Palladyne AI Corp.

Greetings. Welcome to the Paladine AI Corp. Second Quarter 2026 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. Please note this conference is being recorded. I will now turn the conference over to Brian Siegel, Senior Managing Director, Hayden IR. Thank you, Brian. You may begin.

Thank you, Nicole. Good morning. Welcome to Paladine AI's second quarter 2026 earnings conference call. Joining me on the call today are Ben Wolff, President and Chief Executive Officer, and Trevor Thatcher, Chief Financial Officer. Earlier this morning, Paladine AI issued a press release announcing financial results for the second quarter ending June 30th, 2026, along with the 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 AI's website. Today's call will include prepared remarks from Ben and Trevor, followed by a Q&A 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 burn, 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, Paladine AI'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 in Commercial Market Conditions. These and other risk factors are described in detail in Paladine AI's filings with the Security and Exchange Commission, including its annual report on Form 10-K and subsequent filings. Paladine undertakes no obligation to update any forward-looking statements except as required by law. In addition, during the call, management will reference certain non-GAAP financial measures. In general, management will adjust for acquisition of other transaction-related expenses, stock-based compensation expense, non-cash warrant income or expense that are marked to market quarterly based on changes in the company's stock price, expenses related to the change in contingent consideration liabilities associated with closed acquisitions, and any tax impact these items may cause. 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.

Thank you, Brian, and good morning, everyone. Thanks for joining us. Every quarter, we meet with our board of directors to review our prior quarter and year-to-date performance and to discuss, among other things, the business's prospects, opportunities, and challenges in the near, mid, and long term. Prior to that meeting, I meet with the various leaders across the organization for a comprehensive review of the same topics at a business unit and division level. Our most recent board meeting was last week, and I have to say the most recent round of quarterly meetings validated the growing optimism I developed over the quarter. I'm feeling more bullish about our prospects than I have since I returned to the company almost two and a half years ago. We are seeing meaningful traction across all parts of the business. Since I returned, we've built the two things that I believed we needed in order to deliver on our vision for making the United States defense industrial base more competitive, more capable and more responsive. The first is a new kind of autonomy, a decentralized embodied collaborative AI architecture that enables machines to operate on their own, work together and adapt in real time without being pre-programmed or relying on a constant connection to the cloud or relying on human direction and intervention. What I'm describing is the definition of true collaborative autonomy. What most others mean when they use these words is really nothing more than pre-programmed action where humans have made all of the decisions for the machines well in advance. The second is the ability to make the machines that can put that autonomy to work, which requires world-class aerospace engineering, low-cost next-generation avionics, precision manufacturing capabilities, and ultimately complete weapon systems, including access to some of the most capable battle proven lawyer munitions on the planet. Together, they will enable us and our customers to field affordable, attributable systems at scale that are designed from the ground up to leverage our decentralized embodied collaborative AI. These two objectives are closely aligned with our nation's priorities. The Department of War has made it abundantly clear that the United States needs both more intelligent autonomous systems and a stronger industrial base capable of designing, manufacturing, and fielding them quickly and economically. We are focused on doing our part to answer that call. This quarter we began to see every one of these pieces working together in a way that is showing up in revenue, customer activity, and the number of opportunities in front of us. We still have much to do, but the business has meaningful momentum across the company. We generated record quarterly revenue of approximately $5.8 million, up 63% from $3.5 million in the first quarter. The growth was broad-based across our business units, and we expect continued growth through the second half as backlog converts to revenue and new contract rewards and customer wins begin contributing. We ended the quarter with approximately $25 million of backlog, up from 17 million at the end of the first quarter, which means after taking into account our Q2 revenues, we booked roughly $13 million of new business during Q2. The backlog will not always necessarily increase every quarter. The timing of bookings, The duration of contract performance and the timing of revenue recognition can all cause backlog to ebb and flow. But the current backlog and the level of new contract awards and customer engagement give us good visibility into the second half. As a result, we are reaffirming our full year 2026 revenue guidance of $24 to $27 million. We ended the quarter with approximately $44 million of cash on hand, operating cash burned including capital expenditures was above our guided average quarterly rate primarily due to increased business development efforts, some non-recurring capex and the expansion of our engineering team to support new business that will contribute to revenue in the second half of this year. We are also carrying infrastructure that our current revenue base has not fully utilized. This cash burn was offset by our prudent use of our ATM facility. We continue to expect operating cash burn of $32 to $36 million for the full year, inclusive of CapEx, which means we expect operating cash burn to decline in the second half. The defense market is moving quickly towards affordable mass, large numbers of lower-cost autonomous systems that can be deployed and replaced without the economics of traditional weapons platforms. The Department of War is also pushing the industry to develop and field those systems faster than ever. Both trends are directly relevant to what we have built. For the most part, launching 1,000 drones today requires 1,000 soldiers. Other companies are attempting to solve this manpower challenge by automating multi-drone launches that follow a pre-programmed flight path. But that doesn't really solve the challenge because most of these drones can't react to what's happening around them in real time. That still requires a soldier. Pre-programmed flight, or what we call automated flight, is not a substitute for human intelligence or human direction. But true autonomous flight can be. That's what we do, and it is essential to understand the distinction and how that distinction translates to real-world operations. We put real reasoning and decision-making abilities directly on the drone, and then we enable multiple drones to collaborate in a manner such that the knowledge of each individual drone can be aggregated and used across the entire swarm. This is what we mean when we refer to true collaborative autonomy. And we don't just do this on Paladine drones. We enable UAVs from different manufacturers to collaborate with any drones that are also running our swarm OS software. We call our approach decentralized embodied collaborative autonomy or DECA for short. The intelligence operates on the machines at the edge so they can coordinate and adapt without relying on a continuous connection to the cloud or from a remote operator. We proved this capability in the field under real operating conditions during the Army's IVMAS exercise in Q2. Soldiers from the Army's 4th Infantry Division used SwarmOS to command a mixed team of surveillance drones and our own Gremlin X drone in a contested environment. One Army operator controlled the entire group of UAVs. In June, we announced that SwarmOS and GremlinX were awarded contracts by the Army under its disruptive applications program. Following IVMAS, we were informed that certain contract options would be exercised for FY27, and we were formally invited to additional exercises. That exercise, and the future exercises are important steps for us because the software was and is being used by soldiers in an operational setting, not simply being demonstrated by our engineers in a controlled environment. This was not a demo in the traditional sense. Rather, it was a real-world exercise. A few moments ago, we issued a press release about our success at PCC6, which was even larger and more complex than IVMAS. Turning to our business operations, I will start with our components business. Brain is our low cost flight computer for autonomous air systems. It is built into our own Gremlin X mini bomber drone, and it is being integrated on systems designed by us for our defense prime customers. During the quarter, we booked a follow on order from a defense prime that was five times larger than its prior order. The order covers more than 1,000 Brain FC1 units with an aggregate value of approximately $2.3 million. These units deliver the guidance, navigation, and control for a new, low-cost, counter-UAS interceptor. As these systems gain traction with customers, we expect demand for Brain to grow with it, and we are expanding our domestic production capacity accordingly. And Brain may be just the start. In building our own platforms, like Gremlin X and Swarm Strike, as well as designing third-party systems, we have developed a range of other high-value subsystems and components, all made here in the U.S. We're now exploring the business case for supplying some of these components to other drone and missile manufacturers as well. But we will only do so where we have a unique competitive advantage and can deliver differentiated capability or performance or cost advantage. We have no interest in being in a highly competitive commoditized or low margin business. Although there can be no doubt that as a nation, we need more UAV and missile components made here to reduce reliance on foreign sources. Our precision manufacturing business accounts for the balance of our components revenue. It machines and fabricates hardware for defense programs and industrial customers. This capability is strategically important because it allows us to produce components that are often in short supply and that impair our country's capacity to produce the volume of weapons that the Department of War is looking for. We also expect it to support the work required to bring IAI's loitering munitions into production in the United States when and as we develop customer demand. Our engineering services for UAVs, missiles, loitering munitions, and spacecraft generate real revenues today and give us a seat at the table to educate and inform customers about the component and software solutions we offer that could give these customers and their products a competitive edge. During the quarter, we added engineers and moved into a larger facility to accommodate the increasing demand and utilization rates we are experiencing. Specifically, the additional capacity allows us to support existing and new third-party programs continue developing our own products and manufacture and assemble Brain and GremlinX without one activity interrupting the other. SwarmOS also continues to mature and is increasingly being integrated with autonomous systems from other OEMs. An operator defines the mission, but the software allows the machines to respond to what is actually happening around them, coordinate with one another, and adjust in real time. It is not tied to a single airframe or manufacturer, which is one reason the Army has asked us to deploy our software across multiple drone platforms. We are also extending the technology to integrate sensors from other domains, including sensors in space under the recently signed $4.2 million hang time contract with the US Air Force. Today, revenue relating to our DECA AI solutions still comes primarily from development, integration, and trial contracts with the Department of War, but SwarmOS customer engagement is increasing, and the software remains the foundation of our aerospace and defense strategy. Our autonomous systems portfolio combines that software with physical platforms. Gremlin X is a reusable mini bomber designed to deliver a kinetic effect for less than $1,000 per effect. We have prioritized development of this platform which has advanced from TRL-6 to TRL-7 in just the past quarter. We're also evaluating a modular version that could support missions beyond strike, including potentially ISR and County UAS missions by making the payload modular rather than having to feel different airframes for different missions. SwarmStrike is our low cost mini cruise missile designed to operate in coordinated groups using our IntelliSwarm product, which combines SwarmOF and BRAIN. With our alarm contract with the U.S. Navy, we were in the early stages of developing a low-cost, air-launched, near-hypersonic missile for use with the F-35. During the quarter, we were one of only 14 companies invited to the Air Force's relentless Wolfpack Industry Day, which focused on networked, autonomous weapon salvos. We had proposed Swarm Strike as an answer to the challenge, and we were the only small company invited to participate. This does not mean we will land a contract, but it shows the DOW recognizes our innovation and capabilities. Separately and importantly, a major tier one defense prime included Swarm OS in its own relentless Wolfpack proposal. Again, we don't know who will be down selected, but this is great validation from a large industry partner. Major defense primes don't make these kinds of decisions lightly. I will now turn to our partnership with Israel Aerospace Industries, or IAI. In June, we announced that Paladine had entered into a partnership with Israel's largest defense prime. As part of that partnership, we secured the right to Americanize, manufacture, and integrate IAI's Harop, Harpy, and Mini Harpy loitering munitions for the U.S. Department of War. These are large combat-proven systems, not small FPV drones. IAI pioneered the loitering munition category more than 40 years ago and today has a backlog across its business of more than $30 billion. Harpy and Herrick, which have been sold to numerous countries around the globe, are 10-foot wingspan unmanned aircraft that are designed for long-range missions, extended loitering, and for suppression and destruction of enemy air defenses. These are exactly the kind of systems that could potentially mitigate some of the aircraft losses Our country has recently experienced in the Middle East. Harpy is designed to search for and attack enemy radar emitters. I personally am not aware of any other UAV of this size or class that has anti-radiation capabilities. Harrop has an electro-optical seeker, allowing the Harrop to identify and engage a target with precision. Mini Harpy combines anti-radiation and electro-optical capabilities in a smaller system with shorter range and a lower price point. These products have been used in combat and address missions that have become increasingly important as mobile air defense systems become more common and present our military with real targeting challenges. We believe the US military has a meaningful capability gap in this area. As a nation, we typically counter these defenses by launching missiles from manned aircraft. I have been told, but have no way of independently confirming, that the current cost of striking one of these mobile or intermittent air defense systems can range from $10 to $40 million. Our IAI systems can present an alternative at a small fraction of that price without risking human life or the cost of a manned aircraft. We believe that a successful US program based on these IAI systems could ultimately amount to hundreds of millions and potentially even billions of dollars of revenue over time. IAI selected Paladine based in large part on our engineering capabilities, our U.S. manufacturing capacity, our team, and our autonomy software. Once there is a clear government demand signal and we begin the work to stand up domestic production, we believe initial units could be available in about 18 months. We also intend to integrate SwarmOS where appropriate so these systems can coordinate their actions as part of a larger mission set rather than operate only as individual aircraft. That combination takes the mission capability to a whole new level, unlike anything else on the battlefield today. One more proof point worth mentioning is the caliber of people joining our team. This quarter, we added senior military advisors to our Defense Advisory Board, including retired Lieutenant General Sean Ganey, who ran U.S. Army Space and Missile Defense Command, led the operational command behind Golden Dome, and founded the U.S. military's Joint Counter UAS Office, to be blunt, People with that kind of record don't lend their names to companies they don't believe in. He joined us precisely because he truly believes in our mission, our capabilities, and our opportunity to make a real difference for our nation's warfighters. On the commercial and industrial side, we have sharpened our strategy with Paladin IQ in two ways. First, we are focused on applications where autonomy addresses work that is difficult, dangerous, repetitive, and hard to staff, like surface preparation and corrosion treatment typically done by hand. A good example is our robotic work at an Air Force logistics center, which we expanded this quarter with an additional $2.9 million contract award, bringing the total for this program to more than $10.6 million to date. Second, we are shifting to a partner-led go-to-market strategy for IQ and pilot, rather than trying to sell and deploy every solution ourselves. And we are seeing encouraging interest from ecosystem partners. We are not ready to announce more today, but we expect to have more to share on both products over the next several quarters. I will finish with the opportunity pipeline. As of today, we have submitted proposals for more than 20 Department of War funding programs with an aggregate initial potential value of several hundred million dollars. The timing and probability vary significantly by program. Some are relatively near term, others are larger opportunities with longer odds. Of course, we will not win all of them and we may not even win any of them. But the important point is that the number and size of the programs we are pursuing are materially greater than they were six months ago. We are increasingly getting shots on goal as the Department of War's requirements continue to evolve and begin to incorporate the types of capabilities we have been developing for years. To continue the analogy, we have been skating in front of the puck for a while now, and I believe we are just on the cusp of that strategy and focus paying off. We have a lot of work ahead of us, and much of the opportunity I've discussed still depends on successful execution and customer funding decisions. but the quarter showed progress in the areas that matter. Revenue, contractually committed backlog, proving out our autonomy software with customers in the field, repeat component orders and a much larger opportunity pipeline. The pieces we assembled over the last two years are beginning to reinforce one another. That is why I'm increasingly confident that we are in the right place at the right time. With that, I will turn the call over to Trevor to walk through the financials in more detail. Trevor.