Palladyne AI Corp.

Previous wording

our expected timeline of our product revenues;

Current wording

our expected timeline and amount of our product revenues;

Previous wording

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

Current wording

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

Previous wording

our ability to attract and retain qualified personnel with the necessary experience, including employees who are instrumental to our new business strategy;

Current wording

our ability to attract and retain qualified personnel with the necessary experience, including employees who are instrumental to our business strategy;

Previous wording

We believe that our initial customer base will be comprised of innovators and early adopters in the industrial manufacturing, defense, infrastructure maintenance, repair and surveillance, energy and aerospace and aviation industries. We believe that if we are successful in demonstrating the value of our products with these early adopters, there will be many potential customers that follow. Palladyne IQ is being offered through a term-based licensing model that would result in a recurring revenue stream, while Palladyne Pilot is offered through a device-based licensing model. We may also offer add-on functionality for an additional license fee. While we plan to charge an upfront fee for the hardware associated with Palladyne IQ, we may choose to embed the cost in the license fee in the future. We expect to begin generating revenues from commercial customers of Palladyne IQ and Palladyne Pilot in 2025. The majority of our sales and marketing efforts are focused initially on U.S. markets, but we are also exploring opportunities in select non-U.S. markets on a more limited basis.

Current wording

We believe that our initial customer base will be comprised of innovators and early adopters in the industrial manufacturing, defense, infrastructure maintenance, repair and surveillance, energy and aerospace and aviation industries. We believe that if we are successful in demonstrating the value of our products with these early adopters, there will be many potential customers that follow. Palladyne IQ is being offered through a term-based licensing model that would result in a recurring revenue stream, while Palladyne Pilot is offered through a device-based licensing model. We may also offer add-on functionality for an additional license fee. While we plan to charge an upfront fee for the hardware associated with Palladyne IQ, we may choose to embed the cost in the license fee in the future. Based on interaction with dozens of potential customers during the first half of 2025, we believe that the sales cycle for our products is likely to be between 12 and 18 months, or even longer. System integrators and potential customers of Palladyne IQ have indicated that recent changes in U.S. trade policy have caused some potential customers to re-evaluate their automation priorities which we believe will delay certain investment decisions in the near term but will overall create greater opportunities for Palladyne IQ deployments in the United States in the medium and long term. We continue to expect to begin generating revenues from commercial customers in 2025 and for revenues to grow modestly throughout 2026.

Previous wording

We currently expect to derive commercial licensing revenues from commercial customers beginning in 2025. We expect to continue commercialization efforts, internal testing and customer trials for both products throughout 2025. 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 in achieving product revenues, which would adversely affect our financial condition and operating results.

Current wording

We expect to continue commercialization efforts, internal testing and customer trials for both products throughout 2025. 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 in achieving product revenues, which would adversely affect our financial condition and operating results.

Previous wording

We have taken and continue to take numerous steps to manage our use of cash. For example, we conducted two workforce reductions during 2023 (the "2023 RIFs") which allowed us to further conserve our cash resources and manage operating expenses. The last cash payments related to the 2023 RIFs were paid during the first quarter of 2024. Additionally, during the fourth quarter of 2024 and the first quarter of 2025 we raised approximately $39.4 million in gross proceeds from the sale of our Common Stock and warrants. For further information on our financing activities, see "Liquidity and Capital Resources."

Current wording

We have taken and continue to take numerous steps to manage our use of cash. For example, we conducted two workforce reductions during 2023 (the "2023 RIFs") which allowed us to further conserve our cash resources and manage operating expenses. The last cash payments related to the 2023 RIFs were paid during the first quarter of 2024. Additionally, during the fourth quarter of 2024 and the first half of 2025 we raised approximately $60.7 million in gross proceeds from the sale of our Common Stock and warrants. For further information on our financing activities, see "Liquidity and Capital Resources."

Previous wording

Although demand for AI/ML software products has grown in recent years, the market continues to evolve. The market demand for our software is unproven, and important assumptions about the characteristics of targeted markets, pricing and sales cycles may be inaccurate. While we believe that our products will provide significant benefits and return on investment to customers, as it is a new technology, 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 estimate pricing, adoption rates and sales cycles for our products, our business, results of operations and financial condition will be adversely affected.

Current wording

Although demand for AI/ML software products has grown in recent years, the market continues to evolve. The market demand for our software is unproven, and important assumptions about the characteristics of targeted markets, pricing and sales cycles may be inaccurate. Based on interaction with dozens of potential customers during the first half of 2025, we believe that the sales cycle for our products is likely to be between 12 and 18 months, or even longer. While we believe that our products will provide significant benefits and return on investment to customers, as it is a new technology, 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 estimate pricing, adoption rates and sales cycles for our products, our business, results of operations and financial condition will be adversely affected.

Previous wording

Geopolitical and macro-economic factors, such as inflation, changes in United States trade policy, including recently announced tariffs, interest rates, oil prices, unemployment rates, international conflicts, such as the current wars between Russia and Ukraine and in the middle east, volatility in the stock market and political or social unrest, can have significant impacts on economic activity, which in turn could affect demand for our products or our ability to cost-effectively develop and sell our products. Among other things, these and similar factors can affect our ability to hire or retain qualified personnel, our labor and materials costs, the prices we charge for our software products and the budgets of our customers and their expected return-on-investment from the purchase of a license for our software product. Many of these factors are outside of our control but can have a significant impact on our business success and operating results. If we are unable to manage our business successfully in response to any such factors, our business and results of operations would be adversely affected.

Current wording

Geopolitical and macro-economic factors, such as inflation, changes in United States trade policy, including tariffs, interest rates, oil prices, unemployment rates, international conflicts, such as the current wars between Russia and Ukraine and conflict in the middle east, volatility in the stock market and political or social unrest, can have significant impacts on economic activity, which in turn could affect demand for our products or our ability to cost-effectively develop and sell our products. Among other things, these and similar factors can affect our ability to hire or retain qualified personnel, our labor and materials costs, the prices we charge for our software products and the budgets of our customers and their expected return-on-investment from the purchase of a license for our software product. Many of these factors are outside of our control but can have a significant impact on our business success and operating results. If we are unable to manage our business successfully in response to any such factors, our business and results of operations would be adversely affected.

Previous wording

Revenue decreased by $1.7 million, or 50%, from $3.4 million for the three months ended March 31, 2024, to $1.7 million for the three months ended March 31, 2025, as explained below.

Current wording

Revenue decreased by $1.7 million, or 63%, from $2.7 million for the three months ended June 30, 2024, to $1.0 million for the three months ended June 30, 2025, as explained below.

Previous wording

Product development contract revenue increased by $0.8 million, or 94%, from $0.9 million for the three months ended March 31, 2024, to $1.7 million for the three months ended March 31, 2025. The increase was primarily due to the progress made on and completion of certain milestones within our product development contracts during the current period. 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 Foundational Technology and related product development efforts. As a result, there may be fewer opportunities to replace completed contracts.

Current wording

Product development contract revenue decreased by $1.7 million, or 63%, from $2.7 million for the three months ended June 30, 2024, to $1.0 million for the three months ended June 30, 2025. The decrease was primarily due to available funding and the timing of the completion of certain milestones within our product development contracts during the current period. 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 Foundational Technology and related product development efforts. As a result, there may be fewer opportunities to replace completed contracts.

Previous wording

General and administrative expense decreased by $0.9 million, or 18%, from $5.1 million for the three months ended March 31, 2024, to $4.2 million for the three months ended March 31, 2025. General and administrative expense decreased primarily due to reduced labor and labor related expenses, and business insurance expenses, partially offset by increased stock-based compensation expenses.

Current wording

General and administrative expense decreased by $0.1 million, or 3%, from $4.3 million for the three months ended June 30, 2024, to $4.2 million for the three months ended June 30, 2025. General and administrative expense decreased primarily due to reduced labor and labor related expenses and reduced business insurance expenses, partially offset by increased stock-based compensation expenses.

Previous wording

We had no significant income tax expense for the three months ended March 31, 2025 and 2024, respectively. The provision for income taxes for the three months ended March 31, 2025 and 2024 is based on the Company’s estimated annualized effective tax rate for the fiscal years ending December 31, 2025 and 2024, respectively. For the three months ended March 31, 2025 and 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, 2025 and 2024, respectively. The provision for income taxes for the three months ended June 30, 2025 and 2024 is based on the Company’s estimated annualized effective tax rate for the fiscal years ending December 31, 2025 and 2024, respectively. For the three months ended June 30, 2025 and 2024, the Company’s recognized effective tax rate differs from the U.S. federal statutory rate as the Company recorded net taxable losses during the period with a corresponding full valuation allowance on the net deferred tax assets created from the losses.

Previous wording

Revenue derived from product sales decreased by $2.6 million, or 100%, from $2.6 million for the three months ended March 31, 2024, to $0.0 million for the three months ended March 31, 2025. The decrease was due to legacy hardware product sales during the three months ended March 31, 2024 that did not recur during the three months ended March 31, 2025.

Current wording

Revenue derived from product sales decreased by $2.6 million, or 100%. The decrease was due to legacy hardware product sales during the six months ended June 30, 2024 that did not recur during the six months ended June 30, 2025.

Previous wording

Cost of revenue decreased by $1.5 million, or 81%, from $1.9 million for the three months ended March 31, 2024, to $0.4 million for the three months ended March 31, 2025. Cost of revenue decreased primarily due to lower product costs, which resulted from the decline in product revenue, as well as decreased labor and material expenses charged to product development contracts during the three months ended March 31, 2025 as compared to the three months ended March 31, 2024.

Current wording

Cost of revenue decreased by $1.6 million, or 66%, from $2.5 million for the six months ended June 30, 2024, to $0.8 million for the six months ended June 30, 2025. Cost of revenue decreased primarily due to lower product costs, which resulted from the decline in product revenue, as well as decreased labor and material expenses charged to product development contracts during the six months ended June 30, 2025 as compared to the six months ended June 30, 2024.

Previous wording

Sales and marketing expense increased by $0.4 million, or 51%, from $0.8 million for the three months ended March 31, 2024, to $1.2 million for the three months ended March 31, 2025. This increase was driven by increased labor and labor related expenses and increased marketing program costs.

Current wording

Sales and marketing expense increased by $0.4 million, or 17%, from $2.2 million for the six months ended June 30, 2024, to $2.6 million for the six months ended June 30, 2025. This increase was driven by increased marketing program costs related to our new software products.

Previous wording

Other income increased by $29.6 million from $0.1 million for the three months ended March 31, 2024, to $29.7 million for the three months ended March 31, 2025. Other income increased as a result of increased unrealized mark-to-market gains on our outstanding warrants and increased interest income from our investments in marketable securities due to an increase in invested funds.

Current wording

Other income increased by $29.7 million from $0.6 million for the six months ended June 30, 2024, to $30.3 million for the three months ended June 30, 2025. Other income increased almost entirely as a result of increased unrealized mark-to-market gains on our outstanding warrants. In addition, the increase was also impacted by increased interest income from our investments in marketable securities due to an increase in invested funds.

Previous wording

Our backlog, as of March 31, 2025, was $1.9 million, $1.0 million of which was funded and $0.9 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 $8.8 million as of March 31, 2025.

Current wording

Our backlog, as of June 30, 2025, was $1.7 million, $0.9 million of which was funded and $0.8 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 remaining contract value, which combines backlog with estimated remaining potential contract value, including unexercised options from existing firm contracts, was $7.8 million as of June 30, 2025.

Previous wording

Cash, cash equivalents and marketable securities were $46.6 million as of March 31, 2025, compared to $40.1 million as of December 31, 2024. We have incurred losses from operations and negative cash flows from operations since inception and are likely to continue to incur losses from operations and negative cash flows from operations in the near term. As of March 31, 2025, we had an accumulated deficit of approximately $468.1 million and working capital of $47.1 million.

Current wording

Cash, cash equivalents and marketable securities were $62.7 million as of June 30, 2025, compared to $40.1 million as of December 31, 2024. We have incurred losses from operations and negative cash flows from operations since inception and are likely to continue to incur losses from operations and negative cash flows from operations in the near term. As of June 30, 2025, we had an accumulated deficit of approximately $475.6 million and working capital of $62.0 million.

Previous wording

On October 31, 2024, we announced that we raised approximately $7 million in gross proceeds from the sale of Common Stock and warrants through a registered offering and two separate private placements. On November 13, 2024, we entered into an open market sale agreement (the "Sales Agreement") with Jefferies to sell shares of our Common Stock from time to time through an "at-the-market" equity offering program under which Jefferies is acting as our sales agent and on November 13, 2024, we filed a prospectus supplement with the SEC in connection with the offer and sale of up to $18.0 million of shares of our Common Stock pursuant to the Sales Agreement. As of December 31, 2024, we had sold a total of 3,680,543 shares of our Common Stock under the Sales Agreement for gross sales proceeds of approximately $18.0 million, before deducting commission and other expenses. On December 31, 2024 we filed a prospectus supplement in connection with offering for sale an additional $30.0 million of shares pursuant to the Sales Agreement. During the three months ended March 31, 2025, we sold a total of 1,335,807 shares of our Common Stock under the Sales Agreement for gross sales proceeds of approximately $14.4 million, before deducting commission and other expenses. 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

On November 13, 2024, we entered into an open market sale agreement (the "Sales Agreement") with Jefferies LLC to sell shares of our Common Stock from time to time through an "at-the-market" equity offering program under which Jefferies is acting as our sales agent and on November 13, 2024, we filed a prospectus supplement with the SEC in connection with the offer and sale of up to $18.0 million of shares of our Common Stock pursuant to the Sales Agreement. As of December 31, 2024, we had sold a total of 3,680,543 shares of our Common Stock under the Sales Agreement for gross sales proceeds of approximately $18.0 million, before deducting commission and other expenses. On December 31, 2024 we filed a prospectus supplement in connection with offering for sale an additional $30.0 million of shares pursuant to the Sales Agreement. During the six months ended June 30, 2025, we sold a total of 3,056,229 shares of our Common Stock under the Sales Agreement for gross sales proceeds of approximately $29.3 million, before deducting commission and other expenses. In July 2025, we sold 77,960 shares of our Common Stock for gross sales proceeds of approximately $0.7 million, before deducting commission and other expenses, which was the remaining capacity under the at-the-market program in effect at the time. 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

We have taken many steps to reduce our use of cash, for example, we suspended our hardware product development efforts and focusing those efforts on our AI/ML Foundational Technology and related products, conducted the 2023 RIFs and terminated our operations in Pittsburgh, Pennsylvania. We plan to use our existing capital to further commercialize and conduct sales and marketing efforts for Palladyne IQ and Palladyne Pilot, as well as continue product development efforts for the next versions of our products.

Current wording

We have taken many steps to reduce our use of cash. For example, we suspended our hardware product development efforts and focused our product development efforts on our AI/ML Foundational Technology and related products, conducted the 2023 RIFs and terminated our operations in Pittsburgh, Pennsylvania. We plan to use our existing capital to further commercialize and conduct sales and marketing efforts for Palladyne IQ and Palladyne Pilot, as well as continue product testing, debugging and stabilization efforts and conduct product development efforts for the next versions of our products.

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 release and license our commercial products and thereby recognize associated revenue and capital requirements to conduct marketing and sales activities prior to receiving payments sufficient to cover our costs. Any delays in the sales of our software products will negatively impact our ability to generate revenue, profitability, overall operating performance and financial condition. If we are unable to raise additional capital when desired or needed, our business, results of operations and financial condition would be materially and adversely affected.

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 commercialize our products and thereby recognize associated revenue and capital requirements to conduct marketing and sales activities prior to receiving payments sufficient to cover our costs. Any delays in the sales of our software products will negatively impact our ability to generate revenue, profitability, overall operating performance and financial condition. If we are unable to raise additional capital when desired or needed, our business, results of operations and financial condition would be materially and adversely affected.

Previous wording

We currently primarily use cash from equity financings to fund operations and capital expenditures and meet working capital requirements. If additional funds are required to support our working capital requirements, for acquisitions or for other purposes, we may seek to raise funds through additional debt or equity financings or from other sources. We have taken numerous steps to manage our use of cash, including conducting the 2023 RIFs and other related actions. However, we may decide to seek additional financing, and we intend to continue monitoring our liquidity, financial and business results and outlook and market conditions, and may be opportunistic and raise capital when market conditions are good or a favorable opportunity exists including under our "at-the-market" equity offering programs. Any delays in the successful further commercialization and sales of our software products will negatively impact our ability to generate revenue, our profitability and our overall operating performance and result in the need to raise additional capital sooner than expected. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our equity holders could be significantly diluted and these newly issued securities may have rights, preferences or privileges senior to those of existing equity holders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility and would also require us to incur additional interest expense. Additional financing may not be available at all or, if available, may not be available on terms favorable to us or that we find acceptable. For additional information around the risks associated with our capital needs see Part II Item 1A Risk Factors “Our business plans require a significant amount of capital. We may sell additional equity or debt securities to meet capital needs or as we may otherwise determine to be advisable that may dilute our stockholders or introduce covenants that may restrict our operations or our ability to pay dividends. If we require additional capital and are not able to secure new funding, we may not be able to continue our business operations.”

Current wording

We currently primarily use cash from equity financings to fund operations and capital expenditures and meet working capital requirements. If additional funds are required to support our working capital requirements, for acquisitions or for other purposes, we may seek to raise funds through additional debt or equity financings or from other sources. We have taken numerous steps to manage our use of cash, including conducting the 2023 RIFs and other related actions. However, we may decide to seek additional financing, and we intend to continue monitoring our liquidity, financial and business results and outlook and market conditions, and may be opportunistic and raise capital when market conditions are good or a favorable opportunity exists including under "at-the-market" equity offering programs. Any delays in the successful further commercialization and sales of our software products will negatively impact our ability to generate revenue, our profitability and our overall operating performance and result in the need to raise additional capital sooner than expected. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our equity holders could be significantly diluted and these newly issued securities may have rights, preferences or privileges senior to those of existing equity holders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility and would also require us to incur additional interest expense. Additional financing may not be available at all or, if available, may not be available on terms favorable to us or that we find acceptable. For additional information around the risks associated with our capital needs see Part II Item 1A Risk Factors “Our business plans require a significant amount of capital. We may sell additional equity or debt securities to meet capital needs or as we may otherwise determine to be advisable that may dilute our stockholders or introduce covenants that may restrict our operations or our ability to pay dividends. If we require additional capital and are not able to secure new funding, we may not be able to continue our business operations.”

Previous wording

Cash flows used in operating activities during the three months ended March 31, 2025 increased by $0.3 million to $7.5 million from $7.2 million during the same period in 2024. The increase to net cash used in operating activities was primarily attributable to a net increase of $29.2 million in non-cash gains, mainly due to change in the fair value of our warrant liabilities and changes in operating assets and liabilities, which increased by $1.1 million, partially offset by a $30.0 million increase to net income.

Current wording

Cash flows used in operating activities during the six months ended June 30, 2025 decreased by $0.2 million to $12.8 million from $13.0 million during the same period in 2024. The decrease to net cash used in operating activities was primarily attributable to changes in operating assets and liabilities.

Previous wording

Our net cash used in investing activities during the three months ended March 31, 2025 increased by $43.5 million as compared to the same period in 2024. The increase in cash used in investing activities is predominantly due to $27.5 million of purchases of marketable securities during the three months ended March 31, 2025, as compared to $16.0 million of maturities of marketable securities, during the three months ended March 31, 2024.

Current wording

Our net cash used in investing activities during the six months ended June 30, 2025 increased by $48.9 million as compared to the same period in 2024. The increase in cash used in investing activities is almost entirely due to $33.0 million of purchases net of maturities of marketable securities during the six months ended June 30, 2025, as compared to $16.0 million of maturities of marketable securities, during the six months ended June 30, 2024.

Previous wording

Our net cash provided by financing activities during the three months ended March 31, 2025 increased by $14.0 million as compared to the prior year period. The increase in cash provided by financing activities is predominantly due to the $13.9 million, after deducting transaction costs, in net proceeds from the sale of our Common Stock during the three months ended March 31, 2025.

Current wording

Our net cash provided by financing activities during the six months ended June 30, 2025 increased by $35.0 million as compared to the prior year period. The increase in cash provided by financing activities is almost entirely due to the $34.8 million, after deducting transaction costs, in net proceeds from the sale of our Common Stock and exercise of warrants during the six months ended June 30, 2025.