Business Context and Reporting Period
BigBear.ai Holdings, Inc. (formerly GigCapital4, Inc.) filed this Form 8-K on December 13, 2021, reporting events occurring primarily on December 7, 2021. The company completed its business combination with BigBear.ai Holdings, LLC, changed its name to BigBear.ai Holdings, Inc., ceased being a shell company, and began trading on the NYSE under BBAI and BBAI.WS on December 8, 2021.
BigBear.ai provides artificial intelligence, machine learning, data analytics, cybersecurity, cloud engineering, systems engineering, and technical consulting solutions, primarily to government and defense customers, with an emerging commercial-market strategy. Historical financial information covers the three and nine months ended September 30, 2021. Comparisons are affected by the acquisitions of NuWave, PCI, Open Solutions, and ProModel and by successor/predecessor accounting periods.
Financial Metrics and Capitalization
| Metric | Three months ended September 30, 2021 | Nine months ended September 30, 2021 |
|---|---|---|
| Revenue | $40.2 million | $112.1 million |
| Gross margin | $10.8 million; approximately 26.8% of revenue | $30.2 million; approximately 27.0% of revenue |
| Operating income (loss) | $(2.6) million | $(6.5) million |
| Net income (loss) | $(3.1) million | $(8.8) million |
| Adjusted EBITDA | $3.9 million | $7.2 million |
| Net cash provided by operating activities | $1.2 million for the nine-month period | |
| Free cash flow | $0.6 million for the nine-month period |
Revenue increased from $35.6 million on a 2020 pro forma basis to $40.2 million in the third quarter and from $104.5 million on a 2020 pro forma basis to $112.1 million for the nine-month period. The filing attributes growth primarily to new contract awards and increased volume on existing contracts. Cost of revenue was $29.4 million in the third quarter and $81.9 million for the nine-month period. Selling, general and administrative expense was $12.0 million and $32.6 million, respectively, while research and development expense was $1.4 million and $4.2 million.
Adjusted EBITDA is a non-GAAP measure. Third-quarter adjustments included capital-market advisory fees, termination of legacy benefits, integration costs, commercial start-up costs, management fees, and equity-based compensation. Nine-month net loss also reflected $5.6 million of interest expense and a $3.3 million income-tax benefit.
As of September 30, 2021, cash and cash equivalents were $10.8 million and available borrowings were $13.5 million, for stated available liquidity of $24.3 million. Existing debt consisted of a $109.2 million term loan and $1.5 million drawn under a revolver, net debt of $108.0 million after issuance costs and discounts.
At closing, the company issued $200.0 million of unsecured convertible notes due December 15, 2026, bearing 6.0% annual interest payable semiannually. The initial conversion price was $11.50 per share, subject to a reset after 180 days if specified volume-weighted-average-price conditions are met; the conversion price could be as low as approximately $9.78. The notes were initially convertible into approximately 17.4 million shares, while the filing separately reports up to approximately 23.1 million shares reserved for conversion, including interest-related shares.
The company also entered into a new $50.0 million senior secured revolving credit facility with Bank of America, maturing in four years. Initial pricing was 2.00% over the BSBY rate or 1.00% over the base rate, with a 0.25% unused commitment fee. The facility is secured by substantially all assets and certain subsidiary equity and includes secured net leverage and fixed-charge coverage covenants beginning with the quarter ending March 31, 2022.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue rose approximately 13% versus the 2020 pro forma comparison, while nine-month revenue rose approximately 7%.
- Cyber & Engineering revenue increased to $19.2 million in the third quarter and $58.0 million for the nine-month period, driven by contract volume and awards, partly offset by completed contracts.
- Analytics revenue increased to $21.0 million in the third quarter and $54.1 million for the nine-month period, reflecting the inclusion of acquired businesses and new awards.
- Gross-margin percentages were pressured by higher subcontractor costs: Cyber & Engineering cost of revenue was 81% of segment revenue in the third quarter and 80% for the nine-month period.
- SG&A increased materially as the company expanded personnel, information-technology infrastructure, recruiting, public-company compliance, and commercial-market capabilities. Nine-month SG&A included $3.956 million of capital-market advisory fees, $1.482 million for legacy-benefit termination, $1.245 million of integration costs, and $0.773 million of commercial start-up costs.
- Interest expense increased to $5.6 million for the nine-month period, primarily due to the Antares Capital credit facility.
- Backlog increased from $408.6 million at December 31, 2020 to $485.5 million at September 30, 2021, including $103.6 million funded backlog.
- Operating cash flow increased from $0.2 million in the 2020 successor period to $1.2 million in the 2021 nine-month period, but remained dependent on favorable working-capital movements.
Business Combination, Financing, Outlook, and Risks
The transaction generated approximately $110.0 million from the SPAC trust account, $200.0 million from convertible-note financing, and $80.0 million from an AE-affiliated PIPE investment. Approximately $248.8 million of public-share redemptions occurred at $10.00073 per share. Transaction proceeds were used in part to repay $114.4 million of the Antares loan and pay approximately $19.8 million of transaction costs.
Management stated that operating cash flow and available credit were expected to be adequate for anticipated working capital, capital expenditures, lease obligations, and debt service for the next 12 months. The company did not provide formal revenue or earnings guidance in this filing. Management described commercial expansion, new government awards, research and development, and the Palantir partnership as growth initiatives.
Material risks include limited operating history as a combined public company; uncertain demand and market adoption of AI and analytics solutions; dependence on government contracts, appropriations, and regulatory compliance; contract execution and subcontractor costs; COVID-19 and federal vaccination requirements; reliance on third-party technology providers; competition; public-company costs; goodwill and intangible-asset impairment; revenue-estimation judgments on long-term contracts; substantial leverage and restrictive debt covenants; potential dilution from convertible notes, warrants, equity plans, and other issuances; and concentrated ownership. AE Industrial Partners and affiliated entities held approximately 83.5% of outstanding shares based on the ownership table.
The filing states that no cash dividends have been paid and that the company does not expect to pay dividends in the foreseeable future. The convertible-note indenture and credit agreement also restrict dividends and other distributions subject to financial conditions.
Investor Verification Items
- Reconcile post-closing cash, total debt, revolver availability, and the use of trust, PIPE, and note proceeds.
- Review the definitive convertible-note terms, including the conversion-rate reset, interest make-whole provisions, potential dilution, and 2026 maturity.
- Monitor compliance with the senior revolver’s 3.00x secured net leverage covenant and fixed-charge coverage covenant.
- Separate funded backlog from unfunded backlog, unexercised options, and anticipated follow-on awards, which involve different levels of certainty.
- Assess whether higher subcontractor costs and public-company expenses affect gross margins, operating leverage, and cash generation.
- Evaluate the sustainability of Adjusted EBITDA and free cash flow after excluding non-recurring adjustments.
- Confirm the final share count and dilution from convertible notes, warrants, equity plans, advisor payments, and other securities.
- Review the incorporated proxy-statement risk factors, audited financial statements, pro forma statements, and the change in independent auditor from BPM LLP to Grant Thornton LLP.