BlackSky Technology Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. As discussed in the section titled “Special Note Regarding Forward Looking Statements,” the following discussion and analysis contains forward looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in the section titled “Risk Factors” under Part I, Item IA in this Annual Report on Form 10-K. Unless the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “BlackSky”, “the Company”, “we”, “us” and “our” refer to the business and operations of Legacy BlackSky and its consolidated subsidiaries prior to the Merger and to BlackSky Technology Inc. and its consolidated subsidiaries, following the closing of the Merger. 56 General Overview On September 9, 2021, Osprey consummated the Merger with Legacy BlackSky. Immediately following the Merger, Osprey changed its name to “BlackSky Technology Inc.” Legacy BlackSky survived the Merger and is now a wholly owned subsidiary of BlackSky Technology Inc. As a special purpose acquisition company, Osprey had no pre-Merger operations other than to identify and consummate a merger. Therefore, BlackSky’s operations post-Merger are attributable to those of Legacy BlackSky and its subsidiaries, and references to “BlackSky” or the “Company” should be read to include BlackSky’s wholly owned subsidiaries. References in this report to Company actions, assets/liabilities, or contracts may be references to actions taken, assets/liabilities held, or contracts entered into by one or more Company current subsidiaries; however, the Company has distinguished between the actions taken by Legacy BlackSky or Osprey for certain time based, historical transactions. The Company’s results of operations and statements of assets and liabilities may not be comparable between periods as a result of the Merger. Company Overview We own and operate one of the industry's leading high-performance low earth orbit (“LEO”) small satellite constellations. Our constellation is optimized to cost-efficiently capture imagery at high revisit rates where and when our customers need it. The orbital configuration of our constellation is designed to collect data on the most critical and strategic locations in the world. With fourteen satellites in orbit as of December 31, 2022, our constellation is able to image certain locations every 60 to 90 minutes, from dawn to dusk, providing our customers with insights and situational awareness throughout the day. Our satellites are designed with agile pointing capabilities that enable our customers to task our constellation on demand to collect specific locations of interest. Our tasking methodology employs proprietary artificial intelligence (“AI”)-enabled software to efficiently collect images of the most important strategic and economic assets and areas of interest to our customers. We believe that our focus on critical strategies and economic infrastructure and the AI-enabled tasking of our constellation differentiates us from our competitors, who are dedicated primarily to mapping the entirety of the Earth on a routine basis and who, therefore, require up to hundreds of satellites or incrementally more expensive satellites to support their mission. Our differentiated approach to space enables us to deliver highly targeted and valuable intelligence with a smaller constellation fleet that has the added benefit of greater operating and capital efficiencies. Our Spectra AI software platform can, among other things, process millions of observations a day from our proprietary satellite constellation and from multiple external data sources including imaging, radar and radio frequency satellites, environmental sensors, asset tracking sensors, Internet-of-Things (“IoT”) connected devices, internet-enabled narrative sources, and a variety of geotemporal data feeds. Spectra AI employs advanced, proprietary AI and machine learning (“ML”) techniques to process, analyze, and transform these data feeds into alerts, information, and insights that our customers receive, all fully automated. Customers can access Spectra AI's data and analytics through easy-to-use web services or through platform application programming interfaces. Our next generation satellites (“Gen-3”), expected to launch in 2024, are designed to improve our imaging resolution even further and include short wave infrared imaging technology for a broad set of imaging conditions, including nighttime and low-light. We believe these advancements will expand the relevance and certainty of our analytics to continue to ensure our importance to our customers. We also believe the combination of our high-revisit, small satellite constellation, our Spectra AI platform, and low constellation cost is transforming the market for geospatial imagery and space-based data and analytics. Our operating strategy is to continue to enhance the capabilities of our satellite constellation, to increase the number of third-party data sources processed by our Spectra AI platform, and to expand our analytics offerings in order to increase the value we deliver to our customers. Our two strategic assets—our satellite constellation and our Spectra AI platform—are mutually reinforcing: as we capture ever more information about the world’s most important strategic and economic assets and locations, our proprietary database expands and increases its utility; enabling us to better detect, understand, and predict changes that matter most to our customers. Our business has a natural and powerful “flywheel” effect: the more data we collect and analyze, the more valuable the insights we can deliver to our customers. 57 Our current customer base and end market mix are weighted towards U.S. and international defense and intelligence customers and markets. We believe there are significant opportunities to expand our imagery and software analytical services, as well as our professional and engineering service offerings, to a broad set of customers both domestically and internationally. In addition, our services and products can benefit customers in a variety of commercial markets including, but not limited to, energy and utilities, insurance, commodities, mining, manufacturing, logistics, supply chain management, agriculture, environmental monitoring, disaster and risk management, engineering and construction, retail and consumer behavior. We offer a variety of pricing and utilization options for our imagery and software analytical service offerings, with the majority of our agreements structured as subscription contracts, followed by usage-based pricing and transactional licenses. These options provide customers flexibility to utilize our imagery and software analytical services in a manner that best suits their business needs. We offer a range of pricing tiers that enables the customer to manage collection priorities, when during critical events they can pay a premium to prioritize their monitoring and collection requirements. At other times, customers can select lower priority collections to allow for more economical utilization. We currently derive revenue from variable and fixed pricing plans that allow our customers to choose what matters most to them—platform licensing-levels, priority for imagery tasking, and whether to apply analytics or monitoring capabilities overtop the imaging service. Merger with Osprey Technology Acquisition Corp Upon the consummation of the Merger, a number of parties purchased an aggregate of 18.0 million shares of our Class A common stock (the “PIPE Shares”), for a purchase price of $10.00 per share, or an aggregate purchase price of $180.0 million, pursuant to a separate subscription agreement. 78,993,201 shares of Osprey common stock were issued for all of the issued and outstanding equity interests of Legacy BlackSky, inclusive of shares of Osprey’s common stock issued in exchange for both Legacy BlackSky’s issued and outstanding preferred stock and issued and outstanding convertible notes, (inclusive of interest accrued thereon), as if each had converted into Legacy BlackSky common stock immediately prior to the Merger. The Merger was accounted for as a Reverse Recapitalization in accordance with GAAP. Under this method of accounting, Osprey is treated as the acquired company for financial reporting purposes, and Legacy BlackSky is treated as the accounting acquiror. In accordance with this accounting, the Merger is treated as the equivalent of Legacy BlackSky issuing stock for Osprey’s net assets, accompanied by a recapitalization. Osprey’s net assets are stated at historical cost, with no goodwill or other intangible assets recorded, and the Legacy BlackSky operations will be those of BlackSky. Legacy BlackSky was considered the acquirer based on the facts and circumstances, including the following factors evaluated at the time of the Merger: • Legacy BlackSky’s former stockholders held a majority ownership interest in BlackSky; • Legacy BlackSky’s senior management team comprise senior management of BlackSky; • Legacy BlackSky was able to designate all but one director to BlackSky’s initial board; • Legacy BlackSky was the larger of the companies based on historical operating activity and employee base; and • Legacy BlackSky’s operations comprise the ongoing operations of BlackSky. We received approximately $283.0 million in gross proceeds upon consummation of the Merger, comprised of approximately $103.0 million in cash held in trust by Osprey and the proceeds of a $180.0 million sale of PIPE Shares. Transaction expenses paid on closing totaled approximately $39.9 million and we paid post-closing transaction expenses of $6.3 million. Additionally, we repaid approximately $21.4 million in debt and accrued interest and $6.1 million in other close-related expenses. On September 13, 2021, we raised an additional $8.0 million through a direct sale of Class A common stock to Palantir Technologies at $10.00 per share. Net cash proceeds from the Merger, the PIPE Shares, and the Palantir financing, less transaction costs, debt repayments, accrued interest and other closing payments, totaled approximately $223.6 million. 58 As a public company, we are required to comply with Securities and Exchange Commission rules and regulations and New York Stock Exchange listing requirements. Components of Operating Results Revenue Our revenue is generated by selling imagery and software analytics services through our Spectra AI platform and by providing professional and engineering services to strategic customers on a project basis. • Imagery and Software Analytical Services Revenue ◦ Imagery: We offer our customers high-revisit, on-demand high resolution electro optical satellite imaging services. Through our Spectra AI platform, customers can directly task our proprietary satellite constellation to collect and deliver imagery over specific locations, sites, and regions that are critical to their operations. We offer customers several service level options that include basic plans for on-demand tasking or multi-year assured access programs, where customers can secure priority access and imaging capacity at a premium over a region of interest on a take or pay basis. ◦ Data, Software, and Analytics: Our analytics services are also offered on a subscription basis and provide customers with access to our site monitoring, event monitoring and global data services. We leverage our proprietary AI and ML algorithms to analyze data coming from both our proprietary sensor network and third-party space sources in real-time to provide data, insights, and analytics for our customers. We provide services related to object, change and anomaly detection, site monitoring, and enhanced analytics through which we can detect key pattern of life changes in critical locations. These critical locations can include strategic locations and infrastructure such as ports, airports, and construction sites; retail activity; commodities stockpiles; and other sites that contain critical commodities and supply chain inventory. We expect continued imagery and software analytical services revenue growth in the year ending December 31, 2023, as compared to the prior year, as a result of increases in our sales orders driven by stronger customer demand. • Professional and Engineering Services Revenue— We develop and deliver advanced launch vehicle, satellite and payload systems for specific strategic customers that desire to leverage our capabilities in mission systems engineering and operations, ground station operations, software, analytics and systems development. These systems are sold to government customers under fixed price contracts and are often bundled with our imagery services offerings. In certain cases, we retain rights to intellectual property for developed technology of certain systems, and this paid effort offsets some of our product development effort. We also provide technology enabled professional service solutions to support customer-specific feature request and to support the integration, testing, and training of our imagery and software analytical services into the customers organizational processes and workflows. We also provide software systems engineering development services to support the integration of high volume and mass quantities of data in their operating platforms. We expect continued meaningful contribution from our professional and engineering services revenue. Costs and Expenses Our costs and expenses are incurred from the following categories: • Imagery and software analytical services costs primarily include internal aerospace and geospatial software development labor, third-party data and imagery, internal labor to support the ground stations and space operations, and cloud computing and hosting services. Costs are expensed as incurred except for incremental costs to obtain a contract, primarily sales commissions, which are capitalized and amortized to selling, general, and administrative expenses on a systematic basis consistent with the transfer of goods and services. Expense related to stock-based payments is classified in the consolidated statements of operations and comprehensive loss based upon the classification of each employees’ cash compensation. We recognize 59 stock-based compensation expense for those employees whose work supports the imagery and software analytical service costs we provide to customers, under imagery and software analytical service costs, excluding depreciation and amortization. • Professional and engineering service costs primarily include the cost of internal labor for design and engineering in support of long-term development contracts for launch vehicle, satellite, and payload systems as well as subcontract direct materials and external labor costs to build and test specific components, such as the communications system, payload demands, and sensor integration. In addition, we also recognize internal labor costs and external subcontract labor costs for our customer-centric software service solutions. We recognize stock-based compensation expense for those employees who provide professional and engineering services support to customers, under professional and engineering service costs, excluding depreciation and amortization. Operating Expenses Our operating expenses are incurred from the following categories: • Selling, general, and administrative expense consists of salaries and benefit costs, development costs, professional fees, and other expenses which includes other personnel-related costs, stock-based compensation expenses for those employees who generally support our business and operations, and occupancy costs. Our development costs include internal labor costs to develop critical real-time software and geospatial analytic solutions and solution enhancements, including mapping, analysis, site target monitoring, and news feeds. • Research and development expense consists of employees’ salaries, taxes, and benefits costs incurred for data science modeling and algorithm development related to our Spectra AI platform, and for the strategic development efforts to support our long-term strategy. In addition, we employ and classify third-party vendors who fulfill our strategic projects as research and development expense. We intend to continue to invest appropriate resources in research and development efforts, as we believe that investment is critical to maintaining our competitive position. • Depreciation expense is related to property and equipment which mainly consists of operational satellites. Amortization expense is related to intangible assets which mainly consists of customer relationships. Results of Operations for the Years Ended December 31, 2022 and 2021 Effective January 1, 2022, the Company reorganized its captions on the consolidated statements of operations and comprehensive loss to better align the Company’s broad portfolio. As a result, for the year ended December 31, 2021, the amounts presented to reflect the impact of the reorganization have been recasted. This resulted in a $9.7 million reclassification between imagery & software analytical services revenue and professional & engineering services revenue and an $8.5 million reclassification between imagery & software analytical service costs, excluding depreciation and amortization and professional & engineering service costs, excluding depreciation and amortization in the Company's consolidated statements of operations and comprehensive loss. Period to period 60 comparisons are not necessarily indicative of future results. The following table provides the components of results of operations for the years ended December 31, 2022 and 2021: Years Ended December 31, $ % 2022 2021 Change Change (dollars in thousands) Revenue Imagery & software analytical services $ 47,415 $ 15,365 $ 32,050 208.6 % Professional & engineering services 17,935 18,720 (785) (4.2) % Total revenue 65,350 34,085 31,265 91.7 % Costs and expenses Imagery & software analytical service costs, excluding depreciation and amortization 14,462 13,013 1,449 11.1 % Professional & engineering service costs, excluding depreciation and amortization 21,365 21,735 (370) (1.7) % Selling, general and administrative 79,672 86,655 (6,983) (8.1) % Research and development 739 112 627 559.8 % Depreciation and amortization 35,661 14,306 21,355 149.3 % Satellite impairment loss — 18,407 (18,407) NM Operating loss (86,549) (120,143) 33,594 28.0 % Gain on debt extinguishment — 4,059 (4,059) NM Gain on derivatives 11,812 23,885 (12,073) (50.5) % Income on equity method investment 2,087 1,027 1,060 103.2 % Interest income 1,116 — 1,116 NM Interest expense (5,426) (5,165) (261) (5.1) % Other income (expense), net 2,081 (147,656) 149,737 101.4 % Loss before income taxes (74,879) (243,993) 169,114 69.3 % Income tax (expense) benefit — — — — % Loss from continuing operations (74,879) (243,993) 169,114 69.3 % Discontinued operations: Gain (loss) from discontinued operations, net of income taxes 707 (1,650) 2,357 142.8 % Income tax (expense) benefit — — — — % Gain (loss) from discontinued operations, net of income taxes 707 (1,650) 2,357 142.8 % Net loss $ (74,172) $ (245,643) $ 171,471 69.8 % • NM – Fluctuation in terms of percentage change is not meaningful. 61 Revenue Years Ended December 31, $ % 2022 2021 Change Change (dollars in thousands) Imagery & software analytical revenue $ 47,415 $ 15,365 $ 32,050 208.6 % % of total revenue 72.6 % 45.1 % Professional & engineering services revenue 17,935 18,720 (785) (4.2) % % of total revenue 27.4 % 54.9 % Total revenue $ 65,350 $ 34,085 $ 31,265 91.7 % Imagery and Software Analytical Services Revenue Imagery and software analytical services revenue significantly increased for the year ended December 31, 2022, as compared to the same period in 2021, driven by increased imagery and analytics orders from existing customers and several firm-fixed price subscription contracts with new domestic and international customers. In May 2022, we were awarded a subscription contract to deliver advanced high frequency imagery services with an initial contract value of $85.8 million, over a five-year base period, with future year options that, if exercised in full, would increase the contract value to over $1.0 billion and increase the contract term up to ten years. This contract is expected to have a material impact to future revenue. In addition, we were awarded a multi-million dollar contract to provide on-demand satellite imagery and analytics for an international government, which significantly contributed to the increased revenue in the year ended December 31, 2022 compared to the same period in 2021. In addition, analytics revenue also increased primarily from the fulfillment of recently awarded firm-fixed price delivery orders for economic activity monitoring. Expansion of our constellation after placing seven satellites into orbit in 2021 and the growing capabilities of our constellation also contributed to meeting increased customer demand for imagery and analytics orders. Professional and Engineering Services Revenue Professional and engineering services revenue decreased slightly for the year ended December 31, 2022, as compared to the same period in 2021, primarily due to fewer active contracts in 2022, partially offset by increases in the percentage completion of two engineering services contracts, driven by achievement of critical design milestones and delivery of major components of the contract requirements. Costs and Expenses Years Ended December 31, $ % 2022 2021 Change Change (dollars in thousands) Imagery & software analytical service costs, excluding depreciation and amortization $ 14,462 $ 13,013 $ 1,449 11.1 % Professional & engineering service costs, excluding depreciation and amortization 21,365 21,735 (370) (1.7) % Total costs $ 35,827 $ 34,748 $ 1,079 3.1 % 62 Imagery and Software Analytical Service Costs Imagery and software analytical service costs increased for the year ended December 31, 2022, as compared to the same period in 2021, primarily due to increased data sourced from different sensors such as synthetic aperture radar, third-party service costs such as increased hosting costs due to increased data volumes and maintaining the growth of our satellite and ground stations networks, and third-party subcontractor costs to meet specific needs of new customer programs partially offset by lower stock-based compensation expense. We recorded $0.6 million of stock-based compensation expense during the year ended December 31, 2022 as compared to $1.8 million for the year ended December 31, 2021 primarily related to vesting of restricted stock units (“RSUs”) triggered by the completion of the Merger. Professional and Engineering Service Costs Professional and engineering service costs decreased slightly for the year ended December 31, 2022 as compared to the same period in 2021, primarily due to fewer active contracts in 2022, partially offset by an increase of $1.3 million in the estimate to complete on two contracts in 2022 as compared to the prior year. The estimation of total estimated costs to complete on long-term projects are subject to many variables and requires judgment and we may have future changes in estimates, which may have an impact on professional and engineering service costs and associated revenues. Selling, General, and Administrative Years Ended December 31, $ % 2022 2021 Change Change (dollars in thousands) Stock-based compensation expense $ 18,131 $ 38,450 $ (20,319) (52.8) % Salaries and benefit costs 36,517 27,323 9,194 33.6 % Development costs 826 1,419 (593) (41.8) % Professional fees 5,082 6,061 (979) (16.2) % Information technology, recruiting, and other administrative expenses 6,290 5,823 467 8.0 % Selling and marketing 5,553 3,817 1,736 45.5 % Rent expense 2,821 1,958 863 44.1 % Insurance 4,452 1,804 2,648 146.8 % Selling, general and administrative $ 79,672 $ 86,655 $ (6,983) (8.1) % Selling, general, and administrative expenses decreased during the year ended December 31, 2022 as compared to the same period in 2021. Stock-based compensation expense decreased approximately $20.3 million related to the cumulative vesting of RSUs triggered by the successful execution of the Merger in the third quarter of 2021. Salaries and payroll-related benefits increased due to headcount growth in sales, software engineers, and administrative functions. In addition, our public company insurance costs increased during the year ended December 31, 2022 as a result of increased time as a public company caused by the Merger in the third quarter of 2021 and selling and marketing increased due to more advertising, commissions, and trade show expenses. The following is our forecast for total RSU expense as of December 31, 2022, which, in addition to the amounts recognized in selling, general, and administrative expenses, includes the portion that will be capitalized or classified in imagery and software analytical service costs and professional and engineering service costs: 63 (in thousands) For the years ending December 31, 2023 $ 9,043 2024 4,384 2025 3,352 2026 1,200 $ 17,979 Research and Development Years Ended December 31, $ % 2022 2021 Change Change (dollars in thousands) Research and development $ 739 $ 112 $ 627 559.8 % Research and development expense increased for the year ended December 31, 2022 as compared to the same period in 2021. The increase was driven by contracting third-party vendors who fulfill our strategic projects as research and development expense. Depreciation and Amortization Years Ended December 31, $ % 2022 2021 Change Change (dollars in thousands) Depreciation of satellites $ 33,053 $ 12,493 $ 20,560 164.6 % Depreciation of all other property and equipment 2,047 455 1,592 349.9 % Amortization 561 1,358 (797) (58.7) % Depreciation and amortization $ 35,661 $ 14,306 $ 21,355 149.3 % Depreciation expense from satellites increased for the year ended December 31, 2022 as compared to 2021. The increase was driven by six satellites placed in service in the last quarter of 2021 and two satellites placed in service in the first half of 2022. Depreciation expense from all other property and equipment increased for the year ended December 31, 2022 as compared to 2021, primarily driven by capitalization of software in 2022 and additional computer equipment that was placed into service. Amortization expense decreased for the year ended December 31, 2022 as compared to 2021 primarily as a result of in-process research and development from a prior acquisition being fully amortized in 2021. Satellite Impairment Loss We recorded a satellite impairment loss for the year ended December 31, 2021 resulting from the loss of two of our satellites, which occurred on May 15, 2021 when a rocket carrying those satellites suffered a failure during flight. This resulted in an impairment loss of $18.4 million, the full carrying value of the satellites, recorded to earnings during the year ended December 31, 2021. The $18.4 million loss included satellite procurement, launch, shipping, launch support, and other associated costs. There were no satellite impairment losses in the year ended December 31, 2022. 64 Non-Operating Expenses Years Ended December 31, $ % 2022 2021 Change Change (dollars in thousands) Gain on debt extinguishment $ — $ 4,059 $ (4,059) NM Gain on derivatives 11,812 23,885 (12,073) (50.5) % Income on equity method investment 2,087 1,027 1,060 103.2 % Interest income 1,116 — 1,116 NM Interest expense (5,426) (5,165) (261) (5.1) % Other income (expense), net 2,081 (147,656) 149,737 101.4 % • NM – Fluctuation in terms of percentage change is not meaningful. Gain on derivatives Fluctuations in our equity warrants and other equity instruments that we classify as derivative liabilities and measure at fair value are significantly driven by our common stock price; these instruments generated a gain during the year ended December 31, 2022. During the year ended December 31, 2021, we recorded a gain on derivative liabilities primarily due to the change in our common stock price following the Merger. Income on equity method investment The fluctuations in earnings from our equity method investment is directly related to the operating performance of our joint venture LeoStella. Interest income Interest income increased during the year ended December 31, 2022 as a result of our short-term investments purchased in 2022. Interest expense Interest expense was consistent year over year. Other income (expense), net For the year ended December 31, 2022, other income (expense), net primarily included $2.0 million of proceeds from an earnout payment from Spaceflight, Inc. For the year ended December 31, 2021, we incurred an initial loss of $99.7 million upon issuances of the Bridge Notes and Bridge Notes Rights Offering executed in the first half of 2021 as the fair value of these notes and the accompanying Legacy BlackSky common shares and Class A common stock warrants that were granted to certain investors was in excess of the proceeds received. We also incurred $47.7 million in debt issuance costs in 2021 related to the Bridge Notes and the modification of existing debt arrangements. We expensed the debt issuance costs because the Bridge Notes were carried in the consolidated balance sheets at fair value. Upon consummation of the Merger, the Bridge Notes and associated warrant liabilities were converted to equity and extinguished. We do not expect similar charges in future periods. 65 Gain (loss) from discontinued operations, net of income taxes Years Ended December 31, $ % 2022 2021 Change Change (dollars in thousands) Gain (loss) from discontinued operations, net of income taxes $ 707 $ (1,650) $ 2,357 142.8 % On June 12, 2020, we completed the sale of 100% of our interests in Spaceflight to M&Y Space for a final purchase price of $31.6 million. During the year ended December 31, 2021, we recorded a liability for a potential working capital adjustment primarily related to target accounts receivable amount in accordance with the sale. During the year ended December 31, 2022, the Company received an indemnification claim notice regarding certain collection and tax payments related to the Share Purchase Agreement among BlackSky Holdings, Inc., Spaceflight, Inc., and M&Y Space Co., Ltd. The parties agreed to the framework for a global settlement of such indemnification claims, to include a settlement payment by the Company of $1.0 million and a holdback amount of $0.1 million subject to M&Y Space Co.’s ability to collect against certain receivables. As a result, we reduced our existing contingent liability by $707 thousand. Non-GAAP Financial Measures In addition to our results determined in accordance with GAAP, management utilizes certain non-GAAP performance measures, Adjusted EBITDA, and free cash flow for purposes of evaluating our ongoing operations and for internal planning and forecasting purposes. Our management and board of directors believe that these non-GAAP operating measures, when reviewed collectively with our GAAP financial information, provide useful supplemental information to investors in assessing our operating performance. Adjusted EBITDA Adjusted EBITDA is defined as net income or loss attributable to us before interest income, interest expense, income tax expense or benefit, depreciation and amortization, as well as significant non-cash and/or non-recurring expenses as our management believes these items are not useful in evaluating our core operating performance. These items include, but are not limited to, realized loss on conversion of Bridge Notes, stock-based compensation expense, unrealized (gain) loss on certain warrants/shares classified as derivative liabilities, satellite impairment loss, proceeds from an earnout payment, gain on debt extinguishment, (gain) loss from discontinued operations, net of income taxes, severance, income on equity method investment, transaction-related legal settlements, and transaction costs associated with equity instruments accounted for as derivative liabilities. We have presented Adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, we believe that the exclusion of certain items in calculating Adjusted EBITDA can produce a useful measure for period-to-period comparisons of our business. Accordingly, we believe that Adjusted EBITDA provides useful information in understanding and evaluating our operating results. In addition, we believe that Adjusted EBITDA provides additional information for investors to use in evaluating our ongoing operating results and trends. This non-GAAP measure provides investors with incremental information for the evaluation of our performance after isolation of certain items deemed unrelated to our core business operations. Adjusted EBITDA is presented as a supplemental measure to our GAAP measures of performance. When evaluating Adjusted EBITDA, you should be aware that we may incur future expenses similar to those excluded when calculating this measure. In addition, our presentation of this measure should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Furthermore, our computation of Adjusted EBITDA may not be directly comparable to similarly titled measures computed by other companies, as the nature of the adjustments that other companies may include or exclude when calculating Adjusted EBITDA may differ from the adjustments reflected in our measure. Because of these limitations, Adjusted EBITDA should not be considered in isolation, nor should this measure be viewed as a substitute for the most directly comparable GAAP measure, which is net loss. We compensate for the limitations of non-GAAP measures by relying primarily on our 66 GAAP results. You should review the reconciliation of our net loss to Adjusted EBITDA below and not rely on any single financial measure to evaluate our performance. The table below reconciles our Net loss to Adjusted EBITDA for the years ended December 31, 2022 and 2021: Years Ended December 31, 2022 2021 (in thousands) Net loss $ (74,172) $ (245,643) Interest income (1,116) — Interest expense 5,426 5,165 Depreciation and amortization 35,661 14,306 Loss on issuance of Bridge Notes, including debt issuance costs expensed for debt carried at fair value — 147,387 Stock-based compensation expense 20,025 42,571 Gain on derivatives (11,812) (23,885) Satellite impairment loss — 18,407 Proceeds from earn-out payment (2,000) — (Gain) loss from discontinued operations, net of income taxes (707) 1,650 Severance 1,196 — Income on equity method investment (2,087) (1,027) Forgiveness of non-trade receivables 106 — Contingent legal liability — 399 Transaction costs associated with derivative liabilities — 291 Gain on debt extinguishment — (4,059) Adjusted EBITDA $ (29,480) $ (44,438) Free Cash Flow We define free cash flow as cash flows used in, or provided by, operating activities—continuing operations plus cash flows used in, or provided by, operating activities—discontinued operations less purchase of property and equipment and satellite procurement work in process. We have presented free cash flow because it is used by our management and board of directors as an indicator of the amount of cash we generate or use and to evaluate our ability to satisfy current and future obligations and to fund future business opportunities. Accordingly, we believe that free cash flow provides useful information to investors and others, enhancing the overall understanding of our ability to satisfy our financial obligations and pursue business opportunities, and allowing for greater transparency with respect to a key financial metric used by our management in their financial and operational decision-making. Free cash flow is not defined by GAAP and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of free cash flow rather than net cash from (used in) operating activities, which is the most directly comparable GAAP equivalent. Some of these limitations are: • free cash flow is not a measure of cash available for discretionary expenditures since we have certain non-discretionary obligations such as debt repayments or capital lease obligations that are not deducted from the measure; and • other companies, including companies in our industry, may calculate free cash flow differently, which reduces its usefulness as a comparative measure. 67 The table below reconciles our net cash used in operating activities to free cash flow for the years ended December 31, 2022 and 2021: Years Ended December 31, 2022 2021 (in thousands) Net cash used in operating activities $ (44,456) $ (53,872) Purchase of property and equipment (11,677) (1,266) Satellite procurement work in process (32,385) (62,643) Free cash flow $ (88,518) $ (117,781) Net cash used in investing activities $ (81,579) $ (63,614) Net cash (used in) provided by financing activities (5,053) 275,017 Liquidity and Capital Resources As of December 31, 2022, our existing sources of liquidity included cash and cash equivalents and short-term investments. Our cash and cash equivalents excluding restricted cash totaled $34.2 million and $165.6 million as of December 31, 2022 and December 31, 2021, respectively, and our short-term investments totaled $38.0 million and $0 as of December 31, 2022 and December 31, 2021, respectively. We have incurred losses and generated negative cash flows from operations since our inception in September 2014. As of December 31, 2022, we had an accumulated deficit of $545.1 million. Our short-term liquidity as of December 31, 2022 was comprised of the following: (in thousands) Cash and cash equivalents $ 34,181 Restricted cash (1) 2,835 Short-term investments (2) 37,982 $ 74,998 (1) We expect that $1.0 million of restricted cash will transfer to cash and cash equivalents by June 30, 2023. (2) Short-term investments are included in cash flows from investing activities in the consolidated statements of cash flows. We expect cash and cash equivalents and cash generated from operating activities to be sufficient to meet our working capital and capital expenditure needs for the foreseeable future. Our future long-term capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support solution development efforts, the expansion of sales and marketing activities, the ongoing investments in technology infrastructure, the introduction of new and enhanced solutions, and the continuing market acceptance of our solutions. On March 8, 2023, the Company completed the closing of a private placement where the Company issued 16,403,677 shares of the Company’s Class A common stock (the “Shares”) and warrants to purchase up to an additional 16,403,677 shares of Common Stock. The purchase price of each Share and associated warrant was $1.79. The aggregate gross proceeds to the Company from the private placement were approximately $29.5 million, before deducting the placement agent fees and other offering expenses payable by the Company. The Company intends to use the net proceeds from the private placement for general corporate purposes, including working capital. On March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. On March 13, 2023, the FDIC announced that it had transferred all insured and uninsured deposits and substantially all assets of SVB to a newly created, full-service FDIC-operated “bridge bank” called Silicon Valley Bank, N.A., where 68 depositors would have full access to their money beginning immediately. We believe that the impact to our operations, vendors and customers is immaterial to our liquidity. From time to time, we may seek additional equity or debt financing to fund capital expenditures, strategic initiatives or investments and our ongoing operations. We do not have a line of credit or access to immediate funds and we are not subject to any financial or minimum cash metrics. If we decide, or are required, to seek additional financing from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations could be adversely affected. Funding Requirements While our expenses may continue to exceed our revenues in the near term due to investments we are making in sales, marketing and products to increase our market share, we expect this difference to decline as we progress to becoming operating cash flow positive. We expect to continue to incur capital expenditures as we procure and launch satellites to increase image collection capacity, as well as investing in our Gen-3 satellites and our Spectra AI platform to significantly expand our product capabilities in the future. Short-term liquidity requirements As of December 31, 2022, our current assets were approximately $88.5 million, consisting primarily of cash and cash equivalents, restricted cash, short-term investments, trade receivables, prepaid expenses and other current assets, and contract assets. As of December 31, 2022, our current liabilities were approximately $26.9 million, consisting primarily of accounts payable and accrued liabilities, contract liabilities, and other non-recurring current liabilities. Accordingly, we have sufficient cash and working capital to fund our short-term liquidity requirements. Long-Term Liquidity Requirements We anticipate that our most significant long-term liquidity and capital needs will relate to continued funding of operations, satellite development capital expenditures, launch capital expenditures, and ongoing investments in our Spectra AI platform and internal infrastructure that will enable us to scale the business efficiently and securely. We can manage the timing for a large part of our capital expenditures, including the design, build, and launch of our new satellites currently under development, to provide us with additional flexibility to optimize our long-term liquidity requirements. Macroeconomic conditions and credit markets could also impact the availability and, or, the cost of potential future debt or equity financing. Cash Flow Analysis The following table provides a summary of cash flow data for the years ended December 31, 2022 and 2021: Years Ended December 31, $ 2022 2021 Change (in thousands) Net cash used in operating activities $ (44,456) $ (53,872) $ 9,416 Net cash used in investing activities (1) (81,579) (63,614) (17,965) Net cash (used in) provided by financing activities (5,053) 275,017 (280,070) Net (decrease) increase in cash, cash equivalents, and restricted cash (131,088) 157,531 (288,619) Cash, cash equivalents, and restricted cash – beginning of year 168,104 10,573 157,531 Cash, cash equivalents, and restricted cash – end of period (2) $ 37,016 $ 168,104 $ (131,088) (1) Includes purchase of $50.3 million of short-term investments not categorized as cash (2) $38.0 million of short-term investments are not classified as cash, cash equivalents, or restricted cash. Our short-term liquidity at December 31, 2022 was $75.0 million 69 Operating activities For the year ended December 31, 2022, net cash used in operating activities was approximately $44.5 million. The contributor to the decrease in cash used during the year ended December 31, 2022 was the decrease in the operating loss, adjusted for depreciation, amortization, stock-based compensation expense, and other non-cash items in the year ended December 31, 2022 as compared to the year ended December 31, 2021. The operating loss decrease in the year ended December 31, 2022 was primarily due to increased imagery and analytics revenue. This was partially offset by an increase in our unbilled contract assets. Investing activities We continue to have significant cash outflows for satellite procurement and launch related services. C ash paid for the procurement of satellites and other launch-related costs decreased in the year ended December 31, 2022 as compared to 2021. Satellite capital expenditures decreased year o ver year by optimizing cash spend to meet our short and long-term operational needs. In addition, we purchased $50.3 million of short-term investments in corporate debt and governmental securities, which was partially offset by $13.0 million of proceeds from the investments. We also continue to incur labor costs for internally developed capitalized software as we add innovative new services and tools to our Spectra AI platform. Financing activities The most significant impact in the change in cash flows from financing activities in the year ended December 31, 2022 as compared to the year ended December 31, 2021 was related to the $244.9 million proceeds from the Merger, or recapitalization transaction, net of equity issuance costs, and the $58.6 million loan proceeds from the Bridge Notes, both of which occurred in the prior year. 70 Contractual Obligations and Commitments As of December 31, 2022, we have a debt facility from related parties with an outstanding principal amount of $77.1 million and $1.2 million of accrued interest, which matures in October 2024. Please see Note 22 for further information on this facility. We have operational commitments for the next several years related to office leases and remote ground station service arrangements of $6.3 million and $1.5 million, respectively. Please see Note 24 for further information. We have commitments for launch and integration services with a launch services provider. As of December 31, 2022, we have a commitment for one launch to include up to two satellites totaling an amount of $1.7 million with options for additional launches. The terms of the arrangement also allow for us to re-manifest the satellites if there are delays in excess of 365 days or other inexcusable delays occur with the provider. If re-manifest efforts fail, we can request a refund of all recoverable costs after 487 days from original launch date. The launch service provider invoices are based on time-based milestone payments from estimated launch dates. Payment terms are 15 days from invoice date. In addition, we entered into various other operational commitments for the next several years totaling $9.8 million as of December 31, 2022. Critical Accounting Policies and Estimates The preparation of our consolidated financial statements and related notes requires management to make judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Management has based its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a description of our significant accounting policies see Note 2—“Basis of Presentation and Summary of Significant Accounting Policies,” of the notes to the consolidated financial statements. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. Management believes the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our consolidated financial statements. Revenue Recognition The recognition and measurement of revenue requires the use of judgments and estimates. Specifically, judgment is used in interpreting complex arrangements with nonstandard terms and conditions and determining when all criteria for revenue recognition have been met. We primarily generate revenue from the sale of imagery, data, software, and analytics, as well as, professional and engineering services. Identifying the performance obligations contained in a contract, determining transaction price, allocating transaction price, and determining when performance obligations are satisfied can require the application of significant judgment, as further discussed below. Identifying the performance obligations in a contract We execute contracts for a single promise or multiple promises. Specifically, our firm fixed price contracts typically include multiple promises which are accounted for as separate performance obligations. Significant judgment is required in determining performance obligations, and these decisions could change the amount of revenue and profit or loss recorded in each period. Classification of Revenue We classify revenue as imagery and software analytical services, and professional and engineering services in our consolidated statements of operations and comprehensive loss based on the predominant attributes of the performance obligations. 71 Determination of and Allocation of Transaction Price Each customer purchase order sets forth the transaction price for the products and services purchased under the arrangement. The Company estimates any variable consideration, and whether the transaction price is constrained, upon execution of each contract. We may adjust the transaction price over time for any estimated constraints that become probable based on service level provisions within some of our customer purchase orders. For contracts with multiple performance obligations, we evaluate whether the stated selling prices for the products or services represent their standalone selling prices. When it is necessary to allocate the transaction price to multiple performance obligations, management typically uses the expected cost plus a reasonable profit margin to estimate the standalone selling price of each product or service. We also sell standard products or services with observable standalone revenue transactions. In these situations, the observable standalone revenue transactions are used to determine the standalone selling price. Determination of when Performance Obligations are Satisfied Imagery revenue is recognized ratably over the subscription period or at the point in time the customer receives access to the imagery. Software analytical services revenue derived from data, software, and analytics is recognized from the rendering of analytical and monitoring services over time on a firm-fixed price, or at the point in time the customer receives access to an analytic product. Professional and engineering services revenue is generated from both time and materials basis contracts and firm-fixed price service solutions contracts and firm-fixed price long-term engineering and construction contracts. Due to the long-term nature of our engineering and construction contracts, we generally recognize revenue over time using a cost-to-cost measure of progress because it best depicts the transfer of control to the customer as we incur costs on the contracts. Under the percentage-of-completion cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs to complete the performance obligation(s). The estimation of total estimated costs at completion is subject to many variables and requires judgment. We recognize changes in contract estimates on a cumulative catch-up basis in the period in which the changes are identified. Such changes in contract estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in a prior period. If at any time, the estimate of contract profitability indicates a probable anticipated loss on the contract, we recognize the total loss as and when known. Equity Valuations As there was not a market for Legacy BlackSky equity, valuations of Legacy BlackSky equity instruments require the application of significant estimates, assumptions, and judgments. These valuations impact various amounts and accounting conclusions reflected in our consolidated financial statements, inclusive of the recognition of equity-based compensation, debt discounts when debt issuances were accompanied by the issuance of equity (e.g., warrants), and the evaluation of whether beneficial conversion features existed within our convertible financial instruments. The following discussion provides additional details regarding the significant estimates, assumptions, and judgments that impacted the determination of the fair values of equity-based compensation awards, warrants, and the preferred stock and common stock that comprised our capital structure prior to the Merger. The following discussion also explains why these estimates, assumptions, and judgments could be subject to uncertainties and future variability. Equity-Based Compensation Legacy BlackSky issued equity and equity-based awards under our 2021 Equity Incentive Plan (“2021 Plan”), 2014 stock incentive plan, and 2011 stock incentive plan. Awards issued include stock options, restricted stock awards (“RSAs”), and RSUs. Awards under these Plans were approved by the board of directors, and awards that have been canceled, forfeited, or expired are available for issuance in connection with our 2021 Plan. For purposes of recognizing equity-based compensation related to RSAs, RSUs, and stock options granted to employees, management estimates the grant date fair values of such awards to measure the costs to be recognized for services received. For awards with time-based vesting conditions, we recognize compensation costs based upon the straight-line amortization of the grant date fair value of the awards over the requisite service period. When equity-based compensation awards include a performance condition, no compensation is recognized until the 72 performance condition is deemed probable to occur; we then recognize compensation costs based on the accelerated attribution method, which accounts for awards with discrete vesting dates as if they were a separate award. Stock Option and Class A Common Stock Warrant Valuations We use the Black-Scholes option-pricing model to value all options and Class A common stock warrants. Estimating the fair value of stock options using the Black-Scholes option-pricing model requires the application of significant assumptions, such as the fair value of our Class A common stock, the estimated term of the options, risk-free interest rates, the expected volatility of the price of our Class A common stock, and an expected dividend yield. Each of these assumptions is subjective, requires significant judgement, and is based upon management’s best estimates. If any of these assumptions were to change significantly in the future, equity-based compensation related to future awards may differ significantly, as compared with awards previously granted. We have largely moved towards granting RSAs and RSUs to the bulk of our employees, for which the grant date fair value is equal to the trading price fair value of the Class A common stock on the date of grant. For stock options, which are primarily granted to certain management employees, we use the following inputs under Black-Scholes as follows: Expected Dividend Yield—The Black-Scholes valuation model requires an expected dividend yield as an input. The dividend yield is based on historical experience and expected future changes. We currently have no plans to pay dividends on our Class A common stock and, accordingly, have assumed no dividend yield upon valuation of our stock options. Expected Volatility—As there was no observable volatility with respect to our Legacy BlackSky Class A common stock and due to the lack of sufficient history of BlackSky Class A common stock, the expected volatility of our Legacy BlackSky and BlackSky Class A common stock was estimated based upon the historical share price volatility of guideline comparable companies. Risk-free Interest Rate—The yield on actively traded, non-inflation indexed U.S. Treasury notes was used to extrapolate an average risk-free interest rate based on the expected term of the underlying grants. Expected Term—For options granted in 2021 and 2022, since there is not a history of option exercises as a public company, we considered the option vesting terms and contractual period, as well as the demographics of the holders, in estimating the expected term. For options granted prior to 2021, the expected term was the estimated duration to a liquidation event based on a weighted average consideration of the most likely exit prospects for that stage of development. Legacy BlackSky was privately funded and, accordingly, the lack of marketability was factored into the expected term of options granted. We will continue to review our estimate in the future and adjust it, if necessary, due to changes in our historical exercises. Private Placement Warrants and Sponsor Shares We have classified the Private Placement Warrants and Sponsor Shares as long-term liabilities in our consolidated balance sheets as of December 31, 2022 and December 31, 2021. Each liability was initially recorded at fair value on the date of the Merger. The Private Placement Warrants were recorded at fair value using a Black-Scholes option pricing model and the Sponsor Shares were recorded at fair value using a Monte Carlo simulation model. These liabilities are re-measured to fair value at each subsequent reporting date and recorded to gain on derivatives on our consolidated statements of operations and comprehensive loss. We will continue to adjust the liability for changes in fair value until the financial instruments are exercised, redeemed, cancelled or released. The fair value models require inputs including, but not limited to, the fair value of our Class A common stock, the risk-free interest rate, expected term, expected dividend yield and expected volatility. The fair value of our Class A common stock is the closing stock price on the NYSE as of the measurement date. The risk-free interest rate assumption is determined by using U.S. Treasury rates for the same period as the expected terms of the financial instruments. The dividend yield assumption is based on the dividends expected to be paid over the expected life of the financial instruments. We have historically been a private company and lacked sufficient company-specific historical and implied volatility information. Therefore, the expected stock volatility includes both BlackSky’s Class A common stock and public warrant historical volatility as well as the historical volatility of a publicly traded set of 73 peer companies. Changes in these assumptions can materially affect the estimate of the fair value of these instruments and ultimately the change in fair value. Goodwill Impairment We assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. Goodwill is tested annually for impairment as of October 1 st , or more frequently if events or circumstances indicate the carrying value may be impaired. A significant amount of judgement is involved in determining if an indicator of impairment has occurred. Such indicators may include (a) a significant decline in our common stock value; (b) a significant decline in our expected future cash flows; (c) a significant adverse change in legal factors or the business climate; (d) unanticipated competition; or (e) slower growth rates. We identify potential impairment by comparing the fair value of each of our reporting units with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. We performed an annual qualitative goodwill assessment over the balance of goodwill we held related to the BlackSky reporting unit as of October 1, 2022. We also determined that no triggering events occurred during the year ended December 31, 2022 that would require a quantitative assessment. We determined that it is more likely than not that the fair value of the BlackSky reporting unit sufficiently exceeds its carrying value, including goodwill. Although we have a history of recurring losses from operations, negative cash flows from operations, and a significant accumulated deficit, as of the October 1, 2022 analysis, the fair value was greater than 34% in excess of the carrying value for BlackSky. As of December 31, 2022, we believe that the estimated fair values of the BlackSky reporting unit is still in excess of its respective carrying value and therefore is not at-risk of being impaired. Long Lived Asset Impairment We evaluate long-lived assets, including finite-lived intangible assets, property and equipment, satellite procurement work in process and other long-term assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be fully recoverable. Significant judgments in this area involve determining whether a triggering event has occurred and determining the future cash flows for assets involved. In conducting this analysis, we compare the undiscounted cash flows expected to be generated from the long-lived assets (or asset group) to the related net book values. If the undiscounted cash flows exceed the net book value, the long-lived assets are considered not to be impaired. If the net book value exceeds the undiscounted cash flows, an impairment charge is measured and recognized based upon the difference between the carrying value of long-lived assets (or asset group) and their fair value. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is set forth beginning on page F-1 on this Annual Report on Form 10-K. 74 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.