Red Cat Holdings, Inc.

Greetings and welcome to the Red Cat 2Q2026 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'll now turn the conference over to Ankit Hira, Investor Relations. Thank you, Ankit. You may begin.

Good afternoon and welcome to Red Cat 2Q2026 earnings conference call. Joining us today are REDCAT's CEO, Geoff Thompson, COO, Chris Ericson, and CFO, Christian Morrison. Please note that certain information discussed on the call today will include forward-looking statements for our future events and REDCAT's business strategy and future financial and operating performance. These forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict and may cause actual results to differ materially from those stated or implied by those statements. Certain of these risks, uncertainties, and assumptions are discussed in REDCAT's SEC filings, including its most recent annual report on Form 10-K and other SEC filings. These forward-looking statements reflect management's beliefs, estimates, and predictions as of the date of this live broadcast, August 6, 2026, and REDCAT undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. In addition, our comments on the call today contain references to non-GAAP financial measures, such as adjusted EBITDA and key business metrics such as annual recurring revenue. Non-GAAP measures should be viewed in addition to and not as an alternative for the company's reported GAAP results. A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures as well as definitions of the key business metrics reference and management's reasons for including the non-GAAP measures and key business metrics reference may be found in the press release. Finally, I would like to remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the company's website at ir.redcatholdings.com. With that, I'll now turn the call over to Chris.

Thank you, Ankit. Good afternoon, everyone, and thank you for joining RedCat's Q2 2026 earnings call. Operationally, the second quarter was an important quarter as we continued scaling production, expanding our family of systems, and building the infrastructure necessary to support RedCat's next phase of growth. As Geoff will discuss in a bit, demand across our markets remains strong. My team's job is to ensure that we can deliver at scale while maintaining the speed, quality, and flexibility that our customers expect. We continue to improve operational metrics by supporting $20 million in quarterly revenue and improving gross margin to 16%. The most important operational achievement of the quarter was our continued progress scaling manufacturing capacity across the organization. We previously noted that our manufacturing footprint increased fivefold since 2024 to 260,000 square feet. During this past quarter, we added an additional 12,000 square feet of manufacturing and engineering space in San Diego for APM operations. To be clear, square footage is critical, but not the sole focus and end all for capacity. We continue to focus on increasing throughput, improving efficiency, and strengthening supply chain resiliency. Throughout the quarter, we continued expanding production capabilities increasing inventory availability and investing in manufacturing process that support better quality and higher delivery volumes across our product portfolio. We are seeing significant synergy gains through centrally driven collaboration across our multiple product platforms and areas of engineering, system integration, quality programs, and supply chain optimization. These efforts help support continued deliveries across our autonomous platforms while positioning us for anticipated future demand. Importantly, this shows that we're not simply scaling capacity, we're building repeatable processes that enable us to consistently deliver as volumes grow. That includes investments in manufacturing systems, quality control, supplier management, and operational analytics that improve visibility across the organization. As we continue to scale, maintaining quality and execution discipline remains a top priority. Operationally, we continue to make progress across several important programs. At Till Drones, advancement to Gauntlet 2 of the drone dominance program was an important milestone. While the program is still ongoing, moving forward in the process reinforces our confidence in the competitiveness of the platform and the capabilities of our engineering and production teams. We remain focused on execution and supporting the program requirements moving forward. We also continue to support growing international demand for secure, American-made unmanned systems, deliveries to international customers, including the Japan Ground Self-Defense Force further demonstrate our ability to deploy and support our platforms globally while expanding REDCAT's international footprint. One of the most exciting developments of REDCAT is the continued expansion of our family systems. Our Black Widow platform continues gaining traction with customers that require secure, mission-ready small and manned aerial systems. At the same time, we introduced the Hellcat, which extends our ability to support international defense customers with a globally configurable platform derived from the proven Black Widow architecture. This creates additional opportunities to expand our addressable market while leveraging technologies and capabilities already proven in the field. Beyond aerial systems, we're also making meaningful progress in the maritime domain through BlueOps. During the quarter, BlueOps completed production validation testing of its V7 hulls and moved into mass production of the Variant 7 uncrewed surface vessel. A U.S.-built mission-adaptable maritime autonomy platform designed for U.S. and allied defense missions. The Variant 7 brings together domestic autonomy, command and control, communications and mission systems, while supporting intelligence, surveillance and reconnaissance, force protection, harbor and coastal security, contested logistics, and other payload-adaptable missions. This is an important part of how we are expanding REDCAT from an aerial systems provider into a broader all-domain autonomy platform. Recently, we have been selected to participate in the U.S. Office of Naval Research Global MACE 3 and MACE 4 operational experimentation events. These programs provide an opportunity to demonstrate advanced autonomous maritime capabilities alongside government and defense stakeholders and further validate the relevance of our Blue Ops and APM technologies in future naval operating concepts. We also continued validating the broader Blue Ops ecosystem in real-world maritime environments. The recent Navy services engagement further validates the demand we are seeing for a scalable U.S.-built maritime autonomy and reinforces our confidence that Blue Ops is addressing a clear and urgent capability gap for naval customers. In May, we demonstrated the Blue Ops Variant 7 with CHIMETA during an exercise in Key West, Florida, highlighting resilient communications on the move for autonomous maritime operations. For uncrewed surface vessels, reliable connectivity is a critical enabler for operations at a distance, real-time data sharing, swarming, and coordinated missions in dynamic or contested environments. That event was another proof of point that the platform is not just a vessel but a part of the integrated maritime autonomy stack that can support the types of operational requirements naval customers are increasingly prioritizing. Another major operational focus has been integrating the technologies and capabilities we've acquired over the past several quarters, and I would start with Swarm Autonomy. The Department of Defense's Swarm Forge initiative reflects clear direction of travel across the market. Customers want autonomous systems that can operate collaboratively, adapt in complex environments, and generate meaningful effects with fewer operators. The program is designed to accelerate AI-enabled robotic warfare through recurring crucible events, and move validated swarm packages including mission software, coordination logic and interfaces and tactics toward operational transition in 90 days or less. This is why our integration of APM is so strategically important. APM brings multi-agent autonomy and distributed control capabilities that can help enable coordinated operations across air, land and sea. As customers increasingly focus on collaborative autonomous systems, we believe the swarming will be and important differentiator across the REDCap family of systems. Our engineering teams are working to incorporate these capabilities into our future roadmap with the goal of supporting more coordinated, resilient and operationally effective mission profiles. Another important step forward during the quarter was our continued work demonstrating interoperability across leading autonomy platforms. During a recent joint demonstration with Anduril, our team showcased a multi-vendor, find, fix and finish workflow operating under a unified command and control architecture. The demonstration combined ISR provided by Blackwidow autonomous mission orchestration through APM's paradigm software and kinetic effects capabilities integrated through Anduril's ecosystem. We believe these demonstrations validate our family of systems strategy and show how REDCAT technologies can integrate into a broader defense architectures while supporting increasingly sophisticated multi-domain missions. Equally important, these effects demonstrate that REDCAT can serve as a critical contributor within larger defense ecosystems, reinforcing the value of open, interoperable architectures that combine the best-of-breed technologies from multiple providers. From there, the next operational constraint is endurance, and that is where QAISE becomes highly complementary. Quaze adds wireless power transfer capabilities that address one of the most significant remaining barriers to persistent autonomy. Keeping systems powered in the field without manual battery swaps, precise alignment, or connector-based charging. Its platform is designed to support autonomous recharging across air, ground, and maritime environments, including vehicle-mounted systems, drone-in-a-box solutions, uncrewed surface vessels, fixed infrastructure, and underwater charging stations. While integration remains ongoing, we're encouraged by the opportunities this technology creates across multiple platforms. Together, APM and Quaze strengthen two foundational pillars of the autonomy stack, coordination and endurance. Swarming helps autonomous systems work together more intelligently, while wireless power helps keep those systems operating longer with less operator burden. When combined with our aerial and maritime platforms, these technologies enhance our ability to deliver more complete mission-ready solutions for customers operating across increasingly complex environments. Our customers increasingly want interoperable systems that work together seamlessly. They want common control interfaces. They want integrated data flows. They want a single partner that can support multiple mission requirements. That trend continues to accelerate as military organizations adopt multi-domain, operating concepts and seek greater operational flexibility. Our approach is designed around those requirements. As we integrate new technologies, expand our portfolio, and continue building common architectures across the organization, we believe REDCap becomes increasingly valuable to customers looking for comprehensive solutions rather than standalone products. Looking ahead, our operational priorities remain straightforward. First, continue scaling production and deliveries. Second, continue integrating newly acquired technologies into fielded capabilities. Third, maintain the agility and responsiveness that have become hallmarks of the company. We believe the operational foundation we have built over the past several years positions us to support future growth across air, land, and maritime autonomy, and we're excited about the opportunities ahead. I'll now turn the call over to Christian to discuss our financial results.

Thank you, Chris. I'm pleased to present REDCAT's financial performance for the second quarter of 2026, which demonstrates continued revenue growth, improving operating scale, and the investments we are making to support our long-term growth strategy. For the second quarter of 2026, revenue was $20.2 million, representing an increase of 520% from $3.2 million in the prior year period. For the first six months of 2026, revenue totaled $35.7 million compared to $4.8 million in the prior year period. This performance was driven by continued deliveries across our drone portfolio, including Black Widow, FlightWave, and APM platforms, as well as ongoing execution against key defense programs and international opportunities. These results reflect growing customer demand, increased manufacturing output, and the expanding scale of our operations. Our gross margin performance also continued to improve. Gross profit for the second quarter was $3.3 million, representing a 16.1% gross margin, a significant improvement from 11.6% in the quarter of 2025, and a sequential improvement of 12.7% in the first quarter of 2026. The improvement reflects better absorption of manufacturing overhead, increased production volumes, and operational efficiencies as we continue to scale the business. We believe this demonstrates the underlying leverage in our operating model as revenue continues to grow. Capital expenditures totaled approximately $12.6 million during the first six months of 2026. primarily supporting manufacturing expansion at our Blue Ops division, facility improvements, production equipment, and other infrastructure investments. These investments are intended to support anticipated future demand and expand our production capabilities. Our strategic investments in future growth remained significant during the quarter. Total operating expenses were approximately $41.9 million. reflecting continued investment in personnel, manufacturing capacity, product development, acquisitions, and infrastructure required to support our long-term growth objectives. These investments are designed to position REDCAT to capitalize on the significant opportunities we see emerging across defense autonomy and multi-domain robotic systems. Research and development expense increased to approximately $14.2 million during the quarter, reflecting our commitment to innovation, autonomy, next-gen platforms, and the continued expansion of our family of systems. These investments support future product development across aerial, maritime, and autonomous technologies, while helping maintain our competitive edge in rapidly evolving defense markets. Our balance sheet and liquidity position provides a significant competitive advantage, and we believe that Redcat now has one of the strongest balance sheets in the sector and a strong foundation for executing our growth strategy. As of June 30, 2026, we held $325.6 million in cash, compared to $167.9 million at year-end 2025. Working capital increased to approximately $396.5 million, providing substantial financial flexibility to invest in growth initiatives, pursue strategic opportunities, and support increasing production requirements. Our inventory strategy continues to be an important component of our growth plan and use of cash. Inventory, including prepaid inventory, totaled approximately $84.8 million at quarter end, up from $30.4 million at year end. This increase reflects a deliberate effort to secure critical components, strengthen supply chain resilience, and position the company to support anticipated deliveries across existing programs and to deliver faster than our competition. We view this investment as a strategic enabler that allows us to respond quickly to customer demand while mitigating potential supply chain constraints. We view our balance sheet and inventory position as strategic assets. With more than $325 million of cash and significant investments in inventory, manufacturing capacity, and technology expansion, we believe we are in a prime position to support future growth opportunities in real time as they emerge. These investments provide flexibility to respond to customer demand, pursue strategic initiatives, and continue expanding our capabilities across air, land, and maritime autonomy. Looking ahead? We remain confident in our long-term growth trajectory. Our target revenue remains between $150 and $180 million. While the timing of individual contract awards and delivery schedules can create quarter-to-quarter variability, we continue to see substantial opportunities across domestic and international markets and believe the investments we are making today position us well to capitalize on those opportunities. Several key factors support our confidence in that outlook. First, we continue to see strong demand signals across defense and national security markets. Second, our manufacturing footprint, inventory position, and production readiness provide us with the ability and speed to scale deliveries as opportunities materialize. Third, our recent acquisitions, including Quaze Technologies and APM Swarm Robotics, expand our technology capabilities and addressable market while strengthening our position as an integrated all-domain autonomy platform. We also continue to see multiple growth vectors emerging across air, land, and maritime autonomy supported by increasing production readiness, expanding customer demand, and continued progress across our strategic programs. Market conditions remain highly favorable as defense customers increasingly prioritize autonomous and unmanned systems. Combined with our strong balance sheet, expanding product portfolio, and growing operational scale, we believe REDCAT is uniquely positioned to participate in what we view as one of the most significant defense technology modernization cycles in decades. With that, I'll now turn the call over to our CEO, Geoff Thompson.

Thanks, Christian. Good afternoon, everyone, and thank you for joining us on this call. I am thrilled to start with our Q2 2026 results. We delivered a Q2 record of $20 million in revenue this quarter, a strong sequential increase of approximately 30% from the $15 million we reported in Q1 2026. Even more impressive is the gross profit of 3.3 million, which represents a sequential jump of about 66% from what we achieved in the first quarter. This translates to a gross margin of roughly 16% in Q2, up nicely from the 12% we posted in Q1. That is approximately a 27% sequential margin increase. These sequential improvements show that our scaling efforts are working, higher volumes are flowing through, manufacturing efficiencies are kicking in, and we're seeing clear operating leverage quarter after quarter. Now let's look at the bigger picture. The first half of 2026 compared to the first half of 2025. This is where the transformation of Red Cat really stands out. In the first six months of 2025, we generated just $4.8 million in total revenue and recorded a gross loss of about a half a million dollars. Fast forward to the first half of 2026 and the contrast is dramatic. Combined first half 2026 revenue, $36 million. Combined first half 2026 gross profit, $5.2 million. First half gross margins, approximately 15%. That's more than a seven times increase, equating to approximately 636% growth in revenue year over year. And we swung from a gross loss into a solid positive territory. The sequential strength we just delivered in Q2 is accelerating the momentum we built in Q1. And the first half of 2026 already looks completely different from where we stood just one year ago. While these financial milestones mark a significant turning point, the underlying engine driving the performance is a fundamental transformation in how we now operate. Beyond the numbers, we have reshaped how REDCAT operates in defense technology. We are actively moving away from traditional requirements documents, many which predate the lessons learned in Ukraine, and shifting business development to sales and toward direct real-time theater feedback. We have rejected the legacy prime contractor model of middlemen, resellers, and trade show marketing. Instead, we have four deployed solgineers who operate ankle to ankle with warfighters in active operational environments. By capturing direct feedback on active battlefields, we've compressed our product development cycles from years down to weeks. We continue to see competitive systems in the field that simply do not work. and we refuse to place substandard crap in the hands of U.S. warfighters. As excited we are about our strong first half performance, the more important question is how we hit our revenue target, an objective we highly confident in reaching. As we highlighted back in Innovation Day in February, 2026 is fundamentally a second half story. Last year, we delivered a vast majority of our revenue in just 1.5 quarters across Q3 and Q4. That performance was generated off a single product line with a single primary customer operating out of just 22,000 square feet of manufacturing space. Fast forward to today, our scale, capacity, market positions are completely transformed. We enter the second half of 2026 backed by nine active products, approximately 270,000 square feet of expanded production capacity and unit economics featuring average selling prices in the hundreds of thousands of dollars rather than tens of thousands. Thank you for joining us. Redcat has transformed our sales methodology, pioneered a new model of product development and compresses cycles from years to weeks, delivered record first half revenue, continued expanding gross margins on a clear path to profitability, launched new products, received our first orders for blue ops, closed two strategic acquisitions, and massively scaled production. The factory is the weapon. And I'll now turn it over to questions.

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please click the raise hand icon on the bottom of your screen. Once your name and company are announced, please accept the promotion to panelist. Please make sure to have your microphone unmuted. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Austin Bullock with Needham & Company. Please proceed. Austin, you're still on mute.

All right. Can you hear me now? Yes, we can hear you. Hey, guys. Well, congrats on the good first half results. Just maybe first wanted to dig into kind of like the Q2. Like, could you highlight maybe specifically what were the main revenue drivers that you can break out between Teal and Black Widow and Blue Ops would be helpful?

Yeah, well, there's very little anything other than currently for Q2, other than Black Widows and Hellcats. So that's still Q2 is mostly driven out of Teal. But that's already, as we already mentioned today, Apium and Blue Ops are getting paid to go to these exercises. They're on the board. We're very happy that we're finally diversifying our revenue. But we didn't break it out for, you know, which stuff is Fang, which stuff is Black Widows or anything like that.

Okay, fair. And can you assume, was the bulk of this revenue still related to the extended LRIP contract or are these new programs and new opportunities that you're selling into?

No, it was a little less than half was coming out of the Army. You know, there's been a lot of changes. The PMUAS office in Huntsville just got a whole new team put in last week. We're actually going to be meeting with them later, hopefully by tomorrow. They've got General Phillips just got a two-star upgrade. He used to run it, and now they have new people in there. So we'll be able to continue with that, but only half of that revenue came from the Army.

Yeah, and Austin, if I can jump in, I mean, Geoff's spot on. I mean, you look at our 10K from 2025, Army was 73% of our revenue. That's how concentrated we were with the Army. Love the Army. You know, everything we've done in our relationship with the Army is very strong. For the first six months, Geoff is right. It's right about 50%. What I'm so excited about as a CFO is the diversification. Our number two customer is an ally in Japan. Our number three customer is NSPA in Europe. So great, great story. Love how the business is growing and the customer base is expanding.

OK, perfect. Thank you. And I guess to kind of lastly, Looking at kind of the outlook, I guess what gives you guys confidence in this big second half ramp? Are there any key programs we should be tracking? And then kind of piggybacking off of that, would love an update on the Ukraine opportunity and where that kind of stands.

Great. Yeah, some great questions, Austin. Yeah, so the confidence is coming from, you know, we've been in Japan twice working with folks on the variant seven and now actually the variant, not variant five. We got a new name for it. Well, you'll hear about it soon. So there's a lot of interest, you know, Thank you for joining us. So there's a lot of interest in that region. We're spending a lot of time there. Like I said, we've been in Japan twice this month. We're in Taiwan. We're in Korea. I'm heading back there in mid-September. So there's a ton of interest there. The Middle East is actually ramped up. Everyone's talking about USVs now. So there's so much interest coming from that. But then Back into just budgets, right? So the administration has told the Department of War that they want that the big beautiful bill, I think it's $152 billion. They want most of it at least contracted by the end of 2026, which is the end of next month. That's a massive amount of new money that people weren't really paying attention to. Plus the budget from last year. is still not fully spent. And then the international operations are just insane. For instance, again, we're in four live theaters currently. We're not going to say which ones, but the Ukraine opportunity is going very well. We've done some very interesting partnerships, again, which you'll hear about soon, to position us as that frontline ISR drone, which is also now People are starting to understand that for the drone dominance program, the fact that you need an ISR drone. We're so happy that the DDP has, you know, really looking at how that you have to have an ISR drone to complete that. But you should be hearing something from the Ukraine opportunity probably in the beginning of September from us.

Alrighty. Awesome. Well, best of luck in the second half. That's all for me. Thank you, Austin.

Thank you. Our next question comes from the line of Ashok Kumar with Think Equity. Please proceed.

You there, Ashok?

He's muted still. No.

Can you hear me now?

Thank you, Christian, Geoffrey, and Chris. Back to the second half coverage question, the roughly $114 million of second half revenue, the low end of your annual target. So how much is covered today by executed purchase orders of funded contract line items and how much remains in the And then going back to the cost structure, as you highlighted, the OPEX stepped up 43% sequentially to 42 million. So the R&D was doubling. So what drove the step up? Which programs absorbed the R&D increase? and is due to the new base. And so what quarterly revenue reaches operating breakeven and which quarter do you expect to cross it? And the last question is the margin bridge, right? So gross margin improved from 13 to 16%. So can you bridge us to the 30% you targeted for late this year, right? What margins do Army Japan and Vessel revenues each carry and does 30% survive a Vessel volume slip into 27? Thank you.

All right, lots of questions, Ashok. You want me to take the R&D first, guys, and then the Biden-Cocker? Just on the R&D, it's everything that we talked about. Drone dominance is part of why R&D increased. Hellcat, which is our Ukraine variant there, that was a big part of the spending. In addition, we have Blue Ops prototypes that we're working on. Tricon we're working on. The team is working really hard. It's easy to see the dollars. It's hard to see the weekend hours and all the time that the team's putting in that you have to have those products be successful. The investments are being made right now, real-time in R&D.

Thank you, Christian.

And the next question, I'm drawing a blank. You were saying margin?

I can take some of the questions. So the contracts that give us confidence, you'll be hearing about again throughout the rest of August and September. As you know, this is sweeps. There's never been this much money in the history of sweeps available that's got to get spent by the end of September. And as those discussions become live contracts, we will let you know. There's also contracts that we have that we're not allowed to talk about. So we won't talk about them. We'll keep our guidelines. We're told not to talk about it whatsoever or just to point to LinkedIn. So there's lots of things that we can elaborate over the next few weeks for everybody to people understand why we're so confident.

Thank you, Geoff. And the last question on the inventory conversion and gross margin, primarily the gross margin bridge, right? The transition from 16 to 30%.

Yeah, a lot of that gross margin will increase as we approach the end of the year. So as our revenue ramps, our production ramps, there's going to be a lot of economies of scale that's going to drop that down, as well as the improvement from a mix of our USVs. But we do expect to hit 30% towards the end of the year. So it might not be cumulative for the year, but towards the end of the year, our margins will hit 30%.

Yeah, and Christian, you might want to comment on what Teal and Blue Ops look like if they hit their forecast that is part of our target revenue.

No, absolutely. You know, we spend a lot of CapEx, a lot of investment in Blue Ops. The great thing about the USV business is that our ROI is pretty fast on that. And Geoff's right. If we hit our Q4 internal targets, we will absolutely have a profitable division within Blue Ops. The hurdles are not that high. You're talking boats here. It's less than 10 boats and we're adding free cash flow to the business. On the teal side, if we have incremental upside on Hellcat, we are there. So on a standalone basis, those businesses are performing like we believe they can and will be on track to be profitable by the end of the year.

Got it. And just as a last question on Army transition, right, replacement revenues from new programs arriving on time as the revenue base transitions, right? So are there any developments related to SRR to LRIP to OTA sequence, right, where there might be more of a timing issue there?

Yeah, well, they just went through a huge change. Once we have more information on that, we will get that to you once I meet the new team, which I'm hoping to later tomorrow or early next week. So as soon as we have something to report. But they just put in a whole new team, which is pretty exciting because we didn't know if they were going to keep going with that. And obviously they are with a whole brand new team in the SRR and PMUIS community. and they actually just funded some stuff in the LRR portion to AVAV. But we have a very unique customer base now for 2027. We really have to focus a lot. If you look at the Department of War, the new drone czar, the DIU and DOG, all of those things are set up to go really fast without long programs of record. And we're about to apply for SWAP that was on the DIU website last week. And you got till Monday to submit for that $100 million. And it's for a boat that has drones on it. So we feel pretty good about that. We'll see. The down select is only like a week after the submissions. So that's a pretty unique item for us. But you can see that these things aren't just coming from old school Thank you for joining us. and the allocations to the people that win is quick. So, I mean, the drone dominance could be, you know, 14 to 28 million just in Q3 for us. So you've got to adapt to learn how these new organizations like the Dronesar, the DOG and DIU work together and how they filter up to the Department of War as we continue to try to be a resource for all of them in giving our lessons learned in Ukraine and other places and other theaters that we've been in recently.

Got it. One last question, and congratulations again. This is just the finish of the raw materials, the 60 million, right, which suggests shipping is auto-limited rather than production-limited, and your reserve ratio is down to 2% or 9% in December. So is that just a qualitative comment on that? And once again, congratulations.

Yeah, I'll say, I mean, Chris, I have my back on this, but we're upgrading cameras right now. We're in the process of as part of the reason why our margin has improved. I mean, before, that's why our margin was negative. I mean, if the Army wanted to make an adjustment, tweak engineering, we just ate those costs because we're a great partner. Now we're at the part of where we are maturing, doing cost downs in the product, improving it. We have scale. It also means that we have more raw materials than we have before.

Yeah, and our raw materials... There's no indications. Let me see how to best say this. As we start to build up the Hellcats as well, they're the same hardware, the same product. And so there's no reason and no need to write off any inventory. So the reserve as a percentage of the total inventory has gone down.

Thank you, Geoff, Christian, and Chris.

Thank you.

Thank you. Our next question comes from the line of Alex Lattimore with Northland Capital Markets. Please proceed.

Hello, can you hear me? Yes, we got you, Alex. Hey, guys. Great quarter here. The question for me, I think I might have had it answered, but I just want to get some clarity. It sounds like the timing of revenues should step up sequentially 3Q into 4Q. I'm assuming that would be on contracts coming online in 3Q. Fully Materializing, and 4Q. So some confirmation there. And then what is the rough split of UAB and USV revenue in the second half that you expect?

Yeah, so we haven't given specific guidance on splits yet. We just got our first revenue for Blue Ops. They're on the board, and the division's been around less than a year. And they've won every exercise they've gone to, which is pretty exciting. The boat is getting a great reputation. We just put a Volvo engine in for the USB, which was requested by a certain country in the Middle East. They wanted the Volvo engine. It's something that they're looking for. So we won't be breaking it out, but you're correct. There's a lot of stuff happening right now, contracting, not just us, everyone in the defense industry. You're going to see a lot of contracts coming on board in the next few weeks, going into September, and people delivering. We've got... I think we've got between 50 and 80 million of sellable drones that could ship tomorrow if we got the order. And that's basically the Black Widows, basically, and Hellcats. That's sitting there based on our demand that we're seeing and possible contracts that we're hopefully going to sign. Awesome. Q3 and Q4 are going to obviously ramp dramatically, just like last year.

Okay, understood. And then to dig into APM a bit there, can you talk about the opportunity, both qualitatively, maybe from partnerships with Anduril, how that positions you to win different market share outside of Swarmforge? And then if you can comment on the financial prize pool opportunity of Swarmforge as well.

Yeah, well, again, we haven't announced anything on projections or forecasts specifically for APM. We just recently closed on the deal, and they have hit the ground running. They needed to build their team up. They did. Their technology is one of the best swarming technologies ever seen. It's super reliable. And if you've ever been to a swarm... Thank you for joining us. mostly for the mounted soldiers for the army. They were requesting them already to do a trial actually in California like two weeks ago, a week after that Fort Eustis demonstration. The way Quaze can expand things is you can get further into country. You don't have to touch anything. If you're in Ukraine, you can leave those mats out there, stay in the trench and not run out to change batteries. There's so much stuff that Quaze and APM together can do and can drive for revenue, but it's too early for us to start making projections on these acquisitions we just closed.

Understood. Understood. That is it for me. Thank you, guys. Thanks, Alex.

Thanks, Alex.

Thank you. Our next question comes from the line of Brian Dobson with Clear Street. Please proceed.

and you're on mute right now, Brian.

Hi. Hello. Hi, it's Greg Kendi in for Brian Dobson. Just was, yeah, just was wondering if you could kind of touch on the gross margin expansion and how that might look out in the second half. You showed good gross margin expansion year over year and sequentially in 2Q, but now we're gonna see a big, big pop in revenue. So just how should we be thinking about that?

Yeah, I'll touch upon it, then let the expert finish, Christian. Sure. So, you know, just like when we had the TL2, a product we launched, you can see this thing already happening the same way as the TL2 happened. So when we started the TL2, we went from a negative like we did last year with... Thank you for joining us.

Yeah, sure. I mean, we're just at that stage right now, Greg. I mean, that's the name of the game where, you know, we're a good partner with the Army. They have changes. We made the changes. But we can't operate at such a low gross margin forever. And we've been very strategic and deliberate how we do that. We don't want to suffer inequality. We want better quality, better price, better scaling. That's where we're at right now. But we are really excited about Blue Ops. The higher the Blue Ops concentration, the higher the margins. The margins are that accretive to the overall business. Great.

Very helpful. Thanks a lot. Yeah.

Thank you. There are no further questions at this time. I'd like to pass it over to Geoff Thompson for any closing remarks.

Yeah, I just want to say, again, thanks for everybody for joining us on this call. We're hitting our stride. All the hard work we did over the last year is paying off. We're really focused on building our revenue. As I said at the Innovation Day, 2026 is a huge revenue ramp, and then we want to be going into 2027 focusing on profitability. We're very well financed. We have a lot of money in the bank. We're going to continue to expand our Our products like we've done with the Hellcat, getting actual support from the front lines, from the zero line, that's going to make sure that our warfighters have the best product in their rucksack or on top of our boats. So again, thanks everybody, and we'll see you in three months.

Thank you.

This concludes today's webinar. You may disconnect your lines at this time. Thank you everyone for your participation.