Palladyne AI Corp

Previous wording

our ability to successfully pivot our business pursuant to our recently announced strategy to focus on the development of our full-stack, closed-loop autonomy software platform (“AI/ML Software Platform”);

Current wording

our ability to successfully pivot our business pursuant to our strategy to focus on the development of our full-stack, closed-loop autonomy software platform (“AI/ML Software Platform”);

Previous wording

our software product roadmap, including expected timing of new product releases and target markets;

Current wording

our software product roadmaps, including expected timing of new product releases and target markets;

Previous wording

changes in the markets for our software product;

Current wording

changes in the markets for our software products;

Previous wording

We are designing our AI/ML Software Platform to be hardware agnostic in order to be compatible with most industrial robots being sold today and to support specific types of commercially available robots with additional development and the necessary application programming interface (API). The AI/ML Software Platform is expected to enable robotic systems to perform tasks that involve variations in the environment and the objects being manipulated by the robot. Specifically, we expect our AI/ML Software Platform to incorporate internal and external environmental inputs that allow robots to comprehend their environment, determine reasonable behavior given these inputs and to act in real time to achieve the expected task. Each newly learned task will then be incorporated and used to perform future tasks. We believe this closed-loop autonomy approach is the key to how our software can expedite robot training, expand the tasks that a robot can perform, reduce costly workflow stoppages, mitigate downtimes and reduce human labor requirements. We are in the process of completing the development of our full-stack closed-loop autonomy artificial intelligence software which we currently expect to be ready for initial testing by customers in June 2024. We expect to complete initial customer trials throughout the second half of 2024 and to begin generating revenues from commercial customers in 2025.

Current wording

We are designing our AI/ML Software Platform to be hardware agnostic in order to be compatible with most industrial robots being sold today and to support specific types of commercially available robots with additional development and the necessary application programming interface (API). The AI/ML Software Platform is expected to enable robotic systems to perform tasks that involve variations in the environment and the objects being manipulated by the robot. Specifically, we expect our AI/ML Software Platform to incorporate internal and external environmental inputs that allow robots to comprehend their environment, determine reasonable behavior given these inputs and to act in real time to achieve the expected task. Each newly learned task will then be incorporated and used to perform future tasks. We believe this closed-loop autonomy approach is the key to how our software can expedite robot training, expand the tasks that a robot can perform, reduce costly workflow stoppages, mitigate downtimes and reduce human labor requirements.

Previous wording

As a result of our refined strategy, we are optimizing our organization in pursuit of this AI/ML Software Platform opportunity and are taking or have taken actions to reduce costs, including our 2023 RIFs (as defined below) and winding down substantially all of our operations in Pittsburgh, Pennsylvania. For additional information around the risks associated with our strategic decision-making see Part II Item 1A Risk Factors “Due to our limited resources and access to capital, and our failure to properly estimate the time and expense required to commercialize our hardware-centric industrial robotics solutions, we made the decision to focus on our AI/ML Software Platform product and to suspend the development and commercialization of our hardware products. These and future decisions about how to use our limited resources may prove to be wrong and may adversely affect our business.”

Current wording

As a result of our refined strategy, we reorganized our operations to focus on this AI/ML Software Platform opportunity and are taking or have taken actions to reduce costs, including our 2023 RIFs (as defined below) and winding down substantially all of our operations in Pittsburgh, Pennsylvania. For additional information around the risks associated with our strategic decision-making see Part II Item 1A Risk Factors “Due to our limited resources and access to capital, and our failure to properly estimate the time and expense required to commercialize our hardware-centric industrial robotics solutions, we made the decision to focus on our AI/ML Software Platform product and to suspend the development and commercialization of our hardware products. These and future decisions about how to use our limited resources may prove to be wrong and may adversely affect our business.”

Previous wording

We currently expect to derive revenue from our AI/ML Software Platform, which is in its development phase. Prior to commercialization, we must complete the development and testing of our product. Whether we are successful depends on many factors, including those discussed under Part II Item 1A Risk Factors “Risks Related to Our Business.” Such risks may result in delay of the anticipated commercial launch of our software platform, which would adversely affect our financial condition and operating results.

Current wording

We currently expect to derive commercial licensing revenues from Palladyne IQ and Palladyne Pilot beginning in 2025. We expect to continue commercialization efforts, internal testing and customer trials for both products throughout the second half of 2024. Whether we are successful in these efforts depends on many factors, including those discussed under Part II Item 1A Risk Factors. Such risks may result in delay of the anticipated commercial launch of one or both of our products, which would adversely affect our financial condition and operating results.

Previous wording

Prior to commercialization, we must complete the development and testing of our AI/ML Software Platform. As a result, we will use our cash on hand to develop our software platform and fund operations as we seek to commercialize and achieve revenue from our products. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our product development efforts, our ability to sell our software products and thereby recognize associated revenue, capital and human capital requirements to develop a commercial version of our software platform prior to receiving payments sufficient to cover our costs and our ability to lower product costs as volumes increase. In addition, we have taken and continue to take numerous steps to manage our use of cash. For example, on July 12, 2023 (the “July 2023 RIF”), and on November 14, 2023 (the “November 2023 RIF,” and together with the July 2023 RIF, the “2023 RIFs”), we announced reductions in force intended to further conserve our current cash resources and manage operating expenses. The majority of the cash payments related to the expenses from the July 2023 RIF were paid out during the third quarter of 2023. The majority of the cash payments related to the November 2023 RIF were paid out during the fourth quarter of 2023 and the first quarter of 2024. The November 2023 RIF was substantially completed in the first quarter of 2024. We believe we have sufficient liquidity to operate for at least the next twelve months without the need to raise additional capital. However, we may need to seek additional financing during that time to bolster our cash reserves and increase our ability to continue to pursue our business objectives. As a result, we intend to continue monitoring our liquidity, financial and business results and outlook and market conditions, and may be opportunistic and raise capital when we consider market conditions are good or a favorable opportunity exists. Any delays in the successful commercialization and sales of our AI/ML Software Platform will negatively impact our ability to generate revenue, our profitability, our cash flows and our overall operating performance and result in the need to raise additional capital sooner than expected. We will continue to carefully evaluate our use of cash as we pursue our AI/ML Software Platform opportunity.

Current wording

Prior to commercialization, we must complete the development and testing of our AI/ML Software Platform. As a result, we will use our cash on hand to develop our software platform and fund operations as we seek to commercialize and achieve revenue from our products. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our product development efforts, our ability to sell our software products and thereby recognize associated revenue, capital and human capital requirements to develop a commercial version of our software platform prior to receiving payments sufficient to cover our costs and our ability to lower product costs as volumes increase. In addition, we have taken and continue to take numerous steps to manage our use of cash. For example, on July 12, 2023 (the “July 2023 RIF”), and on November 14, 2023 (the “November 2023 RIF,” and together with the July 2023 RIF, the “2023 RIFs”), we announced reductions in force intended to further conserve our cash resources and manage operating expenses. The majority of the cash payments related to the expenses from the July 2023 RIF were paid out during the third quarter of 2023. The majority of the cash payments related to the November 2023 RIF were paid out during the fourth quarter of 2023 and the first quarter of 2024. The November 2023 RIF was substantially completed in the first quarter of 2024. We continued to incur expenses associated with winding down our hardware-centric business in the second quarter of 2024. We believe we have sufficient liquidity to operate for at least the next twelve months without the need to raise additional capital. However, we may need to seek additional financing during that time to bolster our cash reserves and increase our ability to continue to pursue our business objectives. As a result, we intend to continue monitoring our liquidity, financial and business results and outlook and market conditions, and may be opportunistic and raise capital when we consider market conditions are good or a favorable opportunity exists. Any delays in the successful commercialization and sales of our AI/ML Software Platform will negatively impact our ability to generate revenue, our profitability, our cash flows, our overall operating performance and our ability to continue operations and result in the need to raise additional capital sooner than expected. We will continue to carefully evaluate our use of cash as we pursue our AI/ML Software Platform opportunity.

Previous wording

Although demand for AI/ML platforms and applications has grown in recent years, the market for these platforms and applications continues to evolve. The market demand for our software platform is unproven, and important assumptions about the characteristics of targeted markets, pricing and sales cycles may be inaccurate. While we believe that our AI/ML Software Platform will provide significant benefits and return on investment to customers, as it is a new technology and product, we are dependent on customers who are willing to adopt, purchase, and implement new technologies and products. If customer demand does not develop as expected or we do not accurately forecast pricing, adoption rates and sales cycles for our AI/ML Software Platform, our business, results of operations and financial condition will be adversely affected.

Current wording

Although demand for AI/ML platforms and applications has grown in recent years, the market for these platforms and applications continues to evolve. The market demand for our software platform is unproven, and important assumptions about the characteristics of targeted markets, pricing and sales cycles may be inaccurate. While we believe that our AI/ML Software Platform will provide significant benefits and return on investment to customers, we are dependent on customers who are willing to adopt, purchase, and implement new technologies and products. If customer demand does not develop as expected or we do not accurately forecast pricing, adoption rates and sales cycles for our AI/ML Software Platform, our business, results of operations and financial condition will be adversely affected.

Previous wording

Revenue increased by $1.1 million, or 50%, from $2.3 million for the three months ended March 31, 2023, to $3.4 million for the three months ended March 31, 2024, as explained below.

Current wording

Revenue increased by $1.4 million, or 112%, from $1.3 million for the three months ended June 30, 2023, to $2.7 million for the three months ended June 30, 2024, as explained below.

Previous wording

Research and development expense decreased by $6.5 million, or 69% from $9.4 million for the three months ended March 31, 2023, to $2.9 million for the three months ended March 31, 2024. The decrease was driven primarily by reduced labor and labor related expenses due to the 2023 RIFs.

Current wording

Research and development expense decreased by $9.4 million, or 80% from $11.7 million for the three months ended June 30, 2023, to $2.3 million for the three months ended June 30, 2024. The decrease was driven primarily by reduced labor and labor related expenses due to the 2023 RIFs.

Previous wording

General and administrative expense decreased by $4.6 million, or 47%, from $9.7 million for the three months ended March 31, 2023, to $5.1 million for the three months ended March 31, 2024. General and administrative expense decreased primarily due to reduced labor and labor related expenses, including stock-based compensation, due to the 2023 RIFs.

Current wording

General and administrative expense decreased by $4.0 million, or 48%, from $8.3 million for the three months ended June 30, 2023, to $4.3 million for the three months ended June 30, 2024. General and administrative expense decreased primarily due to reduced labor and labor related expenses, including stock-based compensation, due to the 2023 RIFs.

Previous wording

Sales and marketing expense decreased by $2.9 million, or 78%, from $3.7 million for the three months ended March 31, 2023, to $0.8 million for the three months ended March 31, 2024. This decrease was driven by a decrease in professional service fees related to third-party platform expense utilized in data management of our products and services.

Current wording

Sales and marketing expense decreased by $3.0 million, or 69%, from $4.4 million for the three months ended June 30, 2023, to $1.4 million for the three months ended June 30, 2024. This decrease was driven by a decrease in professional service fees related to third-party platform expense utilized in data management of our products and services and decreased events and public relations expenses.

Previous wording

Asset write-down and restructuring expenses were $0.1 million for the three months ended March 31, 2024.

Current wording

Asset write-down and restructuring expenses were $5.1 million for the three months ended June 30, 2023, as a result of the prior year product development reprioritization. There were no significant asset write-down and restructuring costs for the three months ended June 30, 2024.

Previous wording

We had no income tax expense for the three months ended March 31, 2024 and 2023. The provision for income taxes for the three months ended March 31, 2024 and 2023 is based on the Company’s estimated annualized effective tax rate for the fiscal years ending December 31, 2024 and 2023, respectively. For the three months ended March 31, 2024, the Company’s recognized effective tax rate differs from the U.S. federal statutory rate as the Company recorded net losses during the period with a corresponding full valuation allowance on the net deferred tax assets created from the losses.

Current wording

We had no significant income tax expense for the three months ended June 30, 2024 and 2023. The provision for income taxes for the three months ended June 30, 2024 and 2023 is based on the Company’s estimated annualized effective tax rate for the fiscal years ending December 31, 2024 and 2023, respectively. For the three months ended June 30, 2024 and 2023, the Company’s recognized effective tax rate differs from the U.S. federal statutory rate as the Company recorded net losses during the period with a corresponding full valuation allowance on the net deferred tax assets created from the losses.

Previous wording

Product development contract revenue decreased by $1.4 million, or 62%, from $2.3 million for the three months ended March 31, 2023, to $0.9 million for the three months ended March 31, 2024. The decrease was primarily due to the completion of certain product development contracts during 2023 that have not yet been replaced with new contracts. We expect future revenue from product development contracts to fluctuate due to the timing of additional development contracts signed and the completion of existing contracts. For the time being, we intend to take on only those development contracts that we believe support and contribute to our AI/ML Software Platform development efforts under our refined sales and product development strategy. As a result, there may be fewer opportunities to replace the completed contracts described above.

Current wording

Product development contract revenue was flat for the six months ended June 30, 2024 and 2023. We expect future revenue from product development contracts to fluctuate due to the timing of additional development contracts signed and the completion of existing contracts. For the time being, we intend to take on only those development contracts that we believe support and contribute to our AI/ML Software Platform development efforts under our refined sales and product development strategy. As a result, there may be fewer opportunities to replace completed contracts.

Previous wording

Revenue derived from product sales increased by $2.6 million, from the three months ended March 31, 2023. The increase was primarily due to legacy product sales during the three months ended March 31, 2024.

Current wording

Revenue derived from product sales increased by $2.6 million, from the six months ended June 30, 2023. The increase was primarily due to legacy product sales during the six months ended June 30, 2024.

Previous wording

Cost of revenue increased by $0.1 million, or 6%, from $1.8 million for the three months ended March 31, 2023, to $1.9 million for the three months ended March 31, 2024. Cost of revenue increased mainly due to increased product costs associated with our product revenue, partially offset by decreased labor and material expenses charged to product development contracts during the three months ended March 31, 2024.

Current wording

Cost of revenue decreased by $0.3 million, or 10%, from $2.7 million for the six months ended June 30, 2023, to $2.5 million for the six months ended June 30, 2024. Cost of revenue decreased mainly due to decreased labor and material expenses charged to product development due to contract mix, partially offset by increased product costs associated with our product revenue during the six months ended June 30, 2024.

Previous wording

Other income decreased by $1.6 million for the three months ended March 31, 2024 as compared to the prior year period, primarily as a result of employee retention credit refunds received in the prior year period and decreased interest income from our investments in marketable securities due to the reduction in invested funds during the current year period.

Current wording

Other income decreased by $2.4 million for the six months ended June 30, 2024 as compared to the prior year period, primarily as a result of decreased interest income from our investments in marketable securities due to the reduction in invested funds during the current year period and employee retention credit refunds received in the prior year period.

Previous wording

Our backlog, as of March 31, 2024, was $4.2 million, $2.8 million of which was funded and $1.4 million of which was unfunded. Our backlog is equal to our remaining performance obligations under contracts or the expected value of exercised contracts, both funded and unfunded, less revenue recognized to date. Our total estimated contract value, which combines backlog with estimated potential contract value, including unexercised options from existing firm contracts, was $14.1 million as of March 31, 2024.

Current wording

Our backlog, as of June 30, 2024, was $1.5 million, $0.4 million of which was funded and $1.1 million of which was unfunded. Our backlog is equal to our remaining performance obligations under contracts or the expected value of exercised contracts, both funded and unfunded, less revenue recognized to date. Our total estimated contract value, which combines backlog with estimated potential contract value, including unexercised options from existing firm contracts, was $11.4 million as of June 30, 2024.

Previous wording

We currently use cash from equity financings to fund operations and capital expenditures and meet working capital requirements. As of March 31, 2024, we had $31.8 million in cash, cash equivalents and marketable securities. We believe that our cash, cash equivalents and marketable securities on hand will be sufficient to support operations, working capital and capital expenditure requirements for at least the next 12 months from the date of this Report.

Current wording

We currently use cash from equity financings to fund operations and capital expenditures and meet working capital requirements. As of June 30, 2024, we had $25.8 million in cash, cash equivalents and marketable securities. We believe that our cash, cash equivalents and marketable securities on hand will be sufficient to support operations, working capital and capital expenditure requirements for at least the next 12 months from the date of this Report.

Previous wording

The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our product development efforts, our ability to develop and deliver our commercial AI/ML Software Platform and thereby recognize associated revenue and capital requirements to develop our commercial AI/ML Software Platform prior to receiving payments sufficient to cover our costs. Any delays in the successful commercialization of our software product will negatively impact our ability to generate revenue, our profitability and our overall operating performance.

Current wording

The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our product development efforts, our ability to develop and deliver our commercial AI/ML Software Platform and thereby recognize associated revenue and capital requirements to develop our commercial AI/ML Software Platform prior to receiving payments sufficient to cover our costs. Any delays in the successful commercialization of our software products will negatively impact our ability to generate revenue, profitability, overall operating performance and ability to continue operations.

Previous wording

Cash flows used in operating activities during the three months ended March 31, 2024 decreased by $12.9 million to $7.2 million from $20.1 million during the same period in 2023. The decrease to net cash used in operating activities was primarily attributable to a $14.2 million decrease to net loss, which was driven by the 2023 RIFs, partially offset by a net decrease of $2.6 million in non-cash expenses driven mainly by decreased stock-based compensation and amortization of intangible assets. Additionally, net cash used in operating activities related to changes in operating assets and liabilities decreased by $1.2 million, driven mainly by decreased inventory purchases.

Current wording

Cash flows used in operating activities during the six months ended June 30, 2024 decreased by $27.0 million to $13.0 million from $40.0 million during the same period in 2023. The decrease to net cash used in operating activities was primarily attributable to a $37.6 million decrease to net loss, which was driven by the 2023 RIFs, partially offset by a net decrease of $8.9 million in non-cash expenses driven mainly by decreased asset write-downs, stock-based compensation and amortization of intangible assets. Additionally, net cash used in operating activities related to changes in operating assets and liabilities increased by $1.7 million, driven mainly by decreases in current liabilities.

Previous wording

Our net cash provided by investing activities during the three months ended March 31, 2024 increased by $5.6 million. The increase in cash provided by investing activities is predominantly due to $16.0 million of maturities of marketable securities and no purchases of marketable securities, during the three months ended March 31, 2024, as compared to the $10.7 million of maturities of marketable securities, net of purchases during the three months ended March 31, 2023.

Current wording

Our net cash provided by investing activities during the six months ended June 30, 2024 decreased by $14.7 million. The decrease in cash provided by investing activities is predominantly due to the $31.1 million of maturities of marketable securities, net of purchases during the six months ended June 30, 2023, as compared to the $16.0 million of maturities of marketable securities and no purchases of marketable securities, during the six months ended June 30, 2024.

Previous wording

Our net cash used in financing activities during the three months ended March 31, 2024, was flat as compared to the three months ended March 31, 2023.

Current wording

Our net cash used in financing activities during the six months ended June 30, 2024, was flat as compared to the six months ended June 30, 2023.