BigBear.ai Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results; dollar amounts below are in millions unless noted. BigBear.ai provides AI-powered decision-intelligence software and services across supply-chain and logistics, autonomous-systems, and cybersecurity markets. It reported one operating segment beginning in Q1 2023.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $38.5 | $37.6 | $80.6 | $74.0 |
| Gross profit / margin | $9.0 / 23.3% | $9.6 / 25.5% | $19.2 / 23.8% | $19.5 / 26.3% |
| Operating loss | $(10.2) | $(55.3) | $(22.2) | $(71.8) |
| Net loss | $(16.9) | $(56.8) | $(43.1) | $(75.7) |
| Adjusted EBITDA, non-GAAP | $(3.2) | $(7.7) | $(7.0) | $(10.6) |
Q2 diluted loss per share was $0.12, compared with $0.45 a year earlier; six-month loss per share was $0.30 versus $0.59. The substantially lower prior-year results included a $35.3 million non-cash goodwill impairment. Q2 derivative remeasurement expense was $3.1 million; the six-month expense was $13.7 million.
- Cash flow: Six-month operating cash use was $24.8 million, versus $32.0 million in 2022; free cash flow was negative $24.8 million versus negative $32.5 million. Working-capital movements weighed on operating cash flow.
- Cash and liquidity: Cash was $29.9 million at June 30, up from $12.6 million at year-end, largely reflecting equity financing. Current assets were $71.6 million and current liabilities $71.8 million, a small working-capital deficit. The $25 million Bank of America revolver was undrawn and unavailable because the company did not meet its Adjusted EBITDA availability condition.
- Debt and equity: Gross debt was $200.5 million, including $200 million of 6% convertible notes due December 2026; net debt carrying value was $193.8 million. The D&O financing loan balance was $0.5 million and matures in December 2023. Stockholders’ deficit was $61.6 million. Current derivative liabilities were $44.1 million, principally related to new warrants.
Changes and business indicators
- Revenue increased 2.2% in Q2 and 8.9% for the first half. Management attributed growth mainly to new awards and higher Army-contract volumes; first-half growth also included IT procurement work. Lower Air Force contract activity and Virgin Orbit-related reductions partially offset growth.
- Gross margin weakened: cost of revenue rose faster than revenue, reflecting lower Virgin Orbit margins and, for the first half, increased lower-margin IT procurement work.
- SG&A declined 37.2% in Q2 and 23.9% for the first half, primarily from restructuring and the absence of prior-year integration, advisory, and commercial-start-up costs. Offsets included strategic-initiative professional fees and a Virgin Orbit bad-debt reserve ($0.7 million Q2; $1.4 million first half). R&D also declined.
- Backlog was $205.6 million, down from $218.5 million at year-end 2022. Funded backlog rose to $61.1 million from $57.2 million; total backlog includes unfunded awards and estimated options, which carry greater uncertainty. Separately, remaining performance obligations were $77 million, with approximately 99% expected to be recognized within 12 months.
- Revenue was concentrated: four customers represented 60% of Q2 revenue and 59% of first-half revenue. Customer A contributed 19% and 20%, respectively.
Outlook, risks, and notable items
- No specific revenue or earnings guidance is provided in the filing. Management said projected operating cash generation should cover expected needs for the next 12 months, including payroll, working capital, leases, capital expenditures, and debt service, and said it did not expect to need the revolver in the foreseeable future. Management also considered it reasonably likely the company could continue to miss the revolver’s Adjusted EBITDA availability test.
- Management said the Ukraine conflict had slowed government contract pipeline activity and pushed awards into later periods. It expects geopolitical conditions could support long-term demand, but noted that worsening disruption could harm results.
- Virgin Orbit’s bankruptcy reduced contract volume and led to a bad-debt reserve. Contract estimates at completion can materially affect profit; Q2 net adjustments reduced pretax results by $1.6 million, while first-half net adjustments increased pretax results by $0.4 million.
- Warrant fair values are Level 3 estimates and drove substantial non-cash earnings volatility. The January private placement and June registered direct offering raised approximately $50 million gross combined, but added warrants and common shares; the June offering included warrants for up to 8.9 million shares, and the January placement warrants covered up to 13.9 million shares.
- The filing reports material weaknesses in internal control over financial reporting and ongoing remediation efforts, including work on segregation of duties, revenue-recognition documentation, IT controls, and monitoring. Management said the weaknesses would not be remediated until controls operated effectively for a sufficient period and were tested.
- Management stated ordinary-course litigation, claims, investigations, and government contract audits were not expected to have a material financial impact. No material risk-factor changes from the 2022 Form 10-K were reported.
Important facts for investors to verify
- Whether cash generation improves enough to fund operations and debt service, given continued operating cash use and the revolver’s unavailability.
- Progress toward the revolver’s Adjusted EBITDA borrowing condition and the company’s ability to meet the $200 million convertible-note obligations.
- Revenue conversion and timing within funded backlog and remaining performance obligations, and the renewal or funding of government contracts.
- Customer concentration, Virgin Orbit receivable recoverability, and any further effects on revenue or margins.
- Potential dilution from shares, RSUs, options, convertible notes, and outstanding warrants; common shares outstanding were 155.5 million at June 30 and 155.8 million on August 4, 2023.
- Remediation and independent testing of the reported internal-control material weaknesses, and the assumptions supporting derivative valuations and contract cost estimates.