Business context and reporting period
BigBear.ai Holdings, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company provides AI, machine-learning and analytics solutions, primarily to U.S. government customers, through its Cyber & Engineering and Analytics segments. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise stated.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $37.6m | $36.3m | $74.0m | $71.9m |
| Gross profit | $9.6m | $9.2m | $19.5m | $19.4m |
| Gross margin | 25.5% | 25.2% | 26.3% | 27.0% |
| Operating loss | $(55.3)m | $(3.1)m | $(71.8)m | $(3.9)m |
| Net loss | $(56.8)m | $(3.2)m | $(75.7)m | $(5.6)m |
| Adjusted EBITDA (non-GAAP) | $(7.7)m | $0.5m | $(10.6)m | $3.3m |
Q2 basic and diluted loss per share was $0.45, versus $0.03 a year earlier; six-month loss per share was $0.59, versus $0.05. The Q2 operating loss included a $35.3m non-cash goodwill impairment charge. SG&A was $27.0m in Q2, up 159% year over year, and $49.0m for the first half, up 139%.
For the six months, operating cash flow was $(32.0)m, capital expenditures were $0.5m, and free cash flow (company-defined, non-GAAP) was $(32.5)m. Cash and cash equivalents were $29.8m at June 30, down from $68.9m at year-end; restricted cash was zero, versus $101.0m at year-end. Available liquidity was $29.8m, with no available revolver borrowings.
Debt totaled $201.9m before unamortized issuance costs, including $200.0m of 6% convertible notes due December 2026 and a $1.9m D&O financing loan due December 2022. Net debt on the balance sheet was $193.3m. Stockholders’ equity was $5.8m, compared with $122.4m at December 31, 2021.
Material changes versus the prior comparable period
- Q2 revenue grew 3.6%; first-half revenue grew 3.0%. Analytics revenue rose 18.3% in Q2 and 15.1% for the half, while Cyber & Engineering revenue fell 8.1% and 7.4%, respectively.
- Segment adjusted gross margin was 32% in Q2, unchanged year over year; for the first half it was 33%, versus 34%. Management attributed weaker segment cost ratios to lower-margin prototype contracts in Analytics and increased subcontractor use in Cyber & Engineering.
- Operating expenses increased substantially, reflecting the goodwill impairment, higher equity compensation, commercial start-up spending, public-company costs and integration expenses. Research and development expense increased 36% in Q2 and 94% for the half.
- Interest expense rose 92% in Q2 and 92% for the half, primarily due to the convertible notes replacing the prior Antares credit facility.
- Cash declined materially, principally reflecting $100.9m of financing cash outflow to settle Forward Share Purchase Agreements, as well as operating cash use and the ProModel acquisition.
Outlook, management commentary and risks
- Demand and execution: Management said federal customers’ focus on immediate Ukraine-related needs slowed contract awards and shifted expected revenue timing. It also cited COVID-related supply-chain, labor, travel and site-access disruptions. Management expects the geopolitical environment could support long-term demand, but described the outcome and effects as uncertain.
- Liquidity and revolver: The company was out of compliance with the Bank of America revolver’s fixed-charge-coverage covenant at June 30 and could not draw on the facility. An August 9 amendment waived the quarter’s covenant test but did not restore borrowing access. Access may be regained if the company can provide the required September 30 compliance certificate. Management believes operating cash will cover anticipated needs for the next 12 months and says a revolver draw is unlikely, while also noting future covenant failures are reasonably possible.
- Goodwill and estimates: The company recorded a $35.3m non-tax-deductible impairment in Cyber & Engineering after lowering projections amid slower awards. Analytics goodwill had an estimated fair-value cushion of 8.3%; the filing says a roughly 1% increase in WACC or 3% decrease in forecast revenue could trigger impairment there.
- Acquisition: BigBear.ai acquired ProModel Corporation on April 7 for approximately $16.0m, funded with cash and 649,976 shares. Purchase accounting remained preliminary at June 30.
- Revenue visibility and concentration: Remaining performance obligations were $130m, with approximately 97% expected to be recognized within 12 months. Management-reported backlog was $324.9m at June 30, versus $322.1m at year-end under a revised methodology. Backlog includes estimates and, in some categories, unfunded work and unexercised options; it is not equivalent to contracted revenue. Three customers accounted for 51% of Q2 revenue and 49% of first-half revenue.
- Convertible-note dilution: A May 29 reset lowered the conversion price from $11.50 to $10.61, increasing potential conversion shares to approximately 18.8m, excluding any interest settled in shares. The company was in compliance with the notes’ covenants at June 30.
- Other matters: The company said ordinary-course litigation and claims were not expected to have a material financial impact. It reported no material risk-factor changes from its 2021 Form 10-K. No formal full-year revenue or earnings guidance is provided in the supplied filing text.
Important facts for investors to verify
- Whether the company can meet future revolver covenants and regain access to the $50m facility; the August waiver alone did not restore access.
- Cash burn, working-capital movements and the basis for management’s assertion that liquidity is adequate for the next 12 months.
- Contract award timing, customer concentration, funded backlog and conversion of remaining performance obligations into revenue.
- Assumptions behind the Cyber & Engineering impairment and the narrow Analytics goodwill valuation cushion.
- Potential dilution from convertible notes, warrants, equity awards and acquisition-related share issuance.
- Share-count figures differ within the filing: the balance sheet and equity statement do not match exactly, and the cover page reports a different August 5 outstanding-share count. Verify the applicable issued, treasury and outstanding share totals.