BigBear.ai Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Unaudited three months ended March 31, 2022, compared with the three months ended March 31, 2021. BigBear.ai provides AI/ML-based decision-support solutions and services, primarily to U.S. government customers, through its Cyber & Engineering and Analytics segments. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
- Revenue: $36.4 million, up 2.3% from $35.6 million. Cyber & Engineering revenue fell 6.6% to $17.3 million; Analytics revenue rose 12.0% to $19.1 million.
- Gross profit and margin: Gross profit was $9.9 million versus $10.3 million; gross margin declined to approximately 27.1% from 28.9%. Segment adjusted gross margin was 22% for Cyber & Engineering and 47% for Analytics, versus 23% and 49%, respectively.
- Operating expenses and losses: SG&A rose 117.7% to $22.0 million and R&D rose to $2.9 million from $0.9 million; transaction expenses were $1.4 million. Operating loss widened to $16.4 million from $0.8 million. Net loss was $18.8 million, or $0.14 per share, versus $2.4 million, or $0.02 per share.
- Adjusted EBITDA: Non-GAAP adjusted EBITDA was a loss of $2.9 million, compared with income of $2.7 million. The measure excludes, among other items, stock compensation, commercial start-up costs, integration costs and transaction expenses.
- Cash flow: Operating cash use was $7.5 million versus $0.9 million provided in Q1 2021. Capital expenditures were $0.4 million; free cash flow was negative $7.9 million versus positive $0.7 million. Financing cash use was $102.1 million, primarily for settlement of forward share purchase agreements (FPAs).
- Liquidity and debt: Cash was $60.0 million at quarter-end, down from $68.9 million at year-end. Available liquidity was $110.0 million, including $50.0 million available under an undrawn revolver. Debt principal was $203.1 million, including $200.0 million of 6% convertible notes; debt carrying value, net of issuance costs and current debt, was $193.9 million. The company reported compliance with debt covenants.
- Other indicators: Backlog was $458.7 million, down from $465.7 million at December 31, 2021. Remaining performance obligations were $136 million, with approximately 97% expected to be recognized within 12 months. Three customers represented 47% of quarterly revenue.
Changes and notable items
- Revenue growth was modest overall: Analytics growth, driven primarily by a prototype contract awarded in the second half of 2021, was partly offset by lower Cyber & Engineering contract volume.
- Management attributed higher costs to increased subcontractor use and lower-margin prototype work, as well as commercial start-up spending, public-company costs, hiring, equity compensation and integration activity. SG&A included $3.4 million of commercial start-up costs, $2.4 million of non-recurring integration costs and $3.1 million of equity-based compensation.
- The company repurchased 9.95 million shares under the FPAs for approximately $100.9 million of cash settlement. The shares were recorded as $57.4 million of treasury stock; the FPA liability and its settlement also affected the quarter’s derivative accounting and cash flows.
- On April 7, 2022, after quarter-end, the company acquired ProModel Corporation for $16.1 million, subject to adjustments, using cash and newly issued shares. It plans to place the business in Analytics.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management said cash, expected operating cash generation and available credit should be sufficient for anticipated needs over the next 12 months; actual results and cash generation remain subject to risk.
- Management cited Q1 operational effects from COVID-19, including supply-chain delays, employee absences and access and travel restrictions. Future effects remain uncertain.
- The business depends significantly on government contracts and funding. Revenue is concentrated among a small number of customers; contract estimates, government audits and funding levels may affect results. Backlog includes unfunded work, unexercised options and estimated follow-on awards, which are not guaranteed.
- The $200 million convertible notes carry 6% interest and mature in December 2026. Share-price-linked reset provisions could increase conversion shares by up to 3,058,600 shares under specified conditions, in addition to potential dilution from conversion and equity awards.
- Ordinary-course litigation, claims, investigations and government contract audits are disclosed; management did not expect pending legal matters to have a material financial impact. The company also reported a full valuation allowance against deferred tax assets.
Investor verification priorities
- Track operating cash use, cash balance and revolver availability, particularly after the FPA settlement and ProModel acquisition.
- Assess whether revenue growth and segment margins improve, and whether increased SG&A, R&D and acquisition-related costs generate expected returns.
- Examine the quality and funding status of backlog and remaining performance obligations, including customer concentration and contract renewal or option risks.
- Review convertible-note reset and conversion terms, interest costs and potential dilution, as well as the company’s ability to meet debt covenants.
- Monitor integration of ProModel Corporation, acquisition-related share issuance and any subsequent updates to acquisition costs or expected benefits.