Palladyne AI Corp. Common Stock 2026 Q2 Earnings Call

Thank you, Nicole. Good morning, and welcome to Palladyne 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, Palladyne AI issued a press release announcing financial results for the second quarter ended 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 Palladyne 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 Palladyne'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, Palladyne 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 and commercial market conditions. These and other risk factors are described in detail in Palladyne AI'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 the call, management will reference certain non-GAAP financial measures. In general, management will adjust for acquisition, other transaction-related expenses, stock-based compensation expense, non-cash warrant income or expense that are mark-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. I have to say, the most recent round of quarterly meetings validated the growing optimism I developed over the quarter. I am 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 warrior munitions on the planet. Together, they will enable us and our customers to field affordable, attritable 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. The business has meaningful momentum across the company. We generated record quarterly revenue of approximately $5.8 million, up 63% from three and a half million in the first quarter. The growth was broad-based across our business units. We expect continued growth through the second half as backlog converts to revenue and new contract awards 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. Now, 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. 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 million-$27 million. We ended the quarter with approximately $44 million of cash on hand. Operating cash burn, including CapEx, 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 million-$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. 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. 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. We don't just do this on Palladyne drones. We enable UAVs from different manufacturers to collaborate with any drones that are also running our SwarmOS 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 U.S. Army's Ivy Mass exercise in Q2. Soldiers from the U.S. 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 U.S. Army operator controlled the entire group of UAVs. In June, we announced that SwarmOS and Gremlin-X were awarded contracts by the U.S. Army under its Disruptive Applications Program. Following Ivy Mass, we were informed that certain contract options would be exercised for FY 2027, 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 Ivy Mass. 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. BRAIN may be just the start. In building our own platforms like Gremlin-X and SwarmStrike, 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.