BigBear.ai Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Dollar amounts below are in millions unless otherwise noted. BigBear.ai provides AI-enabled decision-intelligence software and services across supply chains and logistics, autonomous systems, and cybersecurity; much of its revenue comes from government contracts.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $34.0 | $40.7 | $114.6 | $114.7 |
| Gross profit / margin | $8.4 / 24.7% | $11.8 / 28.9% | $27.6 / 24.1% | $31.2 / 27.2% |
| Operating loss | $(8.2) | $(12.4) | $(30.5) | $(84.2) |
| Net income (loss) | $4.0 | $(16.1) | $(39.1) | $(91.8) |
| Adjusted EBITDA (non-GAAP) | $0.2 | $(3.9) | $(6.9) | $(14.6) |
| Net cash used in operating activities | Not separately provided for Q3 | $(18.2) | $(38.4) |
- Q3 revenue fell 16.4% year over year. Management attributed the decline primarily to the wind-down of certain Air Force programs, slower ramp-up of new awards amid geopolitical conditions, and no Virgin Orbit revenue following its bankruptcy.
- For the first nine months, revenue was essentially flat. Lower Air Force and Virgin Orbit revenue was largely offset by higher volume on certain Army programs.
- Gross margin contracted as cost of revenue rose to 75% of Q3 revenue from 71%; for nine months it rose to 76% from 73%. SG&A declined year over year, reflecting restructuring and fewer prior-year integration and other costs.
- Q3 GAAP net income included a $15.7 million favorable change in the fair value of derivative liabilities, principally warrants. The reported profit therefore does not reflect positive operating income: the company recorded an $8.2 million operating loss. Nine-month net loss improved substantially from 2022, which included a $35.3 million goodwill impairment.
- Nine-month operating cash use improved to $18.2 million from $38.4 million. Investing cash use was $2.7 million, mainly capitalized software development costs. Financing provided $40.5 million, principally from equity offerings.
Financial position and liquidity
- At September 30, 2023, cash and cash equivalents were $32.2 million, versus $12.6 million at year-end 2022. Current assets were $65.8 million and current liabilities $57.0 million; working capital was approximately $8.8 million.
- Total debt was $200.0 million principal, reported net of issuance costs at $193.8 million. The unsecured convertible notes bear 6% interest and mature December 2026. The company reported compliance with their covenants.
- The $25 million Bank of America revolver was undrawn and unavailable to borrow at quarter-end because the company did not meet its Adjusted EBITDA availability requirement. Management said it expects operating cash to cover anticipated needs for the next 12 months and considers a revolver draw unlikely; it also noted access may remain unavailable if requirements are not met.
- Total liabilities were $255.3 million against assets of $203.0 million, resulting in a stockholders’ deficit of $52.3 million. Current derivative liabilities were $28.5 million, largely from PIPE and registered-direct-offering warrants.
- Backlog was $170.2 million at September 30, down from $218.5 million at December 31, 2022. Funded backlog declined to $32.9 million from $57.2 million. Remaining performance obligations were $57 million; the company expects approximately 100% to be recognized as revenue within the next 12 months.
Material developments, outlook and risks
- Equity financing and dilution: January’s private placement and June’s registered direct offering generated $50 million in gross proceeds combined. They issued common shares and warrants; additional warrant exercises, equity awards, and conversion of notes could dilute existing holders. Common shares outstanding increased to 156.1 million from 127.0 million at year-end 2022.
- Pangiam transaction: On November 4, 2023, after quarter-end, the company agreed to acquire Pangiam for $70 million in common stock, subject to customary adjustments. The deal requires shareholder and regulatory approvals and is expected by the company to close in Q1 2024. AE Industrial Partners and affiliates beneficially own a majority of both the company and the seller, creating a related-party consideration for investors.
- Government funding and contract timing: A continuing resolution funded the U.S. government at FY 2023 levels through November 17, 2023, or until appropriations were enacted. Management warned that continuing resolutions can delay new awards and that changing federal priorities may affect contracts. Management said key contracts were expected to remain funded.
- Management said geopolitical tensions have slowed the pipeline and pace of awards, potentially shifting revenue into later periods, while expressing a view that demand for advanced AI capabilities may benefit the business over the long term. The filing cautions that worsening conflicts or broader disruption could adversely affect results.
- Customer concentration is significant: Customer A generated 24% of Q3 revenue and Customer D 26%; together they accounted for half of Q3 revenue. Customer D contributed no revenue in the comparable 2022 quarter.
- The filing reports continuing material weaknesses in internal control over financial reporting and ongoing remediation efforts, including stronger segregation of duties, revenue-recognition documentation, IT controls, and monitoring. It states the weaknesses are not remediated until controls operate effectively for a sufficient period and are tested. The disclosure-controls discussion refers to an evaluation “as of March 31, 2022,” an apparent date inconsistency in a September 2023 filing.
- Management reported no material expected effect from ordinary-course litigation, claims, investigations, or audits. Government contract costs may be subject to audit and adjustment. The filing states there were no material changes to the risk factors in the 2022 Form 10-K.
Investor verification points
- Assess whether reported Q3 profitability is sustainable apart from the substantial noncash warrant fair-value gain; review operating losses and Adjusted EBITDA alongside GAAP results.
- Track funded backlog, contract awards, and the timing and funding of government programs, including the effects of the continuing resolution and customer concentration.
- Confirm cash-burn trends, 12-month liquidity assumptions, and whether the revolver becomes available; consider the $200 million notes’ interest and 2026 maturity.
- Review the Pangiam deal’s approvals, final purchase-price adjustments, share issuance and dilution, and related-party governance.
- Monitor warrant and equity-award dilution, derivative-liability remeasurement, and progress remediating internal-control weaknesses; clarify the evaluation date inconsistency in the controls disclosure.