Palladyne AI (PDYN) Q2 2026 Earnings Call Transcript Motley Fool Transcribing, The Motley FoolThu, August 13, 2026 at 5:02 PM UTC 0 Image source: The Motley Fool. Thursday, Aug. 6, 2026 at 8:00 a.m. ET CALL PARTICIPANTS Senior Managing Director, Hayden IR Brian Siegel President and Chief Executive Officer Ben Wolff Chief Financial Officer Trevor Thatcher TAKEAWAYS Revenue $5.8 million, up 470% year over year and 63% sequentially due to broad growth across business units and the conversion of backlog. GAAP Net Loss $12.3 million, or $0.27 per share, compared to $7.
Palladyne AI (PDYN) Q2 2026 Earnings Call Transcript
Motley Fool Transcribing, The Motley FoolThu, August 13, 2026 at 5:02 PM UTC
0
Image source: The Motley Fool.
Thursday, Aug. 6, 2026 at 8:00 a.m. ET
CALL PARTICIPANTS -
Senior Managing Director, Hayden IR - Brian Siegel
President and Chief Executive Officer - Ben Wolff
Chief Financial Officer - Trevor Thatcher
TAKEAWAYS -
Revenue -- $5.8 million, up 470% year over year and 63% sequentially due to broad growth across business units and the conversion of backlog.
GAAP Net Loss -- $12.3 million, or $0.27 per share, compared to $7.5 million in the prior year period, reflecting higher stock-based compensation and business development investments.
Non-GAAP Net Loss -- $10.8 million, or $0.23 per share, excluding the impact of warrant revaluation, stock-based compensation, and contingent consideration liability changes.
Backlog -- $24.6 million, representing a 43% increase from the first quarter after recognizing record revenue.
New Contract Awards -- $13 million, reflecting new business booked during the second quarter primarily in the aerospace and defense segments.
Full Year Revenue Guidance -- $24 million to $27 million, representing year-over-year growth of 357% to 415% driven by organic expansion across all parts of the company.
Operating Cash Burn -- $11.1 million, which was above the guided quarterly average due to engineering team expansion and increased business development efforts.
Full Year Cash Burn Guidance -- $32 million to $36 million, with management expecting quarterly burn to decline through the second half as margins ramp.
BRAIN Order -- $2.3 million, covering more than 1,000 units for a defense prime customer supporting a low-cost counter-UAS interceptor program.
STRATFI Option -- $2.9 million, bringing the total program value for the Air Force Logistics Center robotic project to over $10.6 million.
HANGTIME Contract -- $4.2 million, focused on integrating space-based sensors into the company's autonomous coordination network for the U.S. Air Force.
Gross Margin -- 29% consolidated, reflecting manufacturing utilization that is currently running below full capacity.
Product Revenue -- $2.7 million, primarily generated from precision manufacturing and sales of the BRAIN avionics flight computer.
Engineering Services Revenue -- $1.9 million, driven by third-party programs for UAVs, missiles, and spacecraft.
AI Product Development Revenue -- $1.2 million, which accelerated toward the end of the quarter following the resolution of prior government delays.
Cash and Marketable Securities -- $43.7 million, remaining flat compared to the first quarter level.
ATM Proceeds -- $17.3 million, raised during the first half of 2026 at an average price of $6.84 per share.
Proposals Pipeline -- 20 programs, representing several hundred million dollars in initial potential value across Department of War initiatives.
Gremlin-X TRL -- Level 7, advancing from Level 6 during the quarter following successful field testing by soldiers under operational conditions.
IAI Production Timeline -- 18 months, estimated by management to stand up domestic manufacturing after identifying a clear government demand signal.
Gremlin-X Effect Cost -- less than $1,000, designed as a reusable mini bomber platform to deliver low-cost kinetic effects.
Stock-Based Compensation -- $2.3 million, which increased from $1.1 million last year due to the approval of executive equity awards.
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RISKS -
CFO Thatcher stated that "operating cash burn, including capital expenditures, was above our guided average quarterly rate" during the second quarter, primarily due to increased business development and the expansion of the engineering team.
CEO Wolff noted that "revenue relating to our DECA AI solutions still comes primarily from development, integration and trial contracts," indicating that the software has not yet transitioned to high-volume commercial licenses.
Management reported record quarterly revenue of approximately $5.8 million, representing a 63% sequential increase from the first quarter. The company stated that growth was broad-based across business units, supported by the conversion of backlog and new contract awards. Management highlighted that the business has momentum due to military field testing success and the establishment of a strategic partnership for loitering munitions. The company reiterated its full year 2026 revenue guidance based on visibility from current contract commitments.
CEO Wolff stated, "We are seeing meaningful traction across all parts of the business," citing successful performance during the Army's Ivy Mass exercise.
Management transitioned to a "partner-led go-to-market strategy for IQ and Pilot" to scale industrial software deployments without managing every implementation internally.
The company reported integrating its SwarmOS software with the Anduril Lattice platform at the PC-C6 exercise, completing the technical task in 30 minutes.
CEO Wolff confirmed the partnership with Israel Aerospace Industries allows the company to "Americanize, manufacture and integrate" battle-proven loitering munitions to fill a U.S. capability gap.
Management stated that SwarmOS allows multiple drones to coordinate and adapt to real-time environment changes without relying on a remote operator.
The company added retired Lieutenant General Sean Gainey to its Defense Advisory Board to support its missile defense and counter-UAS strategies.
INDUSTRY GLOSSARY -
ATM Facility: An at-the-market equity offering program used to raise capital by selling shares over time at prevailing market prices.
BRAIN FC1: A low-cost flight computer designed to provide guidance, navigation, and control for autonomous air systems.
DECA: Decentralized Embodied Collaborative Autonomy architecture, where intelligence operates on machines at the edge without constant cloud reliance.
Ivy Mass / PC-C6: Large-scale U.S. Army field exercises used to test and evaluate autonomous technologies under real-world battlefield conditions.
Loitering Munition: A category of weapon system that can loiter in an area before identifying and engaging a target.
STRATFI: The Strategic Funding Increase program, a Department of the Air Force initiative to transition technologies from development to production.
SwarmOS: An AI-powered software platform that allows multiple autonomous vehicles from different manufacturers to collaborate and coordinate missions.
TRL: Technology Readiness Level, a measurement system used to assess the maturity level of a particular technology on a scale of one to nine.
Full Conference Call Transcript
Operator: Greetings. Welcome to the Palladyne AI Corp. Second Quarter 2026 Earnings Call. [Operator Instructions] 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.
Brian Siegel: 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 30, 2026, along with the 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 time lines, defense program activity, potential customer adoption, market opportunities and future strategic positioning across aerospace, 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 takes -- 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 and other transaction-related expenses, stock-based compensation expense, noncash 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.
Benjamin Wolff: 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 businesses 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 2.5 years ago. We are seeing meaningful traction across all parts of the business. Since I returned, we've built the 2 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 preprogrammed 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 preprogrammed 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 layer 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 2 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 1 of these pieces working together in a way that is showing up in revenue, customer activity and a 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 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. That backlog will not always necessarily increase every quarter.
The timing of the 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 million to $27 million. We ended the quarter with approximately $44 million of cash on hand.
Operating cash burn, including capital expenditures, was above our guided average quarterly rate primarily due to increased business development efforts, some nonrecurring 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 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 preprogrammed 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.
Preprogrammed 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 Palladyne drones.
We enable UAVs from different manufacturers to collaborate with any drones that are also running our SwarmOS software. We call our approach to 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 Ivy Mass exercise in Q2. Soldiers from the Army's fourth 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 Gremlin-X were awarded contracts by the Army under its Disruptive Applications Program. Following Ivy Mass, we were informed that certain contract options would be exercised for FY '27, 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 PC-C6, 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 5x 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, maybe just to 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 are now exploring the business case. We're 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 a 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 fabricate 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 them 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 Gremlin-X without 1 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 1 another and adjust in real time. It is not tied to a single airframe or manufacturer, which is 1 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 HANGTIME contract with the U.S. 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 Formula's 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 design 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 counter-UAS missions by making the payload module rather than having to field 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 SwarmOS and BRAIN. With our ALRRM contract with the U.S. Navy, we are 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 only -- we were 1 of only 14 companies invited to the Air Force's Relentless Wolfpack Industry Day, which focused on networked, autonomous weapon salvos.
We had proposed SwarmStrike 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 1 defense prime included SwarmOS 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 Palladyne 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 FPD 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 HAROP, which have been sold in numerous countries around the globe, are 10-foot wing span unmanned aircraft that are designed for long-range missions, extended loitering and the suppression and destruction with 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 any radar emitters. I personally am not aware of any other UAV of this size or class that has anti-radiation capabilities. HAROP has an electro-optical seeker allowing the HAROP 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 at 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 U.S. military has a meaningful capability gap in this area. As a nation, we typically counter these defenses by launching missiles for manned aircraft. I have been told, but have no way of independently confirming, that the current cost of striking 1 of these mobile or intermittent air defense systems can range from $10 million 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 U.S. 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 Palladyne 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 to 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 hold it up 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 advisers to our Defense Advisory Board, including retired Lieutenant General Sean Gainey, who ran U.S. Army Space and Missile Defense Command, led the operational command behind the Golden Dome and founded the U.S. military's joint counter-UAS office to be built. 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 war fighters.
On the commercial and industrial side, we have sharpened our strategy with Palladyne IQ in 2 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. Somewhat relatively near term, others are larger opportunities with longer [ ops ]. 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 6 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 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 2 years are beginning to reinforce 1 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 and in more detail. Trevor?
Trevor Thatcher: Thanks, Ben. I'll focus on our second quarter results, our liquidity position and our capital outlook. Revenue for the second quarter was $5.8 million, up 470% from $1 million a year ago and up 63% sequentially from the first quarter. Product revenue, which today comes primarily from our precision manufacturing business and our BRAIN avionics product was $2.7 million. Engineering Services revenue was $1.9 million, and AI product development contract revenue was $1.2 million, which accelerated near the end of the second quarter after the government shutdown suppressed revenue during the first quarter. Cost of revenue was $4.1 million and consolidated gross margin was approximately 29%.
Similar to the first quarter, our margin reflects manufacturing utilization running well below full capacity and includes setup costs and investments related to new program wins that have not yet been covered by revenue. As these programs come online, we expect that these efforts will turn into a tailwind and as incremental volume runs through capacity we're already carrying. Research and development expense was $4.3 million, up from $3.1 million a year ago, reflecting continued investment in Gremlin-X and our AI software. General and administrative expense was $8.1 million, up from $4.2 million a year ago, driven by added head count from our November acquisitions, hiring to support new business opportunities and higher stock-based compensation expenses.
Stock-based compensation expense was $2.3 million this quarter, up from $1.1 million a year ago, driven largely by executive equity awards approved by shareholders in June. This is a noncash expense and was a primary driver of the increased general and administrative expense and operating loss versus last year. Going into the third quarter, this expense will increase materially from the second quarter since we only recognized roughly 1 month worth of noncash expense in the second quarter related to the new awards.
Sales and marketing expense was $2.3 million, up from $1.3 million a year ago, reflecting the expansion of business development efforts within our Palladyne Aerospace and Defense division as we pursue more opportunities with the Department of War. Operating loss for the quarter was $13.4 million compared to $8.1 million a year ago. Below the operating line, we recorded roughly $1.1 million of other income which includes $800,000 from a noncash gain on the revaluation of our warrant liabilities, together with interest income of $300,000. GAAP net loss was $12.3 million or $0.27 per diluted share compared to $7.5 million and $0.20 per diluted share a year ago.
On a non-GAAP basis, which excludes the impact of warrant revaluation, stock-based compensation and the change in our contingent consideration liability, net loss was $10.8 million or $0.23 per diluted share compared to non-GAAP net loss of $6.4 million or $0.17 per diluted share in the prior year period. Turning to liquidity. We ended the quarter with $43.7 million in cash, cash equivalents and marketable securities, flat with the first quarter and down $3.4 million from the 2025 year-end balance. Operating cash burn, which we define as cash used in operations plus CapEx was $11.1 million during the quarter. This includes approximately $10.2 million of operating cash and $900,000 of CapEx.
This is offset by approximately $10.8 million of net proceeds from our ATM program and $300,000 in interest income. During the first half of 2026, we raised $17.3 million in net proceeds under the ATM at an average price of $6.84 per share. We view the ATM as a flexible tool that we can deliberately use to expand our runway at a low cost of capital. As of June 30, we had approximately $24 million in remaining capacity under the program. Backlog ended the quarter at $24.6 million, an increase of 43%, driven by approximately $13 million of new contract awards during the quarter, partially offset by revenue recognized during the quarter.
We expect a majority of our current backlog to convert to revenue over the next 12 to 18 months. Turning to guidance. We are reiterating our full year 2026 revenue guidance of $24 million to $27 million, which represents roughly 357% to 415% growth over 2025 revenue of $5.2 million, and we continue to expect organic growth across each part of the company. We're also reiterating our full year operating cash burn guidance of $32 million to $36 million or roughly $8 million to $9 million per quarter on average.
We ran above that pace in the first half, although we offset most of that with funds raised via our ATM, and we expect operating cash burn to trend lower through the second half as revenue and margins ramp. Based on our liquidity position, our access to the ATM and our expected backlog conversion, we believe we are well positioned to execute our plan. Operator, we're now ready to take questions.
Operator:[Operator Instructions] Our first question comes from Max Michaelis with Lake Street Capital Markets.
Maxwell Michaelis: Congrats on the quarter. A couple for me, a bunch of different topics here. First, I want to touch on the IAI. You guys mentioned it, but my real question around that is kind of what sort of has been the progress being made on the Americanization progress -- I mean process. Have you identified any domestic manufacturing sites? Do you need that? Have you sort of been in any conversations -- preliminary conversations with U.S. government just around these systems and kind of getting your foot in the door on that end?
Benjamin Wolff: Max, it's Ben. Thanks for the questions on IAI. So we have been very active. We just announced the deal, what, 7, 8 weeks ago, and we hit the ground running with kind of a full court press ticking down the list of every potential U.S. government customer that could be interested in the systems, and we have engaged now, I would say, with about half of those targets. And across the board, I would say that there is meaningful interest but interest is just the beginning. Then you have to get into the specifics and details about performance and capability and all of those kinds of things.
But the bottom line is, we have yet to have anybody that we targeted to tell us that there's no interest. So we are extremely encouraged and feeling bullish about the opportunity set. In a lot of cases, there was the existing familiarity with these weapon systems, but obviously, no perception, but there was access to them here in the United States. So this is a -- we're not starting from a stopped position or a standstill position because these are battle proven weapon systems that the community is generally familiar with. In terms of your question about the facilities and our capacity to manufacture, we have a fair bit of manufacturing capacity in the space today.
The real question is what kind of volumes might the government want and we could quickly outgrow our capability in terms of size and facilities. So we are in the process of identifying additional facilities, not that we would need to manufacture -- or not that we would need to build and construct because of the time lines associated with that. But we are developing a short list of currently available facilities that if the government were to say, let's go, we'd be ready to jump into. And hopefully, without a lot of modifications be ready to start standing up manufacturing in relatively near term.
Maxwell Michaelis: Awesome. Makes sense. A couple more from me. Secondly, Gremlin-X advanced from TRL 6 to TRL 7 in the quarter. What was that specific milestone that got you there? And I guess, what is required to get you guys to TRL 8?
Benjamin Wolff: Over the quarter, we did 5 different design reps. We've talked in the past, Max about how our team can move quickly. That was definitely moving quickly, 5 different design iterations, flying and testing in each instance. What got us over the hurdle was getting into the hands of customers and have the customers actually fly as intended, not us managing or demoing the systems, but actually having soldiers in the field using them under battlefield conditions. So we now feel -- we feel like we're in a great spot with that.
One could argue whether we're at TRL 8 yet or not, but again, because we haven't been in live-fire actual battlefield conditions will hold off on making that announcement. But the bottom line is the systems performed as expected and ahead of schedule.
Maxwell Michaelis: Perfect. Last 1 from me. I think you need $15 million to $18 million of revenue to sort of hit the guidance range for 2026 backlogs and around $25 million that's going to be converted over the next 12 to 18 months. I guess, sure what you guys can. But I mean, when we think about that last $15 million to $18 million in 2026, I mean, what percentage of that is already contracted to be shipped this year, if you could share?
Benjamin Wolff: So when we talk about backlog, that number is contractually committed binding legal contracts. What is less certain is exactly the timing of deliveries hitting with milestones and all of that. So it is a little challenging for me, Max, to give you a straight answer on how much of that backlog will absolutely be delivered in '26 before the end of the year. What I can tell you is we are feeling -- based on everything that we see, that Trevor and I see in the business, we are confident in reiterating the guidance that we previously gave.
Operator: Our next question comes from Mike Latimore with Northland Capital Markets.
Mike Latimore: Great quarter. Great bookings. I guess on SwarmOS, can you talk a little bit about the exercises you're involved with and compare that to kind of some of the programs that are visible like swarm forage? What's the difference between the exercise you're involved in versus, say, the swarm forage program? What are the different requirements? What are the relative opportunities? Maybe just help us clarify that a little bit?
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Benjamin Wolff: Yes, sure. Thanks, Mike, and good talk to you. So the military is like -- it's a Hydra. I mean it's got lots of different groups doing lots of different things. And the DIU has a focus on trying to find and identify companies with products and technologies that could be useful to the military. And so they're kind of on their path that is a bit of a treasure hunt. And they frequently will stand up different kinds of competition, if you will, where they will throw out some specifications and requirements, say, to industry, can you meet these specifications and requirements.
They'll do a bake off, they'll down select and then they'll give some money to actually develop a product into our technology, into what they're looking for based on the best criteria that they had to choose from. So that's 1 path of getting of a young or small or a new entrant company getting their products and technologies and audience in front of people at the Pentagon. There is another path. And that other path is to have a finished product that's ready to go, not still under development, and to get it in the hands of actual users in real-world exercises. And that is what we have just done with both Ivy Mass and with PC-C6.
It is not a matter of having some really smart technologists and some business people take a look at a venture capital type of approach to developing a new product technology. Rather, it is actually getting product and technology in the hands of war fighters, let them get real-world experience with it and evaluate it, and then develop a report that says to the operating units and to the buyers and the acquisition people and the requirements writers, hey, this is something we've actually our hands on in the field. We've used it. And either we like it or we don't like it or here's where it can improve or whatever, they give a full written evaluation.
So what we've just announced this morning with the press release right before this call and what we talked about in past press releases is our success at real-world battlefield condition exercises, not demos that we control. We do a training -- we're training the team that's going to be using or multiple teams. We give them the technology. We give them the drones and they go out like they're on the battlefield, they are in battlefield, and they do exercises using our products. And we have no ability to control it once it's in their hands. So it is not -- it's not a constrained set of environments.
And these are generally soldiers that may or may not have any drone experience. They certainly don't have an experience with autonomous systems. And part of what we get evaluated on is can soldiers who got a lot of training or experience to actually learn it, how challenging is it? Can they use it? Can they accomplish the intended mission? And we have been gratified that at every turn and every exercise that we've been in, we've gotten great feedback that we're under-promising and over-delivering. We're doing -- we're delivering what we told them we would deliver, and that is resulting in getting embodied to more exercises with different and diverse groups of potential users.
And it's -- I would say our reputation is spreading in a very organic way across different units. So a couple of different tasks that you can go. We have opted to go for the 1 that says, we're no longer in a kind of a bake-off. We're just in real-world execution. Does that make sense?
Mike Latimore: Yes. Awesome. And then I guess as you look to the third quarter here, it seems like there could be a really heavy sweeps sort of period here. And I think takes us, talked about spending a lot of money kind of through fiscal year-end. I mean does it feel like this quarter could be another healthy bookings quarter or even better than the second, given that?
Benjamin Wolff: It's premature. The -- when you talk about the cleanup money that's available, it's a little bit like watching a game of musical chairs. And everybody, we, our peers, everybody that's in the defense industry is hoping to go capture some of that, so much of it depends on who's actually got access to what capital, what that individual group's priorities are. So I'm hopeful, but I wouldn't yet say that I'm at the position of saying I have any degree of confidence in it because until it happens, you don't really know, meaning until the music stops, you don't know who's got the chair.
Mike Latimore: Sure. Makes sense. I guess last 1 for me on IAI. They have those 3 products. Are there -- any sense of -- would a customer buy all 3? Is there more interest in 1? Just curious, any feelers there?
Benjamin Wolff: Different customers have different use cases and missions. And so when you think about perhaps the -- what folks are trying to do to deal with longer range and longer distances, you are talking about the bigger platforms, the HAROP and the HARPY. If you were talking about perhaps launching from a vessel to try and destroy another vessel or launching from shore and you're not trying to go very far to hit a target, you might be talking about the Mini HARPY. There's just -- and you realize, I mean, every potential customer purchaser has their own specific reason to exist in their own mission and use case.
So what is uncommon is to have a single customer say, "I need all 3," because that's just -- they generally are operating in different environments with different purposes. But if you want to talk about a customer being, let's say, the U.S. Army, sure, you can see the U.S. buying all 3, absolutely. But when you get down to specific groups, that's where the mission set bifurcates a bit.
Operator: And our next question comes from Adam Samuelson with Jefferies.
Adam Samuelson: I guess for me, I wanted to just hone in on the cash burn and outlook for the balance of the year. Obviously, you've got an outlook that has improved revenue, at least on average in the second half each quarter. How do we think about that scaling into the cash line versus -- margin versus working capital kind of other operating expenses? I'm just trying to think about the kind of base cash spend for underlying the business and how that can kind of scale into cash flow prospectively on greater revenues as we think about 2027?
Benjamin Wolff: Trevor, do you want to respond to that?
Trevor Thatcher: Yes. So I mean we talked about our reiterating our guidance for the year. And if you do the math, to hit those numbers in the back half, cash burn is about $12 million is what we're anticipating. There is some CapEx built into that, that we're going to use strategically there. And -- but we do see, with the revenue trending up and more margin dropping to the bottom of that cash flow does go down and that cash burn requirement goes down.
So we have quite a bit of capacity, both from a manufacturing standpoint and from a product standpoint when we start getting into our AI software opportunities to be able to scale the business without having to add a lot of costs. So we're optimistic about seeing that trend down and still with some planned investment in the business being able to significantly get below what the trend has been in the first half and the second half.
Adam Samuelson: Okay. And maybe just along those lines of the $24 million of backlog, can you share -- is there a proportion of that, that's actually software-related revenue or software licenses and so would presumably carry very high incremental gross margins?
Benjamin Wolff: So the backlog composition that we see going forward is roughly -- and this is just kind of very rough, it's about 50% of product sales, which means our precision components and our avionics. Avionics are higher margin, the precision component's a little lower margin. And then roughly in the range of about 30% relating to our software. Now I don't want -- I want to caution you, most of the revenues that we have coming in from software right now relate to trial contracts and development contracts with the military that have not yet transitioned into high-volume licenses. But it does show that we've got a fair bit of software-related backlog.
It is a good margin business, but it's not the kind of 85% margins that we will expect to be getting when we start just selling -- sending out copies of that software in high volume. And then the balance of our backlog is in the engineering services side of the business.
Operator: Our next question comes from Brian Kinstlinger with Alliance Global Partners.
Brian Kinstlinger: Great. With the successful results at Ivy Mass and PC-C6, can you talk about the next steps in the sales cycle as the end customer gets educated and see these positive results? And how should we think about these events turning into production orders?
Benjamin Wolff: Yes, 2 different parts of it, their brand, because we've got the hardware and software that are being used in these exercises. As I -- you try and look at my cloudy crystal ball, what I believe will happen is, reports will be -- from each of these exercises will be aggregated and accumulated by the folks that are both writing requirements for new programs and contracts and also by the purchasers, the folks who actually spend the money.
And as the need for -- on the software side, the need for autonomous solutions and swarming solutions continues to perkle up -- perk laid up, I think that we will wind up with ultimately having -- and I don't want to say ultimately, I don't think we're talking about years away, I think we're talking about months away, solicitations come out that start to define requirements that look a lot like what is being trialed in the field with our software. And so then the requirements come out, we respond and hopefully we get down selected and we wind up getting the contract.
We have been asked about how we could retrofit our software on drones that have already been deployed to units in the field. And the numbers of drones that they're talking about are not small numbers, they're pretty sizable numbers, starts becoming logistics -- an interesting logistics question about how do you actually then get our software onto drones that are already in the field and distributed across a lot of people and a lot of users. And just because I've been asked -- or what we've been asked doesn't mean that's going to translate into a contract.
But it shows you the kind of thought that's now going into trying to deliver this kind of capability on a broader base. So that's the software side. On the Gremlin-X side, I believe that in the relatively near term, we will probably start getting some inquiries about volumes that we could deliver both in terms of time and cost. And when I say volumes, I think it's going to -- my guess is it will start with relatively modest numbers, hundreds of units, not thousands. But I think that the awareness of the need for a mini bomber solution is now starting to spread.
As you may recall, we originally submitted our mini bomber as a solution for 1 of the original drone dominance programs. We weren't selected because we submitted something that did not meet the requirements. As far as I know, we're the only ones who submitted a mini bomber type of solution for a low-cost per effect or cost per kill. And lo and behold, now we have a solicitation that comes out specifically for mini bombers. And so I think our message is resonating, and I think that as awareness of the cost-effective nature low-cost per effect that a mini bomber can deliver, I think there will be increasing demand and opportunities for that.
So that's all to say I think we're just at the cusp of getting to the point where we can start seeing volume coming in the business on both the software and the drone side.
Brian Kinstlinger: Great. I have 1 follow-up related to that. You highlighted you have 20 proposals submitted were several hundred million dollars. Can you speak to is this hardware mostly? Because it sounds like the software is a little bit further out in terms of procurement. Or maybe just characterize how that proposal activity kind of can be characterized?
Benjamin Wolff: I think most of the biggest dollars there, Brian, are combined hardware and software solutions, meaning 1 of the things that we think makes our hardware solutions more compelling and attractive is because of the inherent capability of jointly developing the hardware and the software in tandem. We've talked about that's why we got back into the hardware business because having systems designed from the ground up that can be optimized from a sensor and compute perspective to be able to leverage our AI capabilities, delivers a whole different category of capabilities to war fighter.
And I think -- I don't have numbers in front of me, Brian, but I think the vast majority of -- I shouldn't say vast majority, a majority of those numbers represented and -- reflected by what I mentioned in terms of size are combined complete systems that incorporate both our hardware and our software.
Operator: Our next question comes from James Kisner with Water Tower Research.
James Kisner: So I just wanted to talk a little more about PC-C6. Congrats again on that. Event's pretty rapidly there from the rehearsal to a larger event. Can you just say kind of what you learned from operating in that kind of faster, bigger environment in general or about SwarmOS.
Benjamin Wolff: Some of the takeaways were -- that we really can get a single soldier to have the mental capacity to be able to focus on those things that really matter that's going on in battlefield environment and not have to try and micro manage the operations of each individual drone. We knew we could do it from a technology perspective, but until you have a soldier with limited experience with drones actually get their hands on it, you don't know that it really proves out. And we saw no limitations on the number of drones that we could fly or the number of drones that fairly inexperienced soldier could actually manage.
So that, from a scaling perspective and from an overall capability perspective was extremely encouraging for us. Some of the things that we learned -- a little things like we learned that if comms is degraded or challenged, which is real-world experiences that our system worked as advertised. That sounds like a little thing, but given the fact that you never know what's going to happen to comms degradation on the battlefield, that was an important thing for us to not just be able to have demonstrated ourselves and be satisfied but to actually have the military see it in action. So that's -- it sounds like a small thing, but it's really a big deal.
We learned a bit about how to best train new people to the system. We compressed the training time so that you have more people using the system faster. We got some good feedback about what they'd like to see on the user interface. And we were given a challenge again to integrate with Anduril's Lattice, and we were challenged to do that in a very short period of time, going for basically a standing position to 60 miles an hour with that, and we did that well. So a lot of great learnings that reinforced our assumptions, but you never know until you're in the field and giving it a try.
Brian Kinstlinger: Yes, that's -- that 30 minutes time is pretty impressive. I guess more broadly, it seems like that hardware independent multivendor approach is resonating at PC-C6. Just as the Army moves towards these larger feed to autonomous systems, like how durable an advantage do you think it is that the vendor neutrality versus the kind of closed single platform ecosystem?
Benjamin Wolff: The mantra at the Pentagon right now is certainly open architecture, not being trapped to beholden to any particular vendor contractor or system. And so I think it plays well. And then you get into the real-world applications, when you have a number of different units from a number of different divisions or even services that are all trying to collaborate and cooperate to accomplish a mission on the battlefield. As you know, I mean, you can see how many different vendors are providing drones to the military today. Lots of them, right? They're buying from a lot of different sources.
Well, how do those drones communicate with 1 another, when you've got a Company A providing drones to this unit and Company B providing drilling some that unit, and we're really missing an opportunity to enable full across-the-board collaboration, our software enables that to happen. So I think it is a big deal. I don't think that the military will ever want it to be just 1 provider of that kind of capability for the reasons we just talked about. They don't want to be beholden to anybody. But we're there and we're doing it, and I think that gives us a lot of room to run with this software suite.
Brian Kinstlinger: Last follow-up on that. I mean so you've now integrated a number of manufacturer's aircraft here, including Anduril. So is it fair to say like bringing a new platform on is getting faster and more repeatable at this point? If you could comment on that?
Benjamin Wolff: Yes. We certainly have learned a lot along the way, but it really depends on the OEM themselves and the architecture for the drone that they've got. I mean we are in the process right now of integrating with our first fixed wing platform. Everything else has been a rotor platform. And we're learning a lot, the architecture on that drone is just different than what we've dealt with before. When you think about the altitude that those fly at and the sensors that they have and the compute they have, things are different. And so I wish it was as simple to say, "All right.
Well, we used to do it in 2 weeks, and now we can get it down to 1 week." It's just not that easy because there's not a lot of consistency in the different components that all have to -- that our software has to touch and manage. So we're understanding a lot more about what questions to ask and what to get nailed down before we begin the process. But it's still -- it can range from 2 to 4 weeks and a couple of people doing it full time to get an integration done from our current knowledge.
Operator:[Operator Instructions] Our next question comes from [ Ralph Weil ].
Unknown Analyst: Good results. Are you involved or trying to become involved at all in the Golden Dome program? And if so, which of your products would fit into that? And the second question would be, your STRATFI program is now, as you said, at $10.6 million. What is the potential market for that product that is used there? And what will your -- where will your capabilities be used?
Benjamin Wolff: On Golden Dome, the primary focus for Golden Dome right now is on larger, more exquisite weapon systems to be able to intercept big things that are coming in, big weapons. There's certainly, I believe, will be an opportunity for us to talk about ways that we can deal with smaller enemy form factors, things like the smaller group on drones that may become problematic. But right now, I think the really big focus and the big dollars are, for example, trying to use space-based assets to take missiles out of the sky. That's not us. We don't play in that sector.
But as kind of it trickles down and they start looking at more local and regional, effectively domes, where you're talking about dealing with the interception of smaller weapons that are coming in, I think we may have an opportunity to play there, but that's not Golden Dome's priority today. In terms of our STRATFI contract, that relates primarily to our IQ product, which is our industrial manufacturing artificial intelligence platform. I mentioned in my comments that, that is primarily focused on doing the kind of challenging work that humans have historically had to do because you are not able to automate it, things like doing paint stripping and surface preparation for large components on aircraft.
That's the thing that we're doing with the Air Force right now. And if you look at the total market for that, not just military market, but the market for being able to substitute automated and autonomous machines for doing the kinds of dangerous and awful jobs that humans don't really want to do anyway but that have historically been too challenging to be able to automate. It is a very large TAM. I mean it is -- globally, it's billions of dollars. So it is a big market opportunity for us. Our focus now is on trying to go deep in individual verticals where we have gotten some success.
So what we refer to as a land and expand approach, start off showing customers what we can do in a narrow targeted use case. And inevitably, as we're already seeing, they started asking questions about, well, now that I've seen that it can do this, can it do that and that and that and that. So that's our land and expand approach. We introduced the version 2 of the software at the beginning of this year. we've had great engagement with customers and systems integrators to do trials. And we expect to start seeing more placements of that software over the second half of this year.
Operator: That does conclude our question-and-answer session. Thank you all for your participation today. This concludes today's teleconference. You may disconnect your lines, and have a wonderful day.
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Published: August 13, 2026 at 08:18PM on Source: RED MAG
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