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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report. In addition to historical information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in Part I Item 1A Risk Factors and elsewhere in this Annual Report. See also Part I Special Note Regarding Forward-Looking Statements in this Annual Report.

Overview

We are a U.S.-based technology company developing and offering embodied AI software and collaborative autonomy solutions, advanced avionics, UAVs, advanced UAV engineering services and precision-manufactured components for defense and commercial/industrial markets. Our core AI software offerings, Palladyne IQ, SwarmOS and Palladyne Pilot, consist of full-stack, closed-loop autonomy software that is intended to enhance the functionality and operational effectiveness of third-party robotic systems across a range of applications. These products are designed to be hardware agnostic, enabling integration across a wide range of robotic platforms, whether third-party or our own proprietary platforms, including industrial robots, cobots, UAVs, UGVs, and ROVs across multiple domains.

We are positioning our defense business as a mid-tier U.S. technology prime defense contractor aiming to combine innovative autonomy, practical engineering and American production to bring intelligent systems into active service faster, safer and more cost-effectively than legacy approaches. We seek to harness our advanced, ethical embodied AI to provide cost-effective lethality and precision harm mitigation through rapidly delivering scalable, low-cost, intelligent and collaborative attritable weapons, including by developing proprietary, UAVs incorporating our avionics and AI technologies. We support these efforts and those of other defense contractors and commercial customers through our vertically integrated aircraft engineering design services, enhanced avionics compute hardware and machining and fabrication services. Palladyne SwarmOS is designed for unmanned platforms and includes advanced autonomy and coordination capabilities that enable multiple UAVs to swarm, collaborate and execute complex missions through distributed tasking and edge-native orchestration. Our embodied AI is designed to operate in complex, contested and high-risk environments, enabling distributed tasking, human-on-the-loop oversight, degraded-communications resilience, multi-domain coordination and real-time responsiveness. Our platform-agnostic autonomy stack combines real-time sensor fusion, adaptive AI models, and edge-native orchestration to support autonomous and collaborative systems across air, ground, maritime and industrial domains where performance, resilience, trust and mission assurance are critical to operational outcomes. These capabilities are intended to meet the performance and reliability requirements of military and defense customers, particularly in applications where it is essential to conduct coordinated multi-vehicle operations in contested environments with degraded communications.

For commercial and industrial customers in particular, Palladyne IQ is designed to enable poly-functional robots, including industrial robots and cobots, to become capable of performing multiple tasks across dynamic real-world industrial environments. Palladyne IQ enables industrial robots and cobots to adapt to variability in tasks, parts, and environments, thereby reducing the need for rigid automation, custom fixtures, and manual intervention. We believe Palladyne IQ has applications across manufacturing, logistics, warehousing, and other industrial settings where unstructured or semi-structured environments have historically limited the adoption of automation. We also offer Palladyne Pilot, a derivative version of SwarmOS tailored to meet the requirements of public safety and commercial customers by delivering core autonomy capabilities with reduced system complexity and cost. Please see Part I Item 1A Risk Factors for a discussion of the risks related to these activities, in particular those discussed under "Risks Related to our Business".

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, Avionics, and UAV Products

We expect to continue commercialization efforts, internal testing and customer trials for our products throughout 2026. Whether we are successful in these efforts depends on many factors, including those discussed under Part II Item 1A Risk Factors. Such risks may result in delay in achieving product revenues, which would adversely affect our financial condition and operating results.

Financing of Operations

We intend to use our cash on hand to continue to enhance our products, conduct product development activities, pursue marketing and sales opportunities and fund operations as we seek to further commercialize and enhance and achieve revenue from our products and services. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our product commercialization and enhancement efforts, our ability to sell our products and services and thereby recognize associated revenue, capital and human capital requirements to develop and sell products and provide services prior to receiving payments sufficient to cover our costs and our ability to lower costs as volumes increase.

We have taken and continue to take numerous steps to manage our use of cash. For example, in 2023 we suspended our legacy hardware product development efforts and focused our product development efforts on our AI/ML Foundational Technology and related products, and terminated our operations in Pittsburgh, Pennsylvania in early 2024. During the fourth quarter of 2024 and fiscal year 2025 we raised approximately $68.9 million in gross proceeds from the sale of our Common Stock and warrants. For further information on our financing activities, see "Liquidity and Capital Resources."

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 sales of our products and services 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.

Strategic Acquisitions

On November 14, 2025, we acquired GuideTech, LLC an engineering company, MKR Fabrication, LLC (also known as MKR Fabricators), a fabrication company, and Warnke Precision Machining, LLC (also known as Warnke Precision Machining), a precision machining company. Our results presented and discussed below include the operating activity for these acquired companies from the acquisition date through December 31, 2025. Our results for periods prior to the acquisition date do not include the financial information of these acquired companies.

Customer Demand

Although demand for AI/ML software products has grown in recent years, the market continues to evolve. The market demand for our software is unproven, and important assumptions about the characteristics of targeted markets, pricing and sales cycles may be inaccurate. Based on interaction with dozens of potential customers, we believe that the sales cycle for Palladyne IQ is likely to be between 12 and 18 months, or even longer, while the sales cycle for Palladyne Pilot is unknown. While we believe that our products will provide significant benefits and return on investment to customers, as it is a new technology, we are dependent on customers who are willing to adopt, purchase and implement new technologies and products. Further, we have U.S. government revenue-generating contracts related to various aspects of our AI/ML Foundational Technology and our Palladyne IQ and Palladyne Pilot products and we have been affected by government shutdowns. For example, during the U.S. government shutdown in the fourth quarter of 2025, we experienced delays in our interactions with certain government agencies that affected our collection efforts, our ability to consummate new government contracts and our ability to maintain or renew government contracts in a timely manner. The duration of the shutdown could have a compounding effect, and the longer it continues, the more significant the potential adverse impact may be on our anticipated revenues for fiscal years 2025 and 2026. For additional information around the risks associated with our government contracts, see Part I Item 1A Risk Factors "A portion of our revenue is currently and will continue to be generated by contracts with government entities, which makes us subject to a number of uncertainties, challenges and risks." If customer demand does not develop as expected or we do not accurately estimate pricing, adoption rates and sales cycles for our products, our business, results of operations and financial condition will be adversely affected.

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. Through our hardware development efforts over many years, including our related AI-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. Our recent acquisitions have also brought us additional and new skills and expertise related to the products and services of the acquired companies. We believe our financial performance is dependent on our ability to enhance and update our products. 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 and sell 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, changes in United States trade policy, including tariffs, interest rates, oil prices, unemployment rates, international conflicts, such as the current wars between Russia and Ukraine and conflict in the middle east, volatility in the stock market and political or social unrest, can have significant impacts on economic activity, which in turn could affect demand for our products or our ability to cost-effectively develop and sell our products. Among other things, these and similar factors can affect our ability to hire or retain qualified personnel, our labor and materials costs, the prices we charge for our products and services and the budgets of our customers and their expected return-on-investment from the purchase of our products and services. Many of these factors are outside of our control but can have a significant impact on our business success and operating results. If we are unable to manage our business successfully in response to any such factors, our business and results of operations would be adversely affected.

Basis of Presentation

Currently, we conduct business through one operating segment. All long-lived assets are maintained in, and all losses are attributable to, the United States of America. See Note 14, Segment Information, in the accompanying consolidated financial statements for more information about our operating segment.

Components of Results of Operations

Revenue, Net

We derive our revenue from three sources. First, we enter into service contracts to provide research and development, engineering and design services with the U.S. government and commercial customers. Our research and development contracts with the government are leveraged to further our product development efforts where possible. Service revenue consists of revenue arising from different types of contractual arrangements, including cost-type contracts, fixed-price contracts and time and materials contracts.

Second, we sell our products. Product revenue primarily consists of sales of our current and legacy hardware products, including the BRAIN family of guidance and navigation computer chips. We have begun sales activities of our AI/ML software products and expect to derive revenue from licensing fees beginning in 2026. As of December 31, 2025 we have not yet recognized any such licensing revenues. We recently launched Palladyne IQ 2.0 and have secured our first paid customer for that product. We believe that near- to mid-term customer growth opportunities exist for both our Commercial and Defense businesses. We expect initial customer engagement with our products to begin with lower volume trials and then move to higher volumes as customers experience our products’ benefits and capabilities.

Third, we generate manufacturing revenue through the sale of precision machined and fabricated components, subassemblies and structures and integrated assembly services for both Defense and Commercial customers in a variety of industries. By supplying high-quality parts to leading U.S. defense prime contractors and emerging defense companies, we deliver a U.S.-based, defense-grade production backbone to customers and provide ourselves with an opportunity to leverage those capabilities in the production of our own proprietary platforms and products.

Services 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 our AI/ML, software 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 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 AI/ML software. 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 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 recognize losses at the contract level in earnings in the period in which they are incurred.

Time and materials contracts – Time and materials contracts relate primarily to design-to-field advanced engineering design services that take aerospace programs from early concept through flight-ready prototype in compressed timelines, while engineering every stage for manufacturability and scale. Revenue on time and materials contracts is generally recognized over time as services are provided and materials are purchased and used in the project.

Product Revenue

Historically, product revenue has related to sales of our legacy hardware products, and certain miscellaneous parts, accessories and repair services. As a result of the GuideTech LLC acquisition in November 2025, we now also sell the BRAIN advanced avionics flight computers and also have begun initial sales activities of our Palladyne IQ and Palladyne SwarmOS products. We have also integrated SwarmOS with our BRAIN X2 product to create IntelliSwarm. We recently launched Palladyne IQ 2.0 and have secured our first paid customer for that product. We have generally provided a limited one-year warranty on hardware included in 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.

Manufacturing Revenue

Through our Palladyne Manufacturing business, comprised of Warnke Precision Machining and MKR Fabricators (companies we recently acquired), we sell precision machined and fabricated components, subassemblies and structures and integrated assembly services to both Defense and Commercial customers. Our operations include machining, fabrication and assembly of aerospace and defense components. Manufacturing revenue is recognized at the point in time when ownership of the goods is transferred, generally at the time of shipment to the customer.

Operating Expenses

Cost of Revenue

Our cost of revenue consists of direct and overhead expenses related to either the sale of our products, our contract services revenue or our manufacturing revenue. Direct expenses include direct labor used in the production of a product or in our services and manufacturing contracts, benefits expense associated with direct labor and materials directly tied to our product sale or services and manufacturing contracts. Overhead expenses include allocable supervisory labor, benefits expense associated with supervisory labor, allocation of facilities expense including rent and utilities and allocation of IT labor support and equipment. Overhead expenses not allocated to cost of revenue are expensed across research and development, general and administrative and sales and marketing expenses, as applicable.

Research and Development

Research and development expenses are mainly comprised of costs from the continuing development and refinement of our AI/ML Foundational Technology and related products and the continuing research and development costs associated with current and future products. These expenses include labor and related benefit expenses, materials and supplies used in our laboratories, patent expenses and related overhead expenses. Our research and development expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

General and Administrative

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.

Sales and Marketing

Our sales and marketing expenses arise from our activities relating to our efforts to market and sell our products and services. The expenses consist primarily of labor, benefits and employee-related costs, marketing programs and events, customer service, lead generation fees, product marketing expense, public relations fees and travel associated with sales generation and marketing support and related overhead expense.

We plan to continue to invest in sales and marketing to grow our customer base and increase our brand awareness. The trend and timing of sales and marketing expenses will depend in part on the timing of the commercial launch of new products and their reception by the market. As our product sales grow, we expect that sales and marketing expenses will increase in absolute dollars in future periods; however, we expect our sales and marketing expenses to decrease as a percentage of our revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

Intangible Amortization Expense

Amortization of intangible assets primarily consists of amortization of identified finite-lived intangible assets that were acquired in connection with business combinations. These costs are amortized on a straight-line basis over their expected useful lives.

Other Income (Loss)

Interest Income, Net

Interest income consists primarily of interest received or earned on our cash and marketable securities balances. Portions of our cash resided in money market investments and in U.S. Treasury securities at various points during the year.

Gain (Loss) on Warrant Liabilities

Gain (loss) 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.

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. 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

Comparison of the Years Ended December 31, 2025 and 2024

Revenue, net

The following table presents our revenue for the years ended December 31, 2025 and 2024:

Year Ended December 31,

(In thousands) 2025 2024 $ Change % Change

Manufacturing Revenue 559 — 559 *NM

Revenue decreased by $2.5 million, or 33%, from $7.8 million in the year ended December 31, 2024 to $5.2 million in the year ended December 31, 2025, as explained below.

Services Revenue

Revenue derived from services contracts decreased by $0.4 million, or 9%, from $5.1 million for the year ended December 31, 2024 to $4.7 million for the year ended December 31, 2025. The decrease was primarily due to available funding and the timing of completion of certain milestones within our product development contracts during the current period, partially offset by increases in design services revenues due to the acquisition of GuideTech in November 2025. We expect future revenue from services contracts to fluctuate due to the timing of new contracts signed and the completion of existing contracts. For the time being, we intend to take on only those prodcut development contracts that we believe support and contribute to our product development efforts. As a result, there may be fewer opportunities to replace completed contract development contracts.

Product Revenue

Revenue derived from product sales decreased by $2.7 million, or 100%, from $2.7 million for the year ended December 31, 2024 to $0.0 million for the year ended December 31, 2025. The decrease was primarily due to one-time legacy hardware product sales during the year ended December 31, 2024 that did not recur in 2025.

Manufacturing Revenue

Manufacturing revenue was $0.6 million for the year ended December 31, 2025. We generate manufacturing revenue through our Palladyne Manufacturing business, comprised of Warnke Precision Machining and MKR Fabricators, both of which are companies we acquired in November 2025.

Operating Expenses

The following table presents our operating expenses for the years ended December 31, 2025 and 2024:

Year Ended December 31,

(In thousands) 2025 2024 $ Change % Change

Operating expenses:

Intangible amortization expense 118 — 118 *NM

Asset write-down and restructuring — (192 ) 192 (100 )%

*NM - Not Meaningful

Cost of Revenue

Cost of revenue decreased by $0.8 million, or 23%, from $3.5 million for the year ended December 31, 2024 to $2.7 million for the year ended December 31, 2025. Cost of revenue decreased primarily due to lower product costs, driven by the decline in product revenue, as well as decreased labor and material expenses charged to product development contracts during the year ended December 31, 2025.

Research and Development

Research and development expenses increased by $2.5 million, or 24%, from $10.4 million for the year ended December 31, 2024 to $12.9 million for the year ended December 31, 2025. Research and development expenses increased during the year ended December 31, 2025 due primarily to labor and labor related expenses associated with product testing, debugging, stabilization and enhancements of our software products.

General and Administrative

General and administrative expenses increased by $0.4 million, or 2%, from $16.8 million for the year ended December 31, 2024 to $17.2 million for the year ended December 31, 2025. General and administrative expense increased primarily due to legal and business insurance expenses largely due to the acquisitions completed in November 2025.

Sales and Marketing

Sales and marketing expenses increased by $0.6 million, or 15%, from $4.1 million for the year ended December 31, 2024 to $4.7 million for the year ended December 31, 2025. This increase was driven by increased marketing program costs for our AI/ML software products.

Intangible Amortization Expense

Intangible amortization expenses increased to $0.1 million for the year ended December 31, 2025. The increase in intangible amortization expense is attributable to the recognition of amortization related to identified intangible assets acquired in connection with business combinations.

Asset Write-down and Restructuring

There were no significant asset write-down and restructuring costs for the year ended December 31, 2025.

Other (Loss) Income

The following table presents other income (loss) for the years ended December 31, 2025 and 2024:

Year Ended December 31,

(In thousands) 2025 2024 $ Change % Change

Other income (loss)

Other income increased by $85.6 million from a loss of $45.7 million for the year ended December 31, 2024 to income of $39.9 million for the year ended December 31, 2025. Other income increased almost entirely as a result of changes in the fair value of our outstanding warrants. Additionally, interest income from our investments in marketable securities increased due to an increase in invested funds.

Provision for Income Taxes

We recognized tax benefits of $2.5 million for the year ended December 31, 2025, and had no significant income tax expense for the year ended December 31, 2024. The income tax benefit recorded for the year ended December 31, 2025 is due to the removal of a portion of our previously recorded valuation allowance on our net deferred tax assets due to net deferred tax liabilities recorded as part of the acquisitions closed during 2025, resulting in an income tax benefit recorded. The future reversal of the net deferred tax liabilities is a source of taxable income to be considered by us when determining whether a valuation allowance is needed for our existing net deferred tax assets. For the years ended December 31, 2025 and 2024, 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

Our backlog, as of December 31, 2025, was $13.9 million, $13.5 million of which was funded and $0.4 million of which was unfunded. Our backlog is equal to our remaining performance obligations under contracts or the expected value of exercised contracts, both funded and unfunded, less revenue recognized to date. Our total estimated contract value, which combines backlog with estimated potential contract value, including unexercised options from existing firm contracts, was $20.0 million as of December 31, 2025.

Liquidity and Capital Resources

Cash, cash equivalents and marketable securities were $47.1 million as of December 31, 2025, compared to $40.1 million as of December 31, 2024. We have incurred losses from operations and negative cash flows from operations since inception and are likely to continue to incur losses from operations and negative cash flows from operations in the near term. As of December 31, 2025, we had an accumulated deficit of approximately $480.8 million and working capital of $46.9 million.

On October 31, 2024, we announced that we raised approximately $7 million in gross proceeds from the sale of Common Stock and warrants through a registered offering and two separate private placements. In May 2025, 2,790,700 of the 2024 Warrants were exercised resulting in proceeds of $6.4 million.

On November 13, 2024, we entered into an open market sale agreement (the "Sales Agreement") with Jefferies LLC to sell shares of our Common Stock from time to time through an "at-the-market" equity offering program under which Jefferies is acting as our sales agent and on November 13, 2024, we filed a prospectus supplement with the SEC in connection with the offer and sale of up to $18.0 million of shares of our Common Stock pursuant to the Sales Agreement. As of December 31, 2024, we sold all of the shares offered pursuant to this prospectus supplement consisting of a total of 3,680,543 shares of our Common Stock for gross sales proceeds of approximately $18.0 million, before deducting commission and other expenses. On December 31, 2024 we filed a prospectus supplement in connection with offering for sale an additional $30.0 million of shares pursuant to the Sales Agreement. During the year ended December 31, 2025, all shares under this prospectus supplement were sold, consisting of a total of 3,134,189 shares of our Common Stock under the Sales Agreement for gross sales proceeds of approximately $30.0 million, before deducting commission and other expenses. On August 6, 2025 we filed a prospectus supplement in connection with offering for sale an additional $50.0 million of shares pursuant to the Sales Agreement (the “August 2025 Prospectus Supplement”). As of December 31, 2025, 1,307,852 shares were sold under the August 2025 Prospectus Supplement for gross sales proceeds of approximately $7.5 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.

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 significant 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, in 2023 we suspended our legacy hardware product development efforts and focused our product development efforts on our AI/ML Foundational Technology and related products, and terminated our operations in Pittsburgh, Pennsylvania in early 2024. We plan to use our existing capital to further commercialize and conduct sales and marketing efforts for our commercially available product and services, as well as continue product testing, debugging and stabilization efforts and conduct 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 commercialize our products and thereby recognize associated revenue and capital requirements to conduct marketing and sales activities prior to receiving payments sufficient to cover our costs. Any delays in the sales of our products and services 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 additional 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 intend to continue monitoring our liquidity, financial and business results and outlook and market conditions, and may be opportunistic and raise capital when market conditions are good or a favorable opportunity exists including under our "at-the-market" equity offering programs. Any delays in the successful further commercialization and sales of our products and services will negatively impact

our ability to generate revenue, our profitability and our overall operating performance and result in the need to raise additional capital sooner than expected. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our equity holders could be significantly diluted and these newly issued securities may have rights, preferences or privileges senior to those of existing equity holders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility and would also require us to incur additional interest expense. Additional financing may not be available at all or, if available, may not be available on terms favorable to us or that we find acceptable. For additional information around the risks associated with our capital needs see Part I Item 1A Risk Factors "Our business plans require a significant amount of capital. We may sell additional equity or debt securities to meet capital needs or as we may otherwise determine to be advisable that may dilute our stockholders or introduce covenants that may restrict our operations or our ability to pay dividends. If we require additional capital and are not able to secure new funding, we may not be able to continue our business operations."

As of December 31, 2025, our total minimum lease payments are $14.6 million, of which $1.9 million are due in the next 12 months. For detail regarding our lease obligations refer to Note 4 Leases to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Cash Flows

The following table summarizes our cash flow data for the periods presented:

Year Ended December 31,

(In thousands) 2025 2024 $ Change % Change

Net cash (used in) provided by :

Net Cash Used In Operating Activities

Cash flows used in operating activities during the twelve months ended December 31, 2025, increased by $5.0 million to $27.6 million from $22.6 million during the prior year. The increase to net cash used in operating activities was primarily attributable to changes in net income (loss), adjusted for non-cash items.

Net Cash (Used In) Provided by Investing Activities

Our net cash used in investing activities during the twelve months ended December 31, 2025 increased by $31.5 million. The increase in cash used in investing activities is mostly due to $18.6 million of purchases, net of maturities of marketable securities during the twelve months ended December 31, 2025, as compared to $7.1 million of maturities, net of purchases of marketable securities during the twelve months ended December 31, 2024. Additionally, $5.3 million was used for the acquisition of businesses, net of cash acquired during the twelve months ended December 31, 2025.

Net Cash Provided by Financing Activities

Our net cash provided in financing activities during the twelve months ended December 31, 2025 increased by $15.4 million as compared to the prior year period. This increase was primarily attributable to $42.7 million, after deducting transaction costs, in net proceeds from the sale of our Common Stock and the exercise of warrants during the twelve months ended December 31, 2025, as compared to $23.8 million, after deducting transaction costs, in net proceeds from the sale of our Common Stock and warrants during the twelve months ended December 31, 2024. Partially offsetting this increase, we repaid $3.7 million of debt related to the businesses acquired in 2025.

Emerging Growth Company Status

Section 102(b)(1) of the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can choose not to take advantage of the extended transition period and comply with the requirements that apply to non-emerging growth companies, and any such election to not take advantage of the extended transition period is irrevocable.

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, 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 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. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and estimates include those related to:

Business Combinations

We utilized the purchase method of accounting for business combinations, which requires the allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of consideration transferred over the fair value of net identifiable assets is recorded as goodwill. Determining fair values involves significant management judgment, particularly with respect to identifiable intangible assets and contingent consideration. These estimates require the use of valuation models and assumptions such as projected cash flows, discount rates, customer attrition rates, and royalty rates. Changes in these assumptions could impact the amount of goodwill and intangible assets recognized, as well as future amortization expense or impairment charges.

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 are measured using the Black-Scholes valuation model, which includes assumptions related to expected volatility, expected life, risk-free interest rate and expected dividends. These estimates are judgmental and could differ materially in the future. Changes in the fair value of the 2024 Warrants are recorded as a component of other income and expense.

Recent Accounting Pronouncements

See Note 1, Basis of Presentation and Summary of Significant Accounting Policies, to consolidated financial statements included elsewhere in this Annual Report on Form 10-K for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the date of this Annual Report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this item.

Item 8. Financial Statements and Supplementary Data.

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm (PCAOB: 185) 62

Consolidated Balance Sheets 63

Consolidated Statements of Operations 64

Consolidated Statements of Comprehensive Loss 65

Consolidated Statements of Cash Flows 66

Consolidated Statements of Stockholders' Equity (Deficit) 67

Notes to Consolidated Financial Statements 68

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors

Palladyne AI Corp.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Palladyne AI Corp. and subsidiaries (the Company) as of December 31, 2025 and December 31, 2024, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2025, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2025 and December 31, 2024, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2025, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company's auditor since 2024.

Salt Lake City, Utah

March 5, 2026

PALLADYNE AI CORP.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

As of

Assets

Current assets:

Prepaid expenses and other current assets 1,653 1,275

Intangible assets, net 10,430 —

Other non-current assets 460 438

Liabilities and stockholders’ equity (deficit)

Current liabilities:

Current operating lease liabilities 1,058 1,079

Other non-current liabilities 2,874 —

Commitments and contingencies (Note 13)

Stockholders’ equity (deficit):

Accumulated other comprehensive income 11 6

Total stockholders’ equity (deficit) 74,675 (9,533 )

Total liabilities and stockholders’ equity (deficit) $ 95,712 $ 56,253

See accompanying notes to the consolidated financial statements.

PALLADYNE AI CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

Year Ended December 31,

Operating expenses:

Cost of revenue (exclusive of items shown separately below) 2,690 3,488

Intangible amortization expense 118 —

Asset write-down and restructuring — (192 )

Gain (loss) on warrant liabilities 37,740 (46,935 )

Other income, net 221 2

Income (loss) before income tax expense 7,501 (72,612 )

Income tax benefit (expense) 2,538 (5 )

Net income (loss) per share

Weighted-average shares used in computing net income (loss) per share

See accompanying notes to the consolidated financial statements.

PALLADYNE AI CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

Year Ended December 31,

Other comprehensive income:

Change in unrealized income on available-for-sale investments 5 3

Total other comprehensive income 5 3

See accompanying notes to the consolidated financial statements.

PALLADYNE AI CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended December 31,

Cash flows from operating activities:

Depreciation of property and equipment 974 825

Amortization of intangible assets 118 —

Change in fair value of warrant liabilities (37,740 ) 46,935

Allowance for credit losses — 285

Amortization of investment discount (1,386 ) (75 )

Deferred income tax benefit (2,541 ) —

Changes in operating assets and liabilities, net of acquisitions:

Prepaid expenses and other current assets (132 ) 1,048

Operating lease assets & other non-current assets 1,005 1,242

Accrued liabilities and current operating lease liabilities (904 ) (3,164 )

Operating lease liabilities (1,003 ) (1,077 )

Net cash used in operating activities (27,637 ) (22,627 )

Cash flows from investing activities:

Purchases of property and equipment (713 ) (265 )

Acquisition of a business, net of cash acquired (5,302 ) —

Purchases of marketable securities (75,563 ) (8,859 )

Net cash (used in) provided by investing activities (24,578 ) 6,876

Cash flows from financing activities:

Proceeds from exercise of stock options 74 130

Proceeds from issuance of common stock under ESPP 148 —

Proceeds from the exercise of warrants 6,419 —

Shares repurchased for payment of tax withholdings — (105 )

Payment of obligations under finance leases (20 ) (3 )

Payment of debt obligations (3,696 ) —

Proceeds from the issuance of warrants — 4,432

Proceeds from issuance of common stock 36,371 20,028

Payment of transaction costs related to issuance of common stock (50 ) (682 )

Net cash provided by financing activities 39,246 23,800

Net (decrease) increase in cash and cash equivalents (12,969 ) 8,049

Cash and cash equivalents at beginning of period 31,188 23,139

Cash and cash equivalents at end of period $ 18,219 $ 31,188

Supplemental disclosure of cash flow information:

Cash paid for income taxes $ 2 $ 10

Supplemental disclosure of non-cash activities:

Purchases of property and equipment financed through notes payable $ 113 $ —

Common stock issued in connection with a business acquisition $ 15,872 $ —

Warrant liabilities reclassified to equity upon exercise $ 10,883 $ —

See accompanying notes to the consolidated financial statements.

PALLADYNE AI CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(in thousands, except share data)

Additional Accumulated Other Total

Common Stock Paid-In Comprehensive Accumulated Stockholders’

Shares Amount Capital Income Deficit Equity (Deficit)

Stock-based compensation — — 2,805 — — 2,805

Common stock issued under equity award plans 958,553 — — — — —

Shares repurchased for payment of tax withholdings (57,352 ) — (105 ) — — (105 )

Other comprehensive income — — — 3 — 3

Stock-based compensation — — 4,447 — — 4,447

Common stock issued under equity award plans 2,240,156 — — — — —

Issuance of common stock under ESPP 30,913 — 148 — — 148

Other comprehensive income — — — 5 — 5

See accompanying notes to the consolidated financial statements.

PALLADYNE AI CORP.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation and Summary of Significant Accounting Policies

Description of the Business

The Company is a U.S.-based technology company developing and offering embodied artificial intelligence (“AI”) software and collaborative autonomy solutions, advanced avionics, unmanned aerial vehicles (UAVs), advanced UAV engineering services and precision-manufactured components for defense and commercial/industrial markets. The Company’s core AI software offerings, Palladyne IQ and SwarmOS/Palladyne Pilot, consist of full-stack, closed-loop autonomy software that is intended to enhance the functionality and operational effectiveness of third-party robotic systems across a range of applications. These products are designed to be hardware agnostic, enabling integration across a wide range of robotic platforms, whether third-party or our own proprietary platforms, including industrial robots, collaborative robots (“cobots”), UAVs, unmanned ground vehicles (“UGVs”), and remotely operated vehicles (“ROVs”) across multiple domains.

Basis of Presentation and Consolidation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The 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.

Business Combinations

The Company utilizes the purchase method of accounting for business combinations. This method requires, among other things, that results of operations of acquired companies are included in the Company’s results of operations beginning on the respective acquisition dates and that assets acquired, and liabilities assumed are recognized at fair value as of the acquisition date. Any excess of the fair value of consideration transferred over the fair values of the net assets acquired is recognized as goodwill. Contingent consideration liabilities are recognized at the estimated fair value on the acquisition date and are recorded in other non-current liabilities in the Company's consolidated balance sheets. Subsequent changes to the fair value of contingent consideration liabilities are recognized in general and administrative expenses in the Consolidated Statements of Operations. The fair value of assets acquired, and liabilities assumed in certain cases, may be subject to revision based on the final determination of fair value during a period of time not to exceed 12 months from the acquisition date. Legal costs, due diligence costs, business valuation costs and all other business acquisition costs are expensed when incurred.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the balance sheet date, as well as reported amounts of revenue and expenses during the reporting period. The Company's most significant estimates and judgments involve contract revenue recognized based on estimates of total contract costs and cost to complete uncompleted contracts, estimates of potential losses on uncompleted contracts, impairment evaluation of contract assets, goodwill and other long lived assets, assumptions used for leases, valuation allowance for net deferred income taxes and valuation of the Company's stock-based compensation, warrants intangible assets and contingent consideration. Management bases its estimates on historical experience and on various other assumptions believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates.

Liquidity and Capital Resources

Cash, cash equivalents and marketable securities were $47.1 million as of December 31, 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 December 31, 2025, the Company also had an accumulated deficit of approximately $480.8 million and working capital of $46.9 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.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents, marketable securities, accounts receivable and unbilled receivables. The Company's cash is placed with high-credit-quality financial institutions and issuers, and generally exceeds federally insured limits. The Company's cash equivalents and marketable securities are money market funds or U.S. Treasury bills with maturity dates within one year. The Company has not realized any losses relating to its cash, cash equivalents or marketable securities.

Accounts Receivable

As of December 31, 2025, five customers accounted for more than 10% of the Company's accounts receivable, which in total represented 78% of the accounts receivable as of December 31, 2025. As of December 31, 2024, three customers accounted for more than 10% of the Company's accounts receivable, which in total represented 100% of the accounts receivable as of December 31, 2024.

Revenue

One and two customers accounted for more than 10% of the Company's revenue for each of the years ended December 31, 2025 and 2024, respectively. These concentrations accounted for 73% and 98% of revenue for the years ended December 31, 2025 and 2024, respectively. The total amount of revenue for each such customer was as follows:

Cash and Cash Equivalents

The Company considers cash as deposits held in bank accounts and undeposited funds. All highly liquid investments with an original maturity of three months or less at the time of purchase are considered to be cash equivalents. The Company's cash equivalents may be comprised of money market funds, certificates of deposit of major financial institutions and U.S. Treasury bills.

Marketable Securities

The Company's marketable securities consist primarily of U.S. Treasury bills. The Company classifies securities that have effective maturities of greater than three months as marketable securities in its consolidated balance sheets. The Company determines the appropriate classification of its investments in marketable debt securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company's marketable debt securities are classified as available-for-sale. The Company carries the marketable debt securities at fair value, and reports the unrealized gains and losses in accumulated other comprehensive income within the consolidated balance sheets. If the fair value of a marketable debt security declines below its amortized cost basis, any portion of that decline attributable to credit losses, to the extent expected to be nonrecoverable before the sale of the security, is recognized in the consolidated statements of operations. There were no allowances for credit losses related to marketable debt securities recorded during the twelve months ended December 31, 2025 and 2024.

Accounts Receivable

Receivables are recorded at the amount the Company expects to collect. Management determines the need for an allowance for credit losses using a specific identification method after taking into account all of its remedies for collection. Management determined no allowance for credit losses was necessary during the twelve months ended December 31, 2025. Management recorded $0.3 million allowance for credit losses during the twelve of December 31, 2024. Receivables are comprised of amounts invoiced for completed contracts and contracts in progress.

Inventories

Inventories primarily consist of raw materials, work-in-process and finished goods. Inventories are stated at the lower of cost or estimated net realizable value. Costs are computed on the first-in, first-out basis and include material, labor and manufacturing overhead. Adjustments are also made to reduce the value of inventory for estimated excess or obsolete balance by evaluating inventory against forecasted revenue and production requirements.

Property and Equipment

Property and equipment is carried at acquisition cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets. The estimated useful lives by asset classification are generally as follows:

Useful life

Robotics and manufacturing equipment 3 – 10 years

Computer equipment 3 – 5 years

Software 3 years

Furniture and fixtures 3 – 5 years

Expenditures for maintenance and repairs are expensed when incurred and betterments that extend the useful lives of property and equipment are capitalized. When assets are retired or disposed, the asset's original cost and related accumulated depreciation are eliminated, and any gain or loss is reflected in the statement of operations.

Leases

In accordance with ASC 842, the Company, at the inception of the contract, determines whether a contract is or contains a lease. For leases with terms greater than 12 months, the Company records the related operating or finance right of use asset and lease liability at the present value of unpaid lease payments over the lease term. The Company is generally not able to readily determine the implicit rate in the lease and therefore uses the determined incremental borrowing rate at lease commencement to determine the present value of lease payments. The incremental borrowing rate represents an estimate of the market interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease.Renewal options are not included in the measurement of the right of use assets and lease liabilities unless the Company is reasonably certain to exercise the optional renewal periods.

Some of the Company's leases contain rent escalations over the lease term. The Company recognizes expense for operating leases on a straight-line basis over the lease term. The Company's lease agreements contain variable lease payments for common area maintenance, utility, insurance and tax. The Company has elected the practical expedient to combine lease and non-lease components for all asset categories. Therefore, the lease payments used to measure the lease liability for these leases include fixed minimum rentals along with fixed non-lease component charges. The Company does not have significant residual value guarantees or restrictive covenants in the lease portfolio.

Impairment of Long-Lived Assets

The Company evaluates its long-lived assets, which includes property and equipment, definite lived intangible assets, and operating lease assets, for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Impairment exists if the carrying amounts of such assets exceed the estimates of future net undiscounted cash flows expected to be generated by such assets.

Goodwill

Goodwill is initially recorded when the purchase price paid for a business acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The Company evaluates goodwill at the reporting unit level for impairment annually, or when an indicator of potential impairment exists. The Company has one reporting unit.

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 three sources. First, the Company enters into service contracts to provide research and development, engineering and design services with the government and commercial customers. The Company's research and development contracts with the government are leveraged to further our product development efforts where possible. Service revenue consists of revenue arising from different types of contractual arrangements, including cost-type contracts, fixed-price contracts and time and materials contracts.

Second, the Company sells its products. Product revenue primarily consists of sales of current and legacy hardware products, including the BRAIN family of guidance and navigation computer chips.

Third, the Company generates manufacturing revenue through the sale of precision machined and fabricated components, subassemblies and structures and integrated assembly services for both Defense and Commercial customers in a variety of industries.

Services 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 AI/ML, software 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 technology in the area of robotic platforms. 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.

Manufacturing Revenue

Through its precision U.S. manufacturing capabilities, the Company sells precision machined and fabricated components, subassemblies and structures and integrated assembly services to both Defense and Commercial customers. The Companies operations include machining, fabrication and assembly of aerospace and defense components. Manufacturing revenue is recognized at the point in time when ownership of the goods is transferred, generally at the time of shipment to the customer.

The revenue recognized for Services, Product and Manufacturing were as follows:

Year Ended December 31,

Manufacturing Revenue 559 —

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 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 are as follows:

The Company recorded its current contract assets, long-term contract assets and current deferred revenue within prepaid expenses and other current assets, other non-current assets and accrued liabilities, respectively. During the years ended December 31, 2025 and 2024, the Company recognized all of the deferred revenue which existed at December 31, 2024 and 2023, respectively.

Remaining Performance Obligations

As of December 31, 2025, the Company had backlog, or revenue related to remaining performance obligations, of $13.9million. 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.

Research and Development Costs

Research and development expenses consist of costs incurred for experimentation, design and testing and are expensed as incurred.

Sales and Marketing Costs

Marketing costs include product demonstration, customer service, lead generation, public relations, market research and internal labor, and are expensed as incurred.

Stock-Based Compensation

The Company calculates the fair value of all stock-based awards, including stock options, restricted stock units and restricted stock awards on the date of grant. The Company values stock options using the Black-Scholes option-pricing model, which requires the use of a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected

dividends. The stock-based compensation expense is recognized on a straight-line basis over the requisite service periods of the awards, which is generally four years. The Company records forfeitures as they occur.

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and 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. Deferred income taxes represent future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. The Company determines its valuation allowance on deferred tax assets by considering both positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis, to ascertain whether it is more likely than not that deferred tax assets will be realized. If the Company determines that it would be able to realize its deferred income tax assets in the future in excess of their net recorded amount, it would make an adjustment to the valuation allowance, which would reduce the provision for income taxes. Conversely, if all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made.

Recently Adopted Accounting 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. The Company adopted ASU 2023-09 during the year ended December 31, 2025, on a prospective basis. Adoption of this standard resulted in changes to the effective tax rate reconciliation as reflected in Note 12, Income Taxes.

Recently Issued Accounting Standard Pronouncements

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:

(In thousands) Level 1 Level 2 Level 3 Total

Assets:

Marketable securities:

Liabilities:

Other non-current liabilities:

(In thousands) Level 1 Level 2 Level 3 Total

Assets:

Cash equivalents:

Marketable securities:

Liabilities:

As of December 31, 2025, the Company held $28.8 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 contingent consideration relates to the acquisition of GuideTech during 2025, as discussed in Note 5, Acquisitions. The contingent consideration was initially valued as of November 14, 2025, the acquisition date, and will be remeasured at fair value at each reporting date, or more frequently, if events or changes in circumstances indicate that a remeasurement is warranted. The valuation of the contingent consideration requires the use of a valuation model and assumptions such as projected cash flows and discount rates.

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

(In thousands) Warrants

Decrease in fair value of warrants (23,240 )

Exercise of warrants (10,884 )

3. Balance Sheet Components

Inventories

Inventories, net consist of the following:

Raw materials $ — $ 71

Work-in-process 311 —

Finished goods, net 28 —

Total inventories $ 339 $ 71

Property and equipment, net

Property and equipment, net consist of the following:

Robotics and manufacturing equipment $ 2,857 $ 1,128

Financed lease robotics and manufacturing equipment 996 —

Land and building 1,832 —

Furniture and fixtures, and other fixed assets 1,001 952

Construction in progress 682 —

Accumulated depreciation (3,800 ) (3,014 )

Property and equipment, net $ 8,889 $ 4,244

Depreciation expenses were $1.0 million for the year ended December 31, 2025. Depreciation expenses were $0.8 million for the year ended December 31, 2024.

Accrued liabilities

Accrued liabilities consist of the following:

Payroll and related costs $ 1,699 $ 1,811

Other contract liabilities 496 496

Other accrued expenses and current liabilities 863 134

Total accrued liabilities $ 3,550 $ 2,919

Other non-current liabilities

Other non-current liabilities consist of the following:

Contingent consideration $ 1,382 $ —

Equipment financing liabilities 1,492 —

Total other non-current liabilities $ 2,874 $ —

4. Leases

The Company has operating and finance leases for office space, lab space, machining and certain equipment with varying expiration dates through 2035. Leases are categorized at their commencement date, which is the date the Company takes possession or control of the underlying asset. Certain of the operating leases include renewal options ranging from three to ten years, which are not recognized as part of the right-of-use assets as the Company is not reasonably certain that the options will be exercised.

Lease costs for operating leases are as follows (finance lease costs were not material for the periods presented):

Year Ended December 31,

The following table summarizes the Company's lease term and discount rate assumptions:

Year Ended December 31,

Operating leases

Weighted-average remaining lease term (years)

Finance leases 6.0 —

Operating leases 7.6 8.3

Weighted-average discount rate:

Finance leases 10.8 % —

Operating leases 5.9 % 5.4 %

Supplemental balance sheet information related to leases:

(In thousands) Balance Sheet Location 2025 2024

Assets

Finance lease right-of-use assets Property and equipment, net $ 987 $ —

Operating lease right-of-use assets Operating lease assets 8,645 8,841

Liabilities

Financing lease liabilities (current) Accrued liabilities 166 —

Financing lease liabilities (non-current) Other non-current liabilities 761 —

Supplemental cash flow and other information related to leases:

Year Ended December 31,

Cash paid for amounts included in measurement of liabilities:

Operating cash flows from operating leases $ 1,631 $ 1,968

Undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable operating leases with terms of more than one year, as of December 31, 2025 are as follows:

(In thousands) Finance Leases Operating Leases

Present value of lease liabilities $ 927 $ 10,783

5. Acquisitions

On November 14, 2025, the Company acquired 100 percent of the equity interests of GuideTech, LLC (“GuideTech”), Warnke Precision Machining, LLC (“Warnke Precision Machining”) and MKR Fabrication, LLC (“MKR Fabricators”). These transactions (collectively, the “2025 Acquisitions”) were undertaken pursuant to separate purchase agreements entered into on November 14, 2025.

GuideTech is an engineering and aerospace avionics products and services provider. MKR Fabricators and Warnke Precision Machining are U.S.-based precision manufacturing and fabrication businesses supporting defense and industrial customers. Through the 2025 Acquisitions, the Company acquired engineering design services, advanced avionics products and manufacturing and machining capabilities to complement its AI/ML Foundational Technology and related products and offer vertically integrated solutions for defense and commercial markets.

The aggregate consideration transferred for the 2025 Acquisitions was $22.6 million, consisting of $5.4 million of cash, $15.9 million comprised of 2,672,013 shares of common stock, and contingent consideration valued at $1.4 million. The contingent consideration arrangement provides for up to $25 million in earnout payments payable in cash or stock if certain revenue targets are achieved over a five-year period.

The 2025 Acquisitions have been accounted for as business combinations and the total purchase consideration was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date and the excess was recorded as goodwill. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the issuance date of these consolidated financial statements and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill or identified intangible assets. As of December 31, 2025, the primary areas that remain preliminary relate to the valuation of certain intangible items and various tax implications resulting from the acquisition.

The following table presents the preliminary purchase consideration allocation recorded in the Company’s consolidated balance sheet as of the acquisition date:

(in thousands) Amount

Cash and cash equivalents $ 69

Accounts receivable 2,017

Unbilled receivables 316

Prepaid expenses and other current assets 246

Property and equipment 4,793

Operating lease assets 831

Accounts payable (1,331 )

Accrued liabilities (1,455 )

Current operating lease liabilities (59 )

Operating lease liabilities (773 )

Other non-current liabilities (1) (5,093 )

Deferred tax liabilities (2,541 )

Total acquisition consideration $ 22,625

(1)

Other non-current liabilities includes $3.7 million of debt obligations which were repaid prior to December 31, 2025.

The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition:

Amounts Weighted Average Useful Life

(in thousands) (in years)

Customer relationships $ 5,148 8.8

Total intangible assets $ 10,548 8.1

Goodwill represents the future economic benefits arising from other assets that could not be individually identified and separately recognized, such as the acquired assembled workforce and synergies expected to be achieved from the integration of the 2025 Acquisitions. Goodwill is not deductible for tax purposes.

The results of operations of the 2025 Acquisitions from the date of acquisition have been included in the Company’s consolidated financial statements. Pro forma revenue and results of operations have not been presented because the historical results of the 2025 Acquisitions are not material to the Company’s consolidated financial statements in any period presented.

6. Intangible Assets

Goodwill

Changes in the carrying amount of goodwill were as follows:

(In thousands) Amounts

Balance at December 31, 2024 $ -

There was no impairment of goodwill recorded during the twelve months ended December 31, 2025 and 2024.

Acquired Intangible Assets

Acquired intangible assets, net consisted of the following:

The Company recorded $0.1 million of amortization expense during the year ended December 31, 2025, which was recorded as intangible amortization expense in the consolidated statement of operations. The Company had no intangible amortization expense during the year ended December 31, 2024.

As of December 31, 2025, future amortization expense related to acquired intangible assets was as follows:

(In thousands) Amortization Expense

7. 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 September 24, 2026, 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 consolidated balance sheets. As of December 31, 2025, there remained 2,343,750 Earn-Out Shares potentially issuable.

8. 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 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 December 31, 2025, there were 20,549,453deSPAC 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 deSPACWarrants 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 $14.5 million and losses of $15.7 million related to the change in fair value of the deSPAC Warrants during the years ended December 31, 2025 and 2024, respectively. These amounts are recorded as gain (loss) on warrant liabilities within the consolidated statements of operations.

9. 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 December 31, 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 $23.2 million and losses of $31.2 million related to the change in fair value of the of the 2024 Warrants during the years ended December 31, 2025 and 2024, respectively. These amounts are recorded as gain (loss) 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:

Term (in years) 4.3 5.3

Risk-free rate 3.7 % 4.4 %

Dividend yield 0.0 % 0.0 %

10. 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 December 31, 2025, 1.9 million shares were available for 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 December 31, 2025, 202,792 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 December 31, 2025, 469,087shares were available for sale under the ESPP. During the year ended December 31, 2025, 30,913 shares of stock were sold under the ESPP for total proceeds of $0.1 million. No shares of stock were sold under ESPP during the year ended December 31, 2024.

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 years ended December 31, 2025 and 2024:

Options Outstanding Weighted-Average

Weighted Average Remaining Aggregate Intrinsic

Exercise Price Contractual Term Value

Number of Shares (Per share) (In years) (In thousands)

For options granted during the years ended December 31, 2025 and 2024, the weighted-average grant-date fair value was $5.86and $1.26 per option, respectively.

The Company utilizes the Black-Scholes option pricing model for estimating the fair value of options granted, which requires the input of subjective assumptions. The Company calculates the fair value of each option grant on the grant date using the following assumptions:

Expected Term—Options granted generally vest over a period of 48 months and expire 10 years from date of grant. The Company uses the simplified method when calculating expected term due to insufficient historical information.

Expected Volatility—Due to insufficient historical information the Company uses a blended approach when calculating expected volatility. The Company uses its historic data for the periods it has been publicly-traded and a benchmark of other comparable public companies' volatility rates.

Expected Dividend Yield—The dividend yield used is zero as the Company does not have a history of paying dividends on its Common Stock and does not anticipate doing so in the foreseeable future.

Risk-Free Interest Rate—The interest rates used are based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award.

The Company calculated the fair value of options granted under the 2021 Plan on the respective dates of grant using the following weighted average assumptions:

Year Ended December 31,

Options

Risk-free interest rate 3.87 % 4.31 %

Expected term (in years) 3.4 5.89

Expected dividend yield — % — %

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 current 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 total incremental fair value to be recognized as a result of the amendments was $0.2 million. The incremental fair value attributable to the vested options of $0.1 million was recognized as stock-based compensation expense during the twelve months ended December 31, 2024. The remaining incremental fair value attributable to the unvested option shares will be amortized over the remaining requisite service periods.

Restricted Stock Units

The following summarizes the Company's employee RSU activity for the years ended December 31, 2025 and 2024:

Restricted Stock Units Outstanding

Number of Shares Weighted-Average Grant-Date Fair Value (Per share)

RSUs granted generally include service vesting periods of one to four years.

Restricted Stock Awards

The following summarizes the Company's employee RSA activity for the year ended December 31, 2025:

Restricted Stock Awards Outstanding

Number of Shares Weighted-Average Grant-Date Fair Value (Per share)

Outstanding – December 31, 2023 — $ —

Stock-Based Compensation Expense

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

Year Ended December 31,

Cost of revenue $ 52 $ 30

Research and development 428 115

Total stock-based compensation expense $ 4,447 $ 2,805

As of December 31, 2025, there was approximately $8.6 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 2.6 years.

11. Net Income (Loss) Per Share

The following table sets forth the computation of the basic and diluted net income (loss) per share attributable to common stockholders for the twelve months ended December 31, 2025 and 2024, respectively:

PDYN US Equity

PDYN · 10-K · period ended 2025-12-31

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

PDYN US Equity☆

PDYN · 10-K · period ended 2025-12-31

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

PDYN US Equity