What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-20 compared with 2024-02-28 · 145 added, 142 removed, 142 unchanged (67% of the section changed)

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See also Part I Special Note Regarding Forward-Looking Statements in this Annual Report.

Our mission is to deliver software to our customers that enhances the utility and functionality of third-party stationary and mobile robotic systems by enabling these systems to quickly observe, learn, reason and act in structured and unstructured environments.

Our AI/ML Software Platform is being designed with artificial intelligence (AI) and machine learning (ML) techniques 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.

We believe this “human-like” ability to learn and adapt will be a key differentiator in helping our customers maintain optimal productivity in dynamic or unstructured environments, where new situations and unexpected challenges are more likely to cause delays and costly downtime.

Our value proposition is further enhanced relative to other competitive solutions because robotic systems using our AI/ML Software Platform are not required to be continuously connected to the cloud for our software to function, thereby reducing the performance issues associated with poor connectivity and latency typically associated with processing in the cloud.

Our approach also reduces the expense typically associated with transmitting large amounts of data to and from the cloud.

As a pioneer in the robotic systems industry, we benefit from both experiences and lessons gained from our 30-plus years, as well as significant investment in our internal research and development efforts.

Software has been an integral part of our development efforts over the years.

Our vision for our AI/ML Software Platform began in 2017 as a foundational technology to enhance training for the autonomous operation of our own internally developed hardware solutions and progressed to our first CYTAR (Cybernetic Training for Autonomous Robots) government project in 2019.

Significant design and development work began in 2020 when our Chief Technology Officer, Dr.

Denis Garagic, joined our team.

We have since continued to develop our AI/ML software both for the U.S.

Department of Defense and in connection with our development of commercial robotic systems.

As previously disclosed, in November 2023, we decided to suspend our hardware product development efforts to focus on commercializing our AI/ML Software Platform, although some de minimis hardware-related research and development efforts continue.

By de-coupling our AI/ML Software Platform from our own hardware systems and applying it to a wide range of third-party robotics systems, from industrial robots and cobots to mobile systems potentially including drones, autonomous mobile robots (AMR), autonomous underwater vehicles (AUV) and remotely operated vehicles (ROV), we believe we can reach a much broader market more quickly and better utilize our remaining cash resources.

We are designing our AI/ML Software Platform to be hardware agnostic in order to be compatible with most industrial robots being sold today and to support specific types of commercially available robots with additional development and the necessary application programming interface (API).

The AI/ML Software Platform is expected to enable robotic systems to perform tasks that involve variations in the environment and the objects being manipulated by the robot.

Specifically, we expect our AI/ML Software Platform to incorporate internal and external environmental inputs that allow robots to comprehend their environment, determine reasonable behavior given these inputs and to act in real time to achieve the expected task.

Each newly learned task will then be incorporated and used to perform future tasks.

We believe this closed-loop autonomy approach is the key to how our software can expedite robot training, expand the tasks that a robot can perform, reduce costly workflow stoppages, mitigate downtimes and reduce human labor requirements.

As a result of our refined strategy we are optimizing our organization in pursuit of this AI/ML Software Platform opportunity and are reducing costs, including our recent RIFs, shifting all operations to the Salt Lake City, Utah location and winding down substantially all of our operations in Pittsburgh, Pennsylvania.

For additional information around the risks associated with our strategy decision-making see Part I Item 1A Risk Factors “ Due to our limited resources and access to capital, and our failure to properly estimate the time and expense required to commercialize our hardware-centric industrial robotics solutions, we must make decisions on the allocation of resources and have discontinued development and commercialization of certain products;

these decisions may prove to be wrong and may adversely affect our business.”

Our mission is to deliver artificial intelligence software products that enable robotic and unmanned platforms, or robotic systems, in the industrial and defense sectors to perform complex tasks in arbitrary (i.e., unstructured and dynamic) human environments.

Our AI/ML Foundational Technology enhances the utility and functionality of third-party stationary and mobile robotic systems by allowing these systems to quickly observe, learn, reason and act in structured and unstructured environments.

Our 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 and not in the cloud) without extensive programming, training or the latency associated with processing in the cloud.

We believe this "human-like" ability to learn, reason and adapt will be a key differentiator in assisting our customers to enhance productivity in dynamic or unstructured environments, where human reasoning has traditionally been required to complete the task.

We designed our AI/ML Foundational Technology to be hardware agnostic, meaning that our AI/ML software products are designed so that with a minimal integration effort they will be able to function on a wide variety of industrial robots, cobots, unmanned aerial vehicles ("UAV"), unmanned ground vehicles ("UGV") and other remotely operated vehicles ("ROV").

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, is being developed for use with unmanned platforms with our current focus being Class 1 UAVs.

We released the initial commercial version of our Palladyne IQ product in October 2024 and expect to release the initial commercial version of Palladyne Pilot by the end of the first quarter of 2025.

Our Palladyne IQ product continues to undergo reliability testing, debugging and other stabilizing improvements as we continue internal testing and learn from customer trials.

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.

We may also offer add-on functionality for an additional license fee.

We may charge an upfront fee for the hardware associated with Palladyne IQ or embed the cost into the license fee.

We anticipate offering Palladyne Pilot through a device-based licensing model.

We expect to begin generating revenues from commercial customers of Palladyne IQ and Palladyne Pilot in 2025.

The majority of our sales and marketing efforts are focused initially on U.S.

markets, but we are also exploring opportunities in select non-U.S.

markets on a more limited basis.

government revenue-generating contracts related to various aspects of our AI/ML Foundational Technology and our Palladyne IQ and Palladyne Pilot products.

As scheduled to date, we have timely met all the development milestones associated with these contracts and recognized revenue based on work completed.

Please see Part II Item 1A Risk Factors for a discussion of the risks related to these activities, in particular those discussed under "Risks Related to our Business".

As a result of our business evaluation and refined product strategy announced in 2023, we reorganized our operations to focus on the development and commercialization of our AI/ML Foundational Technology and have taken actions to reduce costs, including the 2023 RIFs and winding down substantially all of our operations in Pittsburgh, Pennsylvania.

For additional information around the risks associated with our strategy decision-making see Part I Item 1A Risk Factors " 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 ".

Key Factors Affecting Operating Results

We believe that our performance and future success depend on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in Part I Item 1A Risk Factors of this Annual Report on Form 10-K.

Development, Testing and Commercial Launch of our AI/ML Software Platform

We currently expect to derive revenue from our AI/ML Software Platform, which is in its development phase.

Prior to commercialization, we must complete the development and testing of our product.

Whether we are successful depends on many factors, including those discussed under Part I Item 1A Risk Factors “ Risks Related to Our Business.

” Such risks may result in delay of the anticipated commercial launch of our software platform, which would adversely affect our financial condition and operating results.

Development, Testing and Commercial Launch of our AI/ML Foundational Technology

We currently expect to derive commercial licensing revenues from Palladyne IQ and Palladyne Pilot beginning in 2025.

We expect to continue commercialization efforts, internal testing and customer trials for both products throughout 2025.

Whether we are successful in these efforts depends on many factors, including those discussed under Part I Item 1A Risk Factors " Risks Related to Our Business.

" Such risks may result in delay in achieving product revenues, which would adversely affect our financial condition and operating results.

Financing of Operations

Prior to commercialization, we must complete the development and testing of our AI/ML Software Platform.

As a result, we will use our cash on hand to develop our software platform and fund operations as we seek to commercialize and achieve revenue from the sale of the product.

The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our product development efforts, our ability to sell our software products and thereby recognize associated revenue, capital and human capital requirements to develop a commercial version of our software platform prior to receiving payments sufficient to cover our costs and our ability to lower product costs as volumes increase.

In addition, we have taken numerous steps to manage our use of cash.

For example, on July 12, 2023 and on November 14, 2023 we announced reductions in force intended to further conserve our current cash resources and manage operating expenses.

The majority of the cash payments related to the expenses from the RIF announced on July 12, 2023 were paid out during the third quarter of 2023.

The majority of the cash payments related to the RIF announced on November 14, 2023 were paid out during the fourth quarter of 2023 and the first quarter of 2024.

The November RIF is expected to be completed by the end of the first quarter of 2024.

We believe we have sufficient liquidity to operate for at least the next twelve months without the need to raise additional capital.

However, we may need to seek additional financing during that time to bolster our cash reserves and increase our ability to continue to pursue our business objectives.

We intend to use our cash on hand to continue to enhance our software products, conduct product development activities, pursue marketing and sales opportunities and fund operations as we seek to commercialize and achieve revenue from our products.

The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our product development efforts, our ability to sell our software products and thereby recognize associated revenue, capital and human capital requirements to develop and sell products prior to receiving payments sufficient to cover our costs and our ability to lower product costs as volumes increase.

We have taken and continue to take numerous steps to manage our use of cash.

For example, the 2023 RIFs 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 we raised approximately $25 million in gross proceeds from the sale of our Common Stock and warrants.

For further information on our financing activities in the year ended December 31, 2024, see " Liquidity and Capital Resources.

We believe we have sufficient liquidity to operate for at least the next 12 months without the need to raise additional capital.

However, we may decide to seek additional financing during that time to bolster our cash reserves and increase our ability to continue to pursue our business objectives.

As a result, we intend to continue monitoring our liquidity, financial and business results and outlook and market conditions, and may be opportunistic and raise capital when we consider market conditions are good or a favorable opportunity exists.

Any delays in the successful commercialization and sales of our AI/ML Software Platform will negatively impact our ability to generate revenue, our profitability, our cash flows and our overall operating performance and result in the need to raise additional capital sooner than expected.

Any delays in the successful commercialization and sales of our AI/ML software products will negatively impact our ability to generate revenue, our profitability, our cash flows, our overall operating performance and our ability to continue operations and may result in the need to raise additional capital.

We will continue to carefully evaluate our use of cash and liquidity.

Customer Demand

Although demand for AI/ML platforms and applications has grown in recent years, the market for these platforms and applications continues to evolve.

The market demand for our software platform is unproven, and important assumptions about the characteristics of targeted markets, pricing and sales cycles may be inaccurate.

While we believe that our AI/ML Software Platform will provide significant benefits and return on investment to customers, as it is a new technology and product, we are dependent on customers who are willing to adopt, purchase, and implement new technologies and products.

If customer demand does not develop as expected or we do not accurately forecast pricing, adoption rates and sales cycles for our AI/ML Software Platform, our business, results of operations and financial condition will be adversely affected.

Although demand for AI/ML software products has grown in recent years, the market continues to evolve.

The market demand for our software is unproven, and important assumptions about the characteristics of targeted markets, pricing and sales cycles may be inaccurate.

While we believe that our products will provide significant benefits and return on investment to customers, as it is a new technology, we are dependent on customers who are willing to adopt, purchase and implement new technologies and products.

If customer demand does not develop as expected or we do not accurately estimate pricing, adoption rates and sales cycles for our products, our business, results of operations and financial condition will be adversely affected.

Continued Investment and Innovation

We are a pioneer in the robotic systems industry and benefit from lessons learned over 30-plus years and significant investment in research and development in our proprietary technologies.

Through our development efforts on our hardware products such as the Guardian XO, Guardian XT, Guardian XM and Guardian Sea Class, we have developed a significant amount of advanced technology that we are leveraging to develop our AI/ML Software Platform.

We believe our financial performance is significantly dependent on our ability to successfully commercialize our advanced AI/ML technologies and further dependent on the investments we make in research and development.

It is important that we continually identify and respond to rapidly evolving customer requirements and competitive threats, develop and introduce innovative products, enhance our products and generate active market demand for our products.

If we fail to do this, our market position and revenue may be adversely affected, and our investments in these technologies will not be recovered.

We are a pioneer in the robotic systems industry and benefit from lessons learned over 30-plus years and significant investment in research and development.

Through our hardware development efforts over many years, including our AI-related software development efforts, we developed a significant amount of advanced technology that we are leveraging to develop our AI/ML Foundational Technology and related products.

We believe our financial performance is dependent on our ability to successfully develop and commercialize our products.

If we fail to do this, our market and financial position and revenue may be adversely affected, and our investments in these technologies will not be recovered.

Geopolitical and Macro-economic Environment

Geopolitical and macro-economic factors, such as inflation, interest rates, oil prices, unemployment rates, international conflicts, such as the wars between Israel and Hamas and between Russia and Ukraine, volatility in the stock market and political or social unrest, can have significant impacts on economic activity, which in turn could affect demand for our AI/ML Software Platform or our ability to cost-effectively develop and sell our software platform.

Among other things, these and similar factors can affect our ability to hire or retain qualified personnel, our labor and materials costs, the prices we charge for our software platform and the budgets of our customers and their expected return-on-investment from the purchase of a license for our software platform.

Geopolitical and macro-economic factors, such as inflation, tariffs or the threat of tariffs, interest rates, oil prices, unemployment rates, international conflicts, such as the current wars between Russia and Ukraine and in the middle east, volatility in the stock market and political or social unrest, can have significant impacts on economic activity, which in turn could affect demand for our products or our ability to cost-effectively develop and sell our products.

Among other things, these and similar factors can affect our ability to hire or retain qualified personnel, our labor and materials costs, the prices we charge for our software products and the budgets of our customers and their expected return-on-investment from the purchase of a license for our software product.

Many of these factors are outside of our control but can have a significant impact on our business success and operating results.

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Components of Results of Operations

We historically derived our revenue from two sources.

First, we enter into research and development agreements primarily relating to the commercialization of our products.

We have historically derived our revenue from two sources.

First, we enter into research and development agreements primarily with the government and leverage these contracts to further our product development efforts.

We expect to continue to derive revenue from research and development agreements in future periods.

Product development contract revenue consists of revenue arising from different types of contractual arrangements, including cost-type contracts and fixed-price contracts.

Second, we have historically sold our products and related parts and repair services.

Product revenue primarily consists of sales of our products.

Due to our recent shift in focus away from sales of our hardware products and to licensing of our AI/ML Software Platform, in the future we expect to derive revenue from licensing fees.

Second, we have historically sold our legacy hardware products and related parts and repair services.

Product revenue primarily consists of sales of our legacy hardware products.

Due to our recent shift in focus away from sales of our hardware products and to licensing of our software products, in the future we expect to derive revenue from licensing fees.

We have not yet recognized any such licensing revenue.

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Cost-type contracts are generally entered into with the U.S.

These contracts are billed at cost plus a margin as defined by the contract and Federal Acquisition Regulation (“FAR”).

These contracts are billed at cost plus a margin as defined by the contract and the 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 technology in the area of robotic systems.

Fixed-price contracts – Fixed-price development contracts relate primarily to the development of technology in the area of robotic systems and software.

Fixed-price development contracts generally require a significant service of integrating a complex set of tasks and components into a single deliverable.

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To the extent our actual costs vary from the fixed fee, we will generate more or less profit or could incur a loss.

In accordance with Accounting Standards Codification 606, for fixed price contracts, we will recognize losses at the contract level in earnings in the period in which they are incurred.

In accordance with Accounting Standards Codification 606, for fixed price contracts, we recognize losses at the contract level in earnings in the period in which they are incurred.

Product Revenue

Product revenue has related to sales of our products, and certain miscellaneous parts, accessories and repair services.

Product revenue has related to sales of our legacy hardware products, and certain miscellaneous parts, accessories and repair services.

We have generally provided a limited one-year warranty on hardware product sales.

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Cost of Revenue

Our cost of revenue consists of direct and overhead expenses related to either the sale of our products or our product development contract revenue.

Our cost of revenue consists of direct and overhead expenses related to either the sale of our legacy hardware products or our product development contract revenue.

Direct expenses include direct labor used in the production of a product or in our product development contracts, benefits expense associated with direct labor and materials directly tied to our product sale or product development contracts.

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Research and Development

Research and development expenses are mainly comprised of costs from the continuing development and refinement of robotic systems, which are now suspended, and our AI/ML Software Platform and the continuing research and development costs associated with future products.

Research and development expenses are mainly comprised of costs from the continuing development and refinement of our AI/ML Foundational Technology and related products, the continuing research and development costs associated with current and future products and now suspended development of our robotic systems.

These expenses include labor and related benefit expenses, materials and supplies used in our laboratories, patent expenses and related overhead expenses.

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General and Administrative

Our general and administrative expenses consist primarily of employee-related costs for our finance, legal, people success and other administrative teams, as well as certain executives.

Our general and administrative expenses consist primarily of employee-related costs for our finance, legal, human resources and other administrative teams, as well as certain executives.

In addition, general and administrative expenses include insurance, public company compliance related costs, including outside legal and accounting expenses, other professional fees, facilities and IT expense not allocated to other operating expense categories and related overhead expense.

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Intangible Amortization Expense

Amortization of intangible assets primarily consists of amortization of identified finite-lived trade name and trademarks, developed technology, and customer relationship assets that were allocated a portion of the purchase price from the acquisition of RE2.

These costs are amortized on a straight-line basis over their expected useful lives.

Amortization of intangible assets primarily consists of amortization of identified finite-lived trade name and trademarks, developed technology and customer relationship assets that were acquired as part of the acquisition of RE2, Inc.

These costs were amortized on a straight-line basis over their expected useful lives.

Asset Write-down and Restructuring

Asset write-down and restructuring expenses consist primarily of severance and benefit payments, and acceleration of stock-based compensation expense related to the RIFs announced during 2023, the write-down of inventory, accelerated amortization of our intangible assets, accelerated depreciation of our property, plant and equipment and the write-off of certain assets as a result of our product development reprioritization and pivot in strategy.

Goodwill Impairment

Goodwill represents the excess of consideration transferred over the fair value of tangible and identifiable intangible net assets acquired and the liabilities assumed in a business combination.

All of our goodwill was recognized from the acquisition of RE2.

During the fourth quarter of 2022, due to the sustained decreases in our publicly quoted share price and market

capitalization, we performed a quantitative goodwill impairment test.

Based on the results of the quantitative goodwill impairment assessment we concluded that the carrying value of our goodwill exceeded its fair value and that our goodwill was fully impaired as of December 31, 2022.

Other Income (Loss)

Asset write-down and restructuring expenses consist primarily of severance and benefit payments, and acceleration of stock-based compensation expense related to the 2023 RIFs, the write-down of inventory, accelerated amortization of our intangible assets, accelerated depreciation of our property, plant and equipment and the write-off of certain assets as a result of our product development reprioritization and pivot in strategy to focus on our AI/ML Foundational Technology and related products.

Other (Loss) Income

Interest Income, Net

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Treasury securities at various points during the year.

Gain (Loss) Warrant Liability

Gain (loss) on warrant liability consists of the change in fair value of the private placement warrants we assumed as part of the Business Combination.

(Loss) Gain on Warrant Liabilities

(Loss) gain on warrant liabilities consists of the change in fair value of the deSPAC Warrants and the 2024 Warrants.

Other Income, Net

Other income, net consists primarily of other miscellaneous non-operating items such as proceeds from the CARES Act employee retention credit.

Income Tax Benefit (Expense )

Income Tax Expense

Income taxes consist of taxes currently due plus deferred income taxes related primarily to differences between the tax bases and financial reporting bases of assets and liabilities.

The deferred income taxes represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.

Deferred income taxes represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.

Results of Operations

The discussion below regarding our results of operations for the twelve months ended December 31, 2022, includes the financial results of RE2 beginning on the acquisition date of April 25, 2022 through December 31, 2022.

Our results do not include RE2’s financial information prior to the acquisition.

Comparison of the Years Ended December 31, 2024 and 2023

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Product Revenue

Revenue decreased by $8.4 million, or 58%, from $14.6 million in the year ended December 31, 2022, to $6.1 million in the year ended December 31, 2023, as explained below.

Revenue increased by $1.6 million, or 27%, from $6.1 million in the year ended December 31, 2023 to $7.8 million in the year ended December 31, 2024, as explained below.

Product Development Contract Revenue

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We expect future revenue from product development contracts to fluctuate due to the timing of additional development contracts signed and the completion of existing contracts.

For the time being, we intend to take on only those development contracts that we believe support and contribute to our AI/ML Software Platform development efforts under our refined sales and product development strategy.

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.

Product Revenue

Revenue derived from product sales increased by $1.8 million, or 200%, from $0.9 million for the year ended December 31, 2023 to $2.7 million for the year ended December 31, 2024.

The increase was primarily due to the sale of two Guardian Sea Class systems during 2023.

The increase was primarily due to one-time legacy hardware product sales during the year ended December 31, 2024.

Operating Expenses

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Asset write-down and restructuring

Goodwill impairment

Total operating expenses

*NM - Not Meaningful

Cost of Revenue

Cost of revenue decreased by $1.6 million, or 31%, from $5.0 million for the year ended December 31, 2023 to $3.5 million for the year ended December 31, 2024.

Cost of revenue decreased mainly due to decreased labor and material expense charged to product development contracts during the year ended December 31, 2023.

Cost of revenue decreased mainly due to decreased labor and material expenses charged to product development contracts due to contract mix, partially offset by increased product costs associated with our product revenue during the year ended December 31, 2024.

Research and Development

Research and development expenses increased by $4.9 million, or 14%, from $34.1 million for the year ended December 31, 2022, to $39.0 million for the year ended December 31, 2023.

The increase was driven primarily by an increase in labor and overhead expense as a result of increased headcount (due in part to the RE2 acquisition) and the shift of labor from cost of revenue to research and development due to the timing of new product development contracts being signed and the focus on new product development and commercialization efforts.

As a result, allocated overhead and fringe related costs also increased due to the increase in labor costs.

We expect that future research and development costs will decrease significantly due to the reduction in headcount actions taken during 2023 and early 2024 and other cost savings resulting from the pivot in strategy to prioritize development of our AI/ML Software Platform and discontinue substantially all other research and development efforts.

Research and development expenses decreased by $28.6 million, or 73%, from $39.0 million for the year ended December 31, 2023 to $10.4 million for the year ended December 31, 2024.

The decrease was driven primarily by reduced labor and labor related expenses due to the 2023 RIFs.

Also contributing to the decrease were lower materials and outside professional services expenses due to the suspension of robotic systems and hardware projects beginning in 2023.

General and Administrative

General and administrative expenses decreased by $14.6 million, or 46%, from $31.5 million for the year ended December 31, 2023 to $16.8 million for the year ended December 31, 2024.

General and administrative expense decreased primarily due to reduced stock-based compensation expense of $28.4 million due to certain awards vesting in the prior year.

In addition to the decrease in stock-based compensation expense, business insurance expenses decreased during the current year period to more favorable rates resulting from the latest renewal and legal fees decreased in comparison to the prior year primarily due to the lack of acquisition-related legal expenses arising from the RE2 acquisition during the prior year period.

We also expect that future general and administrative expenses will decrease significantly due to the reduction in headcount actions taken during 2023 and early 2024 and other cost savings resulting from our pivot in strategy to prioritize development of our AI/ML Software Platform with a lower overall cost structure.

General and administrative expense decreased primarily due to reduced labor and labor related expenses, including stock-based compensation, due to the 2023 RIFs.

Legal and business insurance expenses also decreased due to the overall decrease in operations as compared to the prior year.

Sales and Marketing

Sales and marketing expenses increased by $0.9 million, or 9%, from $9.9 million for the year ended December 31, 2022, to $10.8 million for the year ended December 31, 2023.

This increase was driven by an increase in professional service fees related to third-party platform expense utilized in data management of our products and services, increased promotional and event expense during the current year period, and increased expenses related to additional headcount due in part to our RE2 acquisition.

Even considering the expected launch of the AI/ML Software Platform, we expect that future sales and marketing expenses will decrease significantly due to the reduction in headcount actions taken during 2023 and other cost savings resulting from our pivot in strategy to prioritize development of our AI/ML Software Platform with a lower overall cost structure.

Sales and marketing expenses decreased by $6.7 million, or 62%, from $10.8 million for the year ended December 31, 2023 to $4.1 million for the year ended December 31, 2024.

This decrease was driven by decreases in professional service fees related to third-party platform expense utilized in data management of our products and services, labor and labor-related expenses due to the 2023 RIFs and events and public relations expenses.

Intangible Amortization Expense

Intangible amortization expenses increased by $0.6 million, from $2.2 million for the year ended December 31, 2022, to $2.8 million for the year ended December 31, 2023.

The increase in intangible amortization expense is due to the recognition of amortization expenses on identified intangible assets recorded as part of the RE2 acquisition.

As a result of our product development reprioritization announced in November 2023, our intangible assets were fully amortized as of December 31, 2023.

Asset Write-down and Restructuring

Asset write-down and restructuring expenses were $37.9 million for the year ended December 31, 2023, which includes a write-down of inventory of $11.3 million, a $17.6 million charge for the accelerated amortization and write-off of our intangibles and certain other assets as a result our product development reprioritization, $1.2 million of accelerated depreciation related to the shutting down our facilities in Pittsburgh, Pennsylvania, $0.5 million for contract restructuring accruals, $2.9 million in severance and benefit payments, and $4.4 million due to the acceleration of stock-based compensation expense resulting from the early termination of our redemption right over certain shares held by our former Chief Operating Officer in connection with the termination of his employment.

Goodwill Impairment

During the year ended December 31, 2022, we fully impaired our goodwill and recorded a non-cash goodwill impairment of $70.2 million.

The non-cash goodwill impairment was primarily driven by the sustained decrease in our publicly quoted share price and market capitalization.

Other Income (Loss)

The following table presents other income (loss) for the years ended December 31, 2023 and 2022:

Asset write-down and restructuring expenses were $37.9 million for the year ended December 31, 2023, as a result of the prior year product development reprioritization.

There were no significant asset write-down and restructuring costs for the year ended December 31, 2024.

Other (Loss) Income

The following table presents other (loss) income for the years ended December 31, 2024 and 2023:

Year Ended December 31,

(In thousands)

Other (loss) income

Interest income, net

Gain on warrant liability

(Loss) gain on warrant liabilities

Other income, net

Total other income

Other income decreased by $10.6 million for the year ended December 31, 2023 as compared to the prior year period as a result of decreased unrealized mark-to-market gains on our outstanding private placement warrants, partially offset by increased interest income from our investments in marketable securities and increased other income related to employee retention credit refunds received during the current year.

Total other (loss) income

Other (loss) income decreased by $51.1 million from other income of $5.4 million to other loss of $45.7 million for the year ended December 31, 2024 as compared to the prior year period as a result of increased unrealized mark-to-market losses on our outstanding warrants, the lack of employee retention credit refunds received in 2024 as compared to 2023 and decreased interest income from our investments in marketable securities due to the reduction in invested funds during 2024.

Income Tax Benefit (Expense)

Income tax benefit decreased to $7,000 for the year ended December 31, 2023, compared to $3.9 million in income tax benefit for the year ended December 31, 2022.

The income tax benefit recorded during the year ended December 31, 2022 was due to the removal of a portion of our previously recorded valuation allowance on our net deferred tax assets associated with net deferred tax liabilities recorded as part of the acquisition of RE2, resulting in an income tax benefit recognized during the prior year period.

We had no significant income tax expense for the years ended December 31, 2024 and 2023.

For the years ended December 31, 2024 and 2023, our recognized effective tax rate differs from the U.S.

federal statutory rate as the Company recorded net losses during the period with a corresponding full valuation allowance on the net deferred tax assets created from the losses.

Backlog and Total Estimated Contract Value

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Liquidity and Capital Resources

We currently use cash to fund operations and capital expenditures and meet working capital requirements.

As of December 31, 2024, we had $40.1 million in cash, cash equivalents and marketable securities.

We have incurred losses and negative cash flows from operations since inception and are likely to continue to incur losses and negative cash flows from operations in the near term.

As of December 31, 2024, we had an accumulated deficit of approximately $490.8 million and working capital of $38.3 million.

On October 31, 2024, we announced that we raised approximately $7.0 million in gross proceeds from the sale of our Common Stock and warrants pursuant to the Investor Purchase Agreement and the Insider Purchase Agreement.

On November 13, 2024, we entered into an open market sale agreement (the "Sales Agreement") with Jefferies to sell shares of our common stock from time to time through an "at-the-market" equity offering program under which Jefferies is acting as our sales agent and on November 13, 2024, we filed a prospectus supplement with the SEC in connection with the offer and sale of up to $18.0 million of shares of our common stock pursuant to the Sales Agreement.

As of December 31, 2024, we had sold a total of 3,680,543 shares of our common stock under the Sales Agreement for gross sales proceeds of approximately $18.0 million, before deducting commission and other expenses.

On December 31, 2024 we filed a prospectus supplement in connection with offering for sale an additional $30.0 million of shares pursuant to the Sales Agreement.

From January 1, 2025 through the date of this Report, we had sold a total of 1,335,807 shares of our common stock under the Sales Agreement for gross sales proceeds of approximately $14.4 million, before deducting commission and other expenses.

We believe that our cash, cash equivalents and marketable securities on hand will be sufficient to support operations, working capital and capital expenditure requirements for at least the next 12 months from the date of this Report.

The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our product development efforts, our ability to develop and deliver our commercial AI/ML Software Platform and thereby recognize associated revenue and capital requirements to develop our commercial AI/ML Software Platform prior to receiving payments sufficient to cover our costs.

Any delays in the successful commercialization of our software product will negatively impact our ability to generate revenue, our profitability and our overall operating performance.

In addition, 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.

In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all.

Our primary use of cash is for operations and administrative activities including employee-related expenses and general, operating and overhead expenses.

While we do not have any debt, we do have a long-term lease for our facilities in Salt Lake City, Utah.

Future capital requirements will depend on many factors, including the timing and extent of development efforts, the expansion and results of sales and marketing activities, the sales cycle for our products, customer acquisition and revenues, revenue growth rate, customer retention, the introduction of new and enhanced product offerings and market acceptance of our products.

We have taken many steps to reduce our use of cash, for example, we suspended our hardware product development efforts and focusing those efforts on our AI/ML Foundational Technology and related products, conducted the 2023 RIFs and terminated our operations in Pittsburgh, Pennsylvania.

We plan to use our existing capital to complete the development of the initial commercial version of Palladyne Pilot and conduct sales and marketing efforts for both Palladyne IQ and Palladyne Pilot, as well as continue product development efforts for the next versions of our products.

The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our product development efforts, our ability to release and license our commercial products and thereby recognize associated revenue and capital requirements to conduct marketing and sales activities prior to receiving payments sufficient to cover our costs.

Any delays in the successful commercialization of our software products will negatively impact our ability to generate revenue, profitability, overall operating performance and financial condition.

If we are unable to raise additional capital when desired or needed, our business, results of operations and financial condition would be materially and adversely affected.

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.

We currently primarily use cash from equity financings to fund operations and capital expenditures and meet working capital requirements.

If additional funds are required to support our working capital requirements, for acquisitions or for other purposes, we may seek to raise funds through additional debt or equity financings or from other sources.

We have taken numerous steps to manage our use of cash, including conducting the RIFs announced on July 12, 2023 and November 14, 2023, and other related actions, and believe we have sufficient capital to fund our business for at least the next 12 months without seeking additional capital.

However, we may need to seek additional financing during that time to bolster our cash reserves and increase our ability to continue to pursue our business objectives.

Any delays in the successful commercialization and sales of our software platform will negatively impact our ability to generate revenue, our profitability and our overall operating performance and result in the need to raise additional capital sooner than expected.

We have taken numerous steps to manage our use of cash, including conducting the 2023 RIFs and other related actions.

However, we may decide to seek additional financing, and we intend to continue monitoring our liquidity, financial and business results and outlook and market conditions, and may be opportunistic and raise capital when market conditions are good or a favorable opportunity exists including under our "at-the-market" equity offering programs.

Any delays in the successful commercialization and sales of our software products will negatively impact our ability to generate revenue, our profitability and our overall operating performance and result in the need to raise additional capital sooner than expected.

If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our equity holders could be significantly diluted and these newly issued securities may have rights, preferences or privileges senior to those of existing equity holders.

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For additional information around the risks associated with our capital needs see Part I Item 1A Risk Factors "Our business plans require a significant amount of capital.

Our future capital needs may require us to sell additional equity or debt securities that may dilute our stockholders or introduce covenants that may restrict our operations or our ability to pay dividends.

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."

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Net cash used in operating activities

Net cash provided by (used in) investing activities

Net cash used in financing activities

Net decrease in cash, cash equivalents

Net cash provided by investing activities

Net cash provided by (used in) financing activities

Net increase (decrease) in cash, cash equivalents

Net Cash Used in Operating Activities

Cash flows used in operating activities during the twelve months ended December 31, 2023, increased by $11.2 million to $76.6 million from $65.4 million during the same period in 2022.

The increase to net cash used in operating activities was primarily attributable to a net decrease of $50.2 million in non-cash expenses driven mainly by decreases in goodwill impairment and stock-based compensation, offset partially by a $41.5 million decrease to net loss, a decrease to gains on warrant liability revaluation and an increase in asset write-down expenses.

Additionally, net cash used in operating activities related to changes in operating assets and liabilities increased by $2.5 million, driven mainly by increased inventory purchases, offset partially by decreases in unbilled receivables.

Net Cash Provided by (Used in) Investing Activities

Our net cash provided by investing activities during the twelve months ended December 31, 2023 increased by $173.7 million.

The increase in cash provided by investing activities is predominantly due to $65.5 million of maturities of marketable securities, net of purchases, during the twelve months ended December 31, 2023, as compared to the $77.9 million of purchase of marketable securities, net of maturities, and $29.7 million of net cash that was included as part of the purchase consideration for the RE2 acquisition during the twelve months ended December 31, 2022.

Net Cash Used In Financing Activities

Our net cash used in financing activities during the twelve months ended December 31, 2023 decreased by $7.4 million as compared to the prior year period.

The decrease in financing activities was mainly due to a $8.0 million decrease in funds used to remit taxes due upon vesting of equity awards resulting from the withholding of shares valued at such amount from the applicable employees, consultants or directors, to cover such taxes.

Cash flows used in operating activities during the twelve months ended December 31, 2024, decreased by $54.0 million to $22.6 million from $76.6 million during the prior year.

The decrease in net cash used in operating activities was primarily attributable to a $43.0 million decrease in net loss, which was driven by the 2023 RIFs, and a net increase of $6.5 million in

non-cash expenses due to increases in the change in fair value of our warrant liabilities, partially offset by a decrease in asset write-down expenses.

Additionally, net cash used in operating activities related to changes in operating assets and liabilities decreased by $4.5 million, primarily the result of decreased inventory purchases.

Net Cash Provided by Investing Activities

Our net cash provided by investing activities during the twelve months ended December 31, 2024 decreased by $57.8 million.

The decrease in cash provided by investing activities is predominantly due to the maturities, net of purchases, of $65.5 million of marketable securities during the twelve months ended December 31, 2023, as compared to the maturities, net of purchases, of $7.1 million of marketable securities during the twelve months ended December 31, 2024.

Net Cash Provided by (Used in) Financing Activities

Our net cash provided in financing activities during the twelve months ended December 31, 2024 increased by $23.9 million as compared to the prior year period.

The increase in cash provided by financing activities is predominantly due to the $23.8 million in net proceeds from the sale of our Common Stock and warrants, after deducting transaction costs related to the issuance of our Common Stock during the twelve months ended December 31, 2024.

Emerging Growth Company Status

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We are an "emerging growth company" as defined in Section 2(a) of the Securities Act, and have elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards.

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year in which the market value of Common Stock that is held by non-affiliates exceeds $700 million as of the end of that year’s second fiscal quarter, (ii) the last day of the fiscal year in which we have total annual gross revenue of $1.235 billion or more during such fiscal year (as indexed for inflation), (iii) the date on which we have issued more than $1 billion in non-convertible debt in the prior three-year period or (iv) December 31, 2025, and we expect to continue to take advantage of the benefits of the extended transition period, although we may decide to early adopt such new or revised accounting standards to the extent permitted by such standards.

We will remain an emerging growth company until the earliest of (1) the last day of the fiscal year in which the market value of Common Stock that is held by non-affiliates exceeds $700 million as of the end of that year's second fiscal quarter, (2) the last day of the fiscal year in which we have total annual gross revenue of $1.235 billion or more during such fiscal year (as indexed for inflation), (3) the date on which we have issued more than $1 billion in non-convertible debt in the prior three-year period and (4) December 31, 2026, and we expect to continue to take advantage of the benefits of the extended transition period, although we may decide to early adopt such new or revised accounting standards to the extent permitted by such standards.

This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP.

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S.

generally accepted accounting principles ("GAAP").

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue and expenses at the date of the financial statements.

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Revenue Recognition

We have historically recognized revenue from our products and from contractual arrangements to perform product development contract services that are fully funded by our customers.

We have historically recognized revenue from our legacy hardware products and from contractual arrangements to perform product development contract services that are fully funded by our customers.

We recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services.

Revenue from product development contracts is recognized over time as products and services are provided.

For fixed priced contracts we measure progress toward satisfaction of performance obligations using costs incurred to date relative to total estimated costs (“cost-to-cost”).

For fixed priced contracts we measure progress toward satisfaction of performance obligations using costs incurred

to date relative to total estimated costs ("cost-to-cost").

Research and development contracts may last multiple years and estimation of the total transaction price and expected cost requires management's judgment.

Based on the nature of the Company’s research and development contracts, the work to be performed is often complex and may involve new processes, procedures, and tasks which creates uncertainty in estimating contract costs.

All estimates impacting revenue recognition, including estimates of total expected costs, or Estimates at Completion, are reviewed on a periodic basis, at least quarterly.

Based on the nature of our research and development contracts, the work to be performed is often complex and may involve new processes, procedures, and tasks which creates uncertainty in estimating contract costs.

All estimates impacting revenue recognition, including estimates of total expected costs, are reviewed on a periodic basis, at least quarterly.

For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made.

Changes in judgments with respect to these assumptions and estimates could impact the timing or amount of revenue recognition.

Stock-Based Compensation

We use the fair value approach to account for stock-based compensation in accordance with current accounting guidance and recognize stock-based compensation expenses over the period the recipient is required to provide service in exchange for the award.

The Black-Scholes option pricing model is used to estimate the fair value of stock options, which requires the use of a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends.

The fair value of restricted stock grants is based on the closing market price of our stock on the date of grant less the expected dividend yield.

For awards with market based vesting conditions, we estimate the grant date fair value using a Monte-Carlo simulation model or other similar valuation model.

These models require the use of assumptions such as the risk-free rate, expected volatility, expected dividends and the correlation coefficient.

As we accumulate additional employee stock-based awards data over time and as we incorporate market data related to our common stock, we may calculate significantly different volatilities and expected lives, which could materially impact the valuation of our stock-based awards and the stock-based compensation expense that we will recognize in future periods.

Warrant Liabilities

We issued the 2024 Warrants on November 1, 2024.

The 2024 Warrants were determined to be liability classified instruments upon issuance.

The fair value of the 2024 Warrants were initially and subsequently measured using a Monte Carlo valuation model, which includes assumptions that are based on the individual characteristics of the 2024 Warrants on the valuation date, and assumptions related to probability of a fundamental transaction occurring, 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.

Any changes in the fair value of the 2024 Warrants are recorded as a component of other income and expense.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis