Palladyne AI Corp.(PDYN) - 2025 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Presents Palladyne AI Corp.'s unaudited financial statements and management's discussion for Q1 2025 Item 1. Financial Statements (Unaudited) Presents Palladyne AI Corp.'s unaudited condensed consolidated financial statements and notes for Q1 2025 Condensed Consolidated Balance Sheets 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 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) 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) 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 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 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 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] - 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][32] - 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] 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] Note 2. Fair Value Measurements 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 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 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][55][57] - 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] Note 5. DeSPAC Warrants 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][58][63] - 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] - 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] Note 6. 2024 Warrants 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][66][67][300] - 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] - 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] 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 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][72][73][74] 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][78][79][80] 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 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 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] Note 10. Commitments and Contingencies 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] - 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] Note 11. Segment Information 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][92] 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][94] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's analysis of Palladyne AI Corp.'s financial condition, results, liquidity, and cash flow for Q1 2025 Special Note Regarding Forward-Looking Statements 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][97][98] 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] - 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] - 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] Key Factors Affecting Operating Results 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 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] Financing of Operations 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][106] - 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] Customer Demand 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] Continued Investment and Innovation 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] Geopolitical and Macro-economic Environment 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] Results of Operations 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. Provides a detailed comparative analysis of financial results for the three-month periods ended March 31, 2025 and 2024 Revenue, Net 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 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] Product Revenue 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] Operating Expenses 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 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] Research and Development 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] General and Administrative 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] Sales and Marketing 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] Asset Write-down and Restructuring 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] Other Income 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] Provision for Income Taxes 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] Backlog and Total Estimated Contract Value 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] - Total estimated contract value, including backlog and unexercised options, was $8.8 million as of March 31, 2025[121] Liquidity and Capital Resources 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] - The company had an accumulated deficit of approximately $468.1 million and working capital of $47.1 million as of March 31, 2025[122] - 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] - 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][128] Cash Flows 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] - 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] - 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] Emerging Growth Company Status 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][134] Critical Accounting Policies and Estimates 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] Recent Accounting Pronouncements 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] Item 4. Controls and Procedures 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 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][140] Changes in Internal Control over Financial Reporting 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] PART II. OTHER INFORMATION Covers legal proceedings, risk factors, equity sales, defaults, other information, exhibits, and signatures Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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 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] - Operating and financial projections rely on management assumptions that have often been incorrect, leading to potential material differences in actual results[148] - 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] - 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] - Successful commercialization of AI/ML Foundational Technology and related products may be delayed, impacting product availability, customer acquisition, and software licensing revenue[152] - 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] - 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] - 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] - 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][164] - 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][166] - 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][168] - 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] - 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][172] - 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] - 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][175][176] - 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][182] Risks Related to Our Operations and Growth 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][184][185] - 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] - 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][190][191] - 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][193][194] - 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] - 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][197][198] - 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] - 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] - 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][202][203] - 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][206][207] Risks Related to Our Finances 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][209][211] - 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][212][213][214] - 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] - 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][219][220] - 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] - 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][225][226][227] - 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][229][230][232] - 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][234][235] Risks Related to Legal Claims and Regulatory Compliance 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][237][239][240][241] - 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] - 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] - 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][245][246] - 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][248][249][251][252][253] - 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][255][257][258][259][260] - 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] - 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][263][264] - 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][266][267] - 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][269] Risks Related to Our Intellectual Property 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][271][272][273] - 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][279] - 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][281][282][283] - 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] - 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] Risks Related to Ownership of our Securities 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] - 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][288] - 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][290][291] - 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] - 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] - 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][297][298][300] - 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][307] - 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][303] - 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][305][306] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - No defaults upon senior securities were reported[309] Item 4. Mine Safety Disclosures The company reported that this item is not applicable - Mine Safety Disclosures are not applicable to the company[310] Item 5. Other Information 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] Item 6. Exhibits 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] 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]