Merlin, Inc.: Form 10-Q for the period ended Jun 30, 2026

The following discussion and analysis of Merlin's financial condition and results of operations includes information that Merlin’s management believes is relevant to an assessment and understanding of Merlin’s consolidated results of operations and financial condition. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements included in this Quarterly Report and our audited financial statements, unaudited pro forma financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” filed as Exhibit 99.1, Exhibit 99.2 and Exhibit 99.3, respectively, to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 29, 2026 (the “Super 8-K”). This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Merlin’s actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report and the section titled “Risk Factors” in our other SEC filings.

On August 13, 2025, Inflection Point Acquisition Corp. IV (f/k/a Bleichroeder Acquisition Corp. I), a Cayman Islands exempted company (“Inflection Point”), entered into a Business Combination Agreement, dated as of August 13, 2025 (as amended on March 14, 2026, the "Business Combination Agreement"), by and among Inflection Point, IPDX Merger Sub, Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Inflection Point ("Merger Sub"), and Merlin Labs, Inc. (referred to herein prior to the Business Combination as "Legacy Merlin" and subsequent to the Business Combination as "Merlin Labs"). On March 16, 2026 (the "Closing Date"), as contemplated by the Business Combination Agreement, Inflection Point, Merger Sub, and Legacy Merlin consummated the transactions contemplated by the Business Combination Agreement and its related agreements (collectively, the "Business Combination"), pursuant to which, among other things, Merger Sub merged with and into Legacy Merlin (the "Merger"), with Merlin Labs continuing as the surviving corporation and a wholly-owned subsidiary of the Company, as further described below.

Unless the context otherwise requires, all references in this section to “we”, “us”, “our”, “Merlin”, or the “Company” refer to Merlin Labs, Inc. and its subsidiaries prior to the consummation of the Business Combination, and after the consummation of the Business Combination, Merlin, Inc. and its subsidiaries.

Overview

Our vision is to be at the forefront of advancing autonomous flight technology and position ourselves as the leading U.S.-based developer of autonomy solutions for fixed-wing aircraft. Our non-human pilot system, Merlin Pilot, integrates advanced hardware and software to deliver a comprehensive autonomous flight solution that spans the entire flight process, from takeoff to touchdown. By enabling an aircraft to operate with reduced crew or autonomously, we believe Merlin Pilot can significantly enhance flight efficiency, enabling more flights per day or optimized routes, thereby reducing operational costs. This could translate to potential savings of millions of dollars per aircraft annually, offering substantial financial benefits to large fleet operators.

We believe that Merlin Pilot not only addresses the global pilot shortage but has the potential to enhance flight safety, offering a compelling economic model with diverse revenue streams, including hardware integration and recurring, high-margin software support. Our extensive portfolio of proprietary intellectual property combines artificial intelligence with traditional high-assurance flight controls, positioning us to capitalize on the growing trends of autonomous systems and next-generation aviation.

We are currently growing our team of engineers with deep expertise in autonomy and certified software for both military and civilian applications. We are a prime contractor on an Indefinite Delivery, Indefinite Quantity (“IDIQ”) contract with a ceiling value of up to $105 million. Our active certification program includes an issued certification basis and a certification-conformed system with approved military airworthiness plans, underscoring our commitment to delivering reliable and safe autonomous flight solutions.

The Merlin Pilot is an advanced automation system in development to enable full autonomous flight from takeoff to touchdown. It utilizes a comprehensive array of sensor technologies to assess the aircraft’s state and its surrounding environment, allowing it to navigate effectively and recommend trajectory adjustments as necessary.

Our go-to-market strategy is designed around mastering traditional aircraft markets and building a solid foundation of revenue and expertise. Our goal is to sell to both the military and civilian sectors.

We have been chosen as the sole prime contractor for a $105 million IDIQ contract to integrate autonomous capabilities into the C-130J for the U.S. Air Force, which is the most widely used military transport aircraft globally. This contract covers the initial adaptation of the platform and can be extended to both low-rate and full-rate production for all United States Air Force Special Operations Command (“USSOCOM”) fixed-wing aircraft.

We plan to deploy the first Merlin Pilot on either commercial or military aircraft within the next three years. We incurred net losses of $58,427 and $16,296 for the three months ended June 30, 2026 and 2025, respectively. We incurred net losses of $148,846 and $29,029 for the six months ended June 30, 2026 and 2025, respectively. We expect to continue to generate losses over the next few years as we continue to invest in research and development, expand our facilities and expand the technical capabilities of our engineering function. We expect that our existing cash and cash equivalents will be sufficient to meet our capital expenditure and working capital requirements for a period of at least twelve months from the issuance of this Quarterly Report.

Our Business Model

We intend to deploy a hybrid hardware installation and software integration business model whereby we expect to generate revenue from the sale and installation of Merlin Pilot to flight operators necessary for autonomous flight and from the fees associated with providing software support to such operators. We also expect to generate additional revenue from the sale of ancillary services related to operating a fleet of autonomous aircraft. Below is a summary of each of these revenue streams:

• Merlin Pilot Sale and Installation Fees: The anticipated revenue stream from the sale and installation of Merlin Pilot includes licensing or technology fees for the installation and implementation of our technology on an aircraft. This type of revenue would be incurred one time, would be non-recurring and would vary based on the aircraft type. Over time, we expect to be able to scale our engineering and technical installation and implementation capabilities to reduce costs and increase our margins on this type of revenue.
• Software Support Fees: The anticipated revenue stream from software support includes fees generated from providing ongoing technical and operational support to the Merlin Pilot. Under our business model, anticipated software license agreements would typically include a lifetime right of use and would not provide for any support or maintenance to be provided by the Company for the term of the agreement. However, we will offer these services to our customers for additional fees, which we intend to invoice either monthly or annually, depending on the agreement reached with each customer. As such, revenue incurred from support and maintenance will be categorized separately from the revenue originally incurred in selling and implementing the Merlin Pilot on each aircraft.
• Ancillary Fees: We also intend to offer ancillary services designed to meet the needs of our customers. In doing so, we intend to take advantage of the insights we are able to generate from the deployment of our technology to generate additional income with minimal incremental cost. The ancillary services we currently intend to offer include software upgrades and support, which are designed to enhance the autopilot experience, enhanced customer assistance and trainings and data insights that can further optimize routes and individual aircraft performance. We will continue to analyze the possibility of offering additional services as we scale, and the pricing of such services will depend on their widespread acceptance, regulatory approvals and the costs associated with offering such services.

While we expect to generate revenues from each of the three revenue streams discussed above, we do not expect to generate revenues from all three simultaneously until we have achieved scale in our business. Rather, our growth strategy is structured around a phased implementation approach to ensure efficient deployment and scalability of our business model:

Phase 1 — Adapt: During this phase, our engineers are tailoring the core Merlin Pilot system to specific platforms and mission profiles. This phase involves non-recurring engineering funding for each aircraft type with a scalable engineering process over time.

Phase 2 — Integrate: During this phase, the Merlin Pilot system will be integrated onto customer platforms. We may use integration partners, which would allow us to scale our programs effectively.

Phase 3 — License: During this phase, we will offer “Autonomy as a Service” to our installed base of aircraft at a pre-negotiated annual rate, which includes software updates and ongoing support for the Merlin software.

Once we have achieved scale, we expect to generate concurrent revenue from all three of the revenue streams listed above as we deploy our technology across both military and civilian sectors, including both in the United States and globally.

Key Factors Affecting Our Performance

We believe that our future success and financial performance depend on a number of factors that present significant opportunities for our business, but also pose risks and challenges, including those described below in the section of the Prospectus entitled “Risk Factors” and in our other SEC filings.

Our ability to commence and expand commercial operations

We are a development stage company with no commercial operations to date. As such, our business model is dependent on our commencing and expanding commercial operations. We currently anticipate initial customer deliveries within the next year pursuant to the IDIQ production contract to integrate autonomous capabilities into the C-130J for the U.S. Air Force. This, in turn, is dependent upon successfully testing and finalizing the Merlin Pilot for integration on the C-130J aircraft. Our team of engineers, developers and other staff is highly motivated and committed to accomplishing these challenges ahead. Failure to test and finalize the Merlin Pilot in a timely manner could result in us being unable to commercialize our technology on our anticipated timeframe.

We are developing a pipeline of potential customers and partners that we expect will play an integral role in bringing our technology to market. We currently depend on the U.S. government for funding given that it is our single and largest customer. If the U.S. government were to stop supporting the initial development of our technology for military aircraft, our ability to commence and expand commercial operations, including across the civilian sector, would be significantly impaired. Additionally, global conflicts, such as the Russia-Ukraine conflict and ongoing U.S. and Israeli operations in Iran, have created and may continue to create significant global economic uncertainty. While this uncertainty has resulted in a greater need for our technology in the military sector, it may ultimately impact the deployment of our technology across the civilian sector, particularly if it results in a decrease in global travel and airfare.

Widespread acceptance of autonomous flight

Our growth and future success are dependent on public support for autonomous, non-human flight in the United States and other countries where we intend to market and sell our technology. Over time, we expect autonomous flight solutions to gain widespread acceptance and become an integral part of the aviation and travel industries worldwide. However, today it is an unproven and nascent technology. As a result, consumers’ demand for, and willingness to accept, autonomous flight will significantly impact our financial performance. We believe that our leadership status in autonomous flight positions us to continue to set the standard for advanced autonomous solutions and will help us benefit from increasing consumer confidence in, and demand for, autonomous technology over time.

Our ability to capitalize on government expenditures in military defense

Our future growth is largely dependent on our ability to continue to capitalize on increased government support and corporate investment in military technology, including autonomous aircraft. Military technological advancements are garnering significant bipartisan support from U.S. government initiatives, including as evidenced by our IDIQ award. Government expenditures and private sector investments have fueled our growth in recent years, which has resulted in our continued ability to secure increasingly valuable contracts for products and services.

Over time, we expect political support for military innovation and technology to increase, particularly as the military adopts cutting edge technologies such as autonomous flight. If political support for prioritizing the development of military technology decreases, including due to policy changes by current or future administrations and changing congressional funding priorities, we may be unable to secure continued government funding, which would adversely affect our business, development timeline, and financial condition.

Our ability to obtain and maintain regulatory approvals at the federal, state and local levels

Our capacity for continued growth and ability to achieve and maintain profitability depends in large part on our ability to operate effectively in multiple jurisdictions, including at the international, federal and local level. The federal government, along with each local jurisdiction (such as states, counties and townships) in which we operate, has unique regulatory dynamics. These include laws and regulations that can directly or indirectly affect our ability to operate across various jurisdictions, particularly as they relate to autonomous commercial aircraft, as well as matters related to insurance requirements and community support. We believe that we have an industry-leading licensing team of professionals who are in regular communication with the U.S. Federal Aviation Administration and other regulators, and our success will depend on our licensing team’s ability to continue to obtain and maintain regulatory approvals in the ordinary course of business.

Our ability to expand our product and service offerings

We intend to offer customers a diversified suite of services throughout the life of the autonomous aircraft, beginning when we have successfully installed the Merlin Pilot and it begins to be deployed by our customers. Our suite of services is envisioned to include multifaceted offerings, whereby we intend to provide customers with critical services related to the deployment of our technology across the life of the aircraft. We expect that, as we refine our services offering as it is deployed by the U.S. Air Force, the number of services we offer and the percentage of revenue we generate from our service offerings will continue to grow. We anticipate that our service offering will have high penetration rates across our future clients and will provide consistent, recurring revenues throughout the expected life of an aircraft. If we are unable to expand our product services offerings, it would adversely affect our business, development timeline, and financial condition.

Our ability to obtain additional capital

We expect to continue to incur operating losses for the foreseeable future as we continue to expand and develop our technology, and we may need to raise additional capital in future periods. If we are unable to raise additional capital, we may have to significantly delay, scale back or discontinue one or more of our research and development programs. We may be required to cease operations or seek partners for Merlin Pilot at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available. In the absence of additional capital, we may also be required to relinquish, license or otherwise dispose of rights to technologies or products that we would otherwise seek to develop or commercialize on terms that are less favorable than might otherwise be available. If we are unable to secure additional capital, we may be required to take additional measures to reduce costs to conserve our cash in amounts sufficient to sustain operations and meet our obligations. These measures may significantly alter our future business plans and could cause significant delays in the development of our products and ultimately our financial condition and ability to operate as a going concern in future periods.

Macroeconomic considerations

Macroeconomic conditions, such as high inflation and elevated interest rates, continue to be sources of volatility and uncertainty for global economic activity, and may affect our project costs and operations, as well as demand for the Merlin Pilot. Ongoing geopolitical conflicts in Ukraine, and the Middle East, and tensions in United States-China relations may drive further economic instability and inflationary pressures, as well as increase risks for commercial and military aircraft. In the case of the military sector, these geopolitical conflicts have and may continue to impact the need for technological advances to keep the U.S. military at the forefront of the industrial world, which are generally beneficial for our business. However, such conflicts could also significantly impact commercial airline operations, which could negatively impact us in the future.

Components of Our Results of Operations

Revenue

We generate revenue from long-term contracts for the integration, testing, and delivery of our Merlin Pilot software and supporting hardware. In order to satisfy these contracts, we undertake engineering for research, design, development, manufacturing, integration and sustainment of advanced auto-piloting technology.

Cost of Revenue

Our cost of revenue consists primarily of labor, materials, travel, subcontractor costs and other expenses incurred directly in the execution of specific contracts.

We expect the cost of revenue to increase as revenue grows. As a percentage of revenue, cost of revenue may fluctuate from period to period based on the mix, timing, and execution of our contracts. Over the longer term, we expect cost of revenue to increase at a slower rate than revenue as we continue to scale our operations.

Contract Loss Adjustments

We record a contract loss provision liability when the estimated total costs of any contracts are greater than the net contract revenues and recognize the entire estimated loss in the period the loss becomes known. As part of our periodic reassessment of the estimated cost to deliver on these contracts, if we determine the estimated costs will be lower, we may adjust this contract loss provision to reflect the revised estimate.

Research and Development

Research and development expenses consist primarily of personnel-related costs for our development team, including salaries, benefits, bonuses, allocated overhead costs, and stock-based compensation expenses. Research and development expenses also include contractor or professional services fees and third-party cloud infrastructure expenses incurred in developing our product offerings. In the near term, we expect that our research and development expenses will increase as we continue to invest in our product offerings and development capabilities, although these expenses may fluctuate as a percentage of our revenue from period to period. Research and development 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 research and development activities.

General and Administrative

General and administrative expenses consist primarily of personnel-related costs associated with our finance, legal, human resources and administrative personnel, including salaries, benefits, bonuses, allocated overhead costs, and stock-based compensation. General and administrative expenses also include external legal, accounting and other professional services fees, software services dedicated for use by our general and administrative functions, insurance and other corporate expenses.

Selling and Marketing

Selling and marketing expenses consist of personnel-related costs directly associated with our sales and marketing staff, including salaries, benefits, bonuses, commissions, allocated overhead costs, and stock-based compensation. Selling and marketing expenses also include advertising costs and other expenses associated with our marketing and business development programs. In addition, selling and marketing expenses consist of travel-related expenses, software services dedicated for use by our sales and marketing organizations and outside services contracted for sales and marketing purposes.

Interest Income

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

Interest Expense

Interest expense consists of interest on our term borrowings and amortization of debt issuance costs.

Other Expense

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.

Change In Fair Value of Warrant Liabilities

Change in fair value of warrant liabilities consists of gains and losses resulting from a change in fair value of our warrant liabilities.

Change in Fair Value of Convertible Promissory Notes

Change in fair value of convertible promissory notes consists of gains and losses resulting from a change in fair value of our convertible promissory notes, together with interest accrued on those instruments.

Change in Fair Value of Long-Term Debt

Change in fair value of long-term debt consists of gains and losses resulting from a change in fair value of our long-term debt, together with interest accrued on those instruments.

Provision For Income Taxes

Provision for income taxes consist primarily of income taxes related to foreign and state jurisdictions in which we conduct business. We maintain a valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred tax assets will be utilized.

Results of Operations

The following tables set forth our results of operations for the fiscal periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.

($ in thousands)

Comparison of the three months ended June 30, 2026 and 2025

Revenue

($ in thousands)

Revenue for the three months ended June 30, 2026 decreased by $913 thousand, or 29.4%, to $2,194 thousand compared to $3,107 thousand for the three months ended June 30, 2025. This decrease was primarily due to the completion of one phase of our USSOCOM Contract and the beginning of a new phase of the contract during the three months ended June 30, 2026.

Cost of Revenue

($ in thousands)

Cost of revenue for the three months ended June 30, 2026 decreased by $976 thousand, or 31.8%, to $2,090 thousand compared to $3,066 thousand for the three months ended June 30, 2025. This decrease was primarily the result of increased benefit recognized from the contract loss provision, as the related expenses were accelerated and previously recognized in prior periods, and lower subcontractor costs incurred related to the delivery on our USSOCOM Contract as one phase of the project was completed during the three months ended June 30, 2026.

Contract Loss Adjustments

($ in thousands)

Contract loss adjustments for the three months ended June 30, 2026 increased by $223 thousand as a result of the increase in the contract loss provision related to our USSOCOM Contract. The increase in the contract loss provision is the result of a revision of our estimate of total costs required to deliver on an additional phase of the contract.

Operating Expenses

Research and Development

($ in thousands)

Research and development expenses for the three months ended June 30, 2026 increased by $9,531 thousand, or 139.0% to $16,387 thousand compared to $6,856 thousand in the three months ended June 30, 2025, due to increasing personnel related expenses from hiring of new and highly-skilled engineering talent, outsourcing to an increased number of subject matter experts identified specifically to solve unique engineering challenges, and increased equipment and material costs.

General and Administrative

($ in thousands)

General and administrative expenses for the three months ended June 30, 2026 increased by $11,772 thousand, or 309.5% to $15,576 thousand compared to $3,804 thousand in the three months ended June 30, 2025. This was primarily due to an increase in legal, accounting, and other consulting and corporate expenses as a result of the Merger and operating as a public company.

Selling and Marketing

($ in thousands)

Selling and marketing expenses for the three months ended June 30, 2026 increased by $1,066 thousand, or 274.0%, to $1,455 thousand compared to $389 thousand in the three months ended June 30, 2025. This was primarily due to increased advertising costs and increased personnel expenses.

Interest Income

($ in thousands)

Interest income for the three months ended June 30, 2026 increased by $1,316 thousand to $1,447 thousand compared to $131 thousand in the three months ended June 30, 2025, primarily due to higher average cash and cash equivalent balances held in interest bearing money market mutual funds during the three months ended June 30, 2026 due to the receipt of proceeds from the Merger on March 16, 2026 and the May 2026 PIPE.

Interest Expense

($ in thousands)

Interest expense for the three months ended June 30, 2026 decreased by $1,342 thousand, or 100.0%, from $1,342 thousand in the three months ended June 30, 2025. This decrease is driven by the Company's 2024 LSA Loans which were outstanding during the three months ended June 30, 2025 but were extinguished at the time of the Merger and were not outstanding during the three months ended June 30, 2026.

Other Expense

($ in thousands)

Other expense for the three months ended June 30, 2026 decreased by $83 thousand, or 55.0%, to $68 thousand compared to $151 thousand in the three months ended June 30, 2025, primarily driven by a decrease in foreign currency losses and the receipt of insurance proceeds during the three months ended June 30, 2026.

Change in Fair Value of Warrant Liabilities

($ in thousands)

Change in fair value of warrant liabilities for the three months ended June 30, 2026 resulted in an increased loss of $22,219 to $26,144 thousand compared to $3,925 thousand in the three months ended June 30, 2025, primarily due to the May 2026 PIPE triggering a down round adjustment in the Company's previously issued and outstanding liability-classified warrants and the issuance of additional liability-classified warrants in the May 2026 PIPE.

Provision For Income Taxes

($ in thousands)

Provision for income tax expense for the three months ended June 30, 2026 increased by $124 thousand to $125 thousand compared to the three months ended June 30, 2025. This increase in provision for income taxes is primarily driven by an increase in foreign tax expenses for the Merlin Labs NZ Limited entity.

Comparison of the six months ended June 30, 2026 and 2025

Revenue

($ in thousands)

Revenue for the six months ended June 30, 2026 decreased by $780 thousand, or 19.6%, to $3,195 thousand compared to $3,975 thousand for the six months ended June 30, 2025. This decrease was primarily due to additional work being completed under our USSOCOM Contract during the six months ended June 30, 2025 and completion of a phase of that contract during the six months ended June 30, 2026.

Cost of Revenue

($ in thousands)

Cost of revenue for the six months ended June 30, 2026 decreased by $51 thousand, or 1.3%, to $3,729 thousand compared to $3,780 thousand for the six months ended June 30, 2025. This decrease was primarily the result of increased benefit recognized from the contract loss provision, as the related expenses were accelerated and previously recognized in prior periods, and was offset by higher subcontractor and internal costs incurred associated with delivery on our USSOCOM Contract as one phase of the project was completed during the six months ended June 30, 2026.

Contract Loss Adjustments

($ in thousands)

Contract loss adjustments for the six months ended June 30, 2026 increased to $2,229 thousand compared to none for the six months ended June 30, 2025, due to our revision of the estimate of total internal and subcontractor costs to be incurred in the delivery of a phase of the USSOCOM Contract which resulted in the recognition of a favorable adjustment to the contract loss provision of $2,229 thousand for the six months ended June 30, 2026. The favorable contract loss adjustment for the six months ended June 30, 2026 was offset by an additional loss provision of $502 related to the Company's revised estimate of the costs to complete a separate phase of the USSOCOM Contract.

Operating Expenses

Research and Development

($ in thousands)

Research and development expenses for the six months ended June 30, 2026 increased by $16,943 thousand, or 125.2% to $30,477 thousand compared to $13,534 thousand in the six months ended June 30, 2025, due to increasing personnel-related expenses from hiring of new and highly-skilled engineering talent, outsourcing to an increased number of subject matter experts identified specifically to solve unique engineering challenges, and increased equipment and material costs.

General and Administrative

($ in thousands)

General and administrative expenses for the six months ended June 30, 2026 increased by $21,342 thousand, or 256.3% to $29,668 thousand compared to $8,326 thousand in the six months ended June 30, 2025. This was primarily due to an increase in legal, accounting, and other consulting and corporate expenses as a result of the Merger and operating as a public company.

($ in thousands)

Selling and marketing expenses for the six months ended June 30, 2026 increased by $1,350 thousand, or 180.5%, to $2,098 thousand compared to $748 thousand in the six months ended June 30, 2025, primarily due to increased advertising costs.

Interest Income

($ in thousands)

Interest income for the six months ended June 30, 2026 increased by $1,532 thousand, or 354.6%, to $1,964 thousand compared to $432 thousand in the six months ended June 30, 2025, primarily due to higher average cash and cash equivalent balances held in interest bearing money market mutual funds during the six months ended June 30, 2026 due to the receipt of proceeds from the Merger on March 16, 2026 and the May 2026 PIPE.

Interest Expense

($ in thousands)

Interest expense for the six months ended June 30, 2026 decreased by $2,948 thousand, or 99.7%, to $9 thousand compared to $2,957 thousand in the six months ended June 30, 2025, primarily related to the Company’s election to recognize our 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 recognized as a change in fair value of long-term debt rather than in interest expense during the six months ended June 30, 2026.

Other Expense

($ in thousands)

Other expense for the six months ended June 30, 2026 decreased by $15 thousand, or 7.1%, to $196 thousand compared to $211 thousand in the six months ended June 30, 2025, primarily driven by the receipt of insurance proceeds, offset by an increase in foreign currency losses during the six months ended June 30, 2026.

Change in Fair Value of Warrant Liabilities

($ in thousands)

Change in fair value of warrant liabilities for the six months ended June 30, 2026 resulted in a gain of $410 thousand compared to a loss $3,879 thousand in the six months ended June 30, 2025. During the three months ended March 31, 2026, we recognized a gain of $26,555 thousand on change in fair value of warrant liabilities which primarily related to the remeasurement of our warrant liabilities immediately prior to the Merger. This gain was then offset with a loss of $26,144 thousand during the three months ended June 30, 2026, which primarily related to our issuance of additional liability-classified warrants and a down round feature in our warrants being triggered in connection with the May 2026 PIPE.

Change in Fair Value of Convertible Promissory Notes

($ in thousands)

Change in fair value of convertible promissory notes for the six months ended June 30, 2026 increased to $87,824 thousand compared to the six months ended June 30, 2025, due to 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.

Change in Fair Value of Long-term Debt

($ in thousands)

Loss on change in fair value of long-term debt for the six months ended June 30, 2026, increased to $2,470 thousand compared to the six months ended June 30, 2025, due to the election of the fair value option for our amended term loans (2024 LSA) in July 2025. The increase in the loss on change in fair value of long-term debt is driven by remeasurement of our 2024 LSA Loans, together with interest accrued thereon.

Provision For Income Taxes

($ in thousands)

42

Provision for income tax expense for the six months ended June 30, 2026 increased by $172 thousand to $173 thousand compared to $1 thousand in the six months ended June 30, 2025. This increase in provision for income taxes is primarily driven by an increase in foreign tax expenses for the Merlin Labs NZ Limited entity.

Non-GAAP Financial Measures

In addition to our results determined in accordance with U.S. GAAP, we believe that EBITDA and Adjusted EBITDA, non-GAAP financial measures, provide investors with additional useful information in evaluating our performance. We define EBITDA as net loss before interest expense or income, income tax expense or benefit, and depreciation and amortization. We define Adjusted EBITDA as EBITDA adjusted for (i) stock-based compensation expense, (ii) equity-based compensation expense for non-employees, (iii) changes in fair value of warrant liabilities, (iv) changes in fair value of financial instruments accounted for at fair value, and (v) transaction and merger-related costs. We exclude stock-based compensation expense and equity-based payments to non-employees because they are non-cash charges that can vary significantly based on the timing and size of equity awards. Changes in fair value of warrant liabilities reflect periodic non-cash mark-to-market adjustments that will recur each reporting period as long as warrants remain outstanding and are excluded because they are not reflective of our core operating performance. Changes in fair value of convertible promissory notes and long-term debt relate to instruments that were settled in connection with the Merger and are excluded because they are non-cash and are not expected to recur in future periods. Transaction and merger-related costs are excluded because they relate to specific non-recurring corporate events and are not indicative of our ongoing operating performance.

We believe that each of these non-GAAP financial measures provides useful supplemental information to management and investors in evaluating our operations and, when considered with both our U.S. GAAP results and the reconciliation to net loss, the most directly comparable U.S. GAAP financial measure, provides a more complete understanding of our business than could be obtained absent this disclosure. We use these non-GAAP financial measures, together with U.S. GAAP financial measures, such as revenue, gross profit margins and cash flow from operations, to assess our historical and prospective operating performance, to provide meaningful comparisons of operating performance across periods, to enhance our understanding of our operating performance, and to compare our performance to that of our peers and competitors.

The non-GAAP financial measures are presented here because we believe they are useful to investors in assessing the operating performance of our business without the effect of non-cash items, and other items as detailed above. However, these non-GAAP financial measures should not be considered in isolation or as alternatives to net income (loss), income (loss) from operations or any other measure of financial performance calculated and presented in accordance with U.S. GAAP. Our non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies because other companies may not calculate such measures in the same manner as we do.

The following table provides a reconciliation of EBITDA and Adjusted EBITDA to net loss, the most directly comparable financial measure presented in accordance with U.S. GAAP.

($ in thousands)

Liquidity and Capital Resources

We have incurred operating losses and negative cash flows, primarily from the production of our proprietary Merlin Pilot technology. Certain contracts have become loss-making due to variable consideration constraints and contract costs exceeding the contract price. Concurrently, our expenses have risen due to business growth, increased headcount, expanded corporate functions, higher proposal activity, and increased fees for professional services.

Our ability to fund our operations and meet our obligations depends on achieving anticipated revenue and cash flow levels, managing costs, and successfully managing working capital. Our ability to generate cash is also subject to economic, financial, competitive, legislative, regulatory, and other factors beyond our control. We cannot guarantee that our business will generate sufficient cash flow to meet our liquidity needs.

To meet these capital requirements, we expect to rely on access to debt and equity markets. However, our ability to obtain additional funding is subject to market conditions, our operating performance, and market perception of our growth. Our capital needs may also vary materially from current plans if, for example, revenues do not meet expectations, or we incur unforeseen expenditures.

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.

We expect our cash and cash equivalents, together with cash we expect to generate from future operations, will be sufficient to fund our operating expenses and capital expenditure requirements for a period of at least twelve months from the date of this Quarterly Report on Form 10-Q. However, because we are in the growth stage of our business and operate in an emerging field of technology, we expect to continue to invest in research and development and expand our sales and marketing team.

We may require additional capital to respond to the expected growth in the demand for our offering, technological advancements, competitive dynamics or technologies, customer demands, business opportunities, challenges, acquisitions or unforeseen circumstances and in either the short-term or long-term may need to seek additional equity or debt financing, or enter into credit facilities, which could involve shareholder dilution or restrictive operational covenants. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited. In particular, global events such as international political turmoil, supply chain disruptions, prolonged inflation and rising interest rates have resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital. If we are unable to raise additional funds when or on the terms desired, our business, financial condition and results of operations could be adversely affected.

The following table summarizes our cash flows for the periods indicated:

($ in thousands)

Operating Activities

Net cash used in operating activities for the six months ended June 30, 2026, was $(50,896) thousand, an increase of $(25,676) thousand from net cash used in operating activities of $(25,220) thousand for the six months ended June 30, 2025. The change in cash used in operations was primarily due to an increase in net loss of $119,817 thousand, a change in non-cash interest expense of $610 thousand, a decrease in change in fair value of warrant liabilities of $4,289 thousand, a change in accounts receivable of $2 thousand, a change in prepaid expenses and other current assets of $712 thousand, and an increase in contract loss provision amortization of $3,345 thousand. These changes are 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 $1,690 thousand and $4,452 thousand, respectively.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2026, was $(3,820) thousand, an increase of $(3,724) thousand from net cash used in investing activities of $(96) thousand for the six months ended June 30, 2025. The change in cash used in investing activities was primarily due to an increase in acquired property and equipment of $3,709 thousand.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2026, was $181,493 thousand, an increase of $187,186 thousand from net cash used in financing activities of $(5,693) thousand for the six months ended June 30, 2025. The change in cash flows provided by financing activities was primarily due to an increase in 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. These changes are offset by an increase in repayments of long-term debt of $27,927 thousand, payment of transaction costs related to the issuance of Series A Preferred Stock in connection with the PIPE of $10,482 thousand, payment of transaction costs related to issuance of common stock in connection with the Merger of $8,528 thousand, and payment of costs directly attributable to the Merger of $2,061 thousand.

Material Cash Requirements for Known Contractual and Other Obligations

As of June 30, 2026, we have no debt obligations, as we paid off the principal amount outstanding of our PGF Loan, our Term Loan (LSA 2021), and our Term Loan (LSA 2024). As of June 30, 2026, restricted cash of $2,570 thousand consists of deposits held at financial institutions that are used to collateralize irrevocable letters of credit required under the Company’s lease agreements.

As of June 30, 2026, and December 31, 2025, our non-cancelable operating lease commitments are $2,190 thousand and $988 thousand, respectively, of which $940 thousand and $657 thousand, respectively, are due in less than one year. Our operating leases relate to our office space, aircraft, motor vehicles, and airport hangar space.

Critical Accounting Estimates

Our condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). As such, we are required to make certain estimates, judgments and assumptions that management believes are reasonable based upon the information available. We base these estimates on our historical experience, future expectations and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments that may not be readily apparent from other sources. We evaluate these estimates on an annual basis. Actual results could differ from those estimates under different assumptions or conditions, and any differences could be material.

There have been no significant changes in our critical accounting estimates during the six months ended June 30, 2026, as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Form 8-K dated and filed with the SEC on March 20, 2026.

Emerging Growth Company Status

Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard, until such time as we are no longer considered to be an emerging growth company. At times, we may elect to early adopt a new or revised standard.

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies of the notes to our consolidated financial statements in the sections titled “Recently Adopted Accounting Pronouncements” and “Recently Issued Accounting Pronouncements Not Yet Adopted” included elsewhere in this Quarterly Report - for a discussion about new accounting pronouncements adopted and not yet adopted as of the date of this report.

Limitations on effectiveness of controls and procedures

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2026.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of June 30, 2026 due to the material weaknesses in our internal control over financial reporting described below.

Previously Reported Material Weaknesses in Internal Control Over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

In the course of preparing our consolidated financial statements as of and for the years ended December 31, 2025 and 2024, and the condensed consolidated financial statements for the three months ended March 31, 2026 and June 30, 2026, our management determined that we have material weaknesses and significant deficiencies in our internal controls over financial reporting. These material weaknesses primarily relate to (i) non-routine and complex transactions, (ii) segregation of duties, and (iii) information technology general controls (ITGCs) over logical access to key systems tested supporting financial reporting.

Specifically, we identified the following material weaknesses:

Management did not maintain effective controls over the accounting for non-routine and complex transactions including valuation of complex financial instruments, warrant liabilities, and equity transactions associated with de-SPAC capital structure, as a result of which management determined that controls were not operating with sufficient precision and frequency to prevent or detect potential material misstatements in the accounting for such instruments on a timely basis; and,

Management did not maintain effective controls relating to segregation of duties and the design of review controls operating at a sufficient level of precision, including controls over period-end financial close and non-routine or complex transactions; and,

Management did not maintain effective information technology general controls (ITGCs) over logical access to key systems tested supporting financial reporting. During the period, deficiencies in the design and operation of access controls indicate that management did not have effective controls in place to appropriately restrict privileged access, formally provision and deprovision user access, and periodically review user access rights.

These control deficiencies, individually and in the aggregate, could result in a misstatement of one or more account balances or disclosures that could lead to a material misstatement of our annual or interim consolidated financial statements, and accordingly, management has determined that these control deficiencies constitute material weaknesses.

Remediation Plan and Status

Management is actively engaged in remediating the material weaknesses described above. The following actions have been taken or are in progress as of the date of this filing:

• Personnel and training: We have hired and continue to hire personnel with public company accounting experience and are providing targeted training on internal control requirements, complex transaction accounting, and financial reporting obligations.
• Control design and implementation: We are implementing additional controls and processes designed to operate at a sufficient level of precision and frequency, and that appropriately evidence the performance of the control, particularly with respect to the accounting and reporting of revenue and non-routine, unusual, or complex transactions.
• Segregation of duties: We have begun to implement processes and controls to better identify and manage segregation of duties risks within our accounting and financial reporting functions.
• Systems and automation: We are evaluating system enhancements to reduce our reliance on manual processes in key areas of our financial close and reporting process.
• External advisor engagement: We have engaged an external advisor to assist with evaluating and documenting the design and operating effectiveness of our internal controls and to assist with remediation of identified deficiencies.

The process of designing and maintaining effective internal control over financial reporting is a continuous effort that requires management to anticipate and react to changes in our business, economic and regulatory environments and to expend significant resources. As we continue to evaluate our internal control over financial reporting, we may take additional actions to remediate the material weaknesses or modify the remediation actions described above.

While we continue to devote significant time and attention to these remediation efforts, the material weaknesses will not be considered remediated until management completes the design and implementation of the actions described above and the controls operate for a sufficient period of time, and management has concluded, through testing, that these controls are effective.

Changes in Internal Control Over Financial Reporting

Other than the remediation efforts described above under “Previously Reported Material Weaknesses in Internal Control over Financial Reporting” and “Remediation Plan and Status”, there were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2026 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Investing in our common stock involves a high degree of risk. In addition to the other information set forth in this Quarterly Report and in other documents that we file with the SEC, you should carefully consider the factors described in the section titled “Risk Factors” in our Prospectus. Other than as disclosed below, there have been no material changes to the risk factors described in the Prospectus. If any of the risk factors described in the Prospectus actually materializes, our business, financial condition and results of operations could be materially adversely affected. In such an event, the market price of our common stock could decline and you may lose all or part of your investment. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.

We depend on aircraft manufacturers and other third parties for proprietary technical data, interface specifications, and software necessary to integrate our autonomy systems onto their aircraft, and our access to this information may be limited, delayed, or withdrawn.

Integrating our autonomy software onto a given aircraft platform generally requires access to proprietary information controlled by the aircraft's manufacturer, including interface control documents, avionics and flight control software specifications, wiring and systems data, and in some cases source code or object code for systems our software must interface with. In many cases, a single manufacturer controls all of this information for a given aircraft type, and we have no alternative source for such information. Our ability to obtain this information, and the terms on which we obtain it, are governed by negotiated agreements, government contracting data rights frameworks, or the manufacturer's own discretion, none of which guarantee continued or timely access.

Our access to this data may be limited or withdrawn. Such limitations may occur if a manufacturer views our autonomy capabilities as competitive with its own current or future offerings, if commercial terms cannot be agreed, if a program contract or teaming arrangement terminates or is not renewed, or if the manufacturer becomes unable or unwilling to support integration work for other reasons. Because this data is often subject to export control restrictions (including ITAR and EAR) and, in government programs, to specific technical data rights allocations under DFARS or FAR, our access can also be affected by regulatory determinations outside our control or the manufacturer's control.

If we lose access to this information for any aircraft type on which we depend, we may be unable to complete, certify, maintain, or update our integration for that aircraft, which could delay or terminate programs, require costly and time-consuming redesign or reverse engineering efforts (which may themselves be legally or practically unavailable), and damage our relationships with customers who have selected that aircraft type. Our dependence on a limited number of manufacturers for this access also gives those manufacturers significant leverage over the commercial terms, timing, and scope of our integration work, which could materially adversely affect our business, financial condition, and results of operations.

We have identified material weaknesses in our internal control over financial reporting. If not remediated, or if we experience additional material weaknesses in the future or otherwise fail to maintain effective internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

In the course of preparing our consolidated financial statements as of and for the years ended December 31, 2025 and 2024, and the condensed consolidated financial statements for the three months ended March 31, 2026 and June 30, 2026, our management determined that we have material weaknesses and significant deficiencies in our internal controls over financial reporting. These material weaknesses primarily relate to (i) non-routine and complex transactions, (ii) segregation of duties, and (iii) information technology general controls (ITGCs) over logical access to key systems tested supporting financial reporting.

These deficiencies, individually and in the aggregate, could result in a misstatement of one or more account balances or disclosures, potentially leading to a material misstatement to the annual or interim consolidated financial statements which may not be prevented or timely detected and, accordingly, management determined that these control deficiencies constitute material weaknesses.

In order to remediate these material weaknesses, we have taken and plan to take the following actions:

• Personnel and training: We have hired and continue to hire personnel with public company accounting experience and are providing targeted training on internal control requirements, complex transaction accounting, and financial reporting obligations.
• Control design and implementation: We are implementing additional controls and processes designed to operate at a sufficient level of precision and frequency, and that appropriately evidence the performance of the control, particularly with respect to the accounting and reporting of revenue and non-routine, unusual, or complex transactions.
• Segregation of duties: We have begun to implement processes and controls to better identify and manage segregation of duties risks within our accounting and financial reporting functions.
• Systems and automation: We are evaluating system enhancements to reduce our reliance on manual processes in key areas of our financial close and reporting process.
• External advisor engagement: We have engaged an external advisor to assist with evaluating and documenting the design and operating effectiveness of our internal controls and to assist with remediation of identified deficiencies.

We will not be able to fully remediate these material weaknesses until these steps have been completed, have been operating effectively for a sufficient period of time and management has concluded, through testing, that these controls are effective. We were not required to, and did not, perform an evaluation of our internal control over financial reporting as of December 31, 2025 or any period in accordance with the provisions of the Sarbanes-Oxley Act. Accordingly, we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses. Material weaknesses may still exist when we first report on the effectiveness of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act.

If not remediated, these material weaknesses could result in material misstatements to our annual or interim consolidated financial statements that might not be prevented or detected on a timely basis, or in delayed filing of required periodic reports. If we are unable to assert that our internal control over financial reporting is effective when required, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to litigation or investigations by Nasdaq, the SEC, or other regulatory authorities, which could require additional financial and management resources. Our remediation efforts may be complicated by our recent transition to operating as a public company and by the accounting, valuation and disclosure requirements associated with our capital structure, including our Series A Preferred Stock, Series A Warrants and other non-routine transactions.