BIGBEAR.AI HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that BigBear.ai
Holdings, Inc. ("BigBear.ai ," "BigBear.ai Holdings ," or the "Company")
management believes is relevant to an assessment and understanding of
BigBear.ai's consolidated results of operations and financial condition. The
following discussion and analysis should be read in conjunction with
BigBear.ai's consolidated financial statements and notes to those statements
included elsewhere in this Quarterly Report on Form 10-Q. Certain information
contained in this management discussion and analysis includes forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of many factors. Please see "Risk Factors" in our Annual Report on Form
10-K for the year ended December 31, 2021 . Unless the context otherwise
requires, all references in this section to the "Company," "BigBear.ai , " "we,"
"us," or "our" refer to BigBear.ai Holdings, Inc.
The following discussion and analysis of financial condition and results of
operations of BigBear.ai is provided to supplement the consolidated financial
statements and the accompanying notes of BigBear.ai included elsewhere in this
Quarterly Report on Form 10-Q. We intend for this discussion to provide the
reader with information to assist in understanding BigBear.ai's consolidated
financial statements and the accompanying notes, the changes in those financial
statements and the accompanying notes from period to period, along with the
primary factors that accounted for those changes.
The discussion and analysis of financial condition and results of operations of
•Business Overview: This section provides a general description of
•Recent Developments: This section provides recent developments that we believe are necessary to understand our financial condition and results of operations.
•Results of Operations: This section provides a discussion of our results of
operations for the three and nine months ended
•Liquidity and Capital Resources: This section provides an analysis of our ability to generate cash and to meet existing or reasonably likely future cash requirements. •Critical Accounting Policies and Estimates: This section discusses the accounting policies and estimates that we consider important to our financial condition and results of operations and that require significant judgment and estimates on the part of management in their application. In addition, our significant accounting policies, including critical accounting policies, are summarized in Note B-Summary of Significant Accounting Policies to the accompanying consolidated financial statements included in this Quarterly Report on Form 10-Q. Business Overview Our mission is to guide our customers to realize their best possible future by delivering transformative technologies and expert, actionable advice. Through this mission, we seek to empower people to make the right decisions, at the right time, every time. We are a leader in the use of Artificial Intelligence (AI) and Machine Learning (ML) for decision support. We provide our customers with a competitive advantage in a world driven by data that is growing exponentially in terms of volume, variety, and velocity. We believe data - when leveraged effectively - can be a strategic asset for any organization. Through our mission-critical analytics solutions and operational expertise, we help our customers make sense of the world in which they operate, understand how known and previously unforeseen forces impact their operations, and determine which decision and course of action will best achieve their objectives. Our products and services are widely used by government agencies inthe United States to support many of the nation's most critical defense and intelligence capabilities. These customers operate in environments of unrivaled scale and complexity, where the cost of a poor decision can be very steep, and the cost of failure devastating. They demand the most sophisticated and capable 29 -------------------------------------------------------------------------------- Table of Contents AI, ML, and predictive analytics solutions available, from a provider who understands their complex operations and can rapidly deploy technology at scale with uncompromising reliability.
Recent Developments
Acquisition Activity
OnApril 7, 2022 , the Company's subsidiaryBigBear.ai , LLC acquiredProModel Corporation ("ProModel Corporation "), a leader in simulation-based predictive and prescriptive analytic software for process improvement enabling organizations to make better decisions, for approximately$16.1 million , subject to certain adjustments. This acquisition complements the Company's previous acquisition ofProModel's Government Services business,ProModel Government Solutions Inc. ("ProModel Government Solutions"), which closed onDecember 21, 2020 . The acquisition ofProModel Corporation was funded through a combination of cash on hand and the issuance of 649,976 shares of the Company's common stock.ProModel Corporation is aligned under the Company's Analytics business segment. Refer to Note D-Business Combinations of the Notes to consolidated financial statements included in this Quarterly Report on Form 10-Q for more information. For risks related to the transaction, see Item 1A. Risk Factors -Risks Related to Our Business and Industry - We may acquire or invest in companies and technologies, which may divert our management's attention, and result in additional dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions or investments - included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 .
COVID-19 Operational Posture and Current Impact
The COVID-19 pandemic continued to cause business impacts in the first nine months of 2022. The emergence of the Omicron variant in late 2021 and resulting increase in COVID cases in early 2022 adversely impacted our operations. During the first nine months of 2022, our performance was adversely affected by supply chain disruptions and delays, as well as labor challenges associated with employee absences, travel restrictions, site access, quarantine restrictions, remote work, and adjusted work schedules. We are actively engaging with our customers and are continuing to take measures to protect the health and safety of our employees by encouraging them to get vaccinated, including booster shots. The ultimate impact of COVID-19 on our operations and financial performance in future periods, including our ability to execute on our customer contracts in the expected timeframe, remains uncertain and will depend on future pandemic-related developments, including the duration of the pandemic, potential subsequent waves of COVID-19 infection or potential new variants, the effectiveness and adoption of COVID-19 vaccines and therapeutics, supplier impacts and related government actions to prevent and manage disease spread, including the implementation of any federal, state, local or foreign vaccine mandates, all of which are uncertain and cannot be predicted. The long-term impacts of COVID-19 on government budgets and other funding priorities that impact demand for our solutions are also difficult to predict but could negatively affect our future results and performance. For additional risks to the corporation related to the COVID-19 pandemic, see Item 1A. Risk Factors - Risk Factors of our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Russian Invasion of
We are closely monitoring the impact of the Russian invasion ofUkraine and its impact on our business. For our government customers, their focus on addressing immediate needs inUkraine has slowed the pipeline and pace of contract awards, pushing revenue further to the right. We continue to expect the geopolitical climate to drive adoption of our offerings over the long term, as it has heightened the need for advanced AI tools that provide enhanced intelligence and full spectrum cyber operations - areas where we have unmatched capabilities. While the conflict is still evolving and the outcome remains highly uncertain, we do not believe the Russian invasion will have a material impact on our business and results of operations. However, if the conflict continues or worsens, leading to greater disruptions and uncertainty within the technology industry or global economy, our business and results of operations could be negatively impacted.
First Amendment and Second Amendment to the
As previously disclosed, as ofJune 30, 2022 , the Company was not in compliance with the Fixed Charge Coverage ratio requirement of the Credit Agreement (the "Bank of America Credit Agreement "), dated as ofDecember 7, 2021 , by and among the Company, the other borrowers party thereto, the lenders from time to time party thereto andBank of America, N.A ., as administrative agent and collateral agent. The Company notifiedBank of America N.A . of the covenant violation, and, onAugust 9, 2022 , entered into the First Amendment (the "First Amendment") to theBank of America Credit Agreement , which, among 30 -------------------------------------------------------------------------------- Table of Contents other things, waived the requirement that the Company demonstrate compliance with the minimum Fixed Charge Coverage ratio provided for in the Credit Agreement for the quarter endedJune 30, 2022 . As ofSeptember 30, 2022 , the Company was not in compliance with the Fixed Charge Coverage ratio requirement of theBank of America Credit Agreement . OnNovember 8, 2022 , the Company entered into a Second Amendment to theBank of America Credit Agreement (the "Second Amendment"), which modifies key terms of the Senior Revolver. As a result of the Second Amendment, funds available under the Senior Revolver are reduced to$25.0 million from$50.0 million , limited to a borrowing base of 90% of Eligible Prime Government Receivables and Eligible Subcontractor Government Receivables, plus 85% of Eligible Commercial Receivables. Additionally, the Second Amendment increased the Base Rate Margin, BSBY Margin and unused commitment fees by 0.25%. The Senior Revolver no longer is subject to a minimum Fixed Charge Coverage ratio covenant following the Second Amendment. In order for the facility to become available for borrowings (the "initial availability quarter"), the Company must report Adjusted EBITDA of at leastone dollar . Commencing on the first fiscal quarter after the initial availability quarter, the Company is required to have aggregated reported Adjusted EBITDA of at least$1 over the two preceding quarters to maintain its ability to borrow under the Senior Revolver (though the inability to satisfy such condition does not result in a default under the Senior Revolver).
See the Liquidity and Capital Resources section below and Note U-Subsequent Events of the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the First Amendment and Second Amendment.
Components of Results of Operations
Revenues
We generate revenue by providing our customers with highly customizable solutions and services for data ingestion, data enrichment, data processing, AI, ML, predictive analytics and predictive visualization. We have a diverse base of customers, including government defense, government intelligence, as well as various commercial enterprises.
Cost of Revenues
Cost of revenues primarily includes salaries, stock-based compensation expense, and benefits for personnel involved in performing the services described above as well as allocated overhead and other direct costs.
We expect that cost of revenues will increase in absolute dollars as our revenues grow and will vary from period-to-period as a percentage of revenues.
Selling, General and Administrative ("SG&A")
SG&A expenses include salaries, stock-based compensation expense, and benefits for personnel involved in our executive, finance, accounting, legal, human resources, and administrative functions, as well as third-party professional services and fees, and allocated overhead. We expect that SG&A expenses will increase in absolute dollars as we hire additional personnel and enhance our systems, processes, and controls to support the growth in our business as well as our increased compliance and reporting requirements as a public company.
Research and Development
Research and development expenses primarily consist of salaries, stock-based compensation expense, and benefits for personnel involved in research and development activities as well as allocated overhead. Research and development expenses are expensed in the period incurred.
We expect research and development expenses to increase in future periods as we continue to invest in research and development activities to achieve our operational and commercial goals.
Restructuring Charges
Restructuring charges consist of employee separation costs related to strategic cost saving initiatives.
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Transaction Expenses
Transaction expenses consist of acquisition costs and other related expenses
incurred in acquiring
We expect to incur acquisition costs and other related expenses periodically in the future as we continue to seek acquisition opportunities to expand our technological capabilities.
Goodwill Impairment
Net decrease in fair value of derivatives consists of fair value remeasurements of private warrants and written put options.
Interest Expense
Interest expense consists primarily of interest expense, commitment fees, and debt issuance cost amortization under our debt agreements.
Income Tax Expense (Benefit)
Income tax expense (benefit) consists of income taxes related to federal and state jurisdictions in which we conduct business.
Segments
We have two operating segments, Cyber & Engineering and Analytics, which were
determined based on the manner in which the chief operating decision maker
("CODM"), who is our Chief Executive Officer, manages our operations for
purposes of allocating resources and evaluating performance. Various factors,
including our organizational and management reporting structure, customer type,
economic characteristics, financial metrics and other factors were considered in
determining these operating segments. Our operating segments are described
below:
Cyber & Engineering
The Cyber & Engineering segment provides high-end technology and management consulting services to its customers. This segment focuses in the areas of cloud engineering and enterprise IT, cybersecurity, computer network operations and wireless, systems engineering, as well as strategy and program planning. The segment's primary solutions relate to the development and deployment of customized solutions in the areas of cloud engineering and IT infrastructure, cybersecurity and computer network operations, data analytics and visualization, and system engineering and program planning.
Analytics
The Analytics segment provides high-end technology and consulting services to
its customers. This segment focuses on the areas of big data computing and
analytical solutions, including predictive and prescriptive analytics solutions.
The segment's primary solutions assist customers in aggregating, interpreting,
and synthesizing data to enable real-time decision-making capabilities.
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Results of Operations
The table below presents our consolidated statements of operations for the following periods:
Three Months Ended September
30, Nine Months Ended
2022 2021 2022 2021
Revenues $ 40,651 $ 40,219 $ 114,654 $ 112,100
Cost of revenues 28,900 29,421 83,446 81,859
Gross margin 11,751 10,798 31,208 30,241
Operating expenses:
Selling, general and administrative 20,233 12,038 69,205 32,557
Research and development 1,785 1,363 7,194 4,158
Restructuring charges 1,562 - 1,562 -
Transaction expenses 566 - 2,151 -
Goodwill impairment - - 35,252 -
Operating loss (12,395) (2,603) (84,156) (6,474)
Net decrease in fair value of derivatives (102) - (1,564) -
Interest expense 3,557 1,870 10,666 5,579
Other expense (income) 8 - 12 (1)
Loss before taxes (15,858) (4,473) (93,270) (12,052)
Income tax expense (benefit) 252 (1,327) (1,491) (3,294)
Net loss $ (16,110) $ (3,146) $ (91,779) $ (8,758) Comparison of the Three Months Ended
Revenues
Three Months Ended September 30, Change
2022 2021 Amount %
Revenues
Cyber & Engineering $ 17,951 $ 19,229 $ (1,278) (6.6) %
Analytics 22,700 20,990 1,710 8.1 %
Total Revenues $ 40,651 $ 40,219 $ 432 1.1 %
Cyber & Engineering revenues decreased by $1,278 during the three months ended
September 30, 2022 as compared to the three months ended September 30, 2021 as a
result of reduced order volume related to certain procurement programs.
Analytics revenues increased by $1,710 during the three months ended September
30, 2022 as compared to the three months ended September 30, 2021 , primarily
driven by new contracts awarded during the three months ended September 30,
2022 , including the award of the U.S. Army Global Force Information Management
("GFIM") contract.
Cost of Revenues
Three Months Ended September 30, Change
2022 2021 Amount %
Cost of revenues
Cyber & Engineering $ 14,712 $ 15,502 $ (790) (5.1) %
Analytics 14,188 13,919 269 1.9 %
Total cost of revenues $ 28,900 $ 29,421 $ (521) (1.8) %
Cost of revenues as a percentage of
revenues
Cyber & Engineering 82 % 81 %
Analytics 63 % 66 %
33-------------------------------------------------------------------------------- Table of Contents Cyber & Engineering cost of revenues as a percentage of Cyber & Engineering revenues increased to 82% for three months endedSeptember 30, 2022 as compared to 81% for the three months endedSeptember 30, 2021 due to higher volume of subcontractor costs on certain contracts as compared to the same period in 2021. Analytics cost of revenues as a percentage of Analytics revenues decreased to 63% for the three months endedSeptember 30, 2022 as compared to 66% for the three months endedSeptember 30, 2021 . The decrease in cost of revenue as a percentage of Analytics revenue is primarily due to certain lower margin contracts during the three months endedSeptember 30, 2021 that were not repeated during the same period in 2022. SG&A Three Months Ended September 30, Change 2022 2021 Amount % SG&A$ 20,233 $ 12,038 $ 8,195 68.1 % SG&A as a percentage of revenues 50 %
30 %
SG&A expenses as a percentage of total revenues for three months endedSeptember 30, 2022 increase to 50% as compared to 30% for the three months endedSeptember 30, 2021 , which was primarily driven by$1,605 of equity-based compensation cost, and$1,153 related to D&O insurance. The increase in SG&A as a percentage of revenues was also driven by increased payroll, information technology and employee recruiting expenses to increase personnel in advance of planned growth in our business as well as our increased compliance and reporting requirements as a public company.
Additionally, the increase for the three months ended
Research and Development
Three Months Ended September 30, Change
2022 2021 Amount %
Research and development $ 1,785 $ 1,363 $ 422 31.0 %
Research and development expenses increased by $422 during the three months
ended September 30, 2022 as compared to the three months ended September 30,
2021 . The increase in research and development expenses was driven by increased
hiring and headcount in our innovations lab as well as investment in various
research projects aimed at continuing to develop and refine our solutions,
including enhancing features and functionality, adding new modules, and
improving the application of the latest AI/ML technologies in the solutions we
deliver to our customers.
Restructuring Charges
Three Months Ended September 30,
2022 2021
Restructuring charges $ 1,562 $ -
Restructuring charges for the three months ended
Transaction Expenses
Three Months Ended September 30,
2022 2021
Transaction expenses $ 566 $ -
Transaction expenses for the three months ended
Three
Months Ended
2022 2021
Net decrease in fair value of derivatives $ (102) $ -
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The net decrease in fair value of derivatives of$102 for the three months endedSeptember 30, 2022 consists of fair value remeasurements of private warrants. Interest Expense Three Months Ended September 30, Change 2022 2021 Amount % Interest expense $ 3,557$ 1,870 $ 1,687 90.2 % Interest expense increased by$1,687 during the three months endedSeptember 30, 2022 as compared to three months endedSeptember 30, 2021 . The increase in interest expense was primarily driven by the higher principal balance of debt associated with our Convertible Notes as compared to the principal balance of debt under our Antares Capital Credit Facility, which was fully settled and terminated inDecember 2021 in connection with the Business Combination. See the Liquidity and Capital Resources section below for more information.
Income Tax Expense (Benefit)
Three Months Ended September 30, Change
2022 2021 Amount %
Income tax expense (benefit) $ 252 $ (1,327) $ 1,579 (119.0) %
Effective tax rate (1.6) % 29.7 %
The decrease in the effective tax rate for the three months ended September 30,
2022 from the three months ended September 30, 2021 was primarily due to
recognition of a full valuation allowance on the Company's deferred tax
balances. The effective tax rate for the three months ended September 30, 2022
differs from the U.S. federal income tax rate of 21.0% primarily due to state
and local income taxes, permanent differences between book and taxable income,
offset by a change in the valuation allowance.
As of
Refer to Note K-Income Taxes of the Notes to consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.
Comparison of the Nine Months Ended
Revenues
Nine Months Ended September 30, Change
2022 2021 Amount %
Revenues
Cyber & Engineering $ 53,902 $ 58,039 $ (4,137) (7.1) %
Analytics 60,752 54,061 6,691 12.4 %
Total Revenues $ 114,654 $ 112,100 $ 2,554 2.3 %
Cyber & Engineering revenues decreased by
Analytics revenues increased by$6,691 during the nine months endedSeptember 30, 2022 as compared to nine months endedSeptember 30, 2021 , primarily driven by revenue from our acquisition ofProModel Corporation in April of 2022 as well as new contracts awarded during the nine months endedSeptember 30, 2022 , including the award of the GFIM contract. 35 -------------------------------------------------------------------------------- Table of Contents Cost of Revenues Nine Months Ended September 30, Change 2022 2021 Amount % Cost of revenues Cyber & Engineering$ 43,725 $ 46,642 $ (2,917) (6.3) % Analytics 39,721 35,217 4,504 12.8 % Total cost of revenues$ 83,446 $ 81,859 $ 1,587 1.9 % Cost of revenues as a percentage of revenues Cyber & Engineering 81 % 80 % Analytics 65 % 65 %
Cyber & Engineering cost of revenues as a percentage of Cyber & Engineering
revenues increased to 81% for nine months ended
Analytics cost of revenues as a percentage of Analytics revenues remained flat at 65% for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . SG&A Nine Months Ended September 30, Change 2022 2021 Amount % SG&A$ 69,205 $ 32,557 $ 36,648 112.6 % SG&A as a percentage of revenues 60 %
29 %
SG&A expenses as a percentage of total revenues for nine months endedSeptember 30, 2022 increased to 60% as compared to 29% for the nine months endedSeptember 30, 2021 , which was primarily driven by$6,490 investment in commercial start-up costs,$8,548 of equity-based compensation cost, and$3,459 related to D&O insurance. The increase in SG&A as a percentage of revenues was also driven by increased payroll, information technology and employee recruiting expenses to increase personnel in advance of planned growth in our business as well as our increased compliance and reporting requirements as a public company. Additionally, the increase for the nine months endedSeptember 30, 2022 includes$741 related to capital market advisory fees related to advisors who assisted with the Business Combination and various integration projects and$6,474 of non-recurring integration costs to streamline business functions across the Company and realize synergies from our acquisitions.
Research and Development
Nine Months Ended September 30, Change
2022 2021 Amount %
Research and development $ 7,194 $ 4,158 Research and development expenses increased by$3,036 during the nine months endedSeptember 30, 2022 as compared to nine months endedSeptember 30, 2021 . The increase in research and development expenses was driven by increased hiring and headcount in our innovations lab as well as investment in various research projects aimed at continuing to develop and refine our solutions, including enhancing features and functionality, adding new modules, and improving the application of the latest AI/ML technologies in the solutions we deliver to our customers. Restructuring Charges Nine Months Ended September 30, 2022 2021 Restructuring charges $ 1,562 $ -
Restructuring charges for the three months ended
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Transaction Expenses
Nine Months Ended September 30,
2022 2021
Transaction expenses $ 2,151 $ -
Transaction expenses for the nine months ended September 30, 2022 consist of
acquisition costs and other related expenses incurred in acquiring ProModel
Corporation as well as costs associated with evaluating other acquisition
opportunities.
Goodwill Impairment
Nine Months Ended September 30,
2022 2021
Goodwill impairment $ 35,252 $ -
Goodwill impairment for the nine months ended September 30, 2022 consists of a
$35,252 non-cash impairment of the goodwill in the Cyber & Engineering reporting
unit.
Nine
Months Ended
2022 2021
Net decrease in fair value of derivatives $ (1,564) $ -
The net decrease in fair value of derivatives of$1,564 for the nine months endedSeptember 30, 2022 consists of fair value remeasurements of written put options and private warrants. The written put option balance was $- as ofSeptember 30, 2022 . Interest Expense Nine Months Ended September 30, Change 2022 2021 Amount % Interest expense $ 10,666$ 5,579 $ 5,087 91.2 % Interest expense increased by$5,087 during the nine months endedSeptember 30, 2022 as compared to nine months endedSeptember 30, 2021 . The increase in interest expense was primarily driven by the higher principal balance of debt associated with our Convertible Notes as compared to the principal balance of debt under our Antares Capital Credit Facility, which was fully settled and terminated inDecember 2021 in connection with the Business Combination. See the Liquidity and Capital Resources section below for more information. Income Tax Benefit Nine Months Ended September 30, Change 2022 2021 Amount % Income tax expense (benefit)$ (1,491) $ (3,294) $ 1,803 (54.7) % Effective tax rate 1.6 % 27.3 % The decrease in the effective tax rate for the nine months endedSeptember 30, 2022 from the nine months endedSeptember 30, 2021 was primarily due to recognition of a full valuation allowance on the Company's deferred tax balances. The effective tax rate for the nine months endedSeptember 30, 2022 differs from theU.S. federal income tax rate of 21.0% primarily due to state and local income taxes, permanent differences between book and taxable income, certain discrete items, offset by a change in the valuation allowance primarily resulting from theProModel Corporation acquisition.
As of
Refer to Note K-Income Taxes of the Notes to consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.
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Supplemental Non-GAAP Information
The Company uses Adjusted EBITDA to evaluate its operating performance, generate
future operating plans, and make strategic decisions, including those relating
to operating expenses and the allocation of internal resources. Adjusted EBITDA
is a financial measure not calculated in accordance with GAAP. Adjusted EBITDA
is defined as net income (loss) adjusted for interest expense (income), net,
income tax expense (benefit), depreciation and amortization, equity-based
compensation, net decrease in fair value of derivatives, capital market advisory
fees, non-recurring integration costs, commercial start-up costs, and
transaction expenses. Non-GAAP financial performance measures are used to
supplement the financial information presented on a GAAP basis.
This non-GAAP financial measure should not be considered in isolation or as a
substitute for the relevant GAAP measures and should be read in conjunction with
information presented on a GAAP basis. Because not all companies use identical
calculations, our presentation of non-GAAP measures may not be comparable to
other similarly titled measures of other companies.
Adjusted EBITDA - Non-GAAP
The following table presents a reconciliation of Adjusted EBITDA to net income (loss), computed in accordance with GAAP:
Three Months Ended September 30 ,
Nine Months Ended
2022 2021 2022 2021
Net loss $ (16,110) $ (3,146) $ (91,779) $ (8,758)
Interest expense 3,557 1,870 10,666 5,579
Income tax benefit 252 (1,327) (1,491) (3,294)
Depreciation and amortization 2,038 1,759 5,764 5,432
EBITDA (10,263) (844) (76,840) (1,041)
Adjustments:
Equity-based compensation 2,222 30 11,160 86
Net decrease in fair value of
derivatives(1) (102) - (1,564) -
Restructuring charges(2) 1,562 - 1,562 -
Capital market advisory fees(3) - 1,510 741 3,956
Termination of legacy benefits(4) - 1,482 - 1,482
Management fees(5) - 229 - 683
Integration costs(6) 2,075 740 6,474 1,245
Commercial start-up costs(7) - 773 6,490 773
Transaction expenses(8) 566 - 2,151 -
Goodwill impairment(9) - - 35,252 -
Adjusted EBITDA $ (3,940) $ 3,920 $ (14,574) $ 7,184 (1) The decrease in fair value of derivatives primarily relates to the changes in the fair
value of certain Forward Share Purchase Agreements (FPAs) that were entered into prior
to the closing of the Business Combination and were fully settled during the first
quarter of 2022, as well as changes in the fair value of private warrants.
(2) In the third quarter of 2022, the Company incurred employee separation costs
associated with a strategic review of the Company's capacity and future projections to
better align the organization and cost structure and improve the affordability of its
products and services.
(3) The Company incurred capital market and advisory fees related to advisors assisting
with the Business Combination.
(4) In the third quarter of 2021, the Company elected to terminate certain legacy employee
incentive benefits with final payments made in the fourth quarter of 2021.
(5) Management and other related consulting fees paid to
subsequent to the Business Combination.
(6) Internal integration costs related to business combinations.
(7) Commercial start-up costs include certain non-recurring expenses associated with
tailoring the Company's software products for commercial customers and use cases.
(8) Transaction expenses primarily related to the acquisition of
which closed on
acquisition opportunities.
(9) During the second quarter of 2022, the Company recognized a non-cash goodwill
impairment charge related to its Cyber & Engineering business segment.
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Free Cash Flow
Free cash flow is defined as net cash (used in) provided by operating activities
less capital expenditures. Management believes free cash flow is useful to
investors, analysts and others because it provides a meaningful measure of the
Company's ability to generate cash and meet its debt obligations.
The table below presents a reconciliation of free cash flow to net cash (used in) provided by operating activities, computed in accordance with GAAP:
Nine
Months Ended
2022 2021
Net cash (used in) provided by operating activities $ (38,390) $ 1,222
Capital expenditures, net (736) (601)
Free cash flow $ (39,126) $ 621 Key Performance Indicators
Backlog
We view growth in backlog as a key measure of our business growth. Backlog
represents the estimated dollar value of contracts that we have been awarded for
which work has not yet been performed, and in certain cases, our estimate of
known opportunities for future contract awards on customer programs that we are
currently supporting.
The majority of our historical revenues are derived from contracts with the
Federal Government and its various agencies. In accordance with the general
procurement practices of the Federal Government, most contracts are not fully
funded at the time of contract award. As work under the contract progresses, our
customers may add incremental funding up to the initial contract award amount.
We generally do not deliver goods and services to our customers in excess of the
appropriated contract funding.
At the time of award, certain contracts may include options for our customers to
procure additional goods and services under the contract. Options do not create
enforceable rights and obligations until exercised by our customers and thus we
only recognize revenues related to options as each option is exercised.
Contracts with such provisions may or may not specify the exact scope, nor
corresponding price, associated with options; however, these contracts will
generally identify the expected period of performance for each option. In cases
where we have negotiated the estimated scope and price of an option in the
contract with our customer, we use that information to measure our backlog and
we refer to this as Priced Unexercised Options. If a contract does not specify
the scope, level-of-effort, or price related to options to procure additional
goods and services, we estimate the backlog associated with those options based
on our discussions with our customer, our current level of support on the
customer's program, and the period of performance for each option that was
negotiated in the contract. We refer to this as Unpriced Unexercised Options.
Many of the customer programs we support relate to key national security and
defense interests. At the end of a contract, our customers may elect to modify
our existing contract, in order to extend the period under which we provide
additional goods and services or may elect to continue to procure additional
goods and services from us under a new contract. If our customer notifies us
that a program we currently support will be continuing under a new contract, we
estimate the backlog associated with that anticipated future contract
("Anticipated Follow-on Awards") based on the assumption that (i) we are highly
likely to be awarded the contract because we are the incumbent, (ii) the program
we support is of critical importance to national security and defense, and
(iii) that if the contract was awarded to a different party, the transition
would be highly disruptive to the achievement of our customer's objectives. For
purposes of estimating backlog related to Anticipated Follow-on Awards, we
assume that the goods and services that we will deliver under that future
contract will be generally similar in scope and pricing compared to our current
contract and that our current level of support on the customer program will
persist under the new contract. Potential contract awards with existing
customers on completely new programs, or with any new customer that we have not
worked with historically, would not be included in Anticipated Follow-on Awards
as there is far greater uncertainty as to whether those opportunities will be
awarded to us.
We define backlog in these categories to provide the reader with additional
context as to the nature of our backlog and so that the reader can understand
the varying degrees of risk, uncertainty, and where applicable, management's
estimates and judgements used in determining backlog at the end of a period. The
categories of backlog are further defined below.
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•Funded Backlog. Funded backlog represents the contract value of goods and
services to be delivered under existing contracts for which funding is
appropriated or otherwise authorized less revenues previously recognized on
these contracts.
•Unfunded backlog. Unfunded backlog represents the contract value, or portion thereof, of goods and services to be delivered under existing contracts for which funding has not been appropriated or otherwise authorized.
•Priced Unexercised Options: Priced unexercised contract options represent the value of goods and services to be delivered under existing contracts if our customer elects to exercise all of the options available in the contract. For priced unexercised options, we measure backlog based on the corresponding contract values assigned to the options as negotiated in our contract with our customer. •Unpriced Unexercised Options: Unpriced unexercised contract options represent the value of goods and services to be delivered under existing contracts if our customer elects to exercise all of the options available in the contract. For unpriced unexercised options, we estimate backlog generally under the assumption that our current level of support on the contract will persist for each option period.
The following table summarizes certain backlog information (in thousands):
September 30, 2022 December 31, 2021
Funded $ 60,548 $ 78,258
Unfunded 52,781 68,203
Priced, unexercised options 143,263 143,969
Unpriced, unexercised options 31,620 31,680
Total backlog $ 288,212 $ 322,110
During the second quarter of the fiscal year ending December 31, 2022 , the
Company revised its methodology for determining backlog. Under the revised
methodology, backlog does not include Anticipated Follow-on Awards, which were
historically estimated when a customer notified us a program we currently
support would be continuing under a new contract. Additionally, we have
reassessed our unpriced, unexercised backlog and while we have this work under
contract with not-to-exceed limits, we have updated our estimates on what we
believe will actually be funded in the future on these contracts. For
comparative purposes we recalculated backlog as of December 31, 2021 , giving
effect to the revised methodology. Under the revised methodology, the $466
million of backlog previously reported as of December 31, 2021 would be $322
million .
Previously Revised
Reported Methodology
December 31, December 31,
2021 2021 Change
Funded $ 91,187 $ 78,258 $ (12,929)
Unfunded 68,203 68,203 -
Priced, unexercised options 143,969 143,969 -
Unpriced, unexercised options 119,747 31,680 (88,067)
Anticipated follow-on Awards 42,582 - (42,582)
Total backlog $ 465,688 $ 322,110 $ (143,578) Liquidity and Capital Resources
Our primary sources of liquidity are cash flows provided by our operations and access to existing credit facilities. Our primary short-term cash requirements are to fund payroll obligations, working capital, operating lease obligations, and short-term debt, including current maturities of long-term debt. Working capital requirements can vary significantly from period to period, particularly as a result of the timing of receipts and disbursements related to long-term contracts. Our medium-term to long-term cash requirements are to service and repay debt and to invest in facilities, equipment, technologies, and research and development for growth initiatives.
Our ability to fund our cash needs will depend, in part, on our ability to generate cash in the future, which depends on our future financial results. Our future results are subject to general economic, financial, competitive, legislative and regulatory factors that may be outside of our control. Our future access to, and the availability of credit on acceptable terms and conditions, is impacted
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Table of Contents by many factors, including capital market liquidity and overall economic conditions.
As stated in Note I-Debt of the Notes to consolidated financial statements included in this Quarterly Report on Form 10-Q, the Company was not in compliance with the covenants of the Senior Revolver as ofSeptember 30, 2022 . Although the Company entered into the First Amendment, which waived the requirement that the Company demonstrate compliance with the minimum Fixed Charge Coverage ratio provided for in the Credit Agreement for the quarter endedJune 30, 2022 , and the Second Amendment, which removed the requirement to comply with the minimum Fixed Charge Coverage ratio, it is currently unable to draw on the Senior Revolver. Based on current forecasts, management believes that it is reasonably likely that the Company may fail to meet the covenant requirements of theBank of America Credit Agreement in future periods and therefore, may be unable to draw on the facility. Management performed a cash flow analysis to identify the Company's projected approximate cash flow and liquidity needs for the next 12 months. Based on the Company's projected cash flow and liquidity needs, we believe that our cash from operating activities generated from continuing operations during the year will be adequate for the next 12 months to meet our anticipated uses of cash flow, including payroll obligations, working capital, operating lease obligations, capital expenditures and debt service costs, and it is considered unlikely that the Company would require access to draw funds on the Senior Revolver in the foreseeable future. While we intend to reduce debt over time using cash provided by operations, we may also attempt to meet long-term debt obligations, if necessary, by obtaining capital from a variety of additional sources or by refinancing existing obligations. These sources include public or private capital markets, bank financings, proceeds from dispositions or other third-party sources.
Our available liquidity consists primarily of available cash and cash equivalents. The following table details our available liquidity:
September
30,
2022 2021
Available cash and cash equivalents $ 21,955 $ 68,900
Available borrowings from our existing credit facilities - 15,000
Total available liquidity $
21,955
The following table summarizes our existing credit facilities:
September 30, 2022 December 31 ,
2021
Convertible Notes $ 200,000 $
200,000
Bank of America Senior Revolver - - D&O Financing Loan 769 4,233 Total debt 200,769 204,233 Less: unamortized issuance costs 8,170 9,636 Total debt, net 192,599 194,597 Less: current portion 769 4,233 Long-term debt, net $ 191,830 $ 190,364
BigBear.ai is party to a seniorBank of America Credit Agreement , entered into onDecember 7, 2021 , providingBigBear.ai with a$25.0 million senior secured revolving credit facility as ofNovember 8, 2022 (the "Senior Revolver"). Proceeds from the Senior Revolver will be used to fund working capital needs, capital expenditures, and other general corporate purposes. The Senior Revolver matures onDecember 7, 2025 . The Senior Revolver includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as the "swing loans." Any issuance of letters of credit or making of a swing loan will reduce the amount available under the revolving credit facility.BigBear.ai may increase the commitments under the Senior Revolver in an aggregate amount of up to the greater of$25.0 million or 100% of consolidated adjusted EBITDA plus any additional amounts so long as certain conditions, including compliance with the applicable financial covenants for such period, in each case on a pro forma basis, are satisfied.The Bank of America Credit Agreement requiresBigBear.ai to meet certain financial and other covenants. The Company was not in compliance with the Fixed Charge Coverage ratio requirement as ofSeptember 30, 2022 , and as a result is currently unable to 41 -------------------------------------------------------------------------------- Table of Contents draw on the facility. The Company notifiedBank of America N.A . of the covenant violation, and onAugust 9, 2022 , entered into the First Amendment, which waived the requirement that the Company demonstrate compliance with the minimum Fixed Charge Coverage ratio provided for in the Credit Agreement for the quarter endedJune 30, 2022 . The Company further entered into the Second Amendment onNovember 8, 2022 , which removed the requirement that the Company comply with a minimum Fixed Charge Coverage ratio, among other changes. The Second Amendment does not provide the Company access to draw on the Senior Revolver, including the borrowing capacity available for letters of credit and swing loans thereunder. However, the Company may regain its access to draw on the Senior Revolver by reporting Adjusted EBITDA of at leastone dollar . Based on the Company's projected cash flow and liquidity needs, which incorporate certain cost saving measures, we believe the Company's current working capital is sufficient to fund the short-term operations of the business and it is unlikely that the Company would require access to draw funds on the Senior Revolver in the foreseeable future.
As of
Refer to Note I-Debt and Note U-Subsequent Events of the Notes to consolidated financial statements included in this Quarterly Report on Form 10-Q for more information. Convertible Notes Upon consummation of the Merger, the Company issued$200.0 million of unsecured convertible notes (the "Convertible Notes") to certain investors. The Convertible Notes bear interest at a rate of 6.0% per annum, payable semi-annually, and not including any interest payments that are settled with the issuance of shares, are convertible into 17,391,304 shares of the Company's common stock at an initial Conversion Price of$11.50 . The Conversion Price is subject to adjustments, including but not limited to, the Conversion Rate Reset described below and in Note I-Debt of the Notes to consolidated financial statements included in this Quarterly Report on Form 10-Q. The Convertible Notes mature onDecember 15, 2026 .
The Convertible Notes require the Company to meet certain financial and other
covenants. As of
OnMay 29, 2022 , pursuant to the conversion rate adjustment provisions in the Convertible Note indenture, the Conversion Price was adjusted to$10.61 (or 94.2230 shares of common stock per$1,000 principal amount of Convertible Notes) because the average of the daily volume-weighted average price of the common stock during the preceding 30 trading days was less than$10.00 . Subsequent to the Conversion Rate Reset, the Convertible Notes are convertible into 18,844,600 shares, not including any interest payments that are settled with the issuance of shares.
As of
D&O Financing Loan
OnDecember 8, 2021 , the Company entered into a$4,233 loan (the "D&O Financing Loan") withAFCO Credit Corporation to finance the Company's directors and officers insurance premium. The D&O Financing Loan has an interest rate of 1.50% per annum and a maturity date ofDecember 8, 2022 .
Cash Flows
The table below summarizes certain information from our consolidated statements of cash flows for the following periods:
Nine
Months Ended
2022 2021
Net cash (used in) provided by operating activities (38,390) 1,222
Net cash used in investing activities (5,201) (825)
Net cash (used in) provided by financing activities (104,375) 675
Net (decrease) increase in cash and cash equivalents and restricted cash
(147,966) 1,072
Cash and cash equivalents and restricted cash at the beginning of period
169,921 9,704
Cash and cash equivalents and restricted cash at the end of the
period $ 21,955 $ 10,776
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Operating activities
For the nine months endedSeptember 30, 2022 , net cash used in operating activities was$38,390 . Net loss before deducting depreciation, amortization and other non-cash items was$40,992 and was partially offset by a favorable change in net working capital of$2,602 which contributed to operating cash flows during this period. The favorable change in net working capital was largely driven by a decrease in prepaid and other current assets of$3,549 , an increase in accounts payable of$1,946 , and an increase in other liabilities of$1,760 . These favorable changes were partially offset by an increase in accounts receivable of$2,359 , a decrease in accrued liabilities of$993 , and a decrease in contract liabilities of$1,004 . For the nine months endedSeptember 30, 2021 , net cash provided by operating activities was$1,222 . Net loss before deducting depreciation, amortization and other non-cash items was$6,152 and partially offset by a favorable change in net working capital of$7,374 during this period. The favorable change in net working capital was largely driven by an increase in contract liabilities of$1,595 , an increase in accounts payable of$6,737 , and an increase in accrued liabilities of$4,733 . These increases were partially offset by an increase in contract assets of$288 and an increase in prepaid and other current assets of$5,829 . Investing activities
For the nine months ended
For the nine months ended
Financing activities
For the nine months endedSeptember 30, 2022 , net cash used in financing activities was$104,375 , primarily consisting of the purchase of Company shares as a result of settlement of the FPAs of$100,896 , and the partial repayment of short-term borrowings of$3,464 related to the D&O Financing Loan.
For the nine months ended
Critical Accounting Policies and Estimates
For the critical accounting estimates used in preparing our consolidated financial statements, we make assumptions and judgments that can have a significant impact on revenue, cost and expenses, and other expense (income), net, in our consolidated statements of operations, as well as, on the value of certain assets and liabilities on our consolidated balance sheets. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe are reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. Except as set forth below, our critical accounting estimates have not changed materially from those disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operation included in our Annual Report on Form 10-K, for the year endedDecember 31, 2021 , as filed with theSEC onApril 29, 2022 and subsequently amended onMay 12, 2022 .
Goodwill Impairment Testing
During the second quarter of the fiscal year endingDecember 31, 2022 , the Company identified factors indicating that the fair value of both the Cyber & Engineering and Analytics reporting units may be less than their respective carrying amounts and performed a qualitative goodwill impairment assessment. These factors were related to a shift in the Federal Government's focus to address immediate needs inUkraine , causing a slowdown in the pace of contract awards. This resulted in lower revenues than anticipated during the period and caused future revenue projections to be revised. As a result, the Company determined that a quantitative goodwill impairment assessment should be performed. The Company utilized a combination of the discounted cash flow ("DCF") method of the Income Approach and the Market Approach. Under the Income Approach, the future cash flows of the Company's reporting units were projected based on estimates of future revenues, gross margins, operating income, excess net working capital, capital expenditures, and other factors. The Company utilized estimated revenue growth rates and cash flow projections. The discount rates utilized in the DCF method were based on a weighted-average cost of capital ("WACC") determined from relevant market comparisons and adjusted for specific reporting unit risks and capital structure. A terminal value 43 -------------------------------------------------------------------------------- Table of Contents estimated growth rate was applied to the final year of the projected period and reflected the Company's estimate of perpetual growth. The Company then calculated the present value of the respective cash flows for each reporting unit to arrive at an estimate of fair value under the Income Approach. The Market Approach is comprised of theGuideline Public Company and the Guideline Transactions Methods. The Guideline Public Company Method focuses on comparing the Company to selected reasonably similar (or guideline) publicly traded companies. Under this method, valuation multiples were: (i) derived from the operating data of selected guideline companies; (ii) evaluated and adjusted based on the strengths and weaknesses of the Company relative to the selected guideline companies; and (iii) applied to the operating data of the Company to arrive at an indication of value. In the Guideline Transactions Method, consideration was given to prices paid in recent transactions that had occurred in the Company's industry or in related industries. The Company then reconciled the estimated fair value of its reporting units to its total public market capitalization as of the valuation date. The carrying value of the Cyber & Engineering reporting unit exceeded its fair value and accordingly the Company recorded a non-tax-deductible goodwill impairment charge of$35,252 , which was included within the consolidated statement of operations for the nine months endedSeptember 30, 2022 . As ofJune 30, 2022 , the estimated fair value of the Analytics reporting unit exceeded its carrying value by 8.3%. An increase in the WACC of approximately 1% or a reduction in the forecasted revenues of approximately 3% would have resulted in an impairment of the goodwill within the Analytics reporting unit using the Income Approach. Our Analytics reporting unit had$67,125 of goodwill as ofSeptember 30, 2022 . The goodwill balance for this reporting unit continues to be at risk for future impairment for the reasons discussed above. We performed a quarterly assessment to identify potential indicators of impairment for our Analytics reporting unit during the three months endedSeptember 30, 2022 . Based on our performed assessment, we did not identify any impairment indicators for the Analytics reporting unit during the three months endedSeptember 30, 2022 and determined that it was not more likely than not that the carrying value of the Analytics reporting unit exceeded its fair value. We will continue to closely monitor the operational performance of this reporting unit, including the impacts of our revenue and gross margin projections, as well as the realization of cost reductions resulting from our recently initiated cost savings measures in assessing the fair value of goodwill.
Recent Accounting Pronouncements
See Note B-Summary of Significant Accounting Policies of the consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of recently issued accounting pronouncements.
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