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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______

Commission file number 001-40031
BigBear.ai Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware85-4164597
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
6811 Benjamin Franklin Drive, Suite 200, Columbia, MD
21046
(Address of Principal Executive Offices)(Zip Code)
(410) 312-0885
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.0001 par valueBBAINew York Stock Exchange
Redeemable warrants, each full warrant exercisable for one share of common stock at an exercise price of $11.50 per shareBBAI.WSNew York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
x
Smaller reporting company
o
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
There were 156,815,819 shares of our common stock, $0.0001 par value per share, outstanding as of November 3, 2023.



BIGBEAR.AI HOLDINGS, INC.
Quarterly Report on Form 10-Q
September 30, 2023

TABLE OF CONTENTS

ItemPage
2

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
BIGBEAR.AI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited; in thousands, except share and per share data)
September 30,
2023
December 31,
2022
Assets
Current assets:
Cash and cash equivalents
$32,184 $12,632 
Accounts receivable, less allowance for doubtful accounts of $1,705 as of September 30, 2023 and $98 as of December 31, 2022
29,030 30,091 
Contract assets
452 1,312 
Prepaid expenses and other current assets
4,104 10,300 
Total current assets
65,770 54,335 
Non-current assets:
Property and equipment, net
1,095 1,433 
Goodwill
48,683 48,683 
Intangible assets, net
82,823 85,685 
Right-of-use assets4,188 4,638 
Deferred tax assets
 51 
Other non-current assets
452 483 
Total assets
$203,011 $195,308 
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable
$9,076 $15,422 
Short-term debt, including current portion of long-term debt
 2,059 
Accrued liabilities
15,460 13,366 
Contract liabilities
2,320 2,022 
Current portion of long-term lease liability803 806 
Derivative liabilities28,467  
Other current liabilities
871 2,085 
Total current liabilities
56,997 35,760 
Non-current liabilities:
Long-term debt, net
193,784 192,318 
Long-term lease liability4,517 5,092 
Deferred tax liabilities
2  
Other non-current liabilities
 10 
Total liabilities
255,300 233,180 
Commitments and contingencies (Note L)
Stockholders’ deficit:
Common stock, par value $0.0001; 500,000,000 shares authorized and 156,053,939 shares issued and outstanding at September 30, 2023 and 127,022,363 at December 31, 2022
17 14 
Additional paid-in capital297,218 272,528 
Treasury stock, at cost 9,952,803 shares at September 30, 2023 and December 31, 2022
(57,350)(57,350)
Accumulated deficit
(292,174)(253,064)
Total stockholders’ deficit
(52,289)(37,872)
Total liabilities and stockholders’ deficit
$203,011 $195,308 

The accompanying notes to the consolidated financial statements are an integral part of these statements.
1


BIGBEAR.AI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except share and per share data)


Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Revenues
$33,988 $40,651 $114,601 $114,654 
Cost of revenues
25,579 28,900 87,016 83,446 
Gross margin
8,409 11,751 27,585 31,208 
Operating expenses:
Selling, general and administrative
15,533 20,233 52,825 69,205 
Research and development
(349)1,785 3,004 7,194 
Restructuring charges 1,562 780 1,562 
Transaction expenses
1,437 566 1,437 2,151 
Goodwill impairment   35,252 
Operating loss(8,212)(12,395)(30,461)(84,156)
Interest expense
3,540 3,557 10,656 10,666 
Net decrease in fair value of derivatives
(15,659)(102)(1,971)(1,564)
Other (income) expense(87)8 (87)12 
Income (loss) before taxes
3,994 (15,858)(39,059)(93,270)
Income tax (benefit) expense(5)252 51 (1,491)
Net income (loss)
$3,999 $(16,110)$(39,110)$(91,779)
Basic net income (loss) per share
$0.03 $(0.13)$(0.27)$(0.72)
Diluted net income (loss) per share
$0.03 $(0.13)$(0.27)$(0.72)
Weighted-average shares outstanding:
Basic
155,830,775 126,270,282 146,679,444 128,103,625 
Diluted
157,894,001 126,270,282 146,679,444 128,103,625 
















The accompanying notes to the consolidated financial statements are an integral part of these statements.
2


BIGBEAR.AI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
(unaudited; in thousands, except share data)


Three Months Ended September 30, 2023
Common StockAdditionalTreasuryAccumulatedTotal stockholders’
SharesAmountpaid in capitalstockdeficitdeficit
As of June 30, 2023155,452,774 $17 $291,933 $(57,350)$(296,173)$(61,573)
Net income— — — — 3,999 3,999 
Equity-based compensation expense— — 4,793 — — 4,793 
Issuance of shares for equity-based compensation awards, net601,165 — (39)— — (39)
Issuance of shares purchased under ESPP— — 531 — — 531 
As of September 30, 2023156,053,939 $17 $297,218 $(57,350)$(292,174)$(52,289)
Three Months Ended September 30, 2022
Common StockAdditionalTreasuryAccumulatedTotal stockholders’
SharesAmountpaid in capitalstockdeficitequity (deficit)
As of June 30, 2022126,263,451 $14 $270,184 $(57,350)$(207,059)$5,789 
Net loss— — — — (16,110)(16,110)
Equity-based compensation expense— — 2,222 — — 2,222 
Issuance of shares vested for RSUs9,764 — — — — — 
As of September 30, 2022126,273,215 $14 $272,406 $(57,350)$(223,169)$(8,099)

















The accompanying notes to the consolidated financial statements are an integral part of these statements.





3


BIGBEAR.AI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
(unaudited; in thousands, except share data)


Nine Months Ended September 30, 2023
Common StockAdditionalTreasuryAccumulatedTotal stockholders’
SharesAmountpaid in capitalstockdeficitdeficit
As of December 31, 2022127,022,363 $14 $272,528 $(57,350)$(253,064)$(37,872)
Net loss— — — — (39,110)(39,110)
Equity-based compensation expense— — 12,592 — — 12,592 
Issuance of Private Placement shares13,888,889 2 7,079 — — 7,081 
Issuance of Registered Direct Offering shares11,848,341 1 6,764 — — 6,765 
Issuance of shares for equity-based compensation awards, net2,585,688 — (2,276)— — (2,276)
Issuance of shares for exercised convertible notes188 — — — — — 
Issuance of shares purchased under ESPP708,470 — 531 — — 531 
As of September 30, 2023156,053,939 $17 $297,218 $(57,350)$(292,174)$(52,289)
Nine Months Ended September 30, 2022
Common StockAdditionalTreasuryAccumulatedTotal stockholders’
SharesAmountpaid in capitalstockdeficitequity (deficit)
As of December 31, 2021135,566,227 $14 $253,744 $ $(131,390)$122,368 
Net loss— — — — (91,779)(91,779)
Equity-based compensation expense— — 11,160 — — 11,160 
Repurchase of shares as a result of Forward Share Purchase Agreements(9,952,803)— — (57,350)— (57,350)
Issuance of common stock as consideration for the acquisition of ProModel Corporation649,976 — 7,501 — — 7,501 
Exercise of warrants51 — 1 — — 1 
Issuance of shares vested for RSUs9,764 — — — — — 
As of September 30, 2022126,273,215 $14 $272,406 $(57,350)$(223,169)$(8,099)







The accompanying notes to the consolidated financial statements are an integral part of these statements.
4

BIGBEAR.AI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)

Nine Months Ended September 30,
20232022
Cash flows from operating activities:
Net loss$(39,110)$(91,779)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense5,936 5,764 
Amortization of debt issuance costs1,512 1,570 
Equity-based compensation expense12,592 11,160 
Goodwill impairment 35,252 
Non-cash lease expense450  
Provision for doubtful accounts1,607 55 
Deferred income tax expense (benefit)53 (1,450)
Net decrease in fair value of derivatives(1,971)(1,564)
Loss on sale of property and equipment10  
Changes in assets and liabilities:
Increase in accounts receivable(546)(2,359)
Decrease (increase) in contract assets860 (297)
Decrease in prepaid expenses and other assets6,181 3,549 
(Decrease) increase in accounts payable(6,346)1,946 
Increase (decrease) in accrued liabilities2,035 (993)
Increase (decrease) in contract liabilities298 (1,004)
(Decrease) increase in other liabilities(1,794)1,760 
Net cash used in operating activities
(18,233)(38,390)
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (4,465)
Purchases of property and equipment(2)(736)
Capitalized software development costs(2,744) 
Net cash used in investing activities
(2,746)(5,201)
Cash flows from financing activities:
Proceeds from issuance of Private Placement shares and Registered Direct Offering shares50,000  
Payment of Private Placement and Registered Direct Offering transaction costs(5,724) 
Repurchase of shares as a result of forward purchase agreements (100,896)
Repayment of short-term borrowings(2,059)(3,464)
Issuance of common stock upon ESPP purchase531  
Payments for taxes related to net share settlement of equity awards(2,217)(15)
Net cash provided by (used in) financing activities
40,531 (104,375)
Net increase (decrease) in cash and cash equivalents and restricted cash
19,552 (147,966)
Cash and cash equivalents and restricted cash at the beginning of period
12,632 169,921 
Cash and cash equivalents and restricted cash at the end of the period
$32,184 $21,955 
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock as consideration for the acquisition of ProModel Corporation$ $7,501 
    


The accompanying notes to the consolidated financial statements are an integral part of these statements.
5

BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)

Note ADescription of the Business

BigBear.ai Holdings, Inc.’s (“BigBear.ai”, “BigBear.ai Holdings”, or the “Company”) mission is to help deliver clarity for clients as they face their most complex decisions. BigBear.ai’s artificial intelligence (“AI”)-powered decision intelligence solutions are leveraged in three primary markets—global supply chains & logistics, autonomous systems, and cybersecurity. The Company’s customers, including federal defense and intelligence agencies, manufacturers, third party logistics providers, retailers, healthcare, and life sciences organizations, rely on BigBear.ai’s solutions to empower leaders to decide on the best possible course of action by creating order from complex data, identifying blind spots, and building predictive outcomes. Unless otherwise indicated, references to “we”, “us” and “our” refer collectively to BigBear.ai Holdings, Inc. and its consolidated subsidiaries.

Note BSummary of Significant Accounting Policies

Basis of Presentation

We prepared these accompanying unaudited consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, they do not include all information and notes required by GAAP for complete financial statements. Amounts presented within the consolidated financial statements and accompanying notes are presented in thousands of U.S. dollars unless stated otherwise, except for percentages, units, shares, per unit, and per share amounts.

In the opinion of management, these consolidated financial statements reflect all adjustments that are of a normal recurring nature necessary for a fair presentation of our results of operations, financial condition, and cash flows for the interim periods presented. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates. Significant estimates inherent in the preparation of our consolidated financial statements include, but are not limited to, accounting for revenue and cost recognition; evaluation of goodwill; intangible assets; and other assets for impairment; income taxes; equity-based compensation; fair value measurements; and contingencies. We eliminate intercompany balances and transactions in consolidation.

The results of operations for the interim periods presented are not necessarily indicative of results to be expected for the full year or future periods. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022.

Segment Information

Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM is its Chief Executive Officer.

As of December 31, 2022, the Company had two operating and reportable segments that were organized by sector: Cyber & Engineering and Analytics. During the first quarter of 2023, the Company reevaluated its operating and reportable segments under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 280 - Segment Reporting, following an organizational and legal entity restructuring, which allowed the Company to align its operations with how the business will be managed. As a result of such changes, the performance of the Company’s operations are evaluated by the CODM using the consolidated financial results of the Company. As a result of this reevaluation, effective for the first quarter of fiscal year 2023, the Company determined it that it manages its operations as a single operating and reportable segment.

The single reportable segment is consistent with information used by the CODM to assess performance, make operating decisions, and allocate resources. The Company evaluates the operating performance of its one segment based upon information included in management reports.

6

BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)
Accounts Receivable

The Company generally records a receivable when revenue is recognized as the timing of revenue recognition may differ from the timing of payment from customers. Payment terms and conditions vary by contract, although terms generally include a requirement of payment within 30 to 60 days. The Company's accounts receivables do not bear interest, and they are recorded at the invoiced amount less an estimated allowance for expected credit losses. In addition to estimating an allowance based on specific identification of certain receivables that have a higher probability of not being paid, the Company also records an estimate for expected credit losses for the remaining receivables in the aggregate using a loss-rate method that considers historical bad debts, age of customer receivable balances, and current customer receivable balances. Additionally, the Company considers future reasonable and supportable forecasts of economic conditions to adjust historical loss rate percentages as necessary. Balances are written-off when determined to be uncollectible. The provision for expected credit losses is recorded in selling, general, and administrative expenses in the consolidated statements of operations.

Capitalization of Software Costs

Software development costs incurred in the development of software to be sold, leased, or otherwise marketed, incurred subsequent to the establishment of technological feasibility and prior to the general availability of the software, are capitalized when they are expected to become significant. Such costs are amortized over the estimated useful life of the applicable software once it is made generally available to our customers.

We evaluate the useful lives of these assets on an annual basis, and we test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. For the three and nine months ended September 30, 2023 and 2022, we have recognized no impairments of capitalized software costs.

Emerging Growth Company

Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth 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 an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.

This may make comparison of the Company’s financial statements with another public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The amendments in ASU 2016-13 require an entity to record an allowance for credit losses for certain financial instruments and financial assets, including accounts receivable, based on expected losses rather than incurred losses. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The new guidance is effective for the years beginning after December 15, 2022, including interim periods. The Company prospectively adopted ASU 2016-13 as of January 1, 2023. The adoption of ASU 2016-13 did not have a material impact to the Company’s consolidated financial statements or related disclosures.

7

BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)
Note CRestructuring Charges

Upon performing a strategic review of the Company’s capacity and future projections, the Company initiated restructuring actions in the third and fourth quarters of 2022, both of which were completed as of December 31, 2022. The purpose of the restructuring was to better align the organization and cost structure and improve the affordability of products and services. A liability reflecting unpaid employee separation costs of $1,535 is presented on the consolidated balance sheets within other current liabilities as of December 31, 2022.

During the first quarter of 2023, the Company further refined its organizational structure to align with the change in its reportable and operating segments, resulting in additional employee separation costs of $780, net of tax benefits. The Company had completed this restructuring action as of March 31, 2023. A liability reflecting unpaid employee separation costs of $48 is presented on the consolidated balance sheets within other current liabilities as of September 30, 2023.

The table below presents the activity in restructuring charges for the nine months ended September 30, 2023:

As of December 31, 2022$1,535 
Additions780 
Settlements(2,267)
As of September 30, 2023
$48 

Note DBusiness Combinations

ProModel Acquisition

On April 7, 2022, the Company’s subsidiary BigBear.ai, LLC acquired 100% of the equity interest in ProModel Corporation (“ProModel Corporation”), a leader in simulation-based predictive and prescriptive analytic software for process improvement enabling organizations to make better decisions, for approximately $16.1 million, subject to certain adjustments. This acquisition complements the Company’s previous acquisition of ProModel’s Government Services business, ProModel Government Solutions Inc. (“ProModel Government Solutions”), which closed on December 21, 2020. The acquisition was funded through a combination of cash on hand and the issuance of 649,976 shares of the Company’s common stock. ProModel Corporation was aligned under the Analytics reportable operating segment prior to the Company’s reevaluation of its operating and reportable segments, effective for the first quarter of fiscal year 2023.

The purchase agreement with the sellers of ProModel Corporation also stipulates that certain funds would be held in escrow (such funds, the “Indemnity Escrow Deposit”, the “Distribution Withholding Deposit”, and the “Adjustment Escrow Deposit”), for the benefit of the seller. Pursuant to and subject to the terms and conditions of the Escrow Agreement, the Adjustment Escrow Amount of $200, the Distribution Withholding Escrow Amount of $100, and the Indemnity Escrow Amount of $100 shall be held in escrow until released in accordance with the purchase agreement and the Escrow Agreement.

8

BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)
The following table summarizes the fair value of the consideration transferred and the estimated fair values of the major classes of assets acquired and liabilities assumed as of the acquisition date.
April 7, 2022
Cash paid$8,559 
Equity issued7,501 
Purchase consideration$16,060 
Assets:
Cash$4,094 
Accounts receivable743 
Prepaid expenses and other current assets1,600 
Contract assets398 
Property and equipment83 
Other non-current assets21 
Intangible assets9,300 
Total assets acquired$16,239 
Liabilities:
Accounts payable5 
Accrued liabilities7,752 
Contract liabilities1,555 
Deferred tax liabilities1,458 
Total liabilities acquired$10,770 
Fair value of net identifiable assets acquired5,469 
Goodwill$10,591 

The following table summarizes the intangible assets acquired by class:
April 7, 2022
Technology$3,500 
Customer relationships5,800 
Total intangible assets$9,300 

The acquired technology and customer relationship intangible assets have a weighted-average estimated useful lives of 7 years and 20 years, respectively.

The fair value of the acquired technology was determined using the relief from royalty (“RFR”) method. The fair value of the acquired customer relationships was determined using the excess earnings method.

The acquisition was accounted for as a business combination, whereby the excess of the purchase consideration over the fair value of identifiable net assets was allocated to goodwill. The goodwill reflects the potential synergies and expansion of the Company’s offerings across product lines and markets complementary to its existing products and markets. For tax purposes, the goodwill related to the acquisition is deductible.

Pro Forma Financial Data (Unaudited)

The following table presents the pro forma consolidated results of operations of BigBear.ai for the nine-month period ended September 30, 2022 as though the acquisition of ProModel Corporation had been completed as of January 1, 2021.
Nine Months Ended September 30, 2022
Net revenue
$115,899 
Net loss(92,856)
9

BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)

The amounts included in the pro forma information are based on the historical results and do not necessarily represent what would have occurred if the business combination had taken place as of January 1, 2021, nor do they represent the results that may occur in the future. Accordingly, the pro forma financial information should not be relied upon as being indicative of the results that would have been realized had the acquisition occurred as of the date indicated or that may be achieved in the future.

Note EFair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, short-term debt, including the current portion of long-term debt, accrued liabilities, and other current liabilities are reflected on the consolidated balance sheets at amounts that approximate fair value because of the short-term nature of these financial assets and liabilities.

Private warrants, Private Placement (“PIPE”) warrants, and warrants issued under the registered direct offering (“RDO warrants”) are valued using a modified Black-Scholes option pricing model (“OPM”), which is considered to be a Level 3 fair value measurement. See Note O—Warrants for information on the Level 3 inputs used to value the private warrants and PIPE warrants.

The table below presents the financial liabilities measured at fair value on a recurring basis:
September 30, 2023
Balance Sheet Caption
Level 1
Level 2Level 3Total
PIPE warrantsDerivative liabilities$ $ $17,083 $17,083 
RDO warrantsDerivative liabilities  11,286 11,286 
Private warrantsDerivative liabilities  98 98 
December 31, 2022
Balance Sheet CaptionLevel 1Level 2Level 3Total
Private warrantsOther non-current liabilities$ $ $9 $9 

The changes in the fair value of the Level 3 liabilities are as follows:
PIPE warrantsRDO warrantsPrivate warrants
December 31, 2022$ $ $9 
Additions14,893 15,536  
Changes in fair value2,190 (4,250)89 
Settlements   
September 30, 2023$17,083 $11,286 $98 

10

BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)
Note FIntangible Assets, net

The intangible asset balances and accumulated amortization are as follows:
September 30, 2023
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
Weighted
average
useful
life in years
Customer relationships$74,600 $(10,501)$64,099 20
Technology26,200 (10,220)15,980 7
Software for Sale2,744  2,744 3
Total$103,544 $(20,721)$82,823 
December 31, 2022
Gross
carrying
amount
Accumulated
amortization
Net
carrying
amount
Weighted
average
useful
life in years
Customer relationships$74,600 $(7,702)$66,898 20
Technology26,200 (7,413)18,787 7
Total$100,800 $(15,115)$85,685 

The table below presents the amortization expense related to intangible assets for the following periods:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Amortization expense related to intangible assets$1,869 $1,904 $5,606 $5,394 

The table below presents the estimated amortization expense on intangible assets for the next five years and thereafter as of September 30, 2023:
Remainder of 2023
$1,868 
20248,320 
20258,388 
20268,388 
20276,979 
Thereafter48,880 
Total estimated amortization expense$82,823 

Note GPrepaid expenses and other current assets

The table below presents details on prepaid expenses and other current assets:
September 30,
2023
December 31,
2022
Prepaid insurance$639 $3,205 
Prepaid expenses1,570 1,663 
Prepaid taxes1,816 1,827 
Pre-contract costs(1)
79 3,605 
Total prepaid expenses and other current assets$4,104 $10,300 
(1) Costs incurred to fulfill a contract in advance of the contract being awarded are included in prepaid expenses and other current assets if we determine that those costs relate directly to a contract or to an anticipated contract that we can specifically identify and contract award is probable, the costs generate or enhance resources that will be used in satisfying performance obligations, and the costs are recoverable (referred to as pre-contract costs).

11

BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)
Pre-contract costs that are initially capitalized in prepaid assets and other current assets are generally recognized as cost of revenues consistent with the transfer of products or services to the customer upon the receipt of the anticipated contract. All other pre-contract costs, including start-up costs, are expensed as incurred.

Note HAccrued Liabilities
The table below presents details on accrued liabilities:
September 30,
2023
December 31,
2022
Payroll accruals
$9,567 $11,319 
Accrued interest
3,562 567 
Other accrued expenses2,331 1,480 
Total accrued liabilities
$15,460 $13,366 

Note IDebt

The table below presents the Company’s debt balances:
September 30,
2023
December 31,
2022
Convertible Notes$200,000 $200,000 
Bank of America Senior Revolver  
D&O Financing Loan 2,059 
Total debt200,000 202,059 
Less: unamortized issuance costs6,216 7,682 
Total debt, net193,784 194,377 
Less: current portion 2,059 
Long-term debt, net$193,784 $192,318 

Convertible Notes

On December 7, 2021, the previously announced merger (“Merger”) with GigCapital4, Inc. (“GigCapital4”) was consummated and the Company issued $200.0 million of unsecured convertible notes (the “Convertible Notes”) to certain investors. The Convertible Notes bear interest at a rate of 6.0% per annum, payable semi-annually, and not including any interest payments that are settled with the issuance of shares, were initially convertible into 17,391,304 shares of the Company’s common stock at an initial Conversion Price of $11.50. The Conversion Price is subject to adjustments. On May 29, 2022, pursuant to the Convertible Note indenture, the conversion rate applicable to the Convertible Notes was adjusted to 94.2230 (previously 86.9565) shares of common stock per $1,000 principal amount of Convertible Notes because the average of the daily volume-weighted average price of the common stock during the preceding 30 trading days was less than $10.00 (the “Conversion Rate Reset”). After giving effect to the Conversion Rate Reset, the Conversion Price is $10.61 and the Convertible Notes are convertible into 18,844,600 shares, not including any interest payments that are settled with the issuance of shares. The Convertible Note financing matures on December 15, 2026.

The Company may, at its election, force conversion of the Convertible Notes after December 15, 2022 and prior to October 7, 2026 if the trading price of the Company’s common stock exceeds 130% of the conversion price for 20 out of the preceding 30 trading days and the 30-day average daily trading volume ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to $3.0 million for the first two years after the initial issuance of the Convertible Notes and $2.0 million thereafter. Upon such conversion, the Company will be obligated to pay all regularly scheduled interest payments, if any, due on the converted Convertible Notes on each interest payment date occurring after the conversion date for such conversion to, but excluding, the maturity date (such interest payments, an “Interest Make-Whole Payments”). In the event that a holder of the Convertible Notes elects to convert the Convertible Notes (a) prior to December 15, 2024, the Company will be obligated to pay an amount equal to twelve months of interest or (b) on or after December 15, 2024 but prior to December 15, 2025, any accrued and unpaid interest plus any remaining amounts that would be owed up to, but
12

BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)
excluding, December 15, 2025. The Interest Make-Whole Payments will be payable in cash or shares of the common stock at the Company’s election, as set forth in the Indenture.

Following certain corporate events that occur prior to the maturity date or if the Company exercises its mandatory conversion right in connection with such corporate events, the conversion rate will be increased in certain circumstances for a holder who elects, or has been forced, to convert its Convertible Notes in connection with such corporate events.

If a Fundamental Change (as defined in the Convertible Note indenture) occurs prior to the maturity date, holders of the Convertible Notes will have the right to require the Company to repurchase all or any portion of their Convertible Notes in principal amounts of one thousand dollars or an integral multiple thereof, at a repurchase price equal to the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the repurchase date.

The Convertible Notes require the Company to meet certain financial and other covenants. As of September 30, 2023, the Company was in compliance with all covenants.

On May 29, 2022, pursuant to the conversion rate adjustment provisions in the Convertible Note indenture, the Conversion Price was adjusted to $10.61 (or 94.2230 shares of common stock per one thousand dollars of principal amount of Convertible Notes). Subsequent to the adjustment, the Convertible Notes are convertible into 18,844,600 shares, not including any interest payments that are settled with the issuance of shares.

During the three and nine months ended September 30, 2023, Convertible Notes with a principal of $0 and $2,000 were exercised for 0 and 188 shares of the Company’s common stock, respectively. As of September 30, 2023, the Company has an outstanding balance of $200.0 million related to the Convertible Notes, which is recorded on the balance sheet net of approximately $6.2 million of unamortized debt issuance costs.

Bank of America Senior Revolver

The Company is party to a senior credit agreement with Bank of America, N.A. (the “Bank of America Credit Agreement”), entered into on December 7, 2021 (the “Closing Date”), subsequently amended on November 8, 2022, providing the Company with a $25.0 million senior secured revolving credit facility (the “Senior Revolver”). Proceeds from the Senior Revolver will be used to fund working capital needs, capital expenditures, and other general corporate purposes. The Senior Revolver matures on December 7, 2025 (the “Maturity Date”).

The Senior Revolver is secured by a pledge of 100% of the equity of certain of the Company’s wholly owned subsidiaries and a security interest in substantially all of the Company’s tangible and intangible assets. The Senior Revolver includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as the “swing loans.” Any issuance of letters of credit or making of a swing loan will reduce the amount available under the revolving credit facility. The Company may increase the commitments under the Senior Revolver in an aggregate amount of up to the greater of $25.0 million or 100% of consolidated adjusted EBITDA plus any additional amounts so long as certain conditions, including compliance with the applicable financial covenants for such period, in each case on a pro forma basis, are satisfied.

As of the Closing Date, borrowings under the Senior Revolver bear interest, at the Company’s option, at:
(i)A Base Rate plus a Base Rate Margin of 2.00%. Base Rate is a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 0.50%, (b) the prime rate of Bank of America, N.A., and (c) Bloomberg Short-Term Yield Index (“BSBY”) Rate plus 1.00%; or
(ii)The BSBY Rate plus a BSBY Margin of 1.00%.

The Base Rate Margin and BSBY Margin became subject to adjustment based on the Company’s Secured Net Leverage Ratio after March 31, 2022. The Company is also required to pay unused commitment fees and letter of credit fees under the Bank of America Credit Agreement. The Second Amendment (defined below) increased the Base Rate Margin, BSBY Margin and unused commitment fees by 0.25%.

The Bank of America Credit Agreement requires the Company to meet certain financial and other covenants. The Company was not in compliance with the Fixed Charge Coverage ratio requirement as of June 30, 2022, and as a result was unable to draw on the facility. The Company notified Bank of America N.A. of the covenant violation, and on August 9, 2022, entered into the First
13

BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)
Amendment (the “First Amendment”) to the Bank of America Credit Agreement, which, among other things, waived the requirement that the Company demonstrate compliance with the minimum Fixed Charge Coverage ratio provided for in the Credit Agreement for the quarter ended June 30, 2022.

The Company was not in compliance with the Fixed Charge Coverage ratio requirement as of September 30, 2022, and as a result was unable to draw on the facility. On November 8, 2022, the Company entered into a Second Amendment to the Bank of America Credit Agreement (the “Second Amendment”), which modifies key terms of the Senior Revolver. As a result of the Second Amendment, funds available under the Senior Revolver are reduced to $25.0 million from $50.0 million, limited to a borrowing base of 90% of Eligible Prime Government Receivables and Eligible Subcontractor Government Receivables, plus 85% of Eligible Commercial Receivables. Additionally, the Second Amendment increased the Base Rate Margin, BSBY Margin and unused commitment fees by 0.25%. Following entry into the Second Amendment, the Senior Revolver no longer is subject to a minimum Fixed Charge Coverage ratio covenant. In order for the facility to become available for borrowings (the “initial availability quarter”), the Company must report Adjusted EBITDA of at least one dollar. Commencing on the first fiscal quarter after the initial availability quarter, the Company is required to have aggregated reported Adjusted EBITDA of at least $1 over the two preceding quarters to maintain its ability to borrow under the Senior Revolver (though the inability to satisfy such condition does not result in a default under the Senior Revolver).

Failure to meet these Adjusted EBITDA requirements is not deemed to be a default but will limit the Company’s ability to make borrowings under the Senior Revolver until such time that the Company is able meet the Adjusted EBITDA thresholds as defined in the Second Amendment. The Company did not meet the Adjusted EBITDA requirement during the nine months ended September 30, 2023, and is unable to draw on the Senior Revolver as of September 30, 2023.

The Second Amendment removes the requirement that the Company demonstrate compliance with the minimum Fixed Charge Coverage ratio.

Based on current forecasts, management believes that it is reasonably likely that the Company may fail to meet the minimum Adjusted EBITDA requirements of the Bank of America Credit Agreement in future periods and therefore, may be unable to draw on the facility. Management performed a cash flow analysis to identify the Company’s projected approximate cash flow and liquidity needs for the next 12 months. Based on the Company’s projected cash flow and liquidity needs, we believe that our cash from operating activities generated from continuing operations during the year will be adequate for the next 12 months to meet our anticipated uses of cash flow, including payroll obligations, working capital, operating lease obligations, capital expenditures and debt service costs, and it is considered unlikely that the Company would require access to draw funds on the Senior Revolver in the foreseeable future.

As of September 30, 2023, the Company had not drawn on the Senior Revolver. Unamortized debt issuance costs of $151 as of September 30, 2023, are recorded on the consolidated balance sheets and are presented in other non-current assets. The Bank of America Credit Agreement requires the Company to deliver monthly borrowing base certificates. The Company did not deliver such monthly borrowing base certificates for the months ending December 31, 2022, January 31, 2023, February 28, 2023, and March 31, 2023. Bank of America N.A. notified the Company of the reporting violation, and on April 21, 2023, Bank of America N.A. and the Company entered into the Third Amendment (the “Third Amendment”) to the Bank of America Credit Agreement, which, among other things, waived the requirement that the Company deliver the monthly borrowing base certificate for the months ending December 31, 2022, January 31, 2023, February 28, 2023, and March 31, 2023, and removed the reporting requirement to deliver a monthly borrowing base certificate going forward until the Company meets the Adjusted EBITDA requirements set forth above and is permitted to draw on the Senior Revolver.

D&O Financing Loan

On December 8, 2021, the Company entered into a $4,233 loan (the “D&O Financing Loan”) with AFCO Credit Corporation to finance the Company’s directors and officers insurance premium through December 2022. The D&O Financing Loan had an interest rate of 1.50% per annum and a maturity date of December 8, 2022.

On December 8, 2022, the Company entered into a $2,059 loan (the “2023 D&O Financing Loan”) with AFCO Credit Corporation to finance the Company’s directors and officers insurance premium through December 2023. The 2023 D&O Financing Loan required an upfront payment of $1,109 and has an interest rate of 5.75% per annum and a maturity date of December 8, 2023.
14

BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)
Note JLeases

The Company is obligated under operating leases for certain real estate and office equipment assets. The Company’s finance leases are not material. Certain leases contained predetermined fixed escalation of minimum rents at rates ranging from 2.5% to 5.4% per annum and remaining lease terms of up to eight years, some of which include renewal options that could extend certain leases to up to an additional five years.

The following table presents supplemental information related to leases at September 30, 2023:
Weighted average remaining lease term4.93
Weighted average discount rate10.61 %

The table below presents the rent expense under all leases for the following periods:
Three Months Ended September 30,Nine Months Ended September 30,
20232023
Rent expense
$312 $1,060 

Rent expense for the three months ended September 30, 2023 includes $11 of short-term lease costs and $13 of variable lease costs. Rent expense for the nine months ended September 30, 2023 includes $105 of short-term lease costs and $84 of variable lease costs. The Company subleases certain leases. As of September 30, 2023, the Company has subleased four of its real estate leases and recognized $28 and $119 of sublease income on the consolidated statements of operations during the three and nine months ended September 30, 2023, respectively.

The following table presents supplemental cash flow and non-cash information related to leases:
Nine Months Ended September 30, 2023
Cash paid for amounts included in the measurement of lease liabilities - operating cash flows from leases$1,071 

As of September 30, 2023, the future annual minimum lease payments for operating leases are as follows:
Remainder of 2023$370 
20241,261 
20251,207 
20261,138 
2027531 
Thereafter3,625 
Total future minimum lease payments$8,132 
Less amounts related to imputed interest(2,812)
Present value of future minimum lease payments5,320 
Less current portion of long-term lease liability803 
Long-term lease liability$4,517 

Note KIncome Taxes
The table below presents the effective income tax rate for the following periods:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Effective tax rate0.1 %(1.6)%(0.1)%1.6 %

The Company was taxed as a corporation for federal, state, and local income tax purposes for the three and nine month periods ended September 30, 2023 and September 30, 2022. The effective tax rate for the three and nine month periods ended
15

BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)
September 30, 2023 and September 30, 2022 differ from the U.S. federal income tax rate of 21.0% primarily due to state and local income taxes, permanent differences between book and taxable income, certain discrete items, and the change in valuation allowance, including a change in valuation allowance resulting from the ProModel Corporation acquisition during the three and nine months ended September 30, 2022.
Note L—Commitments and Contingencies

Contingencies in the Normal Course of Business

Under certain contracts with the U.S. government and certain governmental entities, contract costs, including indirect costs, are subject to audit by and adjustment through negotiation with governmental representatives. Revenue is recorded in amounts expected to be realized on final settlement of any such audits.

Legal Proceedings

The Company is subject to litigation, claims, investigations and audits arising from time to time in the ordinary course of business. Although legal proceedings are inherently unpredictable, the Company believes that it has valid defenses with respect to any matters currently pending against the Company and intends to defend itself vigorously. The outcome of these matters, individually and in the aggregate, is not expected to have a material impact on the Company’s consolidated balance sheets, consolidated statements of operations, or cash flows.

Note MWritten Put Option

Immediately prior to the stockholder vote for the Merger, GigCapital4 executed a series of Forward Share Purchase Agreements (“FPAs”) with Highbridge Tactical Credit Master Fund. L.P. and Highbridge SPAC Opportunity Fund, L.P. (the “Highbridge Investors”), Tenor Opportunity Master Fund Ltd. (“Tenor”), and Glazer Capital, LLC and Meteora Capital, LLC (the “Glazer Investors”, together with the Highbridge Investors and Tenor, the “Investors”). The FPAs provide that each of the Investors would not redeem their shares and instead would hold the shares for a period of up to three months following the consummation of the Merger, at which time they would have the right to sell the shares to the Company for $10.15 per share (the “Written Put Option”). The Investors had the right to sell shares on the open market before the end of the three-month period provided that the share price was at least $10.00 per share. If the Investors sold any shares in the open market within the first month of the three-month period and at a price greater than $10.05 per share, the Company would pay the Investors $0.05 per share sold.

The following table indicates the aggregate number of shares of common stock subject to the FPAs by each Investor:
December 6, 2021
Highbridge Investors2,453,195
Tenor2,499,608
Glazer Investors5,000,000
Total shares9,952,803

During the first quarter of 2022, the Company settled the derivative liability associated with the Written Put Option by repurchasing all 9,952,803 shares of its common stock at the Investors’ request. Certain of the Investors requested for their shares to be repurchased prior to the end of the three-month period at a reduced price per share. As a result, 5,000,000 shares were repurchased at $10.125 per share during the first quarter of 2022.

During the three months ended March 31, 2022, the derivative liability was remeasured to its intrinsic value at each date that the underlying shares were repurchased. The resulting gain of $1,281 was presented in net increase (decrease) in fair value of derivatives on the consolidated statement of operations during the first quarter of 2022. The intrinsic value of the Written Put Option upon settlement was $43,546 and was recognized directly in equity during the first quarter of 2022.

16

BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)
Note NStockholders’ Equity

Common Stock

The table below presents the details of the Company’s authorized common stock as of the following periods:
September 30,
2023
December 31,
2022
Common stock:
Authorized shares of common stock500,000,000500,000,000
Common stock par value per share$0.0001 $0.0001 
Common stock outstanding at the period end156,053,939 127,022,363 

Treasury Stock

During the nine months ended September 30, 2022, the Company repurchased 9,952,803 shares at a cost of $57,350 to settle the Company’s obligations under the FPAs. These shares are measured at cost and presented as treasury stock on the consolidated balance sheets and consolidated statements of stockholders’ (deficit) equity.

Dividend Rights

Subject to applicable law and the rights, if any, of the holders of any outstanding series of the Company’s preferred stock or any class or series of stock having a preference over or the right to participate with the Company’s common stock with respect to the payment of dividends, dividends may be declared and paid ratably on the Company’s common stock out of the assets of the Corporation that are legally available for this purpose at such times and in such amounts as the Company’s Board in its discretion shall determine.

Voting Rights

Each outstanding share of the Company’s common stock is entitled to one vote on all matters submitted to a vote of stockholders. Holders of shares of common stock do not have cumulative voting rights.

Conversion or Redemption Rights

The Company’s common stock is neither convertible nor redeemable.

Liquidation Rights

Upon the Company’s liquidation, the holders of the Company’s common stock are entitled to receive pro rata the Company’s assets that are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of any holders of the Company’s preferred stock then outstanding.

Preferred Stock

The table below presents the details of the Company’s authorized preferred stock as of the following periods:
September 30,
2023
December 31,
2022
Preferred stock:
Authorized shares of preferred stock1,000,0001,000,000
Preferred stock par value per share$0.0001 $0.0001 
Preferred stock outstanding at the period end

The Company’s Board may, without further action by the Company’s stockholders, from time to time, direct the issuance of shares of preferred stock in series and may, at the time of issuance, determine the designations, powers, preferences, privileges and relative participating, optional or special rights as well as the qualifications, limitations or restrictions thereof, including
17

BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)
dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the Company’s common stock. Satisfaction of any dividend preferences of outstanding shares of the Company’s preferred stock would reduce the amount of funds available for the payment of dividends on shares of the Company’s common stock. Upon the affirmative vote of a majority of the total number of directors then in office, the Company’s Board may issue shares of the Company’s preferred stock with voting and conversion rights which could adversely affect the holders of shares of the Company’s common stock.

Note OWarrants

Registered Direct Offering Warrants

On June 13, 2023, the Company consummated the closing of a registered direct offering pursuant to an Underwriting Agreement with Cowen and Company, LLC, as representative of the underwriters, for the sale and purchase of an aggregate of 11,848,341 shares of common stock at par value (“Common Stock”) and accompanying common warrants (“RDO warrants”). Each share of Common Stock is accompanied by a common warrant to purchase three-quarters of a share of Common Stock at an exercise price of $2.32 per share. The RDO warrants are initially exercisable for up to 8,886,255 shares of Common Stock at a combined purchase price of $2.11 per share of Common Stock and accompanying common warrant. The RDO warrants will become exercisable six months after issuance and have a five-year term.

The table below presents the value of the RDO warrants under the Black-Scholes OPM using the following assumptions as of the following dates:
September 30, 2023June 13, 2023
Value of each RDO warrant$1.27$1.96
Exercise price$2.32$2.32
Common stock price$1.51$2.30
Expected option term (years)5.25.5
Expected volatility127.40%118.60%
Risk-free rate of return4.50%4.00%
Expected annual dividend yield%%

As of September 30, 2023, the RDO warrants have a fair value of $11,286 and are presented on the consolidated balance sheets within derivative liabilities. A gain of $6,132 and $4,250, which includes transaction costs associated with the issuance of the RDO warrants, was recognized for the three and nine months ended September 30, 2023, respectively, and are presented in net decrease in fair value of derivatives on the consolidated statements of operations.

As of September 30, 2023, there were 8,886,255 RDO warrants issued and outstanding.

PIPE Warrants

On January 19, 2023, the Company consummated the closing of a private placement (the “Private Placement”) by and among the Company and Armistice Capital Master Fund Ltd (the “Purchaser”). At the closing of the Private Placement, the Company issued 13,888,889 shares of the Company’s common stock at par value and warrants to purchase up to an additional 13,888,889 shares of common stock (the “PIPE warrants”). The PIPE warrants have an exercise price of $2.39 per share and may be exercisable as of July 19, 2023 until July 19, 2028. The PIPE warrants are subject to a 4.99% beneficial ownership limitation that precludes the Purchaser from exercising any portion of the PIPE warrants to the extent that, following such exercise, the Purchaser’s beneficial ownership of our then outstanding common stock would exceed 4.99%.

18

BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)
The table below presents the value of the PIPE warrants under the Black-Scholes OPM using the following assumptions as of the following dates:
September 30, 2023January 19, 2023
Value of each PIPE warrant$1.23$1.22
Exercise price$2.39$2.39
Common stock price$1.51$1.87
Expected option term (years)4.85.5
Expected volatility127.40%82.10%
Risk-free rate of return4.60%3.40%
Expected annual dividend yield%%

As of September 30, 2023, the PIPE warrants have a fair value of $17,083 and are presented on the consolidated balance sheets within derivative liabilities. A gain and loss of $9,584 and $2,190 were recognized as a result of the change in fair value for the three and nine months ended September 30, 2023, respectively, and are presented in net decrease in fair value of derivatives on the consolidated statements of operations.

As of September 30, 2023, there were 13,888,889 PIPE warrants issued and outstanding.

Public Warrants

Each public warrant entitles the registered holder to purchase one share of common stock at a price of $11.50 per share, subject to adjustment. Pursuant to the warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares of common stock. This means only a whole warrant may be exercised at a given time by a warrant holder. The warrants will expire on December 7, 2026, at 5:00 p.m., New York City time, or earlier upon redemption or liquidation.

The Company may call the public warrants for redemption as follows: (1) in whole and not in part; (2) at a price of $0.01 per warrant; (3) upon a minimum of 30 days’ prior written notice of redemption; (4) if there is an effective registration statement covering the shares of common stock issuable upon exercise of the warrants and a current prospectus available throughout the 30-day notice period; and (5) only if the last reported closing price of the common stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders.

If the Company calls the public warrants for redemption, management will have the option to require all holders that wish to exercise the Company public warrants to do so on a “cashless basis.”

The exercise price and number of shares of common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including stock dividends, stock splits, extraordinary dividends, consolidation, combination, reverse stock split or reclassification of shares of the Company’s common stock or other similar event. In no event will the Company be required to net cash settle the warrant shares.

As of September 30, 2023 and December 31, 2022, there were 12,150,878 and 12,115,130 public warrants issued and outstanding, respectively.

Private Warrants

The terms and provisions of the public warrants above also apply to the private warrants. If the private warrants are held by holders other than GigAcquisitions4, LLC (“Sponsor”), Oppenheimer & Co. Inc. and Nomura Securities International, Inc. (together, the “Underwriters”), or any respective permitted transferees, the private warrants will be redeemable by the Company and exercisable by the holders on the same basis as the public warrants. The Sponsor, the Underwriters, and any respective permitted transferees have the option to exercise the private warrants on a cashless basis.
19

BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)

The table below presents the value of the private warrants under the Black-Scholes OPM using the following assumptions as of the following dates:
September 30,
2023
December 31,
2022
Fair value of each private warrant$0.56$0.04 
Exercise price$11.50$11.50 
Common stock price$1.51$0.67 
Expected option term (in years)3.23.9
Expected volatility114.70%72.10 %
Risk-free rate of return4.70%4.10 %
Expected annual dividend yield% %

As of September 30, 2023 and December 31, 2022, the private warrants have a fair value of $98 and $9 and are presented on the consolidated balance sheets within derivative liabilities and other non-current liabilities, respectively. The following was recognized as a result of the change in fair value for the three and nine months ended September 30, 2023 and September 30, 2022, respectively, and are presented in net decrease in fair value of derivatives on the consolidated statements of operations:

Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Loss (gain) on change in fair value of private warrants
$56 $(102)$89 $(283)

As of September 30, 2023 and December 31, 2022, there were 174,894 and 210,642 private warrants issued and outstanding, respectively.

Note PEquity-Based Compensation

Class B Unit Incentive Plan

In February 2021, the Company’s Parent, BBAI Ultimate Holdings, LLC (“Parent”), adopted a compensatory benefit plan (the “Class B Unit Incentive Plan”) to provide incentives to directors, managers, officers, employees, consultants, advisors, and/or other service providers of the Company’s Parent or its Subsidiaries in the form of the Parent’s Class B Units (“Incentive Units”). Incentive Units have a participation threshold of $1.00 and are divided into three tranches (“Tranche I,” “Tranche II,” and “Tranche III”). Tranche I Incentive Units are subject to performance-based, service-based, and market-based conditions. The grant date fair value for the Incentive Units was $5.19 per unit.

The assumptions used in determining the fair value of the Incentive Units at the grant date are as follows:
February 16, 2021
Volatility57.0%
Risk-free interest rate0.1%
Expected time to exit (in years)1.6

On July 29, 2021, the Company’s Parent amended the Class B Unit Incentive Plan so that the Tranche I and the Tranche III Incentive Units immediately became fully vested, subject to continued employment or provision of services, upon the closing of the transaction stipulated in the Agreement and Plan of Merger (the “Merger Agreement”) dated June 4, 2021. The Company’s Parent also amended the Class B Unit Incentive Plan so that the Tranche II Incentive Units will vest on any liquidation event, as defined in the Class B Unit Incentive Plan, rather than only upon the occurrence of an Exit Sale, subject to the market-based condition stipulated in the Class B Unit Incentive Plan prior to its amendment.

Equity-based compensation for awards with performance conditions is based on the probable outcome of the related performance condition. The performance conditions required to vest per the amended Incentive Plan remain improbable until they occur due to the unpredictability of the events required to meet the vesting conditions. As such events are not considered probable until they occur, recognition of equity-based compensation for the Incentive Units is deferred until the vesting conditions are met. Once the
20

BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)
event occurs, unrecognized compensation cost associated with the performance-vesting Incentive Units (based on their modification date fair value) will be recognized based on the portion of the requisite service period that has been rendered.

The modification date fair value of the Incentive Units was $9.06 per unit. The assumptions used in determining the fair value of the Incentive Units at the modification date are as follows:
July 29, 2021
Volatility46.0%
Risk-free interest rate0.2%
Expected time to exit (in years)1.2

The volatility used in the determination of the fair value of the Incentive Units was based on analysis of the historical volatility of guideline public companies and factors specific to the Successor.

On December 7, 2021, the previously announced Merger was consummated. As a result, the Tranche I and Tranche III Incentive Units immediately became fully vested and the performance condition for the Tranche II Incentive Units was met. The fair value determined at the date of the amendment of the Class B Unit Incentive Plan was immediately recognized as compensation expense on the vesting date for Tranches I and III. Compensation expense for the Tranche II Incentive Units is recognized over the derived service period of 30 months from the modification date. The remaining compensation expense for the Tranche II Incentive Units will be recognized over the remaining service period of approximately 25 months.

The table below presents the activity in Tranche II of the Class B Units:

Unvested as of December 31, 20221,295,000 
Forfeited(120,000)
Unvested as of September 30, 2023
1,175,000 
As of September 30, 2023, there was approximately $1,382 of unrecognized compensation costs related to Tranche II Incentive Units, which is expected to be recognized over the remaining weighted average period of 0.33 years.

Stock Options

On December 7, 2021, the Company adopted the BigBear.ai Holdings, Inc. 2021 Long-Term Incentive Plan (the “Plan”). The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by providing eligible employees, prospective employees, consultants, and non-employee directors of the Company the opportunity to receive stock- and cash-based incentive awards.

During the nine months ended September 30, 2023, pursuant to the Plan, the Company’s Board of Directors granted certain grantees Stock Options to purchase shares of the Company’s common stock at a weighted-average exercise price of $2.01. The Stock Options vest over four years with 25% vesting on the one year anniversary of the grant date and then 6.25% per each quarter thereafter during years two, three and four. Vesting is contingent upon continued employment or service to the Company and is accelerated in the event of death, disability, or a change in control, subject to certain conditions; both the vested and unvested portion of a Grantee’s Stock Options will be immediately forfeited and cancelled if the Grantee ceases employment or service to the Company. The Stock Options expire on the 10th anniversary of the grant date.

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BIGBEAR.AI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; in thousands of U.S. dollars unless stated otherwise)
The table below presents the fair value of the Stock Options granted during the nine months ended September 30, 2023 using the Black-Scholes OPM and the following assumptions:

Number of Stock Options granted3,153,641
Price of common stock on the grant date
$1.90 to $2.74
Expected option term (in years)
5.8 to 6.2
Expected volatility(1)
96.8% to 128%
Risk-free rate of return
3.3% to 4.1%
Expected annual dividend yield%
Fair value of the Stock Options on the grant date
$1.51 to $2.29
(1) Expected volatility is based on a combination of implied and historical equity volatility of selected reasonably similar publicly traded companies.

The table below presents the activity in the Stock Options:
Stock Options OutstandingWeighted-Average Exercise Price Per ShareWeighted-Average Remaining Contractual Life (in years)Aggregate Intrinsic Value
Outstanding as of December 31, 20222,982,893 $2.89 9.64$ 
Granted3,153,641 2.01 
Forfeited(673,396)2.39 
Expired(32,286)8.36 
Outstanding as of September 30, 2023
5,430,852 $2.41 9.25$ 
Vested and exercisable as of September 30, 2023
272,851 $6.07 8.58$ 
The Stock Options had no intrinsic value as of September 30, 2023. The Company recognizes equity-based compensation expense for the Stock Options equal to the fair value of the awards on a straight-line basis over the service based vesting period. As of September 30, 2023, there was approximately $5,768 of unrecognized compensation costs related to the Stock Options, which is expected to be recognized over the remaining weighted average period of 2.44 years.

Restricted Stock Units

During the nine months ended September 30, 2023, pursuant to the Plan, the Company’s Board of Directors communicated the key terms and committed to grant Restricted Stock Units (“RSUs”) to certain employees and nonemployee directors. The Company granted 0 RSUs to employees during the nine months ended September 30, 2023. RSUs granted to employees generally vest over four years, with 25% vesting on the one year anniversary of the grant date and then 6.25% per each quarter thereafter during years two, three and four. RSUs granted to nonemployee directors vest either on the one year anniversary of the grant date or 25% at the end of quarter following the grant date. Vesting of RSUs is accelerated in the event of death, disability, or a change in control, subject to certain conditions.

The table below presents the activity in the RSUs:
RSUs
Outstanding
Weighted-Average Grant Date Fair Value Per Share
Unvested as of December 31, 20227,595,185 $2.35 
Granted8,472,437 2.07 
Vested(3,372,648)1.81 
Forfeited(2,488,635)2.81 
Unvested as of September 30, 2023
10,206,339 $2.19 

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