103]. - The commercialization of AI/ML Foundational Technology may face delays, affecting product availability and customer acquisition[94]. - The company anticipates that product development delays may occur due to the complexity of its software and the need for ongoing testing and debugging[123]. Market and Competitive Landscape - The market demand for the company's AI/ML software products is unproven, and assumptions about pricing and adoption rates may be inaccurate[112]. - The company operates in a competitive industry with rapid technological changes, and its products may not remain competitive against alternatives[117]. - The company recognizes that large businesses may have competitive internal solutions, which could impact its ability to secure contracts and generate revenue[115]. Regulatory and Compliance Risks - The European Union's AI Act, effective by August 2, 2026, may impose regulatory obligations that could require changes in the company's use of AI technologies[174]. - Noncompliance with the AI Act could result in fines of up to €35 million or 7% of annual global turnover, whichever is higher[174]. - The company is subject to evolving data privacy and security laws, and failure to comply could lead to significant fines and harm to reputation[182]. - Compliance with the Department of Defense's cybersecurity requirements, including the CMMC program, is necessary to compete for contracts, with full compliance expected by 2026[183]. Human Resources and Management - The company is highly dependent on key personnel, and the unexpected loss of senior management could adversely affect product development and business operations[154]. - The company may face challenges in attracting and retaining qualified personnel, particularly in the AI/ML software field, due to intense competition[157]. - The company has closed its facility in Pittsburgh, which may hinder its ability to attract skilled employees in that location[158]. Strategic Direction and Future Outlook - The company pivoted its business focus in November 2023 to prioritize the development and commercialization of its AI/ML Foundational Technology, moving away from hardware products[138]. - The company plans to continue focusing on the development of its AI/ML foundational technology to enhance its product offerings and market presence[356]. - Strategic business relationships are expected to be crucial for growth, but the company may face challenges in identifying and securing suitable opportunities[171]. Financial Instruments and Market Conditions - The company has faced volatility in its publicly traded securities, which may continue to fluctuate significantly due to various factors beyond its control[224]. - The company has received notices of non-compliance with Nasdaq's continued listing requirements in the past, which could lead to potential delisting and impair liquidity[227]. - Current capital market conditions have increased borrowing rates, significantly raising the cost of capital compared to prior periods[150].