BigBear.ai(BBAI) - 2023 Q4 - Annual Report

Part I Item 1. Business BigBear.ai provides Edge AI decision intelligence solutions for national security, supply chain, and digital identity, primarily serving the U.S. government - BigBear.ai provides Edge AI-powered decision intelligence solutions, serving the national security, supply chain management, and digital identity markets through both software and services[12][15] - On February 29, 2024, the company completed the acquisition of Pangiam, a leader in vision AI, to create a comprehensive vision and edge AI portfolio[13] - The company's total addressable market (TAM) is estimated at approximately $80 billion in 2024, projected to grow to $272 billion by 2028[33] - A significant portion of revenue is derived from contracts with public sector agencies, including the U.S. Federal Government[30] - As of December 31, 2023, the company had approximately 480 employees, with a majority holding active security clearances[37] Item 1A. Risk Factors The company faces significant risks including dependence on government contracts, customer concentration, long sales cycles, cybersecurity threats, and substantial indebtedness - A significant portion of business depends on sales to the public/government sector, which are subject to changes in fiscal policies, budgetary constraints, and potential contract terminations[54][250] - The company has a high customer concentration, with three customers comprising 49% of revenue for the twelve months ended December 31, 2023 These contracts contain termination for convenience clauses[65][66] - The sales cycle is often long (6-12+ months) and unpredictable, involving considerable time and expense, particularly with government customers[62] - The company faces risks related to its $200 million in 6.0% Convertible Notes due 2026, including restrictive covenants, subordination to secured debt, and potential dilution upon conversion[283][327] - Cybersecurity threats are a significant risk, as the company's software handles sensitive customer data, making it an attractive target for cyberattacks[176][177] - The integration of the newly acquired Pangiam business presents challenges, and the company may not successfully realize the anticipated strategic and financial benefits[341][343] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[418] Item 1C. Cybersecurity The company's cybersecurity program, based on NIST, is overseen by a CISO and the Board, with no material incidents reported to date - The company's cybersecurity program is built upon the National Institute of Standards and Technology (NIST) Cybersecurity Framework[420] - The program is supervised by a dedicated Chief Information Security Officer (CISO) with over 15 years of experience, who reports to the Board of Directors on cyber risks[421] - The Board of Directors, along with the Audit Committee and Nominating and Governance Committee, have oversight of cybersecurity threats[425] - To date, the company has not experienced any material cybersecurity incidents[425] Item 2. Properties The company leases approximately 54,000 square feet across five primary locations, including its Columbia, Maryland headquarters - The company leases approximately 54,000 square feet of space across five main locations, with its corporate headquarters in Columbia, Maryland[427] Item 3. Legal Proceedings/Legal Matters The company is involved in ordinary course legal matters, not expecting a material impact on its financial condition - The company is subject to litigation and claims in the ordinary course of business but does not expect the outcomes to have a material impact on its financial statements[428] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[429] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE under 'BBAI', with no history or current intent to pay cash dividends - The company's common stock is traded on the NYSE under the ticker symbol "BBAI"[429] - As of December 31, 2023, there were 86 common stockholders of record[430] - The company has never declared or paid cash dividends and does not currently intend to, planning to retain future earnings for growth[431] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal year 2023 saw flat revenue at $155.2 million, a reduced net loss of $60.4 million, improved Adjusted EBITDA, and a decrease in total backlog Recent Developments Recent developments include the Pangiam acquisition, significant capital raises through warrant exercises and offerings, and a shift to a single operating segment - Completed the acquisition of Pangiam on February 29, 2024, a leader in vision AI for global trade, travel, and digital identity[443] - Raised approximately $53.8 million in gross proceeds through two separate warrant exercise agreements in February and March 2024[445][446] - Raised approximately $50 million in gross proceeds during 2023 through a registered direct offering and a private placement[447][448] - Effective Q1 2023, the company reorganized its operations from two segments (Cyber & Engineering and Analytics) into a single operating and reportable segment[451][452] Results of Operations Revenue remained flat at $155.2 million in 2023, while operating and net losses significantly improved due to the absence of goodwill impairment Consolidated Statements of Operations (in thousands) | | Year Ended December 31, | | | | :--- | :--- | :--- | :--- | | | 2023 | 2022 | 2021 | | Revenues | $155,164 | $155,011 | $145,578 | | Gross margin | $40,601 | $42,993 | $34,068 | | Operating loss | ($39,034) | ($110,527) | ($78,472) | | Goodwill impairment | $0 | $53,544 | $0 | | Net loss | ($60,366) | ($121,674) | ($123,552) | - Revenue in 2023 was nearly flat year-over-year, with an increase of just $0.15 million Growth in Army programs was offset by the wind-down of certain Air Force programs and lower volume from Virgin Orbit following its bankruptcy[471] - SG&A expenses decreased by $13.7 million (16.2%) in 2023 compared to 2022, driven by restructuring actions and a reduction in non-recurring integration and advisory costs[475] - Research and development expenses decreased by $3.4 million (40.0%) in 2023 due to the capitalization of certain software development projects that reached technological feasibility[477] Supplemental Non-GAAP Information Adjusted EBITDA improved to a $3.2 million loss in 2023, and Free Cash Flow improved to negative $22.1 million, reflecting better operational efficiency Adjusted EBITDA Reconciliation (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net loss | ($60,366) | ($121,674) | ($123,552) | | Adjustments | $57,163 | $104,589 | $128,404 | | Adjusted EBITDA | ($3,203) | ($17,085) | $4,852 | Free Cash Flow (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | ($18,307) | ($48,918) | ($19,782) | | Capital expenditures, net | ($3,830) | ($769) | ($639) | | Free cash flow | ($22,137) | ($49,687) | ($20,421) | Key Performance Indicators Total backlog decreased to $167.8 million as of December 31, 2023, primarily due to reductions in priced, unexercised options and funded backlog Backlog Summary (in thousands) | Backlog Category | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Funded | $30,112 | $57,234 | | Unfunded | $49,382 | $18,220 | | Priced, unexercised options | $63,878 | $112,119 | | Unpriced, unexercised options | $24,438 | $30,900 | | Total backlog | $167,810 | $218,473 | Liquidity and Capital Resources As of December 31, 2023, liquidity was $32.6 million, total debt was $195.5 million, and net cash used in operating activities improved to $18.3 million Liquidity and Debt Summary (in thousands) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $32,557 | $12,632 | | Total available liquidity | $32,557 | $12,632 | | Total debt, net | $195,502 | $194,377 | Consolidated Cash Flows (in thousands) | | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($18,307) | ($48,918) | | Net cash used in investing activities | ($3,830) | ($5,234) | | Net cash provided by (used in) financing activities | $42,062 | ($103,137) | - The company's $200 million in unsecured convertible notes bear 6.0% interest and mature on December 15, 2026 The conversion price was adjusted to $10.61 in May 2022[512][513] Critical Accounting Policies and Estimates Critical accounting policies involve significant estimates in revenue recognition, goodwill impairment, warrant valuation, and software development cost capitalization - Revenue from long-term contracts is generally recognized over time using a percentage-of-completion cost-to-cost measure of progress, which requires significant estimation of total contract costs[553][561] - Goodwill is assessed for impairment annually as of October 1 In 2022, the company recorded a non-cash goodwill impairment charge of $53.5 million related to its former Cyber & Engineering and Analytics reporting units[540][547] - Private, PIPE, and RDO warrants are classified as liabilities and remeasured at fair value each period, with changes recognized in earnings Public warrants are classified as equity[568] - The company capitalizes software development costs incurred after technological feasibility is established In 2023, $3.3 million in such costs were capitalized[653] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Primary market risks include common stock value fluctuations impacting derivative liabilities and convertible debt, interest rate risk on fixed-rate debt, and inflation - The main market risk is tied to the value of the company's common stock, which impacts derivative liabilities and convertible debt features[579] - The company is exposed to interest rate risk, with $200 million in fixed-rate long-term debt outstanding as of December 31, 2023[579] - Inflation is a factor, but the company believes it can mitigate its effects through price increases and contractual escalation clauses[580] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2021-2023, along with the independent auditor's report Consolidated Balance Sheet Data (in thousands) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $199,910 | $195,308 | | Cash and cash equivalents | $32,557 | $12,632 | | Goodwill | $48,683 | $48,683 | | Total Liabilities | $267,245 | $233,180 | | Long-term debt, net | $194,273 | $192,318 | | Total stockholders' deficit | ($67,335) | ($37,872) | Consolidated Statement of Operations Data (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenues | $155,164 | $155,011 | $145,578 | | Gross margin | $40,601 | $42,993 | $34,068 | | Operating loss | ($39,034) | ($110,527) | ($78,472) | | Net loss | ($60,366) | ($121,674) | ($123,552) | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures The company reports no changes or disagreements with its accountants on financial disclosures - None[795] Item 9A. Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with prior material weaknesses remediated - Management concluded that disclosure controls and procedures were effective as of December 31, 2023[796] - Previously disclosed material weaknesses related to segregation of duties, revenue recognition, and IT General Controls were remediated as of December 31, 2023[800][801] - Based on its assessment, management concluded that internal control over financial reporting was effective as of December 31, 2023[798] Item 9B. Other Information Executive officers adopted Rule 10b5-1 trading plans for equity award tax obligations, and a NYSE-compliant Clawback Policy was adopted - On December 15, 2023, several executive officers adopted Rule 10b5-1 trading plans to facilitate the sale of shares to cover tax withholding obligations related to equity awards[804][805][808] - The Compensation Committee adopted a Clawback Policy compliant with NYSE rules, allowing the company to recover excess incentive-based compensation from executives in the event of a material financial restatement[810] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not Applicable[811] Part III Items 10-14 Information for Items 10-14 will be incorporated by reference from the company's definitive 2024 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Registrant's 2024 Proxy Statement, which will be filed within 120 days of the fiscal year-end[812][813][814] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists all exhibits, financial statements, and schedules filed with the Form 10-K, including governance and material contracts - This item provides a list of all financial statements, schedules, and exhibits filed with the Form 10-K, including governance documents, material contracts, and certifications[815][816][817] Item 16. Form 10-K Summary The company indicates no Form 10-K summary - None[818]