Greetings. Welcome to the Palladyne AI and IAI Partnership Conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Brian Siegel, Senior Managing Director with Hayden IR. Please go ahead.
Thank you. Good morning, everyone. I'm Brian Siegel. I'm joined this morning by Ben Wolff, President and Chief Executive Officer of Palladyne AI, and Trevor Thatcher, CFO. Note that Ben is traveling. We apologize if there is a delay or clarity issues. Yesterday morning, Palladyne AI announced a historic foundational and transformational transaction with Israel Aerospace Industries, or IAI, Israel's largest and arguably most innovative government-owned aerospace and defense company. We've convened this call to walk investors and analysts through the significance of this strategic partnership and what it means for the company. During today's call, management will make forward-looking statements within the meaning of the federal securities laws. These statements involve risks and uncertainties that could cause actual results to differ materially from those described.
Forward-looking statements include, but are not limited to, statements regarding Palladyne AI's partnership with Israel Aerospace Industries, anticipated Americanization and manufacturing timelines, potential U.S. government contracting activity, and demand for the systems, product development milestones, Palladyne AI's ability to manufacture IAI systems as expected, Palladyne AI's ability to obtain any necessary U.S. government approvals, the future needs of the U.S. military, commercialization plans, market opportunity, and future strategic positioning. Some of these risk factors and uncertainties are described in detail in Palladyne AI's filings with the Securities and Exchange Commission, including annual reports on Form 10-K and subsequent filings. You are encouraged to read those risk factors. Palladyne AI undertakes no obligation to update any forward-looking statements except as required by law. With that, I will turn the call over to Ben.
Thanks, Brian. Good morning, everybody. Thank you for joining us. We're here today to talk about our incredibly important new partnership with IAI. One that is not only important for Palladyne, but also for America's national security and the safety and security of our nation's warfighters. Since I know many of you on this call this morning are new to the Palladyne story, let me start with some context on how we got here before getting into the details of this exciting transformational partnership. Before we open the line for questions, I will also share some Q2 company updates so that you can get a sense for the drumbeat of momentum that I have the pleasure of seeing and experiencing on a daily basis.
In 2019, we started developing the architecture for our advanced Decentralized Embodied Collaborative Autonomy software, or DECA for short, that could work on all manner of robotic systems. The big idea was that there was a large category of machines that could become exponentially more useful by migrating from being remote-controlled or pre-programmed and automated to being truly autonomous, meaning that the machines could make certain decisions on their own and in real-time. In November of last year, we took steps to further leverage our embodied AI technologies by enabling us to optimize the simultaneous development of software and hardware both at the avionics level and at the complete system level. We did this by completing three acquisitions that turned us into a vertically integrated aerospace and defense company with the breadth and depth of skills and experience that rival much larger companies.
Today, Palladyne AI is a U.S. aerospace, defense, and industrial technology company. Our DECA software provides the high-value layer of intelligence that serves as the foundation for everything that we do. Our advanced engineering services enable us to design, improve, and iterate UAVs, missiles, loitering munitions, and spacecraft far more rapidly than ever before. Our components business brings onboard flight computers for UAVs, missiles, and loitering munitions that can be sold on their own or integrated with our DECA swarming software. Our precision manufacturing business brings state-of-the-art production capability, all of this at speed and at a fraction of what these capabilities typically cost. That combination is what makes today's announcement possible. SwarmOS is the DECA intelligence layer that connects everything else I will discuss this morning. You hear a lot of companies talk about AI for drones.
Most of the time, what they mean is enabling a single drone or a swarm of drones to be pre-programmed with set waypoints established before the drones are launched. This is often coupled with collision avoidance capabilities and then called, quote, "autonomy." According to one of my favorite AIs, autonomy for machines means, quote, "the ability to perceive its environment, make decisions, and execute tasks to achieve specific goals without requiring human intervention or remote control." Sorry to break it to you, but pre-programmed flight and collision avoidance is neither collaborative nor is it autonomous. It is more equivalent to cruise control and lane change warnings in human-driven cars. What SwarmOS does is fundamentally different. It enables multiple drones from different manufacturers to share sensor data and collaborate in real time without a centralized controller and without cloud connectivity.
Each drone perceives its environment, makes its own decisions, and acts, but does that collaboratively with the other platforms around it, enabling individual drones as well as a swarm of many drones to respond to what is going on, both in the air and on the ground, in real time, without human intervention, all based on mission intent. It can do this in comms-degraded and GPS-denied environments where other systems stop working. That is exactly what the Department of Defense has been asking for. SwarmOS is not a promising technology sitting in a lab. It is ready for prime time now. We recently flew SwarmOS on drones from four different OEMs simultaneously, including our own Gremlin-X mini bomber, during a three-week Department of Defense joint exercise.
Real soldiers in real battlefield conditions trained on SwarmOS in about 30 minutes, such that a single soldier could easily assign mission parameters and launch the birds with the ability to oversee and manage the swarm, but not needed to direct individual drone operations. This is huge. SwarmOS reduced the required manpower, enabling more soldiers to be in the fight. Equally important, SwarmOS enabled the operator to have a full real-time perspective of what was really going on the battlefield, substantially lightening the soldier's cognitive load so that they could focus on what really matters, mission execution. How we envision building this company is important context for everything that follows. We are not trying to build a better FPV drone.
We are not going after the highly competitive small UAS segment, where there are already hundreds of companies doing really great work, some of whom we have partnered with. What we are doing, however, is pursuing the development of differentiated UAV, missile, and loitering munition systems that address specific capability gaps in the Department of Defense's arsenal. Gremlin-X is our low-cost, reusable mini bomber targeting under $1,000 per effect, which directly answers the Department of Defense's mandate for low-cost, attritable munitions. SwarmStrike is a mini cruise missile with collaborative strike capabilities targeting a price point roughly 90% lower than legacy alternatives. ARRW, our Air-Launched Rapid Response Weapon program, is a near hypersonic missile we are developing for the US Navy.
Our subsidiary GuideTech, which is comprised of a team of world-class aerospace and defense engineers, many of whom spent years working on major UAV, missile, and loitering munition programs at large defense primes, can take a concept from a whiteboard to a flight-ready prototype in under six months, as demonstrated with SwarmStrike. Our Brain avionics suite delivers guidance, navigation, and control capabilities at roughly one-tenth the weight and cost of legacy alternatives. Palladyne Manufacturing, combining Warnke and MKR, give us certified precision manufacturing in Oxford and Saginaw, Michigan, already supporting the F-35, F-16, F-22, C-130, Tomahawk, Harpoon, JDAM, Bradley, and M1A1 Abrams programs, to name a few. These are modern manufacturing capabilities leveraging state-of-the-art machines and tooling, and today we are operating at a fraction of our total capacity. Gremlin-X, SwarmStrike, ARRW, Brain. Capability gap-filling, differentiated systems and products, not high-volume commodities.
That same philosophy runs through everything I'm about to describe. This slide shows the strategic logic and philosophy behind what we have built. Many of the new venture-funded defense tech startups are doing great work. They're bringing a Silicon Valley startup mentality to the defense tech sector. They often bring software-first architecture, fast iteration cycles, agility, and an appetite for risk. Not exactly the attributes one thinks of when describing our historical defense industrial base. There is a good reason why few, if any, VCs were interested in funding defense tech startups until recently. Contracts and revenues are often unpredictable. Opportunities to prove that weapons reliably work on the battlefield are few and far between. The whims of congressional funding can whipsaw investors. The list goes on.
It wasn't until Elon Musk and Peter Thiel demonstrated that real companies with patient investors can make incredibly successful businesses with the government as the primary customer. That is when the VCs jumped in. We've seen this movie before, and so have the smart finance and business people who are now making decisions at the Department of War. I've heard repeatedly that while the Department of War is leaning into innovation and embracing defense tech startups more than ever before, they are also appropriately cautious about the PowerPoint claims of the boys with toys crowd. This is why legacy primes continue to be so important. They bring decades of combat-validated systems, deep domain expertise, extensive portfolios of intellectual property, scale, credibility, and investors who understand the long game. Palladyne Aerospace & Defense was built to bridge both worlds.
The GuideTech and manufacturing acquisitions were done with an eye towards something larger. We believed that with those capabilities, we could be an attractive partner to one or more large defense primes that could benefit from the combination of our technologies, our expertise and our production capabilities. So far, it has worked out better than expected. The partnership with IAI that we announced yesterday is exactly the type of partnership we built Palladyne for. We have been describing our execution path in three stages, proving and integrating today, converting to larger revenue-generating contracts in 2027, and scaling from 2028 onward. The IAI partnership does not change that framework. What it does however, is it becomes a defining event for the current phase and the opportunity to materially uplevel what the later stages represent financially. On to the big news.
Yesterday morning, we announced an exclusive U.S. strategic partnership with Israel Aerospace Industries, or IAI, to Americanize, manufacture, integrate, and market IAI's battle-proven, long-duration loitering munition systems to the U.S. Department of War. Now, let me walk through what that means. Israel Aerospace Industries is Israel's largest defense company, today wholly owned by the Israeli government, and one of the top 30 defense companies in the world. IAI's backlog is over $30 billion. IAI represents more than 70 years of continuous innovation and operational deployment across more than 50 countries. Here is a truly important fact about IAI. They did not just enter the loitering munition category. They created it. The term didn't exist before IAI introduced it. More than 40 years ago, their missile systems group had the vision to combine a missile with a UAV.
For years, people said, "What does that even mean?" They built it, they proved it, and they demonstrated the power of its capabilities in numerous conflicts over the years. Now, the term loitering munitions is on the tip of almost everyone's tongues. Still, despite the billions of dollars being invested by defense tech startups and legacy primes alike, no one has created loitering munitions that match the capabilities of IAI's HAROP, HARPY, and Mini HARPY, which are the first systems from IAI we intend to Americanize to meet Department of War requirements. These systems are combat-proven across real campaigns for decades. Not a startup with a promising concept, not new weapons with carefully scripted demos that work under ideal conditions.
Down in Texas, where I live, there is a common phrase we use to describe someone who is all show and no go, a lot of talk and hand-waving, but short on performance. We say they are all hat and no cattle. That is not IAI, for sure. To paraphrase Guy Bar Lev, IAI's Executive Vice President and GM of the Space, Missiles, and Systems Division from yesterday's release, IAI selected Palladyne for our combination of advanced autonomy, engineering expertise, and certified U.S. manufacturing, and for our team's ability to move with the urgency the current threat environment demands. I will be honest, I did not know that Palladyne on its own, without the GuideTech and manufacturing acquisitions, could have secured this partnership.
While we had been in talks with them for almost a year, the IAI team came to visit us after we closed our transformational acquisitions last fall, met with our people, and came away genuinely impressed with our engineering capability, our manufacturing, and the way we operate. We have the capabilities of a large defense prime, even though we are not the size of one. We are still small, nimble, and entrepreneurial. That combination appealed to them and they chose us as a result. Getting the right mental model here is really important for understanding the scale of the IAI opportunity. When many people hear about loitering munitions today, most think of Group 1 drones, including FPV drones and other small UAVs with kinetic capabilities. Those are real systems with real utility. HARPY, HAROP, and Mini HARPY are in a completely different category.
A complete HARPY or HAROP system is not a single UAV. It includes the UAV, launchers that resemble 40-foot shipping containers, and command and control centers. These are unmanned aircraft with a wingspan of about 10 feet across. HARPYs and HAROPs support diverse missions but can be launched and managed from common infrastructure, creating tremendous flexibility on the battlefield. A quick internet search reveals rumored reports of sales of these systems to countries with very small defense budgets relative to the U.S. that show contract ranges in years past in the low to mid hundreds of millions of dollars. These contracts were reportedly for modest quantities. When you are talking about the world's largest defense budget and a capability it does not currently have in its arsenal, I believe the potential for these systems could be in the billions of dollars over time.
To give investors a sense of the procurement environments where these systems are relevant, across the U.S. Army and Navy, we see at least six military Program Executive Offices and Portfolio Acquisition Executives, or PEOs and PAEs, with aggregate budgets of close to $200 billion over multiple years that are focused on capabilities and solutions that squarely align with the capabilities of our new loitering munitions portfolio. We are not suggesting that we are competing for all of that, but it gives you a sense of the scale of the procurement apparatus that will be evaluating this capability. Our job, starting yesterday, is to make each of these PEOs and PAEs aware that this is a newly available, uniquely American capability, and then to work to determine the U.S. government's actual demand for these systems. What makes these systems so unique?
First and foremost, they are designed to cost-effectively suppress and destroy enemy air defenses. They're particularly well-suited to attack intermittent and mobile air defenses. HARPY is a purpose-built suppression and destruction of enemy air defense loitering munition designed to autonomously detect, track, and destroy hostile radar emitters. With a launch weight of approximately 300 pounds, a range of 200 to 1,000 km, and endurance of six to nine hours, HARPY can patrol large areas of contested airspace while waiting for enemy air defenses to activate. Unlike traditional anti-radiation missiles that are launched against a known threat and immediately expend themselves, HARPY provides a persistent, autonomous presence over the battlefield, allowing operators to suppress sophisticated integrated air defense networks at a fraction of the cost of conventional strike packages.
Its proven operational history, mature anti-radiation seeker technology, and ability to independently prosecute radar threats make it a highly effective force multiplier for opening access to contested environments. HAROP is a long-endurance, electro-optically guided loitering strike system that combines ISR, target acquisition, and precision attack in a single combat-proven platform. With up to nine hours of endurance, a substantial warhead, and the ability to search, identify, track, abort, re-attack, and strike from multiple attack angles, HAROP gives commanders persistent sensor-to-shooter capability against time-sensitive, relocatable, and high-value targets. Unlike HARPY, which is optimized for autonomous anti-radiation missions against radar emitters, HAROP is optimized for human-confirmed EO/IR targeting and flexible precision strikes against both stationary and moving targets. Mini HARPY delivers advanced suppression and destruction of enemy air defense capabilities together with precision strike capabilities in a smaller, lighter, and more easily deployed platform optimized for distributed operations.
With a launch weight of approximately 100 pounds, endurance of up to two hours, and a range of approximately 100 km, Mini HARPY enables tactical units to rapidly locate and engage radar emitters and visually identify targets with a single weapon system. By combining autonomous anti-radiation homing with electro-optical target acquisition, Mini HARPY offers operational flexibility typically unavailable in systems of its size class. Its compact footprint, rapid deployment capability, and multi-mission functionality makes it particularly well-suited for expeditionary forces, special operations units, and mobile formations operating in highly contested environments. Our partnership with IAI gives us the exclusive rights in the U.S. to Americanize, manufacture, integrate, and market this platform family to the U.S. government. We expect to adapt the systems to U.S. requirements and serve as a prime contractor to the U.S. government.
IAI provides engineering support and supplies certain subsystems and components subject to U.S. government approval and receives a standard industry royalty rate. To be clear, we paid nothing upfront for this exclusivity. To put that in context, I believe a well-funded defense tech startup trying to develop systems like these from scratch would likely spend years and potentially hundreds of millions of dollars or more, and still not have a battle-proven technology at the end. To my knowledge, no one in the world has yet developed anti-radiation capabilities that match IAI's. Access to IAI's intellectual property to offer these systems to the U.S. government is frankly irreplaceable. Now let's talk about how the partnership works. Our engineering team will focus on the Americanization process and the integration of SwarmOS software, adapting the platforms to U.S. operational requirements and implementing any modifications that the U.S. government requires.
We have the intellectual horsepower to do this. Our manufacturing group will handle certified domestic production and assembly. Worth noting, we already manufacture some components for some of IAI's UAVs in our Michigan production facility. Palladyne AI handles all aspects of the relationship with the U.S. government. As I said above, job number one for us now is talking to the people in the Department of Defense who need to know that there is a clear path to acquire American versions of these highly capable, battle-proven loitering munitions. As part of the Americanization process, we expect the Department of Defense to be interested in putting SwarmOS on these platforms. Autonomy on a single drone already dramatically increases the value proposition beyond human remote control.
Swarming autonomy across multiple platform types, Group 3s in the air for nine hours, Group 2s for two hours, shorter duration strike platforms, all collaborating in real time, leveraging each other's sensor data, doing battle damage assessment that informs the next wave, takes the capability to a completely different level and becomes a true force multiplier. When you combine these loitering munitions with SwarmOS, we believe you get a capability set that nobody anywhere in the world has anything close to. The relationship provides us up to 10 years of exclusivity, is performance-based, and has the potential to expand to other products and systems as we gain traction. We will be disciplined about capital deployment. We are not standing up high-volume production facilities until we have a clear demand signal from the U.S. government. This is not a build it and we hope they will come scenario.
With a blueprint for proven scale manufacturing that has evolved and been perfected by our partners at IAI over decades, we can and will move expeditiously once it becomes clear that the U.S. government is ready to move out with these platforms. Depending on the volumes involved, we think we can have the first units produced in 12 to 18 months from the time the government says go. To answer the question, can you actually build these things? The answer is yes. We have the team and know-how, and we have a meaningful head start with facilities and equipment. We have over 100,000 sq ft of certified precision manufacturing in Oxford and Saginaw, Michigan, and available space in Salt Lake City. We are currently making components for the F-35, the F-16, F-22, C-130, Tomahawk, Harpoon, JDAM, Bradley, and M1A1 Abrams programs.
We have major primes like Lockheed, Boeing, and Kratos as a few of the current customers we can name publicly, and we have plenty of capacity to do more. I personally have been through IAI's factory in Israel. This is not a terribly CapEx-intensive manufacturing endeavor. We will scale what we have, and if demand outstrips our current capabilities, we will expand. Specific decisions about facilities and production capacity will again be made as we get a sense for demand from the U.S. government. Now let's talk about momentum in our core business. Since the start of Q2, we have accomplished a number of important milestones in addition to securing the IAI partnership. Most importantly, we recently completed a three-week Department of Defense exercise running SwarmOS across multiple drones from different manufacturers with a single operator.
The feedback was, A, that we exceeded expectations, and B, at least in one senior leader's view, every drone in the arsenal should be equipped with SwarmOS. We agree. On top of that, we flew IntelliSwarm for the first time in that exercise. We've been invited to participate with SwarmOS in five other Department of Defense exercises over the remainder of this year. On the partnership front, we have multiple new drone OEM integrations in progress. Next, we received a significant order for Brain, our advanced flight computer. We'll talk more about that in the future. Finally, we added Retired Lieutenant General Sean Bernabe and Retired Brigadier General Gwyn Armfield to our team. A lot of validation has happened in a short time, and we are just getting started. Why now?
Four things are happening simultaneously that create a specific and time-limited opportunity for a company built exactly the way we have built Palladyne. The Department of Defense has a clear cost per effect mandate. Priorities are shifting from the biggest and most expensive to the smartest, cheapest, and fastest. Everything we are building, from Gremlin-X and SwarmStrike, to ARRW, to the IAI loitering munitions family, is a direct answer to that mandate. There's an executive mandate for domestic defense production. Reshoring is policy backed by real action. Bringing the world's most battle-proven loitering munitions to America and manufacturing them here is exactly what that policy is designed to produce. Autonomous systems are moving from concept to operational deployment right now, not just someday in the future. We are running SwarmOS in live Department of Defense exercises now. The threat environment has changed.
Intermittent mobile air defenses are increasingly challenging us. Counter UAS systems often rely on intermittent radars. All of this creates contested airspace. The ability to suppress and destroy enemy air defense is more relevant than ever before. We announced the partnership yesterday. There is much to do. We will be disciplined on capital. We will not build ahead of demand. When you look at what we have built, who we are partnered with, what the Department of Defense needs, and where defense procurement is heading, the fit here is as good as anything I have seen. We are not boys with toys. We are men and women on a mission. The mission just got an order of magnitude bigger. With that, we can open the line for questions. Operator?
Thank you. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Max Michaelis with Lake Street Capital Markets. Please proceed with your question.
Hey, guys. Thanks for taking my questions. You mentioned that you'd be able to stand up sort of a munitions system, a manufacturing process in 12 to 18 months, from the time DOD said go. Do you expect that to come at the end of 2026, where you kind of go through the testing phases and the DOD's kind of ready to go forward with this?
Max, we expect that to begin literally as soon as we see that there is real interest and demand from the government. It's hard for me to peg a specific timeline on that. It could happen next month. It could happen in six months. I think it really depends on the demand signals that we see from the government. We are gearing up from the standpoint of our team's focus to be able to move out as quickly as the government wants to.
Okay. Just going back to some of the Q2 updates. When we look at sort of the order activity, I know Q1 was a little bit slower. Q2 was going to pick up, and Q3 and Q4 are going to accelerate from the first half of the year. How has order activity trended in Q2 going into Q3?
I'd say that we are on track with what we had internally anticipated. I'm not going to get into a lot of specifics since we are only partway through Q2. We are pleased with the momentum that we see in the business.
Awesome. Thanks, guys.
Thanks, Max.
Thank you. Our next question comes from the line of Michael Latimore with Northland Capital Markets. Please proceed with your question.
Hey, guys. Phenomenal news here. I think this is exciting to watch unfold. I had some questions here. I believe you already are talking to U.S. prospects here on the loitering munitions. I was just wondering what the main agencies are that you're targeting?
Army and Navy are the two organizations that we think have the biggest need, and could represent the largest orders. Long-Range Precision Fires in the Army is one program that I think has some published requirements that our new systems could meet. When you take a look at things like the Mini HARPY, as I mentioned in my comments, the tactical and operational capabilities that make it maybe ripe for SOCOM, Marines, et cetera. I think we've got opportunities across all of the services with these systems. Again, as I mentioned, all of them fill unique mission profiles that we really don't have other products in the U.S. arsenal to address today.
Awesome. A quick follow-on on that. Are the contacts that you're talking to now, are these ones you've had in the past or new ones or maybe a mix?
All of the above. Yeah. All of the above. Again, we were cautious about not having a lot of discussions in advance of the news coming out. Yesterday morning marked go time. We've already had some great inquiries just as a result of the news that came out.
Great. Let's see. One more here. How comfortable are you that a customer will buy these loitering munition systems if you do not have an Americanized version yet? Then maybe, is there a need to bring a demo or two online to sell this further?
We believe that there is a possibility that the U.S. government might want to get started sooner rather than later, in which case, we might not need to have fully Americanized versions. It is too early to tell what the requirement will be. You see some indication just in recent months of the U.S.'s willingness to get started with systems that are foreign-made systems. I do not have a clear crystal ball on that at this point. Having said that, the Americanization process is not going to involve re-engineering the hardware and propulsion systems, we do not think. We think that to the extent that it has requirements associated with it might involve things like some of the software, some of the guidance systems, things like that, things that our team has core competencies in, and we would not expect to take a long time.
So much is going to depend ultimately on just the appetite and how quickly they want to start getting these systems integrated into the overall capability set that the U.S. military has.
Great. Just one more quick here. One more quick one, if I could. What specific budget line items are you looking at that could cover the loitering munitions?
There are literally six different PAEs and PEOs that have budget for this kind of system. As I mentioned in my comments, we think that that is hundreds of billions of dollars at this point that will be spent over a period of years. There is not just one line item specifically. There are some very large line items that these systems could very easily fit into.
Awesome. Thank you, Ben.
Thank you.
Thank you. Our next question comes from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.
Great. Thanks so much. Can you lay out the roadmap and estimated time related to the milestones for getting to production ready?
Brian, it depends so much on what the government wants to see happen in terms of the evolution of these systems. It's one thing to make them as they are currently designed and architected in the U.S. It's another thing to make modifications to them and then go into production. I think in an ideal case, where what the government really cares about is them being made in America by an American company with a supply chain that is not concerning to them because it's got foreign sourcing. That is a much easier thing to stand up, and that's where we think we could have first units in 12 to 18 months from the time that the government says go. I want to be really clear, that requires the government to say go and it then requires us to promptly move out and start that production process.
To the extent that the government wants changes to be made, it's unpredictable at that point how long that might take. Our expectation would be to the extent the government wants changes, that the government would be funding those changes.
To be clear, 12 to 18 months, if they are okay with as is. If they need modifications, it's that additional time on top of it.
That's right.
Yep.
Some of that might be able to happen simultaneously. It just depends, Brian, on what the extent of the changes are.
What are the investments the company needs to make to execute the roadmap, including people, over the next 12 to 18 months?
I think we've got all of the people and facilities required to do whatever is necessary from an Americanization process. In terms of the assembly process and overall production of the systems, if we get into larger volumes, think anywhere from dozens to hundreds of units a month, we will need more physical space. As I mentioned, though, from my review of the facilities that do comparable work in Israel, this is not a hugely capital-intensive process. It requires space, but it does not require exquisite equipment other than when it comes to testing the products as they come off of the assembly line. There will be some CapEx associated certainly with being able to do all of the testing and vetting and validation required for systems that are 10-foot wingspan systems. We're not talking about huge dollars here.
I want to reserve comment on what that means until I understand what kind of volumes we're really talking about.
Lastly, I know it's very early, you haven't produced one yet, but what are the economics split between you and IAI on the drones, and what does a margin profile look like long-term at scale for this, maybe?
The economic terms with IAI are favorable to us in many respects. It has a single-digit kind of mark industry standard royalty rate that we will pay them for the sale of each system that we secure to the U.S. government. In addition, we will look to them to provide components and subsystems that they can provide cost-effectively to us. I'm sure they will have some margin on whatever they provide to us as being the prime. Other than that, it's a very straight-up deal. In terms of the margins that we expect, Brian, so much of that depends on what we are able to ultimately successfully sell these systems to the U.S. government for and what they have an appetite for.
I would say that you can look at others that are in the business of selling larger Group 2, Group 3, Group 4 UAV platforms to the U.S. government. Take a look at what those margin profiles look like, and that is what I would expect us to be achieving as well.
Great. Thank you so much.
Thank you, Brian.
Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star one on your telephone keypad. Our next question comes from the line of Suji Des ilva with Roth Capital Partners. Please proceed with your question.
Hi, Ben. Hi, Trevor. Congratulations on this exciting announcement. Ben, has the domestic component sourcing effort versus how IAI sources now, has that already begun? Have you been proactive about that or is that something you'd have to wait for a government contract to begin? Any color there would be helpful.
Because of our internal component manufacturing capability, we've obviously scoped out what we would want to do on our side through our own manufacturing capabilities. In terms of the rest of the supply chain, that's something that we're really just getting started on now. We got the partnership terms negotiated and inked, now the transfer of information that ranges everything from the facilities requirements to the engineering specs to the BOM and everything in between. That transfer of information starts now. We're at the top of the first inning when it comes to that part.
All right. That's helpful, Ben, to know where you are. Just, can you touch again on the competitive selection that IAI went through in selecting you guys? What were the key factors were there? I know you covered some of that in the prepared remarks, any summary or color there would be helpful, yeah.
Yeah, obviously they probably ought to speak and can speak to this better than me. I don't know all that went into in their selection process. We do know that because of the capability of these systems and how unique they are, IAI probably could have partnered with anybody they wanted to. I have some anecdotal information about others that were interested and whether or not they were part of a formal process or not, I can't answer that question. What we do know is what they've told us, which is represented in some of the quotes in the press release that we issued yesterday. It is a combination of the way we do business, our proven track record as a leadership team, our autonomy capabilities, our manufacturing capabilities, and our engineering capabilities. All of that combined gave them confidence that we were the right partner for them.
Okay, great. Thanks, Ben.
Thank you, Suji.
Thank you. Ladies and gentlemen, there are no further questions at this time. This concludes our question and answer session. We'll conclude our call today. We thank you for your interest and participation. You may now disconnect your lines.