Palladyne AI Corp.(PDYN) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents Palladyne AI Corp.'s unaudited consolidated financial statements, including balance sheets, operations, and cash flows Condensed Consolidated Balance Sheets | 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 | 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) | 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) | 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 | 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 Note 1. Basis of Presentation and Summary of Significant Accounting Policies Description of the Business - 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] Basis of Presentation and Consolidation - 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][28] - 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] Summary of Significant Accounting Policies and Use of Estimates - 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] Liquidity and Capital Resources - 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] - 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] - As of June 30, 2025, the Company had an accumulated deficit of approximately $475.6 million and working capital of $62.0 million[31] - Management believes it has sufficient financial resources for at least the next 12 months from the date of this report[32] Revenue Recognition - 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] Revenue from Contracts with Customers - 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][35][36][37] - 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] 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 - Deferred revenue decreased from $248 thousand at December 31, 2024, to $0 at June 30, 2025, as all deferred revenue was recognized[41] 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 - 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] Recently Issued Accounting Standard Pronouncements - 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] - 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] Note 2. Fair Value Measurements - Warrant liabilities decreased significantly from $51.4 million at December 31, 2024, to $11.2 million at June 30, 2025[47] - 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] 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 Inventories, Net 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 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 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] Accrued Liabilities 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 - 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][55] - 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] Note 5. DeSPAC Warrants - 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] - 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] - DeSPAC Public Warrants are Level 1 fair value measurements, while deSPAC Private Placement Warrants are Level 2[62] Note 6. 2024 Warrants - 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] - 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] 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 2021 Stock Plan - As of June 30, 2025, 2.0 million shares were available to grant under the 2021 Equity Incentive Plan[72] 2015 Stock Plan - No further awards may be made under the Old Sarcos 2015 Equity Incentive Plan, with any forfeited awards added to the 2021 Plan[73] 2024 Inducement Plan - 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] 2021 Employee Stock Purchase Plan - 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] Stock Option Activity 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 - 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][79][80] - 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] Restricted Stock Units Activity 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 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 - 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][85] - 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] Stock-Based Compensation Expense 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] Note 8. Net Income (Loss) Per Share 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] Note 9. Income Taxes - The Company had no significant income tax expense for the three and six months ended June 30, 2025 and 2024[89] - 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] - The Company is evaluating the impact of the recently signed One Big Beautiful Bill Act on its tax position[90] Note 10. Commitments and Contingencies Legal Proceedings - The Company has not recorded any material loss contingency related to legal proceedings as of June 30, 2025, and December 31, 2024[91] 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][93] - No liability has been accrued for these indemnification obligations as the likelihood of incurring a material payment is not probable or reasonably estimable[93] Note 11. Segment Information - 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][95] - All revenue and losses are attributable to operations within the United States[97][98] 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 - 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Palladyne AI Corp.'s financial condition, operating results, liquidity, capital resources, and accounting policies Special Note Regarding Forward-Looking Statements - 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][103][104] 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] - Both Palladyne IQ and Palladyne Pilot are in early stages of commercialization, undergoing reliability testing, debugging, and improvements[106] - 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] Key Factors Affecting Operating Results Development, Testing and Commercial Launch of our AI/ML Software Products - Commercialization efforts, internal testing, and customer trials for both products are expected to continue throughout 2025, with potential delays impacting financial results[110] Financing of Operations - 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] - 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] Customer Demand - 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] Continued Investment and Innovation - 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] Geopolitical and Macro-economic Environment - 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] Results of Operations Comparison of the Three Months Ended June 30, 2025 and 2024 Revenue, Net 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] Operating Expenses 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] - 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] Other Income 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] Provision for Income Taxes - 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] Comparison of the Six Months Ended June 30, 2025 and 2024 Revenue, Net 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] - Product development contract revenue decreased by $0.9 million (24%) due to available funding and timing of milestone completion[131] Operating Expenses 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] - Sales and marketing expense increased by $0.4 million (17%) due to increased marketing program costs related to new software products[137] Other Income 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] Provision for Income Taxes - 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] Backlog and Total Estimated Contract Value - 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][142] Liquidity and Capital Resources - 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] - 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][145] - 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][150] Cash Flows 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] - Net cash used in investing activities increased by $48.9 million, mainly due to $33.0 million in net purchases of marketable securities[154] - 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] Emerging Growth Company Status - 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] Critical Accounting Policies and Estimates - 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] Recent Accounting Pronouncements - Refer to Note 1, Basis of Presentation and Summary of Significant Accounting Policies, for information on recently adopted and recently issued accounting pronouncements[160] 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 exempt from providing quantitative and qualitative disclosures about market risk[161] Item 4. Controls and Procedures 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 - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2025[162] Changes in Internal Control over Financial Reporting - No material change in internal control over financial reporting occurred during the fiscal quarter ended June 30, 2025[164] PART II. OTHER INFORMATION Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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 - 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] - The company has no previous history or experience commercializing software products; prior hardware commercialization efforts were unsuccessful[173] - Successful commercialization of AI/ML Foundational Technology and related products may be delayed, impacting product availability, customer acquisition, and revenue[175] - Anticipated revenues are expected to be primarily derived from the licensing of AI/ML software products for the foreseeable future[178] - 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][181] - The company operates in a competitive industry subject to rapid technological change, and its products may not be competitive with other alternatives[197] Risks Related to Our Operations and Growth - 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][206] - 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] - The business and prospects depend significantly on the ability to build and maintain an effective brand, which could be harmed by negative publicity[214] - 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] - Failure to effectively manage business growth, including maintaining effective teams, hiring personnel, commercializing products, and implementing systems, could materially and adversely affect prospects[217] - 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] - Substantial research and development costs are expected for AI/ML Foundational Technology, with no guarantee of reaching profitability or achieving significant licensing revenue[220] - 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][224] - Risks related to wars, natural disasters, health epidemics, and supply chain disruptions could significantly disrupt operations and adversely affect the business[226][228] Risks Related to Our Finances - Business plans require a significant amount of capital; additional equity or debt securities may be sold, potentially diluting stockholders or introducing restrictive covenants[229][231] - 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] - 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][240] - 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] - 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][250] - 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][253] Risks Related to Legal Claims and Regulatory Compliance - 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][256][259] - 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] - 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] - 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][263] - 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][266][269] - 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][272][277] - 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] - 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][281] - Governmental export and import controls and laws could subject the company to liability if not in compliance, affecting international sales and operations[282][284] - Increased scrutiny and changing expectations from stakeholders regarding ESG practices and reporting could cause additional costs, resources, and risks[285] Risks Related to Our Intellectual Property - 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][287] - 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] - 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] - 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][299] - 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] - 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] Risks Related to Ownership of our Securities - 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][303] - 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] - 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][307] - 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] - If securities or industry analysts cease publishing research or change their recommendations, the price and trading volume of Common Stock could decline[311] - The deSPAC Public Warrants and deSPAC Private Placement Warrants may expire worthless if they are not "in the money" prior to their expiration[314] - The company may redeem unexpired deSPAC Warrants prior to their exercise at a time that is disadvantageous to deSPAC Warrant holders[315] - Exercise of deSPAC Warrants and 2024 Warrants would increase the number of shares eligible for future resale and result in dilution to stockholders[316][317] - 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] - 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][320] - 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][322][324] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] - The resulting 2,790,700 shares of Common Stock were issued without registration under Section 4(a)(2) of the Securities Act[325] Item 3. Defaults Upon Senior Securities This item is not applicable to Palladyne AI Corp. for the reporting period - Not Applicable[328] Item 4. Mine Safety Disclosures This item is not applicable to Palladyne AI Corp. for the reporting period - Not applicable[329] Item 5. Other Information 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] Item 6. Exhibits 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] - XBRL Instance Document, Taxonomy Extension Schema, and Cover Page Interactive Data File are embedded[332] Signatures - The report was signed by Benjamin G. Wolff (President and CEO) and Trevor Thatcher (Chief Financial Officer) on August 6, 2025[337]