Palladyne AI Q3 2026 Earnings Call Transcript

Palladyne AI (NASDAQ:PDYN) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Palladyne AI reported record revenue of $8.6 million for Q3 2026, a 895% increase year-over-year and a 48% increase from Q2 2026.

The company raised the lower end of its full-year revenue guidance to $25 million while maintaining the upper end at $27 million.

Key drivers include the launch of the Brain FC1 flight computer and increased government contract revenues, particularly from the Army’s Project Convergence Capstone 6 exercise.

Strategic partnerships with FANUC and Orca Tech are expanding market access and potential applications for Palladyne’s technology.

The company ended the quarter with $18.7 million in backlog, a decrease due to recognized revenue, but higher than earlier in the year.

Palladyne AI has $47 million in cash, cash equivalents, and marketable securities, with no long-term debt, positioning it well for future growth.

Operating loss for the quarter was $13.4 million, although the company expects improved performance in Q4.

Notably, Swarm OS received top performance ratings from the Army, validating its potential in real-world applications.

Full Transcript

OPERATOR

Thank you for standing by and welcome to Palladyne AI’s third quarter 2026 earnings conference call. Currently, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. To remove yourself from the queue, please press star 11 again. Please be advised that today’s conference is being recorded. I would now like to hand the call over to Ross Collums.

Please go ahead.

Ross Collums (Investor Relations)

Good morning and welcome to Palladyne AI’s third quarter 2026 earnings conference call. Joining me on the call today are Ben Wolf, President and Chief Executive Officer, and Trevor Thatcher, Chief Financial Officer. Earlier this morning, Palladyne AI issued a press release announcing financial results for the third quarter ended September 30, 2026, along with updated commentary regarding milestones achieved during the quarter and 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 question-and-answer session. During today’s call, management will make forward-looking statements within the meaning of the federal securities laws. These statements include, but are not limited to, statements regarding 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 defense and commercial market conditions.

These and other risk factors are described in detail in Palladyne AI’s filings with the SEC, including its annual report on Form 10-K and subsequent filings. Palladyne AI undertakes no obligation to update any forward-looking statements except as required by law. In addition, during this call, management will reference certain non-GAAP financial measures. In general, management will adjust for acquisition and other transaction-related expenses, stock-based compensation expense, non-cash warrant gains or losses that are marked to market quarterly based on changes in a 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 will turn the call over to Ben.

Benjamin G. Wolff (Chief Executive Officer)

Good morning. Thanks for joining us today. We generated record revenue of 8.6 million in the third quarter. That’s up 895% from a year ago and up 48% from the second quarter, which itself was a record. Compared to Q2, revenue from our components business grew 26%, driven in part by our first deliveries of our new Brain FC1 flight computers. Revenues from government contracts increased 135% sequentially as well. Given that trajectory, we are raising the low end of our full year revenue guidance to $25 million while reiterating the top end of $27 million.

Trevor will walk you through the details, but the short version is this: we are doing what we promised at the beginning of this year. I’m going to spend most of my time today on what drove the quarter and why I believe it matters. For where we’re headed, there are three key themes. First, our Intelligent Autonomy software for drones is out of the lab and in the field. It has been and will continue to be evaluated by the Army in real world exercises, and it’s receiving the highest marks possible. Second, our components business is scaling and Brain is gaining traction. And third, the partner-led strategy we described last quarter for our Intelligent Autonomy software for manufacturing is expanding access to customer opportunities that are far beyond what I thought would have been possible at this stage of our development.

I’ll start by discussing the recent Army field exercises where our Swarm OS advanced Intelligent Autonomy software has differentiated itself from the hype, PowerPoints, and marketing claims that are permeating the discussion of autonomous systems. Last quarter I concluded my comments about the Army’s IV mass exercise that we had participated in by asking you to stay tuned for news about an exercise that was even larger and more complex. That exercise was Project Convergence Capstone 6, or PCC 6, the Army’s premier division-scale test of future warfare held at the National Training Center at Fort Irwin in the Mojave Desert.

PCC 6 brought together the U.S. Joint Force and allied military partners to evaluate how new technologies actually perform in a real world operational setting. It is not a trade show and it is not a choreographed or controlled demo. Rather, we put the technology in the hands of real soldiers, and then we are dismissed from the battlefield while the soldiers put Swarm OS through the paces in real world scenarios—no hand holding by us. Here’s the punchline: at PCC 6, Swarm OS enabled multi-drone, multi-vendor autonomous operations tasked and managed by a single soldier who had minimal training with our system. Without Swarm OS, soldiers need to be trained to operate each different kind of drone, and each drone must either be remote controlled by a soldier or alternatively pre-programmed to arrive at a waypoint destination regardless of whether the target is still there or not. In plain English, most drones today are as dumb as a box of rocks, and many confuse the term unmanned with autonomous, sometimes out of ignorance and sometimes intentionally.

With Swarm OS, a group of disparate drones can be tasked and managed by a single soldier. Through our simple user interface, those drones collaborate and react in real time to evolving conditions on the ground and in the air, relying on our unique and patented decentralized embodied collaborative autonomy architecture. But you shouldn’t just take my word for it. During PCC 6, the Army evaluated Swarm OS against nine key performance criteria, and we received the highest ratings possible on all nine. I want to put that in context. We’ve spent a lot of time on these calls and in individual meetings with investors explaining the difference between automation, autonomy, and collaborative autonomy. I can explain that distinction all day long, but when the Army puts the software through its paces and gives it top marks across the board, that makes the point far better than I can.

Swarm OS’s ability to deliver intelligent collaborative autonomy works as advertised, and it is exceeding expectations of those who would be using it in real world scenarios. We followed PCC 6 with the Northern Strike 2026 exercise at Camp Grayling, Michigan in August, continuing the series of Department of Defense exercises that began with IV Mass. Every one of these exercises adds to our operational track record, and that track record is what we think is the single most important factor in moving from free demonstrations—where we were—to paid exercises—where we are now—and ultimately to procurement. I can’t tell you when, I can’t tell you how much, but I can tell you we are on the best path we could be on.

From my perspective, unlike some, we don’t have to make excuses about why our tech doesn’t work as advertised. That makes an impression, and one that matters. One point I’ve made repeatedly is that Swarm OS is not tied to a single airframe or manufacturer. This quarter we put that into practice with more platforms and more missions. We entered into our first fixed-wing UAV partnership with Orca Tech, an innovative producer of fixed-wing VTOL Group 2 drones. Orca’s aircraft are already fielded and NDAA-compliant, and our agreement extends Palladyne Pilot and Swarm OS to them to support both defense and commercial applications.

Fixed-wing aircraft fly farther and longer than quadcopters, so this opens up an expanded mission set for our software. We also partnered with NordaDynamics, a Ukrainian-Estonian company whose Underdog module has been proven in combat at scale, under heavy jamming and without GPS. The two pieces fit together naturally. Swarm OS is the brain of the swarm. It finds and tracks multiple targets on land and at sea and decides which drone goes after which target.

Underdog takes it from there and handles the final approach even when GPS and communications are being jammed, with a human still authorizing every engagement. Put simply, that’s a swarm that can engage multiple targets at once without needing one operator per drone or a constant link back to the ground. I think that’s enough about offense; let’s talk about defense, since Swarm OS is equally applicable there. Counter-UAS is quickly becoming one of the most important missions on the modern battlefield, and we’re focused on developing ways to leverage our unique capabilities to deliver a swarm-on-swarm defensive capability. Last quarter I mentioned that we were evaluating a modular version of Gremlin X that could support missions beyond strike, including Counter-UAS, by swapping payloads rather than building a different airframe for every mission.

After quarter end, together with Federal Ammunition, the largest ammunition company in North America, and Mossberg, the largest shotgun manufacturer in North America, we launched the joint development of SwarmShot, a modular, reusable kinetic solution designed to defeat incoming enemy drones. It combines purpose-built ammunition, a unique airborne weapon module, and Swarm OS. We’re developing it first as a mission add-on for Gremlin X, followed by a planned integration kit for compatible third-party drones.

Turning to our components business—what I refer to as our picks-and-shovels business—our low-cost Brain flight computer and avionics suite was recently selected as a finalist in the Army’s Fuse X Tech Apex Intercept competition. That puts us in an Army evaluation pathway focused on low-cost interceptors and fire control. In other words, it’s exactly the kind of affordable answer to an inexpensive enemy drone that the Department of Defense is looking for.

Brain delivers guidance, navigation, and control at roughly one-tenth the weight and cost of legacy avionics. It’s built into our own Gremlin X, and it’s integrated into systems we designed for defense primes. Last quarter I told you about a follow-on order from a defense prime for more than 1,000 Brain units to support a new low-cost Counter-UAS interceptor, and I said we were expanding our domestic production capabilities to meet demand. In the third quarter we shipped more Brain flight computers than ever before, including the first units of our new Brain FC1, our cost-optimized, mission-grade flight computer with more modest capabilities.

Assisting primes with overall weapon systems design through our engineering services business puts us in the pole position to be able to deliver a Brain that is optimized for the customer’s requirements. We can design new versions of Brain, commercialize them, and deliver at scale here in the United States relatively quickly. This past quarter we began supporting two new development customers—one developing an interceptor missile and one developing a heavy-lift multirotor platform that plans to use Brain.

It is also a natural candidate for Swarm OS. Both are early and there’s no guarantee either one reaches production, but this is the model: we assist with design and test, and if the product moves forward, our components are likely to move forward with it. Turning to another important development in our components business, we delivered precision-machined components for a new customer for an initial order of 500 small drones. While our manufacturing business has historically focused more on components for missiles and larger UAVs, we think that there are interesting opportunities emerging in the high-volume, lower-cost UAV segment.

Turning to our partnership with Israel Aerospace Industries, or IAI: as a reminder, in June we secured the exclusive U.S. rights to Americanize, manufacture, integrate, and market IAI’s Harpy, Harop, and Mini Harpy loitering munitions for the Department of Defense. These are among the most battle-tested loitering munitions that exist. Since our announcement, the partnership has continued to gain visibility and attract interest from key constituents.

As I have said before, the IAI systems fill a void in our nation’s arsenal. But these are not small, inexpensive UAVs that are purchased quickly and then stored in a closet somewhere. Purchases of these systems typically involve hundreds of millions of dollars, which require advanced planning and budget. This doesn’t happen overnight, although the Department of Defense has demonstrated a willingness and ability to move more quickly than ever. An examination of historical purchases of larger UAV platforms leading to programs of record reflects contracting cycles measured in two to four years, not two to four months.

I know many of you are thinking about the defense budget and the politics around it, so let me address that head on. First, Ukraine and Iran have made it clear that both unmanned and autonomous machines will play a key role in the future of warfare. This isn’t just a Republican view or a Democrat view—it’s bipartisan. No one is ignoring what is playing out in Ukraine and Iran, nor is anyone putting their heads in the sand about what the Chinese and Russians are developing.

No one thinks we can afford to have anything other than a decisive and overwhelming technology and capability advantage over our adversaries. Having said that, following last week’s election, it doesn’t take a rocket scientist to understand that the timing and amount of the defense budget is anything but certain. Budget uncertainty can delay when and if contracts are awarded. I’ve heard several examples of major programs being terminated even after award; other awards being deferred indefinitely. Our own third quarter was modestly impacted by funding that we had been promised but not yet contracted being diverted back to the Department of Defense to support funding for the war effort. Remember, since Congress has not approved funding for the war, the Pentagon is reprogramming existing funds and depleting stockpiles without the funding to replace them. That creates near-term pain for some, long-term opportunity for others.

Fortunately, most of our revenues aren’t dependent on programs that we believe are at risk for being cut. And there can be no question that, no matter the size of the budget, autonomy and low-cost weapons will be a priority going forward. Turning to the commercial side of our business, last quarter I told you we were increasingly focusing on a partner-led go-to-market strategy for Palladyne IQ, and I said that I expected we would have more to share soon. To that end, this past quarter we announced the first major step in that plan: a strategic collaboration with FANUC, a global leader in industrial automation. With over 40 million robots installed worldwide, why does that matter? Industrial robots are very good at doing exactly what they’re told or programmed to do.

The hard part, from both a time and expense perspective, is the programming itself. Programming a robot today often takes skilled specialists and a lot of time, and every time the part or the process changes, someone has to do it all over again. Our software lets the robot recognize a part, understand the orientation of the part and its relationship in space to the robot, and then generate a path for the robot to follow to complete the task. We solve that complex problem quickly and cost effectively with an approach we call Scan to Path.

Pairing Scan to Path with FANUC robots makes FANUC’s robots easier and faster to deploy, and far more adaptable. The partnership is already opening doors. Through our collaboration and joint sales motions with FANUC, our software is now in front of a host of manufacturing companies ranging from Fortune 500 companies to small and mid-sized businesses, and everything in between. FANUC featured us at its Customer Day in August, and in October it selected Palladyne IQ to be featured in its booth at Fabtech, one of the largest manufacturing trade shows in North America.

I’ll give you a sense of the types of challenges we’re being asked to solve in the auto industry with Palladyne IQ. One Fortune 100 company wants to use robots equipped with Palladyne IQ to grind down hundreds of tack welds per unit, a job that can only be done by hand today. Another manufacturer is looking to robots equipped with Palladyne IQ to handle sealing seams in finished products. In this use case, we believe the material savings alone could pay for our solution, not to mention the savings on labor.

This company has an entire team whose job it is to write code for the seam-sealing task. Palladyne IQ greatly simplifies and accelerates robot training for this application. A third prospect is buying a large fleet of welding robots and is looking at our software to create a digital twin environment so that the welding robots can be programmed offline rather than trained one at a time on the factory floor. But let’s be pragmatic. Sales cycles with large Fortune 100 companies are notoriously long, and none of these opportunities has resulted in revenue yet. But being included in our partner solution, its showcase events, and its customer conversations is exactly the validation we set out to earn when we charted this course at the beginning of this year.

Allow me to turn to backlog. Last quarter I cautioned that backlog would not necessarily increase every quarter because the timing of bookings, contract performance, and revenue recognition would cause it to ebb and flow. The third quarter is a good example. We ended the quarter with 18.7 million of backlog, of which 15.3 million is funded. During the quarter we recognized a record 8.6 million of revenue, which drew backlog down, and we signed 2.7 million in net new contracts.

The third quarter is typically a seasonally slower period for defense awards, and defense budget uncertainty didn’t help. Even so, our backlog at quarter end was materially higher than at the start of both the first and second quarters of this year. And although backlog didn’t grow at the same rate it did in Q2, we didn’t let our foot off the gas on our business development efforts. Strong revenue for the quarter led to a decrease in operating cash burn, as we said it would. However, it remains elevated because we’re continuing to invest in research and development across all of our product lines and in the working capital needed to fund revenue growth. We expect full year operating cash burn to land at or slightly above the high end of our guided range, largely because of opportunistic capex purchases which have positioned us well for further growth in our components business.

We expect fourth quarter burn to come in below our year-to-date quarterly average as revenue and margins improve. With $47 million in cash, cash equivalents, and marketable securities and no long-term debt, we believe we are well positioned to execute. During the quarter our cap table improved as the hangover from the 2021 de-SPAC merger was eliminated when the related 20.5 million warrants representing the right to purchase approximately 3.4 million shares and 2.3 million remaining contingent merger consideration shares expired on September 24th. That reduced our fully diluted share count by over 9%.

In closing, we still have a lot of work ahead of us, and much of what I’ve described still depends on execution and on customer funding decisions. But this quarter delivered on the things that matter: record revenue, top marks from the Army for our autonomy software, growing components and Brain shipments, and a commercial channel partner that is putting us in front of manufacturers we wouldn’t likely have reached on our own. Looking to 2027, we’ll finalize our budget with our Board of Directors early next year, and we expect our 2026 growth to extend into 2027.

I’m as confident as I was last quarter, and frankly more so, that we are in the right place at the right time. With that, I’ll turn the call over to Trevor to walk through the financials in more detail.

Trevor Thatcher (Chief Financial Officer)

Thanks, Ben. I’ll discuss our third quarter results, our liquidity position, and our capital outlook. Revenue for the third quarter was $8.6 million, up 895% from $900,000 a year ago and up 48% sequentially from the second quarter. Product revenue, which today comes primarily from our precision manufacturing business and our brain avionics product, was $3.4 million. Engineering services revenue was $2.4 million and AI product development contract revenue was $2.8 million.

Cost of revenue was $4.8 million and consolidated gross margin was 44%, up from 29% in the second quarter. As we anticipated at the end of last quarter, new programs coming online drove higher product development contract revenues as well as higher product revenues were generated through our existing manufacturing capacity and fulfillment of brain orders during the quarter. Research and development expense was $4 million, up from $3.1 million a year ago, primarily from higher labor and labor-related expenses associated with the development of our Gremlin X UAV product.

General and administrative expense was $10.1 million, up from $4.1 million a year ago, driven by higher stock-based compensation expense, added headcount from our November 2025 acquisitions, and hiring to support new business opportunities. Stock-based compensation expense was $4.8 million this quarter, up from $1.1 million a year ago. The increase is primarily due to executive equity awards approved by shareholders in June. As we noted last quarter, this increase was expected and a primary driver of the increased G&A expense and operating loss versus last year.

Sales and marketing expense was $2.7 million, up from $1.2 million a year ago, driven by increased headcount to support our expanded marketing, commercial and defense sales, and business development efforts during the year. Operating loss for the quarter was $13.4 million compared to $8.1 million a year ago. Below the operating line, we recorded roughly $1.4 million of other income, which includes a non-cash gain of $1.1 million from the revaluation of our warrant liabilities, primarily due to the expiration and write-off of de-SPAC warrants during the quarter. As Ben mentioned, GAAP net loss was $12 million or $0.25 per diluted share compared to $3.7 million or $0.09 per diluted share a year ago.

On a non-GAAP basis, which excludes the impact of warrant revaluation and write-offs, stock-based comp, and the change in our contingent consideration liability, non-GAAP net loss was $8.2 million or $0.17 per diluted share compared to non-GAAP net loss of $6.4 million or $0.16 per diluted share in the prior-year period. Turning to liquidity, we ended the quarter with $47 million in cash, cash equivalents, and marketable securities, up $3.3 million from the end of the second quarter. Operating cash burn, which we define as cash used in operations plus CapEx, was $8.7 million during the quarter, which includes $900,000 of CapEx. This was offset by approximately $11.7 million of net proceeds from our ATM. During the first nine months of 2026, we raised $29 million in net proceeds under the ATM at an average price of $6.53 per share before deducting agent fees.

We remain focused on managing our operational cash burn as revenue scales and we may use our ATM opportunistically to expand our runway at a low cost of capital. As of September 30, approximately $12.6 million remained available under our ATM program. Backlog ended the quarter at $18.7 million, a decrease of 24% driven by revenue recognized, partially offset by approximately $2.7 million of net new contract awards during the quarter. Our backlog is up $4.8 million, or 35% from year end. We continue to expect a majority of our current backlog to convert to revenue over the next 12 to 18 months.

Turning to guidance, as Ben mentioned, we are raising the bottom of our full-year 2026 revenue guidance to $25 million and reiterating the top end of $27 million, which represents roughly 377% to 415% growth over 2025 revenue of $5.2 million. We continue to expect organic growth across each part of the company. Through the first nine months, operating cash burn was $30 million, and we now expect full-year operating cash burn to come in at or slightly above the high end of our $32 to $36 million range, primarily driven by the timing of working capital fluctuations and investments to support our revenue growth.

We expect Q4 operating cash burn to be below the year-to-date quarterly average through increased revenue and gross margin performance compared to the first half of the year. Based on our expected backlog conversions, the opportunities we have in the pipeline, and our liquidity position, we believe we are well positioned to execute our plan and drive shareholder value. Operator, we’re now ready to take questions.

OPERATOR

As a reminder, to ask a question you will need to press star-11 on your telephone to remove yourself from the queue. Please press star-11 again. Please stand by while we compile the Q&A roster. Our first question comes from Max Michaelis with Lake Street. Your line is open.

Max Michaelis (Analyst)

Hey guys, congrats on the quarter and thanks for taking my questions. First one for me. You kind of brought up the budgets and going into 2027 for the NDAA. First question is around sort of the funding gap between the Democrats and Republicans. I know Trump had talked about one and a half trillion dollars for his proposal. Have you heard a number being floated around by what the Democrats may want with them coming into power in January? I know it’s still early, but I guess there’s probably going to be some shrinkage in the budget proposal.

But do you see any changes towards sort of autonomy or drone line items in that budget?

Benjamin G. Wolff (Chief Executive Officer)

Max, this is Ben. Thanks for the question. Good to talk to you this morning. You know, there’s a lot of talk and unfortunately the Dems don’t speak with a single voice and I think they’re still trying to figure out what their newfound power is actually going to mean. What we hear consistently on both sides of the aisle is that autonomy and collaborative autonomous systems are a key area of focus and an area of much-needed future investment. Whether we wind up with seeing the 4554 billion dollar number that’s been floated before by the administration or something less than that, it’s still going to be, in our view, a large amount of money unlike anything we’ve seen in the past. So we are optimistic about it being a significant amount of funding which we should benefit from. We are not so optimistic at this point about how long it will take to get a new bill approved and signed by the President.

Max Michaelis (Analyst)

Okay, that makes sense. And then secondly, I mean, help me out a little bit here. You guys have announced a lot of these different partnerships. Maybe stack-rank these partnerships by what have been the most impactful so far and maybe which ones do you see as ramping more in the near term here and being more impactful going into Q4 and Q1? I think it’s fiduciary. You’ve talked about a few others as well in the press release. So maybe help us out there with some of these partnerships you guys have been talking about.

Benjamin G. Wolff (Chief Executive Officer)

You bet. I think because of the nature of the commercial and industrial side of our business and the fact that customers can make decisions more quickly without reliance on a federal budget being passed, I’m very optimistic about the significance of our FANUC partnership and what it means given the sales traction and customer engagement that we’re seeing there. So I’m really bullish about what that means for us in ’27. In terms of some of the drone partnerships that we have, those are kind of second-order relationships, meaning first we have to get the software working on the drone platforms, then we have to demonstrate it, and you wind up with the ultimate customer, meaning the federal government, needing to want both the software and that specific drone platform and they have to find money and all that has to fit into their broader programming and the scheme with which they want to deploy weapons.

So I think that those—everything related to the government that we’re doing with SwarmWest—had massive opportunity upside. But I can’t, my crystal ball at this point is so broken, I can’t predict when that’s going to actually generate material revenues. What I do know is more exposure is better. And that’s really the important thing with any of these partnerships. It’s a way of getting exposure. When you’re a relatively small company with a modest amount of sales and marketing budget like we have, you need others to go out there and evangelize your product and capability for you.

And that’s the real significance of these partnerships.

Max Michaelis (Analyst)

Awesome. Yeah. FANUC. Not fanuc. Sorry about that.

Benjamin G. Wolff (Chief Executive Officer)

Yeah, you bet.

OPERATOR

Thank you. Our next question comes from Mike Latimore with Northland Capital Markets. Your line is open.

Mike Latimore (Analyst)

Great. Yeah, thanks a lot. Quarter looks great. In terms of just, I don’t know, natural bookings flow in your business, would it make sense that, you know, your end customers get orders in the, you know, third quarter through the federal government and then they place orders with you in the fourth quarter? So naturally, you know, kind of manufacturing components businesses would have bigger fourth quarter bookings versus third quarter. Is that not a logical sequence?

Benjamin G. Wolff (Chief Executive Officer)

It is logical. In a normal environment, the third quarter is historically kind of the slowest quarter, just because of the nature of the cycle of the federal budget. I can’t predict what’s going to happen here, Mike. You know, I just, I just don’t know. I am hopeful that bookings go up more in the fourth quarter than what we saw in the third quarter, but given the politics and the federal budget and all of that, I just—I really—my crystal ball’s broken.

Mike Latimore (Analyst)

Okay, got it, got it. Then you mentioned some opportunities in the small UAV space. What products are you selling there?

Benjamin G. Wolff (Chief Executive Officer)

So we are manufacturing some components that are used in the production of small Group 1 drones. And that is a first for us. And I think that there is a lot of opportunity there for precision-manufactured components as more and more focus emerges on domestic production of all of the components used in drones that are being purchased by the U.S. military.

Mike Latimore (Analyst)

Got it. Okay, great. And then you had, I think it was $2.4 million of—you called it—AI contract revenues. Is that basically just like paid-for exercises in R&D or what is—

Benjamin G. Wolff (Chief Executive Officer)

Yeah, yeah. I mean, you know, a year ago, the revenue that we had from our defense contracts was paying us to advance the capability basically in our labs. Now we’re getting paid to actually put it out in the field. So that is—that’s a big development for us. It’s exactly where we wanted to be. And as I said in my prepared comments, you know, this is a progression: get the product working, we internally test it, get it in the hands of the warfighter, they test it, prove what it can do, and then we evangelize across all of the different constituents in the Pentagon that this is here now, capable now, working now.

And it’s something that you should be putting into your overall weapon systems and planning from a budget and a deployment perspective. And so that’s the stage that we’re at now.

Mike Latimore (Analyst)

Got it. And just last one, back on Swarm OS, I know there’s lots of exercises and opportunity, I guess. Any additional clarity on pricing for Swarm OS? I think in the past, I think you talked about maybe 5% to 10% of hardware. Is that still a good range or any more just definitiveness about pricing here?

Benjamin G. Wolff (Chief Executive Officer)

We are focused on, Mike, the 10% of total hardware cost, total platform cost. That’s what we’ve kind of zeroed in on. And in part because we’ve opened the aperture on the type of drones that we’re going to be deployed on. So we are no longer kind of constraining it to the larger drone platforms. We’re seeing more and more small drones come out with some amount of modest compute on them, which means they can leverage our software. So we’re, you know, we are open to putting our software on drones that are $3,000 drones instead of $20,000 drones.

And that. And so as a result, we’ve just made it simple. We’re at 10% of the cost of the drone. So on a $3,000 drone, it’s $300. On a $30,000 drone, it’ll be $3,000. That makes sense because the more compute, the more robust the platform, the more exquisite it is, the more capable it is, the more it can leverage our software, and the more valuable our software becomes. So I think that makes sense. We’re not hearing any pushback from direct end users on that pricing structure.

Having said that, I have to qualify that by saying we don’t have any large contracts buying it yet either. So, you know, but philosophically, we’re not getting anybody saying that’s unreasonable or that sounds out of line.

Mike Latimore (Analyst)

Yeah. Okay, great. Thank you.

Benjamin G. Wolff (Chief Executive Officer)

Thanks, Mike.

OPERATOR

Thank you. As a reminder, to ask a question, please press star 11 on your telephone. Again, please press star 11 to ask a question. Our next question comes from Brian Kinslinger with Alliance Global Partners. Your line is open.

Kevin

Hi, this is Kevin on for Brian. Good morning. Thanks for taking our questions. You said Brain shipments were the highest they’d been in Q3. How are you thinking about the ramp for FC1 from here, and what are you seeing in terms of customer demand for the lower-cost product?

Benjamin G. Wolff (Chief Executive Officer)

So a lot of interest, but, you know, it can be a lengthy cycle in terms of first you have to get a design win, then it gets incorporated into the new product, then the product gets demonstrated and goes through the typical contracting process on a competitive basis with the end user. So we’re delighted with where we are. We see a lot of momentum and interest. We continue to engage with new customers about it, but ultimately, as I said in my comments, it takes our customer as a prime winning contracts with the federal government.

And those are all in various stages. And for the reasons we discussed before about the uncertainty around the federal budget, that timing is more murky than ever. So I’m optimistic and bullish over the medium and long term. Short term, it’s a crapshoot. It’s anybody’s guess about how quickly we could see significant increased demand.

Kevin

Understood. Thank you. And then with the NORDA partnership, you’re extending the Swarm OS beyond their applications to detect and engage with terrestrial maritime targets. Does this meaningfully expand the addressable market for Swarm OS? And how are you seeing the customer demand for these types of applications?

Benjamin G. Wolff (Chief Executive Officer)

So think of what NORDA does as kind of the last 40, 50 yards, which has been, you know, historically has been used where a human is flying the drone and to get within proximity of a target. And then the human can rely on NORDA’s solution to nail that target. With our solution, you don’t need the human managing to get the drone within that last 40 or 50 yards. Our autonomous system does it for the human, and therefore it can also be done in a swarming context.

We think that that opens up the aperture for a lot of new use cases, new deployments. When you combine the two products together, we think it’s very synergistic. But to be clear, it’s early days, and we’re just beginning that process of socializing with customers what the two products on a combined basis could be leveraged to do.

Kevin

Understood. Thank you.

OPERATOR

Thank you. I’m showing no further questions at this time. This concludes today’s conference call. Thank you for participating. You may now disconnect.

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