Palladyne AI Q4 2025 Earnings Call - Reiterated $24M-$27M 2026 Guidance as Vertical Integration Starts to Drive Backlog

Operator: Greetings, and welcome to the Palladyne AI fourth quarter and year-end 2025 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Brian Siegel, Investor Relations. Thank you. You may begin.

Brian Siegel, Investor Relations, Palladyne AI: Morning and welcome to Palladyne AI’s fourth quarter and full year 2025 earnings conference call. Joining me on the call today are Ben Wolfe, President and Chief Executive Officer, and Trevor Thatcher, Chief Financial Officer. Earlier this morning, Palladyne AI issued a press release announcing its financial results for the fourth quarter of full year ended December 31, 2025, along with updated commentary regarding backlog and its reiterated 2026 revenue guidance. A copy of that release, along with the accompanying financial tables, is available on the investor relations section of Palladyne’s website. Today’s call will include prepared remarks from Ben and Trevor, followed by a question and answer session. During today’s call, management will make forward-looking statements within the meaning of the Federal Securities laws.

These statements include, but are not limited to, statements regarding Palladyne’s 2026 revenue guidance, expected backlog conversion, anticipated quarterly operating cash usage, product development milestones, commercialization timelines, defense program activity, potential customer adoption, market opportunities, and future strategic positioning across air, space, land, and maritime domains. Forward-looking statements are based on current expectations, assumptions and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied. These risks and uncertainties include, among others, Palladyne’s ability to execute on development programs, convert backlog into revenue, scale production, manage operating expenses, integrate acquired businesses, secure additional contracts, maintain liquidity, and navigate evolving defense and commercial market conditions. These and other risk factors are described in detail in Palladyne’s filings with the Securities and Exchange Commission, including its annual report on Form 10-K and subsequent filings.

Palladyne undertakes no obligation to update any forward-looking statements except as required by law. In addition, during this call, management will reference certain non-GAAP financial measures which adjust for acquisition-related expenses, stock compensation, non-cash warrant income or expense that are marked to market quarterly based on changes in the company’s stock price, and a tax benefit related to acquisitions. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is included in this morning’s press release. With that, I’ll turn the call over to Ben.

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: Thank you, Brian. Good morning, everyone. Thanks for joining us. This is our first earnings call since I returned to the company two years ago and only our second press earnings release. In mid-January, we provided formal revenue guidance for the first time. Today, we are reiterating 2026 revenue guidance of $24 million-$27 million. That is roughly 4-5 times our 2025 revenue. Additionally, backlog has already increased from approximately thirteen and a half million dollars at the end of 2025 to nearly $18 million midway through the first quarter. We believe 2026 will be the first full year where the structural transformation we completed in November translates into measurable revenue growth. To understand why it helps to step back and look at what we built in 2025. We think about 2025 in two phases.

The first phase was validation. In the first 3 quarters, we were upgrading Palladyne IQ. We integrated feedback from the US Air Force, potential Fortune 100 customers, and others who were using and gaining experience with our first IQ release. That work clarified where our commercial product needed improvement, and it directly shaped IQ 2.0, which we completed and started showing to customers at the beginning of January. That resulted in our first signed commercial IQ customer contract a couple of weeks ago. At the same time, we advanced our collaborative autonomous drone product, Palladyne Pilot, and created a swarming variant branded SwarmOS for Defense and National Security. We signed MOUs with Red Cat and Draganfly and expanded capabilities through military development contracts. We also strengthened the balance sheet, added senior military leadership to our board, and expanded our AI-related patent portfolio.

In November, the second phase began: transformation. We acquired GuideTech, Warnke Precision Machining, and MKR Fabricators. We launched Palladyne Defense. We added avionics design and engineering, proprietary UAV and missile systems, precision components, certified U.S.-based manufacturing and backlog. We moved from being primarily a development-stage AI company to a vertically integrated, embodied AI-centric industrial and defense platform company generating meaningful revenues. In short, we exited 2025 fundamentally different. 2026 will be the first full year of operations as a vertically integrated, embodied AI-centric industrial and defense company. Before I talk about execution, I want to address something that underpins everything we are doing. How our AI is fundamentally different. This week, my co-founder, Dr. Garagić, and I published a white paper that makes a simple point about our biologically inspired AI architecture.

Most AI platforms live in massive centralized data centers, taking up enormous real estate and consuming tremendous amounts of power. They are, in a nutshell, built to think. They analyze, they recommend. They identify patterns and connect dots that we humans could never do on our own. These AI platforms are basically Google search on steroids. Machines, think of robots and drones, operating in dynamic real-world environments can’t rely on centralized intelligence that lives in the cloud for minute-by-minute instruction. Machines in the real world need to react instantly, often in a split second, the way we humans do. They can’t deal with communications latency or, worse, communication gaps or failures. Nor is it economical to have machines continuously connected to the cloud. The answer is to put the intelligence on the machine itself, enabling these machines to function more similarly to the way we humans do.

Nature got it right. The human nervous system does not ask permission for every movement. It reacts at the edge. It coordinates locally. It adapts in real time. It keeps functioning when communication is degraded. That biological model is the inspiration for the architecture we have built into our AI software products. Our autonomy lives at the edge. It operates on the machine. It collaborates across machines. It does not depend on instructions from a centralized set of algorithms that live in the cloud. Our white paper is now available on our website and on LinkedIn. I encourage you to spend a few minutes reading it, and feel free to drop me a note if you would like to discuss it further. SwarmOS enables decentralized, edge-based, distributed collaboration.

IntelliSwarm combines SwarmOS with our BRAIN X2 avionics platform to deliver a fully integrated hardware and software collaborative AI stack for drones and missiles. This is not simply cloud-based AI layered onto hardware. In particular, for defense applications, that distinction is a critical differentiator in contested environments and multi-domain operations. This capability is the reason we were able to execute across air today and soon space as well. Since closing the acquisitions, we have moved with focus. On the commercial side, Matthew Muta joined us from our board of directors to lead our commercial and industrial business. We released Palladyne IQ 2.0 and signed our first customer through a systems integration partner deploying Palladyne IQ for robotic surface preparation. While this deal is not financially material, it is strategically important. On the defense side, we introduced IntelliSwarm, integrating SwarmOS into BRAIN X2.

We also branded Project Banshee as Gremlin-X and advanced the development of this mini bomber drone concept. We successfully demonstrated a cross-platform coordinated swarm using IntelliSwarm on Gremlin-X and SwarmOS on Red Cat drones. This isn’t the kind of pre-programmed drone swarms everyone else talks about. Rather, this is true autonomous swarming, where each drone perceives, reasons, and acts, and most importantly, collaborates. I’m often asked about the distinction between automation and autonomy, since many people think these words are interchangeable. They are not. Automation is pre-programmed, routinized action. With automation, all of the decisions were made in advance by the humans who programmed the machine. If the machine comes across something it wasn’t programmed for, it is stuck, dead in the water, until a human gets it back on track. With autonomy, the machine makes decisions.

Yes, humans can still make decisions too, but that’s not the definition of autonomy. What we do is autonomy, not automation. There is similar confusion about use of the word swarm or swarming in the context of drones. Just like there are many different levels of autonomy for self-driving cars, the same is true for drones. Those cool drone light shows with thousands of drones creating pretty images in the sky are a form of swarming, but they are pre-programmed automated swarms with no need or ability to deviate from the choreographed plan. There is the limited autonomy that many UAV companies tout today, which enables drones to automatically prevent collisions with one another when flying in close proximity. That is an important, albeit rudimentary, form of autonomy. There is full autonomous swarming, which the U.S. military refers to as wolfpack swarming.

wolfpack swarming takes the capability up a notch. This is where an advanced, collaborative, and hierarchical swarm of drones operates as a cohesive unit with specialized distributed roles, mimicking the behavior of wolves to hunt, detect, and destroy targets while at the same time avoiding each other and obstacles. There is SwarmOS from Palladyne. SwarmOS delivers wolfpack swarming, significantly upgraded with the closest thing there is to artificial instinct and intuition. It adds game theory optimization to predict intent and adapt to friendly and hostile moves, maximizing target coverage for intelligence, surveillance, and reconnaissance, and mission effectiveness when action is required. These are significant, non-trivial distinctions. As you’ve probably noticed, there was a ton of confusion among OEMs, customers, and investors on this very important point. Not all swarming is the same. Not all AI is the same. Not all software is the same.

Some is more capable than others. We believe SwarmOS is truly unique and exactly what the Department of War needs. My life would be a lot easier if people in our industry would simply get the words right. My goal today is to make sure the investment community can sift through the noise and truly understand the difference. As a company, our broader mission is to ensure that our differentiated capabilities are known and understood throughout the U.S. government and the military, as well as with partners and defense contractors. We are also extending the same distributed autonomy model into the space domain.

Through development work with the Air Force Research Lab, we are expanding SwarmOS to incorporate satellites as another source of sensor data, another node on our distributed information network, if you will, that can add to the knowledge used by our embodied AI to enhance mission effectiveness. Separately, we expanded our relationship with Portal Space Systems, advancing navigation, guidance, spacecraft modeling, embedded software, and avionics support for its next-generation space logistics platforms. Our expanded relationship with Portal strengthens our propulsion presence in space today. Over time, propulsion and autonomy architectures naturally intersect, which provides additional future opportunities. Together, these efforts position us across air and space with long-term potential into land and sea-based unmanned systems as well. On the manufacturing side, we recently secured a contract for a missile propulsion subsystem from a major defense prime customer.

That contract is another validation of our propulsion, engineering, and manufacturing capabilities and expands our footprint in advanced defense programs that will generate revenue this year. We also progressed development across Gremlin-X and new brain variants, and we strengthened our intellectual property portfolio with a new patent issuance supporting decentralized swarming architectures while also submitting applications for 4 new patents related to our AI products and technologies. Let me frame the roadmap simply. We use the analogy of crawl, walk, and run, not as separate strategies, but as stages of maturation. In 2025, we built the path. In 2026, we crawl.

Crawl is about proving that the integrated model works at scale, converting backlog into revenue, monetizing development programs, generating product revenue from acquired businesses, executing live demos and trials for SwarmOS, IntelliSwarm and IQ 2.0, and advancing Gremlin-X, Swarm Strike, and BRAIN variants toward defined milestones. We walk in 2027. Walk is where we expect proof to become repeatability. We expect broader SwarmOS and IntelliSwarm integrations, repeat IQ 2.0 wins, increasing BRAIN deployments, expanding programs, and multiple product-based revenue streams. At that point, growth becomes more systematic and less episodic. We run. Run is where decentralized, embodied, collaborative autonomy operates seamlessly across air, space, and eventually land and sea. Where IntelliSwarm enables larger and more complex distributed systems. Where autonomy and propulsion architectures converge. Where UAV, missile, and avionics revenue scales across multiple defense programs.

This is when today’s emerging and development stage products become a scaled portfolio of core products, driving meaningful revenue and bottom-line growth. 2026 is the first full year where our structural transformation is reflected in operations. We transformed the structure of this company in November. We are executing against a defined progression with intention and precision. We believe 2026 marks the beginning of measurable translation of that transformation into growth. With that, I will turn the call over to Trevor.

Trevor Thatcher, Chief Financial Officer, Palladyne AI: Thanks, Ben. I’ll focus on the fourth quarter results, liquidity position and capital outlook. Before reviewing the numbers, I want to note that the 2025 fourth quarter and full-year results we reported this morning include approximately 6 weeks of contribution from the businesses acquired in mid-November. Revenue for the fourth quarter of 2025 increased 118% to $1.7 million compared to $0.8 million last year. The increase was due to the inclusion of post-acquisition revenues from the acquired companies. Cost of revenue for the quarter was $1.4 million compared to $0.6 million in the prior year period.

Research and development expense was $3.8 million compared to $2.6 million last year, reflecting continued investment in autonomy software, avionics, and product development programs from both Palladyne and the acquired companies. General and administrative expense was $4.7 million compared to $3.5 million in the prior year period. The increase reflects acquisition-related transaction costs, the incremental scope of G&A functions from the acquired businesses, and the normalization of compensation for certain employees of the acquired companies who were not previously receiving market-based salaries. Sales and marketing expense was $1 million compared to $0.6 million last year, reflecting expanded marketing programs and business development efforts. Operating loss for the quarter was $9.3 million compared to $6.5 million in the prior year period.

GAAP net loss for the fourth quarter was $1.5 million or $0.04 per share. On a non-GAAP basis, net loss for the fourth quarter was $6.9 million or $0.16 per share. The primary differences between GAAP and non-GAAP results were as follows: A $46 million non-cash gain related to the change in fair value of warrant liabilities, driven largely by the change in the price of our common stock and public warrants. $1.1 million of stock-based compensation expense, $0.6 million of acquisition-related transaction expenses, and a $2.5 million income tax benefit linked to one of the November acquisitions related to the recognition of deferred tax liabilities associated with acquired intangible assets that were offset against fully valued deferred tax assets, creating a current non-cash tax benefit.

We believe excluding these items provides a clearer view of our underlying operating performance and cash usage. Turning to liquidity, as of December 31st, 2025, we had cash equivalents, and marketable securities of approximately $47 million. Our fourth quarter net cash burn rate was approximately $10 million, which included $8.5 million in cash used in operations.

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: $5.3 million in cash used for acquisitions, $3.7 million to pay down real estate debt acquired from the acquisitions, offset by proceeds from ATM sales of approximately $7.3 million net of commissions. Backlog as of year-end was $13.5 million. As Ben mentioned earlier, backlog increased to nearly $18 million midway through the first quarter. That increase reflects new contract wins and is net of normal invoicing activity during the current year-to-date period. Looking ahead to 2026, Ben has already announced that we are reiterating the guidance we issued on January 13th, 2026 for revenue of $24 million-$27 million. Our 2026 outlook reflects the contribution of the businesses acquired in November. We expect organic growth across each part of the company on a full year-over-year basis.

We currently expect 2026 consolidated quarterly operating cash usage of approximately $8 million-$9 million. The increase from our 2025 run rate reflects ongoing investment in SwarmOS and IQ, incremental investments to bring acquired programs to operational readiness, and incremental headcount costs from building out the new defense and commercial team structures. As you recall, in our previous commentary, we said that we plan to invest $5 million in Gremlin-X and Project SwarmStrike alone over the next 12 to 18 months. We selectively added headcount to drive growth on the defense and commercial sides of the business and to bolster support services consistent with our strategy to translate structural repositioning into operational execution. Based on our liquidity position and expected backlog conversion, we believe we are well-positioned to execute our 2026 plan. Operator, we’re now ready to take questions.

Operator: Thank you. If you’d like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you’d like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Gregory Konrad with Jefferies. Please proceed with your question.

Gregory Konrad, Analyst, Jefferies: Good morning.

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: Hi, Greg.

Gregory Konrad, Analyst, Jefferies: Appreciated all the color and the differentiation and kind of roadmap going forward. Just thinking about 2026, I think you mentioned you expect organic growth along with M&A contribution. Can you maybe just parse out, you know, expectations of some of the growth drivers in the M&A along with kind of Palladyne IQ and Palladyne Pilot?

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: We’re not breaking out the kind of the categories of revenue from the $24 million-$27 million guidance. I think, you know, Trevor mentioned that we’re expecting to see growth in all of those areas, and that’s just through, you know, new customer relationships, new contracts, et cetera, across all three parts of the business. Manufacturing, the UAV side of the business, and then the AI side of the business. We’re expecting growth in all three of those areas, but we’re not giving any specific guidance on the specific growth in those three categories.

Gregory Konrad, Analyst, Jefferies: Then you also, you know, kind of laid out a 2026 and some of the key items for 2027. You know, how do you think about growth going forward? What are the big drivers and just how you’re thinking about maybe some decisions or key contracts that we should, you know, expect or be watching for in 2026, you know, for that transition?

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: On the defense side, which obviously is where there’s an awful lot of action for a lot of reasons, we are aggressively pursuing participation in a number of different programs, both as a prime and as a sub. One of the great benefits that we have with the way we’ve structured the business following the acquisitions is we have, as we think about it, multiple shots on goal, in the ability to both be a prime and also to be a sub. We’ve got contracts that are today representative of that. We expect to get more of those. There are an awful lot of opportunities when you start talking about collaborative swarming, collaborative autonomy, at the Pentagon. We’re aggressively engaged in that.

Similarly on the, on the hardware, both manufacturing side and the subsystem side and complete systems as it relates to UAVs. Expect to see us, you know, aggressively pursue those opportunities. As you know, Greg, those programs can take a long time. Fortunately, we’ve got an administration today that has accelerated that path, but it still can be a time-consuming process with a number of steps between kind of first RFI to the point that you actually have money coming in the door. Our team understands that process extremely well. We’ve got a number of folks on the team that are experienced with securing those kinds of contracts, so we’re very optimistic about where that’s gonna head over the next, you know, 12, 18, 24 months.

I think we have a lot of tailwinds for us on that side of the business. I specifically just mentioned the, you know, the AI side, but also on the IQ side of our AI business, we continue to have great traction with the Air Force on the trials that they’ve been doing with IQ in the aircraft repair and maintenance venue. We are hopeful that we’ll see some expansion in that. You know, don’t just think about our work with the Pentagon as just on the swarming side, it’s also on the industrial robotics AI side.

In terms of the commercial side, we mentioned that we’ve got our first IQ customer, which happened frankly, in a relatively short timeframe compared to some of the other engagements that we’ve had. I think that’s a testament to the maturity level and the development efforts that we’ve put into IQ 2.0, so we expect to see some real growth on the commercial side. One of the things I should point out is that our acquired businesses have both defense and commercial businesses. The manufacturing side, we do manufacturing for the commercial sector on our UAV and aeronautical business. Obviously, we do some stuff in space that we’ve talked about. We do some stuff that is not directly Pentagon-focused.

We’re excited about the fact that we’ve got this dual path, dual approach of both defense and commercial activities. I think that will pay benefits, big dividends over the years as we see, you know, demand from both sides ebb and flow. I think we’ve hedged our bets pretty well.

Gregory Konrad, Analyst, Jefferies: If you don’t mind, I’m just to ask a couple more. Hope that’s okay.

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: Sure. Please do.

Gregory Konrad, Analyst, Jefferies: You brought up a missile contract, which has obviously been, you know, and I think you’re also doing some stuff around loitering munitions and missiles and production ramps have been a big focus of the administration. Can you maybe just talk a little bit more about what you’re doing on the missile side, you know, how much visibility you have into that contract and ramp, and maybe where you see some other future opportunities?

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: We’ve got the benefit, Greg, of being involved in both, new missile efforts, new program efforts, as well as, being a supplier into existing, long-standing, large missile programs. We’re seeing a lot of, you know, a lot of that whole landscape. There is a lot of interest in developing higher quantities of lower cost, higher precision missiles, of all different sizes and capabilities, and we’re playing in that space. You know, the great thing about the way we’ve designed the business now is we can soup to nuts be participating in that missile process. Everything from, initiating design of a brand-new concept, all the way through manufacturing of a complete system or subsystems. We’re very active in that space.

We like that space because it is an opportunity for a lot of innovation, coupled with our AI to make a huge difference. It’s not, frankly, a space that is quite as crowded as some of the other drone and UAV marketplaces are.

Gregory Konrad, Analyst, Jefferies: Then just a clarification question. You said quarterly $8 million-$9 million usage. Was that free cash flow or cash flow from ops?

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: Trevor, you wanna take that one?

Trevor Thatcher, Chief Financial Officer, Palladyne AI: Yeah. That’s our expected cash usage in operation. You know, there could be other cash flows coming in, you know, whether those are from ATM sales or what. Those are not considered in that number.

Gregory Konrad, Analyst, Jefferies: Is that $8 million-$9 million cash flow from ops? I mean, historically, the business has been really CapEx light. You know, just thinking about the manufacturing element. You mentioned some investments. How are you thinking about CapEx going forward?

Trevor Thatcher, Chief Financial Officer, Palladyne AI: Yeah. You know, we do have CapEx assumptions baked into that. There are some needs across the business. I wouldn’t say they’re significant right now. And as things progress within the development of our products, we’ll reevaluate that and make the investments where we need to. As of right now, we don’t see any real significant CapEx needs.

Gregory Konrad, Analyst, Jefferies: Then maybe last one for me. I mean, you know, the business has evolved a lot. I think in the past, you talked about you have the target business model from a profitability standpoint. Can you maybe talk a little bit with the new mix, how you’re thinking about, you know, gross margins? Is there a, you know, particular revenue level for profitability? Just some of the changes that we should accept with the new business from a profitability standpoint?

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: You wanna take that one, Trevor?

Trevor Thatcher, Chief Financial Officer, Palladyne AI: Yeah. Yeah. you know, we’re not We’ve given guidance on revenue. We’re not at a point where we’re going to be giving guidance on anything below that. you know, it’s still early on with these new acquired businesses. We expect that as things develop, as we see progress made both on the customer front and on our product development milestones, that we’ll start sharing more guidance around things below the revenue line. Right now we’re just gonna stick to that revenue guidance that we’ve given.

Gregory Konrad, Analyst, Jefferies: Thank you all.

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: I’ll give a little more color beyond that. You know, there’s no reason that we see that the margins that we’ve talked about historically for our AI business will be materially different than what we’ve talked about. We’re still bullish on that in terms of, you know, software-like margins. I think we have talked about the fact that on the hardware side, we’re focused on higher margin opportunities. We don’t wanna get into really low margin businesses, and so far, I think we’re doing a good job at that.

While Trevor’s absolutely correct that we don’t wanna give you a specific number at this point, you know, we’re focusing on those higher margin opportunities so that we keep our margins across the entire enterprise relatively robust.

Gregory Konrad, Analyst, Jefferies: I’ll leave it at that. Thank you.

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: Thanks, Greg.

Trevor Thatcher, Chief Financial Officer, Palladyne AI: Thanks, Greg.

Operator: Thank you. Our next question comes from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.

Brian Kinstlinger, Analyst, Alliance Global Partners: Great. Thanks so much for taking my questions. As it relates to your partnerships with Red Cat and Draganfly, what are the obstacles or tasks that remain to get the system into production and/or the OEMs give them the ability to bid on procurements with your technology? Any updates would be great.

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: Sure. I’ll take them one at a time, Brian, and good morning. On Red Cat, we’ve been doing extensive testing with them over the last, you know, X number of months. That has been going very well. We’re going through the certification process that they have established for their vendors. Our system is a little more complex and capable than many other software platforms that are out there for drones. It has been a lengthier process, making sure that we can actually deliver on all of the things that our specifications say we can. I think we’re at the end of that process now, so we expect to be certified on Red Cat drones, you know, virtually any time.

That has culminated in us then negotiating a broader, more in-depth and detailed partnership agreement with them, a real implementation agreement, and we expect that to be signed. I think it may be signed even today or certainly, you know, within the next few days. That is the next step in getting to the point then that they can actually start offering our system to the government. We’ve been doing joint demonstrations for the government so far, and all of those have gone well. On Draganfly, we’re still in the process of implementing and porting our code onto their platforms. That has not yet been completed. No real roadblocks other than everybody’s busy, and we’ve got all of us have a lot of things on our plate.

I expect that to happen this quarter. We’re making progress on that one also, and we’ve got a number of other discussions with other OEMs going. I’m very bullish about where we are with drone OEMs.

Brian Kinstlinger, Analyst, Alliance Global Partners: Great. You mentioned your first commercial IQ contract. Can you talk about the timing of expectations for both IQ and Pilot for first production units?

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: Well, I mean, the first sale of IQ 2.0 is a production deployment. That’s gonna happen in, I think, in the coming weeks. The contract’s been signed, and we’re ready to start implementation on that. That’s up and ready to go. I think at this point, you know, we’ve talked before that it’s generally, in our view, a 12- to 18-month sales cycle. This one happened to come together much more quickly than that, so it is possible for it to come together more quickly.

We’re in the process now of exposing customers of all different shapes and sizes, you know, in terms of size and, you know, number of locations and all that kind of stuff, to the new, highly capable 2.0 version, and we’ll see how quickly we can make some sales come together. We’re firing on all the cylinders on IQ 2.0. On the drone swarming capability, you know, that really is not a onesie-twosie kind of sale, as you can imagine. That is larger contracts, larger volumes, and those, by definition, take longer to come together. We have a task in front of us to get the, you know, the customer base out there to understand that this is an incredibly capable and unique type of swarming autonomy that doesn’t exist.

When other as I mentioned in my comments, when other people talk about swarming, it’s not this kind of swarming. Just like there are different layers of autonomy in self-driving cars, there are different layers of autonomy in things that fly. We are at the most advanced edge of that. Our biggest mission, Brian, right now is to get the marketplace to understand that the capability exists, that it’s not science fiction. It doesn’t have to be on their roadmap for 2032. It could be on their roadmap for 2026. That’s our mission in front of us.

Brian Kinstlinger, Analyst, Alliance Global Partners: I guess my follow-up to that would be, how are you educating the end customer? Which to me, at least given war, would be the federal government, of course. How are you educating them, and how educated are they right now?

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: We’re just at the beginning stages of the education process, and education involves a lot of meetings, followed by demonstrations. You know, you start with PowerPoint presentations, which of course, people are tired of seeing PowerPoint presentations. You do the PowerPoint presentation to, you know, many different people, as many shots on goal as you can get, and then you promptly follow that up by saying, "It’s not just PowerPoint. Come out to the field. We’ll do a demonstration for you tomorrow if you’re ready.

Brian Kinstlinger, Analyst, Alliance Global Partners: Great. Then, obviously it’s only been one week with the war, if you call it, in Iran. Two things. First of all, is that leading to delays in conversations because everyone now is focused on that? Does it lead into more urgency and more rapid conversations? Maybe talk about, if at all, in one week it’s changed the procurement process.

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: I haven’t seen any change, other than additional inquiries and interest levels. You know, fortunately for us, the folks that are involved in defining requirements, learning about new technologies, figuring out how to integrate those new technologies into the battlefield, they’re not out in the field. They’re very much focused on trying to get our country prepared for what happens tomorrow, the day after tomorrow, next week, next year, and for the years to come. We haven’t seen any impact in a negative sense, but certainly, a lot more awareness of what modern warfare looks like, and that creates significant tailwinds for us.

Brian Kinstlinger, Analyst, Alliance Global Partners: Great. My last question is, you’ve talked a lot about R&D, but maybe you could just rank your top R&D priorities for 2026?

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: At the top of our list is getting material advancement on our 2 UAV platforms, the Gremlin X and the Project SwarmStrike. That’s a significant part of our R&D effort. Continuing to evolve and enhance the capabilities of both SwarmOS and IQ. I think those are the 4 R&D priorities. Fortunately for us, all of the contracts that we have that are development contracts with U.S. government and the Department of Defense, they are all in line, one way or another, with the advancement of those capabilities and technologies. We are from time to time given the opportunity to participate in things that are outside of that kind of main swim lane, and we decline to pursue those because we are very focused on those 4 primary objectives for 2026.

Brian Kinstlinger, Analyst, Alliance Global Partners: Great. Thanks so much for answering my questions.

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: Thanks, Brian.

Brian Kinstlinger, Analyst, Alliance Global Partners: Thanks, Brian.

Operator: Thank you. Ladies and gentlemen, as a reminder, if you’d like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Michael Latimore with Northland Capital Markets. Please proceed with your question.

Michael Latimore, Analyst, Northland Capital Markets: All right, great. Yeah, thanks. Good morning. I guess, just on the backlog topic, you know, maybe can you talk a little bit about which orders or types of products led to the increase in backlog from, you know, 10 to 18? That’s a big change this quarter already. As you look to the, you know, sort of for the go gets for the rest of the year, what are some of your better prospects in terms of, you know, the types of agencies or products that you might be selling to kind of get the rest of the backlog in here?

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: We’re not gonna get into a detailed breakdown of the backlog at this point, Mike. I will tell you that as, I think both Trevor and I alluded to, we see significant opportunities across all three business units that we have. It’s too early for me to predict kind of which ones are going to come out on top. There is just a tremendous amount of momentum that we’re seeing in the business. We have a lot of confidence in being able to, you know, give you the guidance that we have and to watch that backlog continue to grow meaningfully over the course of the year.

Michael Latimore, Analyst, Northland Capital Markets: Great. You know, as you go out and sell to new prospects, can you talk a little bit about the value of having these three segments? Like, you know, how is your sales pitch, you know, include all three? How do you make the, you know, the pitch that these three, you know, bring a significant advantage to a prospect?

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: Yeah, let me give you a kind of a generic example. It is based, in fact, on one project that we’re currently trying to secure. This is a new development program for a weapon system. We were able to present the ability to go from white paper concept all the way through to both component manufacturing and complete assembly and include our intelligence to deliver a holistic platform system that achieves all of the stated objectives. That soup to nuts approach had all, you know, had engineers and business people involved from all three divisions collaborating. I got to tell you know, Just backing up for a second.

This is one of the better integration efforts from an M&A effort that I’ve ever seen. The teams are working together as if they’ve been working together for years and years, seamless. That’s an example of being able to go attack a response to a government inquiry about a new weapon system, where before, we would have been a minor player or just, you know, one part of a bigger team. We were able to present a complete, unified proposal. That’s exciting. I think there’s gonna be a lot more of that in the future.

The other thing that the acquisitions do for us, kind of outside of just a single program or project, is we wind up with a much broader set of relationships across the whole defense sector that allows us to go to the customers of one of those business units and present, the opportunities that we have through our other two business units. That has already paid dividends. We’re excited. I think the, you know, the analogy of one plus one plus one equals a lot more than three, has so far proven to be very much true.

Michael Latimore, Analyst, Northland Capital Markets: Okay, great. Thanks. Then, just on the SwarmOS, can you talk a little bit about how you’re gonna price that? You know, is there a way to kind of think about a license per, I don’t know, 10 drones or something? Or just a little bit more clarity on how you’d price this?

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: Yeah. Our focus is licensing it on a per drone basis. We’ve said historically, or in the past, we’ve said that we expect it to be priced somewhere between 5% and 10% of the total drone system cost. So far, the engagement that we’re having with customers is kind of right in line with that. Bigger, more expensive, more capable, more sensor-laden, UAV platforms, the cost will be higher. Smaller, lower cost, less capable drone systems, more, you know, single purpose type things like that, will be lower cost. So far, we’re not getting any pushback on that general approach to pricing. Having said that, I’ll remind you that we still have to land our first major customer.

Michael Latimore, Analyst, Northland Capital Markets: Yeah. Would the prospects for SwarmOS be, you know, more likely to be with smaller, say, short-range drones or bigger long-range drones or too early to say?

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: I think it’s everything in between. I mean, our ultimate vision is you’ve got some larger, longer duration, fixed wings that have our software on them, from one OEM, able to communicate and engage in swarming capability with shorter duration, lower cost, more tactical drones. You can imagine scenarios where, you know, a loitering ISR platform is in the air for 5, 10 hours. You’ve got different sorties of quadcopters that come in to theater to perform a specific mission set. Maybe they have not accomplished all of that mission. A second sortie comes in and instantaneously is downloaded with what the latest and greatest information from the fixed wing oversight loitering ISR platform has.

You know, that kind of a cohesive real-time, autonomous swarming capability can expand across all of the different drone or UAV sizes. That’s where the real value comes in.

Michael Latimore, Analyst, Northland Capital Markets: Yep. Yep. Okay, great. Thanks a lot.

Ben Wolfe, President and Chief Executive Officer, Palladyne AI: Thank you, Mike.

Operator: Thank you. Ladies and gentlemen, that concludes our question and answer session, and we’ll conclude our call today. We thank you for your interest and participation. You may now disconnect your lines.