MRLN 10-Q — Smart Summary

• Business description: Merlin, Inc. (formerly Inflection Point Acquisition Corp. IV) develops AI-powered software that fulfills the functions of a human pilot in self-flying aircraft, enabling reduced crew and unmanned flight across military and civil programs, proven through hundreds of autonomous flights from test facilities across the globe; shares trade on Nasdaq under the symbol "MRLN."
• Merger timeline: On August 13, 2025, the Company entered into a Business Combination Agreement with IPDX Merger Sub, Inc. and Legacy Merlin (Merlin Labs, Inc., incorporated October 10, 2018 as Apollo Flight Research, Inc.); the Merger closed on March 16, 2026, with Legacy Merlin becoming a wholly-owned subsidiary of the Company ("Merlin OpCo").
• Domestication: On March 13, 2026, Inflection Point filed a notice of deregistration with the Cayman Islands Registrar of Companies and was domesticated as a Delaware corporation, changing its name to "Merlin, Inc."; immediately prior, holders of Class B ordinary shares converted such shares one-for-one into Class A ordinary shares, which then converted automatically into post-Domestication shares.
• Accounting treatment: The Merger is accounted for as a reverse recapitalization under U.S. GAAP, with Inflection Point treated as the acquired company for financial reporting purposes and Legacy Merlin determined to be the accounting predecessor to the combined Company.

• Going concern / liquidity: During the three months ended March 31, 2026 and 2025, the Company incurred net losses of $90,419 and $12,733, respectively, and negative operating cash flows of $23,644 and $13,081, respectively; accumulated deficit stood at $641,472 as of March 31, 2026. Management concluded that liquidity is sufficient for at least one year from the issuance date, supported by the March 16, 2026 Merger PIPE of $120,000 in gross proceeds and a May 1, 2026 follow-on PIPE of $80,000 in gross proceeds.
• Revenue concentration: The Company generated $1,002 and $868 in revenue during the three months ended March 31, 2026 and 2025, respectively, with >90% from the U.S. government; accounts receivable from the U.S. government totaled $1,307 and $368 as of March 31, 2026 and December 31, 2025, respectively.
• Restricted cash: Restricted cash of $2,569 as of March 31, 2026 (none as of December 31, 2025) consists of deposits collateralizing irrevocable letters of credit under lease agreements, all classified as non-current; total cash, cash equivalents, and restricted cash was $125,346 at March 31, 2026 versus $59,343 at December 31, 2025.
• Selected expense items: The Company recorded $150 as a reduction to R&D expense under third-party research agreements in each of the three months ended March 31, 2026 and 2025; advertising expense was $554 and $271 for those same periods; $2,061 of Merger-related transaction costs were capitalized and subsequently netted against Merger proceeds upon closing.
• Recently adopted standard: The Company early-adopted ASU 2025-03 (variable interest entity accounting acquirer determination) as of January 1, 2026, applying it in its analysis of the Merger.

• Transaction structure: Inflection Point, Merger Sub, and Legacy Merlin entered into the Business Combination Agreement on August 13, 2025; the Merger was treated as a reverse recapitalization, with Legacy Merlin common stockholders receiving shares at an exchange ratio of approximately 3.102 and each Legacy Merlin option converted at the same ratio.
• Pre-closing financing: Between July and November 2025, Legacy Merlin issued Pre-PIPE Bridge and Pre-Funded PIPE Notes and Warrants to certain investors; in November 2025, Inflection Point, Legacy Merlin, and certain investors entered into Series A SPAs under which the Company issued 12.0% Series A Cumulative Convertible Preferred Stock and PIPE Warrants for aggregate gross proceeds of $120,000 (the "Closing PIPE") at the Closing.
• Net proceeds: Total cash into the Merger was $123,070 ($3,070 from Inflection Point, comprising $25,864 gross trust proceeds less $23,220 in transaction costs plus $426 from the operating account, and $120,000 from the Closing PIPE); $28,334 was immediately used to prepay the 2024 LSA Loans, resulting in net cash to Merlin of $94,736.
• Share count impact: Common shares outstanding went from 5,306,250 at December 31, 2025 to 84,540,978 immediately after the Merger, reflecting the conversion of redeemable convertible preferred stock (adding 17,154,902 shares), application of the 3.102 exchange ratio (adding 47,966,076 shares), and issuance to Inflection Point stockholders and rightsholders (13,750,282 shares), with Additional Paid-In Capital reaching $501,798.

• Revenue mix: U.S. government agencies represented the dominant customer type at $950 (three months ended March 31, 2026, vs. $837 prior year); commercial and non-U.S. government customers contributed $52 vs. $31, with New Zealand revenues accounting for the entirety of the commercial and non-U.S. government figure in both periods.
• Remaining performance obligations: As of March 31, 2026, the aggregate transaction price allocated to remaining performance obligations was $1,124, all of which is expected to be recognized over the next 12 months; no revenue recognized in Q1 2026 or Q1 2025 related to performance obligations satisfied in prior periods.
• Contract loss provision: The Company revised its cost estimate on the United States Air Force Special Operations Command contract during Q1 2026, reducing the contract loss provision liability to $738 as of March 31, 2026 (from $4,173 at December 31, 2025) and recognizing a favorable adjustment of $2,451 on the consolidated statement of operations; amortization of the previously recognized contract loss provision as a reduction to cost of revenue was $984 in Q1 2026 vs. $672 in Q1 2025.
• Contract balances: Accounts receivable, net rose to $1,342 at March 31, 2026 from $368 at December 31, 2025; unbilled receivables declined to $399 from $1,570 as previously earned but uninvoiced amounts were billed during Q1 2026; deferred revenue was $0 at both March 31, 2026 and December 31, 2025 (down from $112 at December 31, 2024), with $112 recognized from beginning deferred revenue during Q1 2025 and none during Q1 2026.

• Fair value hierarchy overview: As of March 31, 2026, the only recurring assets were money market mutual funds classified as Level 1 with a fair value of $121,417; the only recurring liability was warrant liabilities classified as Level 3 at $87,803. As of December 31, 2025, Level 1 assets were money market mutual funds of $56,695, and Level 3 liabilities totaled $137,255, comprising 2024 LSA Loans current portion ($19,175), convertible promissory notes ($29,107), 2024 LSA Loans non-current portion ($12,207), and warrant liabilities ($76,766).
• Warrant liabilities rollforward (Q1 2026): Warrant liabilities moved from $76,766 at December 31, 2025 to $87,803 at March 31, 2026, reflecting a $22,111 fair value decrease prior to the Merger, $6,859 of exercises prior to the Merger, $3,745 exchanged in the Merger, $48,195 of new warrants issued in the Merger, and a $4,443 fair value decrease after the Merger. For comparison, warrant liabilities moved from $3,586 at December 31, 2024 to $3,540 at March 31, 2025.
• Convertible promissory notes rollforward: Notes carried at fair value of $29,107 at December 31, 2025 increased by $87,824 in fair value changes before being fully converted in the Merger ($116,931), leaving a balance of $— at March 31, 2026.
• 2024 LSA Loans rollforward: Loans carried at $31,382 at December 31, 2025 were reduced by $4,562 in contractual principal repayments, increased $1,514 by non-cash fair value changes, and extinguished for $28,334 in connection with the Merger, leaving a balance of $— at March 31, 2026.
• Valuation methodology: Level 3 warrant liabilities and convertible promissory notes were valued using a probability-weighted expected return method; the Merger-occurrence probability was 85% as of December 31, 2025 and 100% as of the Closing Date, with a calibrated discount rate of 500.0%. PIPE Warrants as of March 31, 2026 were valued via Monte Carlo simulation using a 4.96-year remaining term, $7.35 common stock fair value, 65.0% volatility, 3.88% risk-free rate, and 0% dividend yield.

Depreciation expense: $417 for the three months ended March 31, 2026, compared to $381 for the three months ended March 31, 2025.

• Lease portfolio: The Company leases office space, aircraft, and airport hangar space under noncancelable operating leases expiring on various dates through 2033; a New Zealand lease contains one five-year renewal option that is not reasonably certain to be elected and is excluded from the right-of-use asset.
• New Boston office lease: In February 2026, the Company entered into an office lease in Boston, MA commencing March 23, 2026 and expiring January 31, 2029; the Company holds an early termination right (effective on the second anniversary of commencement with nine months' prior notice) for a $150 termination penalty, which is reasonably certain to be exercised and was therefore included in the lease calculations — resulting in a recognized right-of-use asset and lease liability of $1,632 at commencement.
• Uncommenced Bedford, MA lease: On September 4, 2025, the Company entered into a lease for airport hangar and corporate office space in Bedford, MA that has not yet commenced and carries estimated total future payments of $34,247 through September 2035; the lease is expected to commence in 2027, and no right-of-use asset or lease liability has been recorded as of March 31, 2026.
• Lease liability maturity: Total future minimum operating lease payments as of March 31, 2026 were $2,874, less a present value discount of $455, yielding a lease liability of $2,419 ($977 current, $1,442 long-term); weighted average remaining lease term was 2.60 years and weighted average discount rate was 12.52% as of March 31, 2026.

• Debt status at quarter-end: Following the redemption of the 2022 PGF Loan, the redemption of the 2024 LSA Loans, and the conversions of the Pre-PIPE Bridge and Pre-Funded PIPE Notes in connection with the Merger, the Company did not have any outstanding debt as of March 31, 2026; as of December 31, 2025, total long-term debt was $32,055, with current maturities of $19,271, resulting in long-term debt, net of $12,784.
• 2022 PGF Loan redemption: On February 24, 2026, the Company exercised its unilateral right to prepay the 2022 PGF Loan (NZD 1,000, $660 USD at issuance; fixed rate of 7.47%; effective interest rate 7.5%) at a redemption price of $782, which equaled the then-current carrying amount.
• 2024 LSA Loans redemption: On the Closing Date, the Company prepaid the 2024 LSA Loans in full at a contractual redemption price of $28,334 (inclusive of aggregate outstanding principal, accrued unpaid interest, and make-whole premiums); the loans had been drawn in three tranches of $12,500, $12,500, and $10,000 on May 28, August 30, and October 23, 2024, respectively, at a total nominal interest rate of 15%, and were accounted for under the fair value option following a July 1, 2025 amendment treated as an extinguishment under ASC 470-50.
• Pre-PIPE Bridge and Pre-Funded PIPE conversions: The Company issued $23,445 in aggregate principal of Pre-PIPE Bridge Notes (12.0% per annum, compounded semi-annually following amendment) and $64,706 in aggregate principal of Pre-Funded PIPE Notes (12.0% per annum, compounded semi-annually; total proceeds $55,000 plus $9,259 from a November 18, 2025 incremental issuance of $10,893 principal); both series were accounted for under the fair value option and automatically converted into shares of Series A Preferred Stock upon Closing of the Merger.

• Warrant classification: The 2019 LSA Warrants, 2021 LSA Warrants, and 2024 LSA Warrants were classified as liabilities under ASC 480 (underlying shares were redeemable convertible preferred stock outside the Company's control); the 2024 LSA Amendment Warrants were similarly liability-classified under ASC 480 due to exchange rights into convertible debt instruments; the Pre-PIPE Bridge Warrants, Pre-Funded PIPE Warrants, and PIPE Warrants were liability-classified under ASC 815 because certain settlement adjustments prevented fixed-for-fixed equity classification — all categories required initial and subsequent fair value measurement with changes in fair value through the condensed consolidated statements of operations.
• Pre-Merger dispositions: In August 2025, the holder of the 2024 LSA Warrants exchanged all such warrants for Pre-PIPE Bridge Notes and accompanying Pre-PIPE Bridge Warrants, leaving none outstanding immediately prior to the Merger; the 2019 LSA Warrants and 2021 LSA Warrants were automatically exercised on a cashless basis for Series Seed Prime and Series B Prime redeemable convertible preferred stock, respectively; the 2024 LSA Amendment Warrants were not exercised and were instead exchanged for shares of Series A Preferred Stock and PIPE Warrants at the Merger; the Pre-PIPE Bridge and Pre-Funded PIPE Warrants were converted into PIPE Warrants to purchase common stock at the Merger, with additional PIPE Warrants issued for cash in connection with the Closing PIPE.
• Outstanding warrants: As of March 31, 2026, 21,157,300 PIPE Warrants to purchase Common Stock were outstanding at an exercise price of $12.00 per share, expiring March 31, 2031; the exercise price is subject to a downward reset if, on the 21st trading day following six months after the Closing Date, the 20-day VWAP is below the then-current exercise price, with a floor of $5.00, and is also subject to customary adjustments for stock dividends and splits, dilutive issuances, subsequent rights offerings, pro rata distributions, and fundamental transactions.
• Fair value changes: The Company recorded a gain on the change in fair value of warrant liabilities of $26,555 thousand for the three months ended March 31, 2026, compared to $46 thousand for the three months ended March 31, 2025.

• Reverse recapitalization: All Legacy Merlin redeemable convertible preferred stock (17,381,016 shares across Series Seed, A, A-1, B, and B-1) first converted one-to-one into Legacy Merlin common stock, which was then exchanged into 53,907,368 shares of Company common stock at an exchange ratio of approximately 3.102.
• Common stock authorization and reserves: As of March 31, 2026, the Company has 800,000,000 shares of $0.0001 par value common stock authorized, with 715,455,443 shares reserved for conversion of Series A Preferred Stock and exercise of stock options and PIPE Warrants.
• Series A Preferred Stock — structure and outstanding: The Company has authorized 50,000,000 shares of Series A Preferred Stock ($0.0001 par value, $12.00 stated value per share), classified in mezzanine equity as redeemable outside the Company's control; accretion to the earliest redemption date (five years from the Closing Date) uses the effective interest method. In March 2026, certain holders converted 3,571 shares into 3,579 shares of common stock, leaving 21,711,880 shares outstanding as of March 31, 2026.
• Series A Preferred Stock — key economic terms: Dividends accrue cumulatively on a semi-annually compounding basis at 10.0% if paid in cash or 12.0% if paid in-kind; the initial conversion price is $12.00 (subject to a potential reset to the greater of the 20-day VWAP or $5.00 on the 21st trading day following six months after the Closing Date); holders may put shares at Accrued Value after the fifth anniversary, while the Company may call shares at premiums ranging from 150% of Accrued Value before the first anniversary down to 100% on or after the fifth anniversary.

• Two-class method: Series A Preferred Stock and PIPE Warrants are treated as participating securities because they entitle holders to participate in dividends on an as-converted and as-exercised basis, respectively; however, since these securities have no contractual obligation to share in losses, net loss is fully attributable to common stockholders for both the three months ended March 31, 2026 and 2025.
• EPS summary: Net loss widened to $(90,419) thousand for Q1 2026 from $(12,733) thousand in Q1 2025; after Series A Preferred Stock dividends and accretion of $(1,417) thousand, net loss attributable to common stockholders was $(91,836) thousand, yielding basic and diluted net loss per share of $(1.27) vs. $(0.18) in the prior-year period.
• Anti-dilutive exclusions: Total anti-dilutive shares excluded from diluted EPS jumped to 50,329,713 in Q1 2026 from 10,623,937 in Q1 2025, driven primarily by the addition of 21,818,962 Series A Preferred Stock shares and 21,157,300 PIPE Warrants (both absent in Q1 2025), partially offset by the elimination of all LSA warrant and conversion feature equivalents that were present in Q1 2025.

• Plan capacity: As of March 31, 2026, 10,386,879 shares of common stock are reserved for issuance under the Merlin Labs 2018 Equity Incentive Plan, of which 1,677,207 shares remain available for future grants.
• Option activity: After retroactive application of recapitalization (adding 4,400,730 shares and reducing weighted-average exercise price by $3.88), options outstanding at December 31, 2025 were restated to 6,494,810 at $1.85; during Q1 2026, 1,680,541 options were granted at a weighted-average exercise price of $8.47, 406,385 were exercised (cash proceeds of $226, intrinsic value $3,058), 389,227 expired, and 26,288 were forfeited, leaving 7,353,451 outstanding at March 31, 2026 (weighted-average exercise price $3.40, remaining life 7.1 years, aggregate intrinsic value $29,046) and 4,549,732 exercisable (weighted-average exercise price $1.59, remaining life 5.8 years, aggregate intrinsic value $26,206).
• Grant-date fair value & unrecognized expense: Weighted-average grant-date fair value of options granted was $11.73 in Q1 2026 vs. $3.69 in Q1 2025; unrecognized compensation expense as of March 31, 2026 is $7,024, expected to be recognized over a weighted-average period of 1.33 years.
• Non-employee stock grant: During Q1 2026, the Company granted 100,000 shares of common stock to non-employees, valued at the opening price of MRLN on the grant date; as of March 31, 2026, these shares have not yet been issued.

• Provision for income taxes: The Company recorded a provision of $48 for the three months ended March 31, 2026 vs. $1 for the three months ended March 31, 2025, yielding effective tax rates of (0.05)% and (0.01)%, respectively.
• Rate reconciliation: The effective tax rates differ from the U.S. statutory rate primarily due to the effect of the valuation allowance recorded against the Company's net operating losses.
• Uncertain tax positions: As of March 31, 2026 and December 31, 2025, the Company has not recognized any liabilities for uncertain tax positions.

• Single segment structure: The Company operates as a single operating and reportable segment; the CODM uses consolidated net loss to evaluate performance, allocate resources, set incentive compensation targets, and plan for future periods.
• Segment assets: The measure of segment assets is reported on the condensed consolidated balance sheets as total consolidated assets.
• Geographic assets: Property and equipment, net and operating lease right-of-use assets, net totaled $7,821 (United States) and $4,865 (New Zealand) as of March 31, 2026, vs. $4,541 and $3,546, respectively, as of December 31, 2025.

• Plan contributions: The Company made contributions of $59 (three months ended March 31, 2026) and $54 (three months ended March 31, 2025) to its defined contribution plan, which covers substantially all employees meeting certain eligibility requirements; contributions are made at the discretion of the Board of Directors.

• PIPE transaction: On May 1, 2026, the Company issued 8,000,000 shares of common stock and warrants to purchase 4,000,000 shares of common stock via a PIPE transaction for aggregate gross proceeds of approximately $80,000.
• Warrant terms: The warrants carry an exercise price of $6.67 per share and will expire five years from issuance.

• Business focus: Merlin Pilot is a non-human pilot system integrating hardware and software for full autonomous flight (takeoff to touchdown) on fixed-wing aircraft, targeting both military and civilian markets with revenue streams from hardware integration and recurring software support.
• Key contract: Merlin Pilot has been chosen as the sole prime contractor on a $105 million IDIQ contract to integrate autonomous capabilities into the C-130J for the U.S. Air Force (USSOCOM), with potential extension to low-rate and full-rate production across all USSOCOM fixed-wing aircraft; total identified pipeline is approximately $3.0 billion.
• Net losses: Net losses were $90,419 thousand for the three months ended March 31, 2026, versus $12,733 thousand for the three months ended March 31, 2025; management expects losses to continue over the next few years as investment in R&D, facilities, and engineering expands.
• Liquidity outlook: Management states that existing cash and cash equivalents are expected to be sufficient to meet capital expenditure and working capital requirements for at least twelve months from the issuance of this Quarterly Report.

• Revenue streams: The company describes 3 anticipated revenue streams: (1) Merlin Pilot Sale and Installation Fees — non-recurring licensing/technology fees that vary by aircraft type; (2) Software Support Fees — recurring fees invoiced monthly or annually for ongoing technical and operational support, categorized separately from initial sale revenue; and (3) Ancillary Fees — software upgrades, enhanced customer assistance, trainings, and data insights offered for additional fees with minimal incremental cost.
• Phased rollout: The business model follows a 3-phase implementation: Phase 1 (Adapt) — non-recurring engineering funding to tailor Merlin Pilot to specific platforms; Phase 2 (Integrate) — integration onto customer platforms, potentially using integration partners to scale; Phase 3 (License) — "Autonomy as a Service" at a pre-negotiated annual rate including software updates and ongoing support.
• Revenue timing: The company does not expect to generate revenues from all 3 streams simultaneously until it has achieved scale, at which point it expects concurrent revenue across military and civilian sectors both in the United States and globally.

• Development stage, no commercial operations: The company has no commercial operations to date and anticipates initial customer deliveries within the next year under an IDIQ production contract to integrate autonomous capabilities into the C-130J for the U.S. Air Force, contingent on successfully testing and finalizing the Merlin Pilot for integration on the C-130J aircraft.
• Single-customer dependency: The U.S. government is the company's single and largest customer; if U.S. government support for initial development of its technology for military aircraft were withdrawn, the company's ability to commence and expand commercial operations, including across the civilian sector, would be significantly impaired.
• Geopolitical risk: Global conflicts, including the Russia-Ukraine conflict and ongoing U.S. and Israeli operations in Iran, have increased demand for the company's technology in the military sector but may impair deployment across the civilian sector, particularly if global travel and airfare decline as a result.

• Growth dependency: The company states its future growth is largely dependent on continued government support and corporate investment in military technology, including autonomous aircraft, citing its IDIQ award as evidence of bipartisan U.S. government support.
• Risk to funding: Management warns that if political support for military technology prioritization decreases — due to policy changes by current or future administrations or shifting congressional funding priorities — the company may be unable to secure continued government funding, adversely affecting its business, development timeline, and financial condition.

• Regulatory scope: Growth and profitability depend on operating effectively across international, federal, and local jurisdictions, each with unique regulatory dynamics affecting autonomous commercial aircraft operations, insurance requirements, and community support.
• FAA engagement: Management states it has an "industry-leading licensing team" in regular communication with the U.S. Federal Aviation Administration and other regulators, with continued success dependent on that team's ability to obtain and maintain regulatory approvals in the ordinary course of business.

Services strategy: The company intends to offer a diversified suite of services tied to the autonomous aircraft lifecycle, beginning once the Merlin Pilot is successfully installed and deployed by customers, with offerings described as "multifaceted" and covering critical services related to technology deployment across the life of the aircraft.

• Growth trajectory: Management expects the number of services offered and the percentage of revenue from service offerings to grow as the offering is refined through deployment with the U.S. Air Force.
• Revenue model: The company anticipates high penetration rates across future clients and consistent, recurring revenues throughout the expected life of an aircraft; inability to expand product services offerings is flagged as a risk that would adversely affect business, development timeline, and financial condition.

• Ongoing operating losses: Management expects to continue incurring operating losses for the foreseeable future as the company expands and develops its technology, and states it may need to raise additional capital in future periods.
• Risk of program curtailment: If additional capital cannot be raised, management states it may have to significantly delay, scale back, or discontinue one or more research and development programs, and may be required to cease operations or seek partners for Merlin Pilot on less favorable terms.
• Asset disposition risk: Absence of additional capital may require the company to relinquish, license, or otherwise dispose of rights to technologies or products on less favorable terms than might otherwise be available.
• Going concern risk: If additional capital cannot be secured, measures to reduce costs and conserve cash may significantly alter future business plans, cause significant delays in product development, and could affect the company's ability to operate as a going concern in future periods.

• Macroeconomic headwinds: High inflation and elevated interest rates are cited as sources of volatility and uncertainty that may affect project costs, operations, and demand for the Merlin Pilot.
• Geopolitical risks: Ongoing conflicts in Ukraine, the Middle East, and U.S.-China tensions may drive further economic instability, inflationary pressures, and increased risks for both commercial and military aircraft.
• Military sector offset: Management notes that geopolitical conflicts have and may continue to drive demand for technological advances to keep the U.S. military at the forefront, which is described as generally beneficial for the business.
• Commercial aviation exposure: Such conflicts could significantly impact commercial airline operations, which management flags as a potential negative for the company in the future.

Revenue source: Revenue is generated from long-term contracts for the delivery of Merlin Pilot software and supporting hardware, which require engineering for research, design, development, manufacturing, integration, and sustainment of advanced auto-piloting technology.

• Composition: Cost of revenue consists primarily of labor, materials, travel, subcontractor costs, and other expenses incurred directly in the execution of specific contracts.
• Outlook: Management expects cost of revenue to increase as revenue grows, but over the longer term to increase at a slower rate than revenue as operations scale; as a percentage of revenue, cost of revenue may fluctuate period to period based on the mix, timing, and execution of contracts.

• R&D expense composition: Research and development expenses consist primarily of personnel-related costs for the development team, including salaries, benefits, bonuses, allocated overhead costs, and stock-based compensation expenses, as well as contractor or professional services fees and third-party cloud infrastructure expenses incurred in developing product offerings.
• Cost offset mechanism: R&D expense is reduced for amounts received by the Company in connection with research and development agreements with third-parties, where the Company is paid for R&D activities.
• Near-term outlook: Management expects R&D expenses to increase in the near term as the Company continues to invest in product offerings and development capabilities, though these expenses may fluctuate as a % of revenue from period to period.

G&A cost composition: General and administrative expenses consist primarily of personnel-related costs (salaries, benefits, bonuses, allocated overhead, and stock-based compensation) for finance, legal, human resources, and administrative personnel, as well as external legal, accounting and other professional services fees, software services dedicated for G&A functions, insurance, and other corporate expenses.

• Cost composition: Selling and marketing expenses consist primarily of personnel-related costs for sales and marketing staff — salaries, benefits, bonuses, commissions, allocated overhead, and stock-based compensation — plus advertising costs and expenses associated with marketing and business development programs.
• Additional components: Also included are travel-related expenses, software services dedicated to the sales and marketing organizations, and outside services contracted for sales and marketing purposes.

Interest income composition: Interest income consists of interest earned on cash and cash equivalents balances held in interest bearing time and money market accounts.

Category definition: Other expense consists of gains and losses on the disposal of assets and gains and losses from foreign currency transactions and remeasurements of foreign currency-denominated monetary assets and liabilities to the U.S. dollar.

Fair value components: Change in fair value of long-term debt consists of gains and losses resulting from a change in fair value of the company's long-term debt, together with interest accrued on those instruments.

• Composition: Provision for income taxes consists primarily of income taxes related to foreign and state jurisdictions in which the company conducts business.
• Valuation allowance: A valuation allowance is maintained on federal and state deferred tax assets, as management has concluded it is not more likely than not that the deferred tax assets will be utilized.

• Revenue growth: Revenue grew 15.4% to $1,002 thousand in the three months ended March 31, 2026, from $868 thousand in the three months ended March 31, 2025, driven primarily by additional work completed under the USSOCOM Contract; U.S. government agencies accounted for $950 thousand (up 13.5%) and commercial and non-U.S. government customers $52 thousand (up 67.7%).
• Gross profit swing: Gross profit improved to $1,813 thousand from $154 thousand, aided by $2,451 thousand in contract loss adjustments in the current period (none in the prior period), despite cost of revenue rising to $1,640 thousand from $714 thousand.
• Operating expense expansion: Total operating expenses more than doubled to $28,825 thousand from $11,558 thousand, with R&D rising to $14,090 thousand from $6,679 thousand and G&A rising to $14,092 thousand from $4,520 thousand, widening the loss from operations to $(27,012) thousand from $(11,404) thousand.
• Non-operating items drove net loss: A $26,555 thousand gain on change in fair value of warrant liabilities was more than offset by an $(87,824) thousand loss on change in fair value of convertible promissory notes and a $(2,470) thousand loss on change in fair value of long-term debt, resulting in total other expense of $(63,359) thousand and a net loss of $(90,419) thousand versus $(12,733) thousand in the prior-year period.

• Cost of revenue: Increased $926 thousand, or 129.7%, to $1,640 thousand for the three months ended March 31, 2026, compared to $714 thousand for the three months ended March 31, 2025, primarily driven by subcontractor costs and other direct charges associated with the USSOCOM Contract, under which more work was completed in the current period.
• Contract loss adjustments: A favorable adjustment of $2,451 thousand was recognized for the three months ended March 31, 2026 (vs. $0 in the prior-year period), resulting from a revised estimate of total internal and subcontractor costs to be incurred in delivering the USSOCOM Contract, which reduced the contract loss provision.

• R&D: Research and development expenses increased by $7,411 thousand, or 111.0%, to $14,090 thousand in the three months ended March 31, 2026, from $6,679 thousand in the prior-year period, driven by hiring of new and highly-skilled engineering talent, increased outsourcing to subject matter experts for unique engineering challenges, and higher equipment and material costs; management expects personnel-related R&D expenses to increase as operations expand.
• G&A: General and administrative expenses increased by $9,572 thousand, or 211.8%, to $14,092 thousand in the three months ended March 31, 2026, from $4,520 thousand in the prior-year period, primarily due to higher legal, accounting, and other consulting expenses related to the Merger and operating as a public company; management expects G&A to continue increasing with additional hiring and public-company obligations.
• Selling & marketing: Selling and marketing expenses increased by $284 thousand, or 79.1%, to $643 thousand in the three months ended March 31, 2026, from $359 thousand in the prior-year period, driven primarily by increased advertising costs and increased personnel expenses.

Interest income: Interest income increased $216 thousand, or 71.8%, to $517 thousand for the three months ended March 31, 2026, compared to $301 thousand for the three months ended March 31, 2025, primarily due to higher average cash and cash equivalent balances held in money market mutual funds, driven by proceeds received from the Merger.

• Interest expense decline: Interest expense fell $1,605 thousand, or 99.4%, to $9 thousand in the three months ended March 31, 2026, from $1,614 thousand in the three months ended March 31, 2025.
• Driver — fair value election: The decrease reflects the Company's election to recognize its term loans (2024 LSA) and related interest costs under the fair value option starting in July 2025; as a result, $956 thousand of cash interest expense related to the 2024 LSA was reclassified to change in fair value of long-term debt rather than recorded in interest expense.

Other expense increase: Other expense for the three months ended March 31, 2026 increased by $67 thousand, or 109.8%, to $128 thousand compared to $61 thousand in the three months ended March 31, 2025, primarily driven by an increase in foreign currency losses of $64 thousand.

Warrant liability gain: Change in fair value of warrant liabilities generated a gain of $26,555 thousand for the three months ended March 31, 2026, compared to $46 thousand in the three months ended March 31, 2025, an increase of $26,509 thousand (marked N/M), primarily driven by the issuance of liability-classified warrants related to the Pre-PIPE Bridge, the Pre-Funded PIPE, the PIPE, and the completion of the Merger on March 16, 2026.

Fair value change: Change in fair value of convertible promissory notes was $(87,824) thousand for the three months ended March 31, 2026, compared to $— for the three months ended March 31, 2025, driven by the issuance of convertible promissory notes related to the Pre-PIPE Bridge and the Pre-Funded PIPE and the completion of the Merger on March 16, 2026.

• Fair value loss: Loss on change in fair value of long-term debt was $(2,470) thousand for the three months ended March 31, 2026, compared to $— for the three months ended March 31, 2025, driven by the election of the fair value option for the amended term loans (2024 LSA).

• Tax provision increase: Provision for income taxes rose by $47 thousand to $48 thousand for the three months ended March 31, 2026, compared to $1 thousand in the three months ended March 31, 2025, driven primarily by an increase in foreign tax expenses for the Merlin Labs NZ Limited entity.

• Non-GAAP definitions: EBITDA is defined as net loss before interest expense or income, income tax expense or benefit, and depreciation and amortization; Adjusted EBITDA further excludes stock-based compensation, equity-based compensation to non-employees, changes in fair value of warrant liabilities, changes in fair value of financial instruments accounted for at fair value, transaction and merger-related costs, and other non-cash items.
• Exclusion rationale: Changes in fair value of warrant liabilities are excluded as non-cash and not reflective of core operating performance; changes in fair value of convertible promissory notes and long-term debt relate to instruments settled in connection with the Merger and are excluded as not expected to recur.
• Adjusted EBITDA vs. GAAP net loss: Adjusted EBITDA loss of $(23,340) thousand in Q1 2026 was significantly narrower than GAAP net loss of $(90,419) thousand, with the largest reconciling items being the $87,824 thousand change in fair value of convertible promissory notes and the $(26,555) thousand change in fair value of warrant liabilities; in Q1 2025, Adjusted EBITDA loss of $(10,388) thousand compared to GAAP net loss of $(12,733) thousand.

• Operating losses: The company has incurred operating losses and negative cash flows primarily from production of its proprietary Merlin Pilot technology, with certain contracts becoming loss-making due to variable consideration constraints and contract costs exceeding contract price; expenses have also risen from increased headcount, expanded corporate functions, higher proposal activity, and increased fees for professional services.
• Private placement: On May 1, 2026, the company issued 8,000,000 shares of common stock and warrants to purchase 4,000,000 shares of common stock in a private placement for aggregate gross proceeds of approximately $80.0 million.
• Liquidity adequacy: Management expects cash and cash equivalents, together with cash generated from future operations, will be sufficient to fund operating expenses and capital expenditure requirements for at least twelve months from the date of this Quarterly Report on Form 10-Q, though additional equity or debt financing may be needed to respond to growth, technological advancements, acquisitions, or unforeseen circumstances.
• Cash flow overview: Operating cash outflows worsened by $10,563 thousand (81%) to $(23,644) thousand in the three months ended March 31, 2026 vs. $(13,081) thousand in the prior-year period; investing outflows increased by $2,080 thousand (2633%) to $(2,159) thousand; financing activities swung to an inflow of $91,806 thousand from an outflow of $(1,547) thousand, driving a net increase in cash and cash equivalents of $66,003 thousand versus a net decrease of $(14,707) thousand in the prior-year period.

• Operating cash outflow: Net cash used in operating activities was $23,644 thousand for the three months ended March 31, 2026, an increase of $10,563 thousand from $13,081 thousand for the three months ended March 31, 2025.
• Primary drivers of increase: The larger cash outflow was primarily driven by an increase in net loss of $77,686 thousand, a decrease in change in fair value of warrant liabilities of $26,509 thousand, partially offset by an increase in change in fair value of convertible promissory notes of $87,824 thousand and changes in accounts payable and accrued expenses of $4,035 thousand and $3,253 thousand, respectively.
• Other contributing factors: Additional items affecting the change included a change in non-cash interest expense of $360 thousand, a change in accounts receivable of $942 thousand, a change in prepaid expenses and other current assets of $1,738 thousand, and an increase in contract loss provision amortization of $2,763 thousand.

• Investing cash outflows: Net cash used in investing activities was $2,159 thousand for the three months ended March 31, 2026, up $2,080 thousand from $79 thousand for the three months ended March 31, 2025.
• Primary driver: The increase was primarily due to an increase in acquired property and equipment of $2,065 thousand.

• Financing cash flows: Net cash provided by financing activities was $91,806 thousand for the three months ended March 31, 2026, a swing of $93,353 thousand versus net cash used of $1,547 thousand in the three months ended March 31, 2025.
• Key inflows: The improvement was driven by proceeds from issuance of warrants of $48,195 thousand, proceeds from issuance of Series A Preferred Stock in connection with the PIPE of $71,805 thousand, and proceeds from issuance of common stock in connection with the Merger of $26,290 thousand.
• Offsetting outflows: These inflows were partially offset by repayments of long-term debt of $32,082 thousand, transaction costs related to the Series A Preferred Stock PIPE of $10,482 thousand, transaction costs related to the Merger common stock issuance of $8,528 thousand, and costs directly attributable to the Merger of $2,061 thousand.

• Debt status: As of March 31, 2026, the company has no debt obligations, having paid off the principal amounts outstanding on its PGF Loan, Term Loan (LSA 2021), and Term Loan (LSA 2024); as of December 31, 2025, those obligations totaled $660 thousand (PGF Loan, due 2032), $500 thousand (Term Loan LSA 2021, matured July 2025), and $35,000 thousand (Term Loan LSA 2024, set to mature January 2027), with $250 thousand and $1,307 thousand repaid in principal on the LSA 2021 and LSA 2024 loans, respectively, during the three months ended March 31, 2025.
• Restricted cash: As of March 31, 2026, restricted cash of $2,569 thousand consists of deposits held at financial institutions used to collateralize irrevocable letters of credit required under the company's lease agreements.
• Operating lease commitments: Non-cancelable operating lease commitments were $2,419 thousand as of March 31, 2026 (of which $977 thousand is due in less than one year) and $988 thousand as of December 31, 2025 (of which $657 thousand is due in less than one year), covering office space, aircraft, motor vehicles, and airport hangar space.

Emerging growth company accounting elections: Under Section 102(b)(1) of the JOBS Act, the company qualifies as an emerging growth company and may adopt new or revised financial accounting standards on the timeline applicable to private companies rather than public companies; any election to opt out of this extended transition period would be irrevocable. The company notes it may elect to early adopt new or revised standards at times.