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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2025


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number: 001-39897

Palladyne AI Corp.

(Exact Name of Registrant as Specified in its Charter)


Delaware	85-2838301
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
650 South 500 West, Suite 150 Salt Lake City, Utah	84101
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (888) 927-7296

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value per share	PDYN	The Nasdaq Stock Market LLC
Redeemable warrants, exercisable for shares of Common Stock at an exercise price of $69.00 per share	PDYNW	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 28, 2025 the registrant had 42,037,410 shares of Common Stock, $0.0001 par value per share, outstanding.

Table of Contents


		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	5
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations	6
	Condensed Consolidated Statements of Comprehensive Income (Loss)	7
	Condensed Consolidated Statements of Stockholders' Equity (Deficit)	8
	Condensed Consolidated Statements of Cash Flows	10
	Notes to Unaudited Condensed Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	63
Signatures		64

Summary Risk Factors.

Our business is subject to numerous risks and uncertainties, including those highlighted in Part II, Item 1A Risk Factors of this report. The following is a summary of the principal risks we face:

•

We are an early stage company with a history of losses, and expect to incur significant losses for the foreseeable future.

•

Our operating and financial projections rely on management assumptions and analyses. If these assumptions or analyses prove to be incorrect, as they often have in the past, our actual operating results may be materially different from our expected or forecasted results.

•

We have yet to achieve positive operating cash flow and our ability to generate positive cash flow is uncertain.

•

We have no previous history or experience with commercializing software products and may not be able to do so efficiently, effectively or at all. We were unsuccessful in our efforts to commercialize the hardware technologies that we and our predecessor companies developed over the past several decades.

•

Successful commercialization of our AI/ML Foundational Technology and related products may be delayed beyond our current expectations and therefore product availability to customers, customer acquisition and receipt of product revenue could be delayed.

•

Our anticipated revenues are expected to be primarily derived from the licensing of our AI/ML software products for the foreseeable future.

•

Any issues in the development and use of our AI/ML Foundational Technology or related products, or issues in products developed by others, may result in reputational harm or liability.

•

Our AI/ML Foundational Technology and related products are new technologies and the timing and magnitude of revenues from customers is uncertain. If we cannot successfully commercialize our AI/ML Foundational Technology and related products on our expected schedule, if our technology does not offer our potential customers the features, functionality and return on investment that they expect and/or if potential customers are not willing to pay for our software products at the license rates that we currently expect, our ability to generate material revenues will be materially impaired.

•

If we are not able to generate material revenues from our software products before we exhaust our financial resources, we may need to cease business operations.

•

We may fail to attract or retain customers at sufficient rates or in sufficient numbers or at all.

•

We have no previous history with our licensing sales model.

•

Important assumptions about market demand, pricing, adoption rates and sales cycles for our software products may be inaccurate.

•

The products related to our AI/ML Foundational Technology require certain limited hardware components, and we are dependent on our suppliers, some of which are currently single, sole or limited source suppliers. Any inability of these suppliers to deliver necessary components of our products at prices, volumes, performance, timing and specifications acceptable to us, could have a material adverse effect on our business, prospects, financial condition and operating results.

•

We operate in a competitive industry that is subject to rapid technological change, and we expect competition to increase. Our products may not be competitive with other alternatives.

•

We may not be able to successfully enhance our product offerings through our research and development efforts.

•

Real or perceived design flaws, errors, defects, glitches, bugs or malfunctions in our AI/ML Foundational Technology and related products, failure of our software products to perform as expected, connectivity issues or user errors can result in lower than expected return on investment for customers, personal injury or property damage and significant security or safety concerns, each of which could materially and adversely affect our results of operations, financial condition or reputation.

•

We use "open source" software, which could negatively affect our ability to offer our AI/ML Foundational Technology and related products and subject us to possible litigation.

•

Our business and prospects depend significantly on our ability to build our brand. We may not succeed in establishing, maintaining and strengthening an effective brand, and our brand and reputation could be harmed by negative publicity regarding us or our AI/ML Foundational Technology and related products. We believe that our previous inability to successfully commercialize our legacy hardware products, and our resulting financial performance, damaged our prior brand. As a result, in March 2024 we changed our name to Palladyne AI Corp. and have branded our AI/ML software products accordingly.

•

Our management team has broad discretion in making strategic decisions to execute our growth plans, and our management's decisions have not always led to the desired result. Current and future decisions may not be successful in achieving our business objectives or may have unintended consequences that negatively impact our growth prospects.

•

If we fail to effectively manage our business, we may not be able to develop, market and commercialize our software products successfully.

•

We may be unable to adequately control the costs associated with our operations in order to achieve profitability.

•

We expect to incur substantial research and development costs and devote significant resources to developing and commercializing our AI/ML Foundational Technology and related products, and we may never reach profitability and/or achieve significant or any licensing revenue.

•

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.

•

Our financial results may vary significantly from period to period due to fluctuations in our operating costs, revenues, product demand and other factors.

•

We are highly dependent on the services of our senior management and other key employees and, if we are unable to attract, integrate and retain a sufficient number of qualified employees, our ability to design and commercialize our AI/ML Foundational Technology and related products, operate our business and compete could be harmed.

•

If we fail to maintain and strengthen effective systems of disclosure controls and procedures and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be adversely affected.

•

We have been and may in the future be subject to risks associated with strategic relationships, acquisitions or transactions and may not identify or form desired strategic relationships in the future.

•

We may become subject to new or changing governmental regulations relating to the development, marketing, licensing, distribution or use of our AI/ML Foundational Technology and related products or to the providing of customer service, and a failure to comply with such regulations could lead to delays in launching our software products and/or withdrawal of our software products from the market, delay our projected revenues, increase costs and/or make our business unviable if we are unable to modify our software products to comply.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PALLADYNE AI CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)


	As of
	September 30, 2025			December 31, 2024

Assets
Current assets:
Cash and cash equivalents	$	27,361		$	31,188
Marketable securities		29,785			8,883
Accounts receivable, net of allowance for credit losses of $0.3 million at December 31, 2024		326			134
Unbilled receivables		1,819			1,179
Inventories		76			71
Prepaid expenses and other current assets		1,146			1,275
Total current assets		60,513			42,730
Property and equipment, net		4,063			4,244
Operating lease assets		8,023			8,841
Other non-current assets		330			438
Total assets	$	72,929		$	56,253
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable	$	565		$	435
Accrued liabilities		2,923			2,919
Current operating lease liabilities		976			1,079
Total current liabilities		4,464			4,433
Warrant liabilities		7,402			51,396
Operating lease liabilities		9,217			9,957
Total liabilities		21,083			65,786
Commitments and contingencies (Note 10)
Stockholders’ equity (deficit):
Common stock, $0.0001 par value, 165,000,000 shares authorized as of September 30, 2025 and December 31, 2024; 42,036,294 and 33,883,894 shares issued and outstanding as of September 30, 2025 and December 31, 2024, respectively		4			3
Additional paid-in capital		531,127			481,289
Accumulated other comprehensive income		14			6
Accumulated deficit		(479,299	)		(490,831	)
Total stockholders’ equity (deficit)		51,846			(9,533	)
Total liabilities and stockholders’ equity (deficit)	$	72,929		$	56,253

See accompanying notes to the condensed consolidated financial statements.

PALLADYNE AI CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except share and per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2025			2024			2025			2024
Revenue, net	$	860		$	871		$	3,585		$	7,025
Operating expenses:
Cost of revenue (exclusive of items shown separately below)		461			479			1,288			2,934
Research and development		3,146			2,582			9,141			7,825
General and administrative		4,138			3,965			12,516			13,381
Sales and marketing		1,180			1,331			3,730			3,516
Asset write-down and restructuring		—			(187	)		—			(192	)
Total operating expenses		8,925			8,170			26,675			27,464
Loss from operations		(8,065	)		(7,299	)		(23,090	)		(20,439	)
Interest income, net		566			249			1,512			967
Gain (loss) on warrant liabilities		3,759			(43	)		33,110			(175	)
Other income, net		—			—			—			2
(Loss) income before income tax expense		(3,740	)		(7,093	)		11,532			(19,645	)
Income tax expense		—			(3	)		—			(3	)
Net (loss) income	$	(3,740	)	$	(7,096	)	$	11,532		$	(19,648	)
Net (loss) income per share
Basic	$	(0.09	)	$	(0.27	)	$	0.31		$	(0.76	)
Diluted	$	(0.09	)	$	(0.27	)	$	0.29		$	(0.76	)
Weighted-average shares used in computing net income (loss) per share
Basic		40,486,615			26,177,413			37,665,540			26,018,708
Diluted		40,486,615			26,177,413			40,161,248			26,018,708

See accompanying notes to the condensed consolidated financial statements.

PALLADYNE AI CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2025			2024			2025		2024
Net (loss) income	$	(3,740	)	$	(7,096	)	$	11,532	$	(19,648	)
Other comprehensive (loss) income:
Change in unrealized income (loss) on available-for-sale investments		20			—			8		(3	)
Total other comprehensive income (loss)		20			—			8		(3	)
Comprehensive (loss) income	$	(3,720	)	$	(7,096	)	$	11,540	$	(19,651	)

See accompanying notes to the condensed consolidated financial statements.

PALLADYNE AI CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

(in thousands, except share data)



	Common Stock					Additional			Accumulated Other						Total
	Class A					Paid-In			Comprehensive			Accumulated			Stockholders’
	Shares			Amount		Capital			Income (Loss)			Deficit			Equity
Balance at December 31, 2023		25,877,865		$	3	$	459,113		$	3		$	(418,214	)	$	40,905
Stock-based compensation		—			—		571			—			—			571
Common stock issued under equity award plans		697,967			—		—			—			—			—
Shares repurchased for payment of tax withholdings		(23,260	)		—		(42	)		—			—			(42	)
Other comprehensive loss		—			—		—			(4	)		—			(4	)
Net loss		—			—		—			—			(7,229	)		(7,229	)
Balance at March 31, 2024		26,552,572		$	3	$	459,642		$	(1	)	$	(425,443	)	$	34,201
Stock-based compensation		—			—		958			—			—			958
Common stock issued under equity award plans		198,127			—		—			—			—			—
Shares repurchased for payment of tax withholdings		(15,200	)		—		(30	)		—			—			(30	)
Exercise of stock options		34,195			—		4			—			—			4
Other comprehensive income		—			—		—			1			—			1
Net loss		—			—		—			—			(5,323	)		(5,323	)
Balance at June 30, 2024		26,769,694		$	3	$	460,574		$	—		$	(430,766	)	$	29,811
Stock-based compensation		—			—		698			—			—			698
Common stock issued under equity award plans		26,851			—		—			—			—			—
Shares repurchased for payment of tax withholdings and other		(8,107	)		—		(12	)		—			—			(12	)
Exercise of stock options		75,527			—		20			—			—			20
Net loss		—			—		—			—			(7,096	)		(7,096	)
Balance at September 30, 2024		26,863,965		$	3	$	461,280		$	—		$	(437,862	)	$	23,421



	Common Stock				Additional		Accumulated Other						Total
	Class A				Paid-In		Comprehensive			Accumulated			Stockholders’
	Shares		Amount		Capital		Income (Loss)			Deficit			Equity (Deficit)
Balance at December 31, 2024		33,883,894	$	3	$	481,289	$	6		$	(490,831	)	$	(9,533	)
Stock-based compensation		—		—		1,149		—			—			1,149
Common stock issued under equity award plans		492,815		—		—		—			—			—
Issuance of common stock, net of cost		1,335,807		1		13,932		—			—			13,933
Other comprehensive loss		—		—		—		(9	)		—			(9	)
Net income		—		—		—		—			22,759			22,759
Balance at March 31, 2025		35,712,516	$	4	$	496,370	$	(3	)	$	(468,072	)	$	28,299
Stock-based compensation		—		—		1,141		—			—			1,141
Common stock issued under equity award plans		88,123		—		—		—			—			—
Exercise of stock options		44,056		—		54		—			—			54
Issuance of common stock under ESPP		15,097		—		76		—			—			76
Issuance of common stock, net of cost		1,720,422		—		14,450		—			—			14,450
Exercise of warrants		2,790,700		—		17,302		—			—			17,302
Other comprehensive loss		—		—		—		(3	)		—			(3	)
Net loss		—		—		—		—			(7,487	)		(7,487	)
Balance at June 30, 2025		40,370,914	$	4	$	529,393	$	(6	)	$	(475,559	)	$	53,832
Stock-based compensation		—		—		1,056		—			—			1,056
Common stock issued under equity award plans		1,579,937		—		—		—			—			—
Exercise of stock options		7,483		—		11		—			—			11
Issuance of common stock, net of cost		77,960		—		667		—			—			667
Other comprehensive loss		—		—		—		20			—			20
Net loss		—		—		—		—			(3,740	)		(3,740	)
Balance at September 30, 2025		42,036,294	$	4	$	531,127	$	14		$	(479,299	)	$	51,846

See accompanying notes to the condensed consolidated financial statements.

PALLADYNE AI CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2025			2024
Cash flows from operating activities:
Net income (loss)	$	11,532		$	(19,648	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Stock-based compensation		3,346			2,227
Depreciation of property and equipment		658			612
Change in fair value of warrant liabilities		(33,110	)		175
Amortization of investment discount		(1,065	)		(56	)
Changes in operating assets and liabilities:
Accounts receivable		(192	)		(63	)
Unbilled receivable		(640	)		455
Inventories		(5	)		1,065
Prepaid expenses and other current assets		129			1,150
Operating lease assets & other non-current assets		925			891
Accounts payable		130			(1,076	)
Accrued liabilities and current operating lease liabilities		(100	)		(2,420	)
Operating lease liabilities		(740	)		(843	)
Net cash used in operating activities		(19,132	)		(17,531	)
Cash flows from investing activities:
Purchases of property and equipment		(477	)		(217	)
Purchases of marketable securities		(56,828	)		—
Maturities of marketable securities		37,000			16,000
Net cash (used in) provided by investing activities		(20,305	)		15,783
Cash flows from financing activities:
Proceeds from exercise of stock options		65			24
Proceeds from issuance of common stock under ESPP		76			—
Proceeds from the exercise of warrants		6,419			—
Shares repurchased for payment of tax withholdings		—			(84	)
Payment of obligations under capital leases		—			(3	)
Proceeds from issuance of common stock		29,100			—
Payment of transaction costs related to issuance of common stock		(50	)		—
Net cash provided by (used in) financing activities		35,610			(63	)
Net decrease in cash and cash equivalents		(3,827	)		(1,811	)
Cash and cash equivalents at beginning of period		31,188			23,139
Cash and cash equivalents at end of period	$	27,361		$	21,328
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	—		$	10

See accompanying notes to the condensed consolidated financial statements.

PALLADYNE AI CORP.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

Description of the Business

The Company's full-stack, closed-loop autonomy software ("AI/ML Foundational Technology") is designed with artificial intelligence ("AI") and machine learning ("ML") technologies to enable robotic systems to perceive their environment and quickly adapt to changing circumstances by generalizing (i.e., learning) from their past experience using dynamic real-time operations "on the edge" (i.e., on the robotic system) without extensive programming and with minimal robot training or the latency associated with processing in the cloud.

Basis of Presentation and Consolidation

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP").

The condensed consolidated financial statements as of September 30, 2025 are unaudited. The condensed consolidated balance sheet as of December 31, 2024 included herein was derived from the audited consolidated financial statements as of that date. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. As such, the information included herein should be read in conjunction with the consolidated financial statements and accompanying notes as of and for the year ended December 31, 2024 included in the Company’s Annual Report on Form 10-K filed with the SEC on February 20, 2025.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company’s fiscal year begins on January 1 and ends on December 31.

In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments necessary for fair financial statement presentation. All adjustments are of a normal recurring nature. Interim results are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending December 31, 2025.

Summary of Significant Accounting Policies and Use of Estimates

There have been no changes to the Company’s significant accounting policies and use of estimates and assumptions described in the annual consolidated financial statements for the year ended December 31, 2024 that have had a material impact on the Company’s condensed consolidated financial statements and related notes.

Liquidity and Capital Resources

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. The Company has incurred losses from operations and negative cash flows from operations since inception and is likely to continue to incur losses and negative cash flows from operations in the near term. As of September 30, 2025, the Company had an accumulated deficit of approximately $479.3 million and working capital of $56.0 million.

These financial statements have been prepared in accordance with GAAP and on the basis that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company’s main source of liquidity has been cash generated by equity offerings. The Company’s primary use of cash is for operations and administrative activities, including employee-related expenses and general, operating and overhead expenses. Future capital requirements will depend on many factors, including the Company’s timing and extent of development efforts, the expansion and success of sales and marketing activities, revenue growth rate, customer retention, the introduction of new and enhanced product offerings and market acceptance of the Company’s products. The Company believes it has sufficient financial resources for at least the next 12 months from the date of this report.

Revenue Recognition

The Company recognizes revenue from the sale of its products and from the delivery of goods and services arising out of its contractual arrangements to provide product development contract services that are funded by the customer. The Company recognizes revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services by following a five-step process:

(1)

Identify the contract with a customer: A contract with a customer exists when (a) the Company enters into an enforceable contract with a customer that defines each party's rights and obligations regarding the products and services to be transferred and identifies the payment terms related to these products and services, (b) the contract has commercial substance and (c) the Company determines that collection of substantially all consideration for products and services that are transferred is probable based on the customer's intent and ability to pay the promised consideration. Contract modifications may include changes in scope of work, and/or the period of completion of the project. The Company analyzes contract modifications to determine if they should be accounted for as a modification to an existing contract or a new stand-alone contract.

(2)

Identify the performance obligations in the contract: The Company enters into contracts that can include combinations of products and services, which are either capable of being distinct and accounted for as separate performance obligations or as one performance obligation if the majority of tasks and services form a single project or capability. Determining whether products or services are considered distinct performance obligations that should be accounted for separately may require significant judgment.

(3)

Determine the transaction price: The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring goods or services to the customer. Such amounts are typically stated in the customer contract. However, to the extent that the Company identifies variable consideration, the Company will estimate the variable consideration at the onset of the arrangement as long as it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company's current contracts do not include any significant financing components because the timing of the transfer of the underlying products and services under contract are at the customer's discretion. Additionally, the Company does not adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Taxes collected from customers and remitted to governmental authorities are not included in revenue.

(4)

Allocate the transaction price to performance obligations in the contract: Once the Company has determined the transaction price, the total transaction price is allocated to each performance obligation in a manner depicting the amount of consideration to which the Company expects to be entitled in exchange for transferring the good(s) or service(s) to the customer. If applicable, the Company allocates the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis. The standalone selling price represents the amount the Company would sell the good(s) or service(s) to a customer on a standalone basis. For government contracts, the Company uses expected cost plus a margin as the standalone selling price. Because the Company's contract pricing with government customers is generally based on expected cost plus a margin, the standalone selling price of the good(s) or service(s) in the Company's contracts with government customers are typically equal to the selling price stated in the contract. When we sell standard good(s) or service(s) with observable standalone sale transactions, the observable standalone sales transactions are used to determine the standalone selling price.

(5)

Recognize revenue when or as the Company satisfies a performance obligation: For each performance obligation identified, the Company determines at contract inception whether it satisfies the performance obligation over time or at a point in time. For performance obligations satisfied over time, revenue is recognized as work progresses when the Company is entitled to the reimbursement of costs plus a reasonable profit for work performed for which the Company has no alternate use. For these performance obligations, the Company generally recognizes revenue using an input method with revenue amounts being recognized proportionately as costs are incurred relative to the total expected costs to satisfy the performance obligation. The Company believes that costs incurred as a portion of total estimated costs is an appropriate measure of progress towards satisfaction of the performance obligation since this measure reasonably depicts the progress of the work effort. Revenue for performance obligations that are not recognized over time are recognized at the point in time when control transfers to the customer (which is generally upon delivery). For performance obligations that are satisfied at a point in time, the Company evaluates the point in time when the customer can direct the use of, and obtain the benefits from, the products and services. Shipping and handling costs are recorded at the time of product shipment to the customer and are included within revenue.

Revenue from Contracts with Customers

The Company derives its revenue from two sources. First, the Company enters into research and development agreements primarily relating to the commercialization of the Company's products. Second, the Company sells its products and related parts and repair services. Product development contract revenue includes revenue arising from different types of contractual arrangements, including cost-type contracts and fixed-price contracts. Historically, product revenue primarily consists of sales of the Company's legacy hardware products. The Company has not yet generated product revenue from its Palladyne IQ and Palladyne Pilot products.

Product Development Contract Revenue

Cost-type contracts – Research, development and/or testing service contracts, including cost-plus-fixed-fee and time and material contracts, relate primarily to the development of the Company's products and related technology. Cost-type contracts are generally entered into with the U.S. government. These contracts are billed at cost plus a margin as defined by the contract and the Federal Acquisition Regulation ("FAR"). The FAR establishes regulations around procurement by the government and provides guidance on the types of costs that are allowable in establishing prices for goods and services delivered under government contracts. Revenue on cost-type contracts is recognized over time as goods and services are provided.

Fixed-price contracts – Fixed-price development contracts relate primarily to the development of the Company's products and related technology. Fixed-price development contracts generally require a significant service of integrating a complex set of tasks and components into a single deliverable. Revenue on fixed-price contracts is generally recognized over time as goods and services are provided. To the extent the Company's actual costs vary from the fixed fee, we will generate more or less profit or could incur a loss. The Company will recognize losses at the contract level in earnings in the period in which they are incurred.

Product Revenue

Product revenue relates to sales of the Company's commercially available products, and certain miscellaneous parts, accessories and repair services. The Company provides a limited one-year warranty on product sales. Product warranties are considered assurance-type warranties and are not considered to be separate performance obligations. Product revenue is recognized at the point in time when ownership of the goods is transferred, generally at the time of shipment to the customer. At the time product revenue is recognized, an accrual is established for estimated warranty expenses based on historical experience as well as anticipated product performance.

Revenue recognized for Product Development Contract Revenue and Product Revenue for the three and nine months ended September 30, 2025 and 2024, were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2025		2024		2025		2024
Product Development Contract Revenue	$	860	$	764	$	3,582	$	4,359
Product Revenue		—		107		3		2,666
Revenue, net	$	860	$	871	$	3,585	$	7,025

Contract Balances

The timing of revenue recognition, billing and cash collection results in the recognition of accounts receivable, unbilled receivables, contract assets and deferred revenue in the Company’s condensed consolidated balance sheets.

Cash funds received in excess of revenue recognized that is contingent upon the satisfaction of performance obligations is accounted for as deferred revenue.

Contract assets include unbilled receivables which are amounts resulting from timing differences between revenue recognition and billing in accordance with agreed-upon contractual terms, which typically occur subsequent to revenue being recognized.

The opening and closing balances of our accounts receivable, unbilled receivables, contract assets and deferred revenue as of September 30, 2025 and December 31, 2024, are as follows:


(In thousands)	Accounts Receivable		Unbilled Receivable		Contract Assets (Current)		Deferred Revenue (Current)
Ending Balance as of December 31, 2024	$	134	$	1,179	$	28	$	248
(Decrease)/increase, net		192		640		7		(248	)
Ending Balance as of September 30, 2025	$	326	$	1,819	$	35	$	—

The Company recorded its current contract assets and current deferred revenue within prepaid expenses and other current assets and accrued liabilities, respectively. During the three and nine months ended September 30, 2025, the Company recognized all of the deferred revenue which existed at December 31, 2024. During the three and nine months ended September 30, 2024, the Company recognized all of the deferred revenue which existed at December 31, 2023.

Remaining Performance Obligations

As of September 30, 2025, the Company had backlog, or revenue related to remaining performance obligations, of $0.8 million. The Company expects most of this backlog to be recognized over the next 12 months. The Company’s backlog represents the expected value of exercised contracts, both funded and unfunded, less revenue recognized to date.

Recently Issued Accounting Standard Pronouncements

As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act until such time as the Company is no longer considered to be an EGC. The adoption dates discussed below reflect this election.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 requires companies to disclose, on an annual basis, specific categories in the effective tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. In addition, ASU 2023-09 requires companies to disclose additional information about income taxes paid. ASU 2023-09 will be effective for annual periods beginning January 1, 2026 and will be applied on a prospective basis with the option to apply the standard retrospectively. The Company does not expect a material impact on its consolidated financial statements related to ASU 2023-09.

In November 2024, the FASB issued ASU No. 2024-03, Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, requiring public entities to disclose additional information about specific expense categories in the notes to the financial statements on an interim and annual basis. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026, and for interim periods beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2024-03.

2. Fair Value Measurements

ASC Topic 820, Fair Value Measurement, defines fair value as the exchange price that would be received for an asset, or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

Level 1—Fair value is based on observable inputs such as quoted prices for identical assets or liabilities in active markets.

Level 2—Fair value is determined using quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in markets that are not active or are directly or indirectly observable.

Level 3—Fair value is determined using one or more significant inputs that are unobservable in active markets at the measurement date, such as an option pricing model, discounted cash flow or similar technique.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

On a recurring basis, the Company measures certain of its financial assets and liabilities at fair value. The fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis was determined using the following inputs as of September 30, 2025 and December 31, 2024:


	As of September 30, 2025
(In thousands)	Level 1		Level 2		Level 3		Total
Assets:
Marketable securities:
U.S. treasury securities	$	29,785	$	—	$	—	$	29,785
Total assets	$	29,785	$	—	$	—	$	29,785

Liabilities:
Warrant liabilities	$	3,041	$	1,079	$	3,282	$	7,402
Total liabilities	$	3,041	$	1,079	$	3,282	$	7,402


	As of December 31, 2024
(In thousands)	Level 1		Level 2		Level 3		Total
Assets:
Cash equivalents:
U.S. Treasury securities	$	12,927	$	—	$	—	$	12,927
Marketable securities:
U.S. treasury securities		8,883		—		—		8,883
Total assets	$	21,810	$	—	$	—	$	21,810

Liabilities:
Warrant liabilities	$	11,630	$	4,128	$	35,638	$	51,396
Total liabilities	$	11,630	$	4,128	$	35,638	$	51,396

As of September 30, 2025, the Company held $29.8 million of available-for-sale debt securities with maturity dates within one year. The fair value of the Company's available-for-sale debt securities approximates their amortized cost basis. The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The carrying amounts of accounts receivable, unbilled receivables, accounts payable and accrued expenses approximate their fair values because of the relatively short periods until they are required to be settled.

The following table sets forth a reconciliation from the opening balances to the closing balances for Level 3 values:


(In thousands)
Balance at December 31, 2024	$	35,638
Decrease in fair value of warrants		(21,472	)
Exercise of warrants		(10,884	)
Balance at September 30, 2025	$	3,282

3. Balance Sheet Components

Inventories, Net

As of September 30, 2025 and December 31, 2024, inventories, net consisted of the following:


(In thousands)	September 30, 2025		December 31, 2024
Raw materials	$	1	$	71
Finished goods, net	$	75	$	—
Total inventories	$	76	$	71

Prepaid Expenses and Other Current Assets

As of September 30, 2025 and December 31, 2024, prepaid expenses and other current assets consist of the following:


(In thousands)	September 30, 2025		December 31, 2024
Prepaid insurance	$	296	$	367
Software		416		647
Other prepaid expenses and assets		434		261
Total prepaid expenses and other current assets	$	1,146	$	1,275

Property and Equipment, Net

As of September 30, 2025 and December 31, 2024, property and equipment, net consist of the following:


(In thousands)	September 30, 2025			December 31, 2024
Robotics and manufacturing equipment	$	1,369		$	1,128
Leasehold improvements		3,927			3,927
Computer equipment		1,304			1,251
Software		—			1
Furniture and fixtures, and other fixed assets		951			951
Construction in progress		184			—
Property and equipment, gross		7,735			7,258
Accumulated depreciation		(3,672	)		(3,014	)
Property and equipment, net	$	4,063		$	4,244

Depreciation expenses were $0.3 million and $0.2 million for the three months ended September 30, 2025 and 2024, respectively. Depreciation expenses were $0.7 million and $0.6 million for the nine months ended September 30, 2025 and 2024, respectively.

Accrued Liabilities

As of September 30, 2025 and December 31, 2024, accrued liabilities consist of the following:


(In thousands)	September 30, 2025		December 31, 2024
Payroll and related costs	$	2,107	$	1,811
Legal services accrual		120		230
Deferred revenue		—		248
Other contract liabilities		496		496
Other accrued expenses and current liabilities		200		134
Total accrued liabilities	$	2,923	$	2,919

4. Earn-Out Shares

On September 24, 2021 (the "Closing Date"), Rotor Acquisition Corp. ("Rotor"), a Delaware corporation, consummated the business combination (the "Business Combination") pursuant to the terms of the Agreement and Plan of Merger, dated as of April 5, 2021 (the "Original Merger Agreement"), by and among Rotor, Rotor Merger Sub Corp., a Delaware corporation and a direct, wholly-owned subsidiary of Rotor ("Merger Sub"), and Sarcos Corp., a Utah corporation ("Old Sarcos"), and Amendment No. 1 to the Agreement and Plan of Merger, dated as of August 28, 2021 (the "Amendment" and the Original Merger Agreement, as amended, the "Merger Agreement"), by and among Rotor, Merger Sub and Old Sarcos. Pursuant to the terms of the Merger Agreement, the Business Combination between Rotor and Old Sarcos was effected through the merger of Merger Sub with and into Old Sarcos, with Old Sarcos continuing as the surviving corporation (the "Merger") and a wholly-owned subsidiary of Rotor. On the Closing Date, Rotor changed its name to Sarcos Technology and Robotics Corporation. To reflect the Company's transition from a hardware-focused company to an AI software-focused company, in March 2024 the Company changed its name from Sarcos Technology and Robotics Corporation to Palladyne AI Corp.

As a result of the Business Combination, each holder of Old Sarcos capital stock is entitled to Contingent Merger Consideration following the closing of the Business Combination in the form of earn-outs, up to an aggregate of 4,687,500 shares of Common Stock (the "Earn-Out Shares"). On September 24, 2025, the four-year anniversary of the Closing Date, 2,343,750 of the Earn-Out Shares

expired without having been released as the closing share price of a share of Common Stock of the Company did not equal or exceed $90.00 for 20 trading days in any 30 consecutive trading-day period at any time beginning on the first anniversary of the Closing Date and ending on the fourth anniversary of the Closing Date. The remaining 2,343,750 Earn-Out Shares will become payable if the closing share price of a share of Common Stock of the Company is equal to or exceeds $120.00 for 20 trading days in any 30 consecutive trading-day period at any time during the period beginning on the first anniversary of the Closing Date and ending on the fifth anniversary of the Closing Date.

The Earn-Out Shares are treated as equity-linked instruments as opposed to shares outstanding, and as such are not included in shares outstanding on the Company's condensed consolidated balance sheets. As of September 30, 2025, there remained 2,343,750 Earn-Out Shares potentially issuable.

5. DeSPAC Warrants

On January 20, 2021, Rotor consummated the initial public offering ("IPO") of 27,600,000 units (the "Units"), including the full exercise by the underwriters of their over-allotment option. Each Unit included one sixth of a share of Class A Common Stock and one half of one warrant (the "deSPAC Public Warrants"). Simultaneously with the closing of the IPO, Rotor consummated the sale of 7,270,000 warrants (the "deSPAC Private Placement Warrants") in a private placement to Rotor Sponsor LLC (the "Sponsor"), an affiliate of Rotor's officers and directors, and certain funds and accounts managed by two qualified institutional buyers. At the Closing Date, Old Sarcos acquired the net liabilities from Rotor, including the deSPAC Public Warrants, and the deSPAC Private Placement Warrants (together the "deSPAC Warrants"). The deSPAC Public Warrants are listed and traded under the PDYNW ticker symbol on the Nasdaq Global Market.

Each whole deSPAC Warrant entitles the registered holder to purchase one sixth of a share of the Company's Common Stock at a price of $11.50 per warrant, subject to adjustment as discussed below, at any time commencing on January 20, 2022, provided that the Company has an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act") covering the shares of the Common Stock issuable upon exercise of the deSPAC Warrants and a current prospectus relating to them is available (or the Company permits holders to exercise their deSPAC Warrants on a cashless basis under the circumstances specified in the warrant agreement (the "deSPAC Warrant Agreement") entered into between Continental Stock Transfer & Trust Company and Rotor and such shares are registered, qualified or exempt from registration under the securities laws of the state of residence of the holder. Pursuant to the deSPAC Warrant Agreement, a deSPAC Warrant holder may exercise its deSPAC Warrants only for a whole number of shares of the Company's Common Stock. The deSPAC Warrants will expire five years after the completion of the Business Combination, or September 24, 2026, at 5:00 p.m., New York City time, or earlier upon redemption or liquidation. As of September 30, 2025, there were 20,549,453 DeSPAC Warrants outstanding.

The Company will not be obligated to deliver any Common Stock pursuant to the exercise of a deSPAC Warrant and will have no obligation to settle such deSPAC Warrant exercise unless a registration statement under the Securities Act with respect to the shares of Common Stock underlying the deSPAC Warrants is then effective and a prospectus relating thereto is current, subject to the Company satisfying its obligations described below with respect to registration, or a valid exemption from registration is available. No deSPAC Warrant will be exercisable, and the Company will not be obligated to issue a share of Common Stock upon exercise of a deSPAC Warrant unless the share of the Company's Common Stock issuable upon such deSPAC Warrant exercise has been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the registered holder of the deSPAC Warrants. If the conditions in the two immediately preceding sentences are not satisfied with respect to a deSPAC Warrant, the holder of such deSPAC Warrant will not be entitled to exercise such deSPAC Warrant and such deSPAC Warrant may have no value and expire worthless. In no event will the Company be required to net cash settle any deSPAC Warrant. In the event a registration statement is not effective for the exercised deSPAC Warrants, the purchaser in the Rotor IPO of a Unit containing such deSPAC Warrant will have paid the full purchase price for the Unit solely for the share of the Company's Common Stock underlying such Unit.

Except as described herein, the deSPAC Private Placement Warrants have terms and provisions that are identical to those of the deSPAC Public Warrants. If the deSPAC Private Placement Warrants are held by holders other than the initial purchasers or their permitted transferees, the deSPAC Private Placement Warrants will be redeemable by the Company in all redemption scenarios and exercisable by the holders on the same basis as the deSPAC Public Warrants. The deSPAC Private Placement Warrants will not be redeemable by the Company so long as they are held by the initial purchasers or their permitted transferees, subject to certain exceptions. The initial purchasers or their permitted transferees, have the option to exercise the deSPAC Private Placement Warrants on a cashless basis.

Redemption of deSPAC Warrants When the Price per Share of the Company's Common Stock Equals or Exceeds $108.00. Once the deSPAC Warrants become exercisable, the Company may call the deSPAC Warrants for redemption:

•

in whole and not in part;

•

at a price of $0.01 per deSPAC Warrant;

•

upon not less than 30 days' prior written notice of redemption (the "30-day redemption period") to each deSPAC Warrant holder; and

•

if, and only if, the last reported sale price of the shares of the Company's Common Stock for any 20 trading days within a 30-trading day period commencing after the deSPAC Warrants become exercisable and ending three business days before the Company sends the notice of redemption to the deSPAC Warrant holders (which is referred to as the "Reference Value") equals or exceeds $108.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like).

If and when the deSPAC Warrants become redeemable by the Company, the Company may exercise its redemption right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws. However, the Company will not redeem the deSPAC Warrants unless an effective registration statement under the Securities Act covering the shares of the Company's Common Stock issuable upon exercise of the deSPAC Warrants is effective and a current prospectus relating to those shares of the Company's Common Stock is available throughout the 30-day redemption period.

Redemption of deSPAC Warrants When the Price per Share of Our Common Stock Equals or Exceeds $60.00. Once the deSPAC Warrants become exercisable, the Company may redeem the outstanding deSPAC Warrants (except as described herein with respect to the deSPAC Private Placement Warrants if the Company does not utilize this redemption provision):

•

in whole and not in part;

•

at $0.10 per deSPAC Warrant upon a minimum of 30 days' prior written notice of redemption; provided that holders will be able to exercise their deSPAC Warrants on a cashless basis prior to redemption and receive that number of shares determined by reference to an agreed table based on the redemption date and the "fair market value" of the Company's Common Stock;

•

if, and only if, the Reference Value (as defined above) equals or exceeds $60.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like); and

•

if the Reference Value is less than $108.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) the deSPAC Private Placement Warrants must also be concurrently called for redemption on the same terms (except as described above with respect to a holder's ability to cashless exercise its deSPAC Warrants) as the outstanding deSPAC Public Warrants, as described above.

Both the deSPAC Public Warrants and the deSPAC Private Placement Warrants are recorded as warrant liabilities on the Company's consolidated balance sheets. The Company values both the deSPAC Public and deSPAC Private Placement Warrants using the closing price of the deSPAC Public Warrants on the Nasdaq Global Market as of the reporting date. The fair value measurement for the deSPAC Public Warrants is considered a level 1 fair value measurement, and the fair value measurement for the deSPAC Private Placement Warrants is considered a level 2 fair value measurement, as the deSPAC Private Placement Warrants are substantially the same, but not identical to, the deSPAC Public Warrants.

The Company recognized gains of $3.7 million related to the change in fair value of the deSPAC Warrants during the three months ended September 30, 2025 and had no significant change in fair value of the deSPAC Warrants during the three months ended September 30, 2024. The Company recognized gains of $11.6 million and losses of $0.2 million related to the change in fair value of the deSPAC Warrants during the nine months ended September 30, 2025 and 2024, respectively.

6. 2024 Warrants

On November 1, 2024, the Company closed a registered direct offering for an aggregate of 2,790,700 shares of its common stock at a purchase price of $2.15 per share. In a concurrent private placement, the Company agreed to issue to the same investor warrants to purchase up to 2,790,700 shares of common stock (the "2024 Private Placement Warrants"). The 2024 Private Placement Warrants have an exercise price of $2.30 per share and were exercised in May 2025, as discussed below.

In a separate concurrent private placement, the Company's Chief Executive Officer and certain other members of the Board of Directors purchased 430,105 shares of common stock at a price of $2.20 per share, which represented the consolidated closing bid price of the Company's common stock on the Nasdaq Global Market on October 30, 2024, and warrants to purchase up to 430,105 shares of common stock, at a price of $0.125 per warrant (the "2024 Concurrent Private Placement Warrants"). The 2024 Concurrent Private Placement Warrants have an exercise price of $2.30 per share and will expire five and one-half years following the date of issue.

The Company received gross proceeds of approximately $7 million, before deducting placement agency fees and offering expenses from the registered direct offering, the 2024 Private Placement Warrants and the 2024 Concurrent Private Placement Warrants (together the "2024 Warrants").

On May 9, 2025, 2,790,700 of the 2024 Private Placement Warrants were exercised. As of September 30, 2025, all 430,105 of the 2024 Concurrent Private Placement Warrants were outstanding. The 2024 Warrants are recorded as warrant liabilities on the Company's consolidated balance sheet. The Company estimated the fair value of the 2024 Warrants using the Black-Scholes valuation model, which is considered a level 3 fair value measurement. The valuation model inputs are based on assumptions related to expected volatility, expected life, risk-free interest rate and expected dividends. These estimates, especially the expected volatility, are highly judgmental and could differ materially in the future. The Company recognized gains of $0.1 million and $21.5 million related to the change in fair value of the 2024 Warrants during the three and nine months ended September 30, 2025, respectively, which are recorded as a gain on warrant liabilities within the consolidated statements of operations.

The following table provides quantitative information regarding assumptions used in the valuation model to determine the fair value of the 2024 Warrants:


	September 30, 2025
Stock price	$	8.59
Term (in years)		4.6
Expected volatility		103.5	%
Risk-free rate		3.7	%
Dividend yield		0.0	%

7. Stock-based Compensation

2021 Stock Plan

The Company's 2021 Equity Incentive Plan (the "2021 Plan") provides stock options, restricted stock units ("RSUs"), restricted stock awards ("RSAs"), stock appreciation rights ("SARS") and performance awards for issuance to Company employees, officers, directors, non-employee agents and consultants. In general, outstanding awards granted under the 2021 Plan vest over one to four years and, in the case of options, are exercisable up to 10 years from the date of grant. The maximum number of shares of Common Stock that may be issued pursuant to the 2021 Plan is (a) 5.0 million shares of Common Stock of the Company plus (b) any shares of Common Stock subject to stock options and other awards that were assumed in the Business Combination and expire or otherwise terminate without having been exercised in full, are tendered to or withheld by the Company for payment of an exercise price or for tax withholding obligations, or are forfeited to or repurchased by the Company due to failure to vest, with the maximum number of shares to be added to the 2021 Plan pursuant to clause (b) equal to 2.1 million shares of Common Stock. As of September 30, 2025, 1.8 million shares were available to grant under the 2021 Plan.

2015 Stock Plan

The Old Sarcos 2015 Equity Incentive Plan (the "2015 Plan") provided stock options, RSUs, RSAs, SARS and performance awards for issuance to Old Sarcos' employees, officers, directors, non-employee agents and consultants. Outstanding awards under the 2015 Plan generally vest over three to five years and are exercisable up to 10 years from the date of grant. Unvested options are forfeited upon termination. No further awards may be made under the 2015 Plan. Any forfeited awards will be added to the 2021 Plan as described above.

2024 Inducement Plan

The Company adopted the 2024 Inducement Equity Incentive Plan (the "Inducement Plan") with an effective date of December 15, 2024 to be used exclusively for grants of nonstatutory stock options, RSUs, RSAs, SARS and performance awards to individuals who were not previously employees or directors of the Company (or who are returning to employment following a bona fide period of non-employment), as an inducement material to the individual's entry into employment with the Company. The Inducement Plan was adopted and approved without stockholder approval pursuant to Nasdaq Listing Rule 5635(c)(4). As of September 30, 2025, 475,000 shares were available to grant under the Inducement Plan.

2021 Employee Stock Purchase Plan

The 2021 Employee Stock Purchase Plan (the "ESPP") provides for the issuance of shares of Common Stock pursuant to purchase rights granted to employees over designated offering periods, by funds accumulated primarily through elective payroll deductions. Offerings under the ESPP commenced in December 2024. As of September 30, 2025, approximately 485,000 shares were available for sale under the ESPP.

Offering periods are generally six months long and begin on June 1 and December 1 of each year. The purchase price for shares of Common Stock purchased under the ESPP is calculated as 85% of the lesser of the fair market value of the Common Stock on (1) the first trading day of the applicable offering period or (2) the last trading day of the offering period.

Stock Option Activity

The following summarizes the Company’s stock option activity for the nine months ended September 30, 2025:


	Options Outstanding					Weighted-Average
				Weighted Average		Remaining		Aggregate Intrinsic
				Exercise Price		Contractual Term		Value
	Number of Shares			(Per share)		(In years)		(In thousands)
Outstanding – December 31, 2024		1,396,957		$	1.88		7.5	$	14,519
Granted		41,667			6.43
Exercised		(51,539	)		1.26
Cancelled		(199,712	)		1.57
Outstanding – September 30, 2025		1,187,373		$	2.11		6.7	$	7,690
Exercisable – December 31, 2024		443,045		$	2.05		5.2	$	4,527
Exercisable – September 30, 2025		810,227		$	2.14		6.3	$	5,230

Option Repricing

On April 17, 2024, the Company amended certain options to purchase 773,551 shares of the Company’s Common Stock. All of the options subject to the amendments had exercise prices that exceeded the value of the Company’s Common Stock on the amendment date.

One set of amendments, which were entered into with seven senior employees of the Company, applied to options to purchase an aggregate of 225,670 shares held by those seven senior employees. These amendments (1) re-started the vesting schedule of the amended options, including for options that had already vested and (2) reduced the per share exercise price of the options to $1.59 (the “New Exercise Price”), which is equal to the closing price of the Company’s Common Stock on April 17, 2024, the effective date of the amendments. No other terms of these options were modified.

The other set of amendments applied to options to purchase an aggregate of 547,881 shares held by other eligible employees and service providers of the Company with an exercise price per share greater than the New Exercise Price. These amendments reduced the per share exercise price of affected options to the New Exercise Price, which is equal to the closing price of the Company’s Common Stock on April 17, 2024, the effective date of the amendments. No other terms of such options were modified.

The amendments resulted in an incremental fair value of $0.2 million. Of this amount $0.1 million related to vested options and was recognized as stock-based compensation expense on the amendment date. The remaining incremental fair value will be amortized over the remaining requisite service periods of the unvested options.

Restricted Stock Units Activity

The following summarizes the Company’s RSU activity for the nine months ended September 30, 2025:


	Restricted Stock Units Outstanding
	Number of Shares			Weighted-Average Grant-Date Fair Value (Per share)
Outstanding – December 31, 2024		1,457,281		$	1.62
Granted		749,598			6.76
Vested		(660,875	)		1.64
Cancelled		(167,565	)		3.95
Outstanding – September 30, 2025		1,378,439		$	4.09

Restricted Stock Awards Activity

The following summarizes the Company’s employee RSA activity for the nine months ended September 30, 2025:


	Restricted Stock Awards Outstanding
	Number of Shares			Weighted-Average Grant-Date Fair Value (Per share)
Outstanding – December 31, 2024		625,000		$	0.59
Granted		1,500,000			2.23
Vested		(625,000	)	0.59
Outstanding – September 30, 2025		1,500,000		$	2.23

Stock-Based Compensation Expense

The Company recognized stock-based compensation expense in the condensed consolidated statement of operations and comprehensive loss as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2025		2024		2025		2024
Cost of revenue	$	17	$	11	$	42	$	18
Research and development		106		40		296		72
Sales and marketing		166		209		555		493
General and administrative		767		438		2,453		1,644
Total stock-based compensation expense	$	1,056	$	698	$	3,346	$	2,227

As of September 30, 2025, there was approximately $8.1 million of unrecognized stock-based compensation cost, which is expected to be recognized over a weighted average period of 2.6 years.

8. Net Income (Loss) Per Share

The following table sets forth the computation of the basic and diluted net loss per share attributable to common stockholders for the three and nine months ended September 30, 2025 and 2024:


	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except share and per share data)	2025			2024			2025		2024
Numerator:
Net income (loss)	$	(3,740	)	$	(7,096	)	$	11,532	$	(19,648	)
Denominator:
Weighted average shares outstanding, basic		40,486,615			26,177,413			37,665,540		26,018,708
Dilutive effect of potential common shares		—			—			2,495,708		—
Weighted average shares outstanding, diluted		40,486,615			26,177,413			40,161,248		26,018,708
Basic net income (loss) per share	$	(0.09	)	$	(0.27	)	$	0.31	$	(0.76	)
Diluted net income (loss) per share	$	(0.09	)	$	(0.27	)	$	0.29	$	(0.76	)
Anti-dilutive securities, excluded		10,277,380			12,007,398			5,842,463		12,007,398

Potentially dilutive shares, which are based on the weighted-average shares of common stock, stock options, unvested stock units, unvested stock awards, purchase rights granted under the employee stock purchase plan and warrants using the treasury stock method are included when calculating diluted net income (loss) per share attributable to the Company when their effect is dilutive. Because the Company incurred a net loss for the three months ended September 30, 2025 and 2024 and the nine months ended September 30, 2024, none of the potentially dilutive common shares were included in the diluted share calculation for that period as they would have been anti-dilutive.

9. Income Taxes

To determine the Company’s quarterly provision for income taxes, the Company used an estimated annual effective tax rate that is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates. Certain significant unusual or infrequently occurring items that are separately reported are separately recognized in the quarter during which they occur and can be a source of variability in the effective tax rate from quarter to quarter.

The Company had no significant income tax expense for the three and nine months ended September 30, 2025 and 2024. The provision for income taxes for the three and 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 three and nine months ended September 30, 2025, the Company’s recognized effective tax rate differs from the U.S. federal statutory rate as the Company recorded net taxable losses during the periods with a corresponding full valuation allowance on the net deferred tax assets created from the losses.

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act, which includes a broad range of tax reform provisions affecting businesses, including extending and modifying certain key Tax Cuts & Jobs Act provisions (both domestic and international), expanding certain Inflation Reduction Act incentives while accelerating the phase-out of others. The enactment of this new bill did not have a material impact on the Company’s consolidated financial statements.

10. Commitments and Contingencies

Legal Proceedings

The Company has been and may in the future be involved in various claims, lawsuits, investigations and other proceedings in the normal course of business. The Company accrues a liability when management believes information available prior to the issuance of its financial statements indicates it is probable a loss has been incurred as of the date of the financial statements and the amount of loss can be reasonably estimated. The Company adjusts its accruals to reflect the impact of negotiation, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Legal costs are expensed as incurred. The Company has not recorded any material loss contingency related to legal proceedings in the balance sheets as of September 30, 2025 and December 31, 2024, respectively.

Indemnifications

In the ordinary course of business, the Company provides or may provide indemnifications of varying scope and terms to investors, directors, officers, employees, customers or vendors with respect to certain matters, including losses arising out of the Company's breach of such agreements, services to be provided by the Company or from intellectual property infringement claims made by third parties. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions may not be subject to maximum loss clauses. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is indeterminable. As of September 30, 2025 and December 31, 2024, the Company has not accrued a liability for these indemnification obligations as the likelihood of incurring a material payment obligation in connection with these indemnification obligations is either not probable or not reasonably estimable due to the unique facts and circumstances involved.

11. Segment Information

The Company has determined that it has a single operating segment. The Company has historically derived revenues from product development contracts focused on the development of technologies included within the Company's AI/ML Foundational Technology, which the Company expects to commercialize and sell under software license arrangements. The accounting policies of the segment are the same as those described in Note 1, Basis of Presentation and Summary of Significant Accounting Policies.

The Company's Chief Executive Officer is the Chief Operating Decision Maker ("CODM"). The CODM allocates resources and makes operating decisions based on consolidated net income. The CODM does not evaluate profitability below the level of the consolidated company. Net income (loss) is used to monitor results on a budget versus actual basis. Net income (loss) is adjusted for various non-recurring and non-cash transactions such as stock compensation expenses and impairment expenses.

The following table presents selected financial information with respect to the Company's single operating segment:


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2025		2024		2025		2024
Segment Revenue	$	860	$	764	$	3,582	$	4,359
Other Revenue (1)		—		107		3		2,666
Total Revenue		860		871		3,585		7,025
Less:
Cost of revenue		444		468		1,246		1,851

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

Palladyne AI Corp. 10-Q