Palladyne AI Corp.

Previous wording

changes in regulations and customs, tariffs and trade barriers;

Current wording

changes in regulations and customs, tariffs and trade barriers and the potential effects on our business and financial results;

Previous wording

Our AI/ML Foundational Technology is the foundational technology for our two software products. The first, Palladyne IQ, has been developed for use with industrial robots and cobots, and the second, Palladyne Pilot, has been developed for use with unmanned platforms with our current focus being Class 1 UAVs. We have released the initial commercial versions of our Palladyne IQ product and our Palladyne Pilot product. We expect to continue to advance and evolve our technology and products in response to the evolving demands of our customers in the various industries we expect to serve. Palladyne IQ and Palladyne Pilot are in the early stages of commercialization (the process of bringing the product to market, generating sales and deploying the product with customers) and they continue to undergo reliability testing, debugging, and other stabilizing improvements.

Current wording

Our AI/ML Foundational Technology is the foundational technology for our two software products. The first, Palladyne IQ, has been developed for use with industrial robots and cobots, and the second, Palladyne Pilot, has been developed for use with unmanned platforms with our current focus being Class 1 UAVs. We expect to continue to advance and evolve our technology and products in response to the evolving demands of our customers in the various industries we expect to serve. Palladyne IQ and Palladyne Pilot are in the early stages of commercialization (the process of bringing the product to market, generating sales and deploying the product with customers) and they continue to undergo reliability testing, debugging, and other stabilizing improvements.

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. 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.

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, we believe that the sales cycle for Palladyne IQ is likely to be between 12 and 18 months, or even longer, while the sales cycle for Palladyne Pilot is unknown. 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 expect to begin generating revenues from commercial customers in the first half of 2026.

Previous 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.

Current wording

We expect to continue commercialization efforts, internal testing and customer trials for both products through the remainder of 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 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."

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 three quarters of 2025 we raised approximately $61.4 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."

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. 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.

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, we believe that the sales cycle for Palladyne IQ is likely to be between 12 and 18 months, or even longer, while the sales cycle for Palladyne Pilot is unknown. 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. Further, we have U.S. government revenue-generating contracts related to various aspects of our AI/ML Foundational Technology and our Palladyne IQ and Palladyne Pilot products and we have been affected by the current government shutdown. For example, we have experienced delays in our interactions with certain government agencies and these have affected our collection efforts, our ability to consummate new government contracts and may prevent us from maintaining or renewing certain government contracts. The duration of the shutdown could have a compounding effect, and the longer it continues, the more significant the potential adverse impact may be on our anticipated revenues for fiscal years 2025 and 2026. For additional information around the risks associated with our government contracts, see Part II Item 1A Risk Factors "A portion of our revenue is currently and will continue to be generated by contracts with government entities, which makes us subject to a number of uncertainties, challenges and risks." 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

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.

Current wording

Product development contract revenue increased by $0.1 million, or 13%, from $0.8 million for the three months ended September 30, 2024, to $0.9 million for the three months ended September 30, 2025. The increase was primarily due to 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

Research and development expenses increased by $0.8 million, or 33%, from $2.3 million for the three months ended June 30, 2024, to $3.1 million for the three months ended June 30, 2025. Research and development costs during the three months ended June 30, 2025 increased due to labor and labor related expenses associated with product testing, debugging, stabilization and enhancements of our software products.

Current wording

Research and development expenses increased by 22%, from $2.6 million for the three months ended September 30, 2024, to $3.1 million for the three months ended September 30, 2025. Research and development costs during the three months ended September 30, 2025 increased due to labor and labor related expenses associated with product testing, debugging, stabilization and enhancements of our software products.

Previous wording

General and administrative expense decreased by $1.0 million, or 11%, from $9.4 million for the six months ended June 30, 2024, to $8.4 million for the six 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.

Current wording

General and administrative expense increased by 4%, from $4.0 million for the three months ended September 30, 2024, to $4.1 million for the three months ended September 30, 2025. General and administrative expense increased primarily due to increased stock-based compensation expenses.

Previous wording

Sales and marketing expense decreased by 4%, from $1.4 million for the three months ended June 30, 2024, to $1.3 million for the three months ended June 30, 2025. This decrease was driven by decreased labor and labor related expense, mostly offset by increased marketing program expenses.

Current wording

Sales and marketing expense decreased by 11%, from $1.3 million for the three months ended September 30, 2024, to $1.2 million for the three months ended September 30, 2025. This decrease was driven by decreased labor and labor related expense, partially offset by increased marketing program expenses.

Previous 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.

Current wording

Other income increased by $4.1 million from $0.2 million for the three months ended September 30, 2024, to $4.3 million for the three months ended September 30, 2025. Other income increased almost entirely as a result of increased mark-to-market gains on our outstanding warrants. Additionally, interest income from our investments in marketable securities increased due to an increase in invested funds.

Previous wording

The following table presents our revenue for the six months ended June 30, 2025 and 2024, respectively:

Current wording

The following table presents our revenue for the nine months ended September 30, 2025 and 2024, respectively:

Previous wording

Revenue decreased by $3.4 million, or 56%, from $6.2 million for the six months ended June 30, 2024, to $2.7 million for the six months ended June 30, 2025, as explained below.

Current wording

Revenue decreased by $3.4 million, or 49%, from $7.0 million for the nine months ended September 30, 2024, to $3.6 million for the nine months ended September 30, 2025, as explained below.

Previous wording

Product development contract revenue decreased by $0.9 million, or 24%, from $3.6 million for the six months ended June 30, 2024, to $2.7 million for the six months ended June 30, 2025. The decrease was primarily due to available funding and the timing of 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 $0.8 million, or 18%, from $4.4 million for the nine months ended September 30, 2024, to $3.6 million for the nine months ended September 30, 2025. The decrease was primarily due to available funding and the timing of 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

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.

Current wording

Revenue derived from product sales decreased by $2.7 million, or 100%. The decrease was due to legacy hardware product sales during the nine months ended September 30, 2024 that did not recur during the nine months ended September 30, 2025.

Previous wording

The following table presents our operating expenses for the six months ended June 30, 2025 and 2024:

Current wording

The following table presents our operating expenses for the nine months ended September 30, 2025 and 2024:

Previous 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.

Current wording

Cost of revenue decreased by $1.6 million, or 56%, from $2.9 million for the nine months ended September 30, 2024, to $1.3 million for the nine months ended September 30, 2025. Cost of revenue decreased primarily due to lower product costs, driven by the decline in product revenue, as well as decreased labor and material expenses charged to product development contracts during the nine months ended September 30, 2025 as compared to the nine months ended September 30, 2024.

Previous wording

Research and development expenses increased by $0.8 million, or 14% from $5.2 million for the six months ended June 30, 2024, to $6.0 million for the six months ended June 30, 2025. Research and development costs during the six months ended June 30, 2025 increased due to labor and labor related expenses associated with product testing, debugging, stabilization and enhancements of our software products.

Current wording

Research and development expenses increased by $1.3 million, or 17% from $7.8 million for the nine months ended September 30, 2024, to $9.1 million for the nine months ended September 30, 2025. Research and development costs during the nine months ended September 30, 2025 increased due to labor and labor related expenses associated with product testing, debugging, stabilization and enhancements of our software products.

Previous 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.

Current wording

General and administrative expense decreased by $0.9 million, or 6%, from $13.4 million for the nine months ended September 30, 2024, to $12.5 million for the nine months ended September 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

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.

Current wording

Sales and marketing expense increased by $0.2 million, or 6%, from $3.5 million for the nine months ended September 30, 2024, to $3.7 million for the nine months ended September 30, 2025. This increase was driven by increased marketing program costs related to our new software products.

Previous wording

There were no significant asset write-down and restructuring costs for the six months ended June 30, 2025 or the prior year period.

Current wording

There were no significant asset write-down and restructuring costs for the nine months ended September 30, 2025 or the prior year period.

Previous wording

The following table presents other income for the six months ended June 30, 2025 and 2024, respectively:

Current wording

The following table presents other income for the nine months ended September 30, 2025 and 2024, respectively:

Previous wording

Other income increased minimally by $0.1 million from $0.5 million for the three months ended June 30, 2024, to $0.6 million for the three months ended June 30, 2025. Other income increased as a result of increased interest income from our investments in marketable securities due to an increase in invested funds.

Current wording

Other income increased by $33.8 million from $0.8 million for the nine months ended September 30, 2024, to $34.6 million for the three months ended September 30, 2025. Other income increased almost entirely as a result of increased mark-to-market gains on our outstanding warrants. Additionally, interest income from our investments in marketable securities increased due to an increase in invested funds.

Previous wording

We had no significant income tax expense for the six months ended June 30, 2025 and 2024, respectively. The provision for income taxes for the six 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 six 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.

Current wording

We had no significant income tax expense for the nine months ended September 30, 2025 and 2024, respectively. The provision for income taxes for the nine months ended September 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 nine months ended September 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

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.

Current wording

Our backlog, as of September 30, 2025, was $0.8 million, $0.2 million of which was funded and $0.6 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 $6.9 million as of September 30, 2025.

Previous 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.

Current wording

Cash, cash equivalents and marketable securities were $57.1 million as of September 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 September 30, 2025, we had an accumulated deficit of approximately $479.3 million and working capital of $56.0 million.

Previous 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.

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 sold all of the shares offered pursuant to this prospectus supplement consisting of a total of 3,680,543 shares of our Common Stock 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 nine months ended September 30, 2025, all shares under this prospectus supplement were sold, consisting of a total of 3,134,189 shares of our Common Stock under the Sales Agreement for gross sales proceeds of approximately $30.0 million, before deducting commission and other expenses. On August 6, 2025 we filed a prospectus supplement in connection with offering for sale an additional $50.0 million of shares pursuant to the Sales Agreement (the “August 2025 Prospectus Supplement”). As of September 30, 2025, no shares were sold under the August 2025 Prospectus Supplement. 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 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.

Current wording

We have taken many steps to reduce our use of cash. For example, we suspended our legacy 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

We may enter into arrangements to acquire or invest in complementary businesses, services and technologies, which may require acquisition capital as well as operational capital for these acquisitions or arrangements. We may be required to seek additional equity or debt financing to facilitate these arrangements. If additional financing is required from outside sources in connection with these arrangements, we may not be able to raise it on terms acceptable to us, or at all.

Current wording

We may enter into arrangements to acquire or invest in businesses, services and technologies, which may require acquisition capital as well as operational capital for these acquisitions or arrangements. We may be required to seek additional equity or debt financing to facilitate these arrangements. If additional financing is required from outside sources in connection with these arrangements, we may not be able to raise it on terms acceptable to us, or at all.

Previous 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.

Current wording

Cash flows used in operating activities during the nine months ended September 30, 2025 increased by $1.6 million to $19.1 million from $17.5 million during the same period in 2024. The increase 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 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.

Current wording

Our net cash used in investing activities during the nine months ended September 30, 2025 increased by $36.1 million as compared to the same period in 2024. The increase in cash used in investing activities is almost entirely due to $19.8 million of purchases, net of maturities, of marketable securities during the nine months ended September 30, 2025, as compared to $16.0 million of maturities of marketable securities during the nine months ended September 30, 2024.

Previous 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.

Current wording

Our net cash provided by financing activities during the nine months ended September 30, 2025 increased by $35.7 million as compared to the prior year period. The increase in cash provided by financing activities is almost entirely due to the $35.5 million, after deducting transaction costs, in net proceeds from the sale of our Common Stock and exercise of warrants during the nine months ended September 30, 2025.