Palladyne AI Corp.

Greetings and welcome to the Paladine 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.

Morning and welcome to Paladine AI's fourth quarter and full year 2025 earnings conference call. Joining me on the call today are Ben Wolf, President and Chief Executive Officer, and Trevor Thatcher, Chief Financial Officer. Earlier this morning, Paladine AI issued a press release announcing its financial results for the fourth quarter of the full year ended December 31st, 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 Paladine'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 Paladine'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, involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied. These risks and uncertainties include, among others, Paladine'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 Paladine's filings with the Securities and Exchange Commission, including its annual report on Form 10-K and subsequent filings. Palo Verde takes 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. The 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.

Thank you, Brian, and 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 to $27 million. That is roughly four to five times our 2025 revenue. Additionally, backlog has already increased from approximately $13.5 million 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 three quarters, we were upgrading Paladine 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, Paladine Pilot, and created a swarming variant branded Swarm OS for defense and national security. We signed MOUs with Red Cat and Dragonfly 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. Then, in November, the second phase began, transformation. We acquired GuideTech, Warnke Precision Machining, and MKR Fabricators. We launched Paladine Defense. We added avionics design and engineering, proprietary UAV and missile systems, precision components, certified US-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. Now, 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. Grogic 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. But 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. So 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. Swarm OS enables decentralized edge-based distributed collaboration. IntelliSwarm combines SwarmOS with our Brain 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. And 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, Matt Muda joined us from our board of directors to lead our commercial and industrial business. We released IQ 2.0 and signed our first customer through a systems integration partner deploying 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 Swarm OS 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. Then 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. Next, 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. Finally, there is SwarmOS from Paladine. SwarmOS delivers wolfpack swarming, but 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. So 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 SWARM OS 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 four 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 Swarm OS, IntelliSwarm, and IQ 2.0, and advancing Gremlin X, Swarm Strike, and brain variants toward defined milestones. Then we walk in 2027. Walk is where we expect proof to become repeatability. We expect broader Swarm OS 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. And then 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. Now we are executing against a defined progression with intention and precision. And we believe 2026 marks the beginning of measurable translation of that transformation into growth. With that, I will turn the call over to Trevor.