BigBear.ai, Inc.

of these types of contract progressions. This award builds upon Big Bear AI's portfolio of work supporting U.S. Army readiness, including its continued delivery of the Global Force Information Management Objective Environment Intelligent Automation Platform. In addition to AIMS, we received a six-month extension from the U.S. Army as the prime contractor for continuing work on the Global Force Information Management System in a six-month contract valued at just over 8.5 million. The extension builds on Big Bear AI's previous work in phase one and phase two, and continues to show the strength of our relationship with the US Army. This is another example of how we are well positioned to win future work. Under the terms of the single source contract, Big Bear AI will serve as the prime contractor to build an enterprise-wide intelligent automation platform, providing the US Army with a holistic view of its global force structure. During the extension, the Big Bear AI team will be charged with migrating the prototype into U.S. Army's Sea Army Cloud, aligned with the U.S. Army's Cloud Plan 2022. Our Pro Model solution continues to enhance our clients' operational efficiency in a variety of use cases. Most recently, we won and expanded work with one of the largest shipbuilders in the world, where we are currently supporting U.S.-based naval operations. displaying the global opportunity for leveraging our capabilities in complex manufacturing environments. We also want to contract with a large industrial automation company where we are assisting in their existing flat product fabrication process to identify constraints and understand the best opportunities for eliminating or reducing them. In doing so, our models will allow key stakeholders to quantify the expected improvements and cost benefits of any considered process changes in advance of implementing those changes. We are winning and beating competitors both large and small as the world unlocks the power of discrete event simulation and digital twins. Now I'm going to switch gears and talk about responsible and ethical AI. Earlier this year, we submitted comments to the National Telecommunications and Information Administration and Department of Commerce concerning accountability measures and policies for artificial intelligence systems. Specifically, we sought to provide a perspective on industry experiences related to complex technology regulation and recommendations based on that experience in response to the Biden administration's concerns around accountability measures and policies for artificial intelligence systems. The rapid acceleration of AI innovation and integration into everyday civil society underscores the importance of ongoing federal efforts to advance trustworthy AI applications, research, and U.S. leadership in the development and use of trustworthy AI in the public and private sectors. Furthermore, U.S. leadership in emerging AI systems and applications supports a national security strategy that defends core democratic values and protects civil liberties and human rights. NCIA's focus on developing sound AI assurance and accountability frameworks and standards is a critical component for realizing the benefits of AI and mitigating risk, while incentivizing organizations to invest in AI system governance and responsible AI products. We focus our thoughts on the scope of AI accountability mechanisms that should be broad enough to encompass certifications, audits, and assessments, but also adaptable to evolving technologies and practices. It should involve collaboration between governments, regulatory bodies, industry stakeholders, academia, and civil society to develop comprehensive frameworks that address the challenges and risks associated with AI design, development, and deployment. Additionally, mechanisms should consider international cooperation and harmonization to facilitate consistent standards and practices across borders while accommodating cultural, legal, and societal differences. AI accountability measures should cover a range of topics to ensure responsible and ethical AI practices. As NTIA continues its work on drafting and issuing a report on AI accountability policy development, Big Bear AI strongly encourages the development of policies and regulations that support and encourage responsible innovation. Put it simply, we believe in the power that responsible technology can play in regulating technology. and believe that today, more than ever, it is not only possible but necessary for AI accountability to be successful. Lastly, I want to share our excitement on the announcement of our new Chief Technology and Strategy Officer, Ted Tanner. Mr. Tanner has more than 30 years of experience, most recently serving as CTO and Chief Architect at IBM Watson Health, now Meredith. Ted also has held architect positions at both Apple and Microsoft and has co-founded several acquired startups, including most recently PocketDoc, acquired by Change Health. He also created one of the first machine learning and natural language processing as a service companies on Amazon AWS called Belief Networks. His extensive experience will be instrumental in delivering technology-led solutions for leaders in government and defense, manufacturing and warehouse operations, and healthcare and life sciences. As I think about the team that we've assembled over the last year, we've truly experienced the best of both worlds. We've elevated top talent that was already in place at Big Bear AI, and we've added top talent from outside of the company. We are never done evolving, but I feel great about how we're positioned to lead in the AI industry with this team. With that, I will turn the call to Julie for a detailed review of our financials.

Thank you, Mandy. This past quarter, we executed well in the face of market challenges, including headwinds from the bankruptcy of Virgin Orbit. Additionally, as we make progress on our transformation to a higher margin technology-led solutions business, we are seeing our contract mix begin to shift and move away from programs like ePASS. ePASS represents a legacy program where we operated as a subcontractor, focused on resource staffing for the US Air Force. Despite these headwinds, we delivered on what we set out to achieve. This is a testament to the team we are building and the quality of our solutions and our ability to execute and grow within our markets. If anything, the current geopolitical climate has highlighted the need for advanced technologies like artificial intelligence in our national security efforts, and we are seeing increased interest in our capabilities as a result. Now let's turn to quarter results. Revenue for the quarter was $38.5 million, up 2% year over year compared to $37.6 million in the second quarter of 22 and up 9% year to date. As always, I want to emphasize that our revenue can be lumpy and can fluctuate meaningfully depending on the quarter in which contracts are awarded, milestones achieved, or contracts complete. For Q2, year-over-year growth was driven by our U.S. Army GFAM contract, partially offset by the termination of the Virgin Orbit contract and the completion of one phase of our EPAS contract. Total gross margin was 23% in the quarter, a 220 basis point decrease from 25% in Q2 2022, driven primarily by the loss in revenue and gross margin from Virgin Orbit after their declared bankruptcy in April. In terms of this contract, we initially anticipated that the company would be sold quickly, but this has not materialized. So we are taking further action to write off most of what is remaining from the Q1 invoice this quarter, which is reflected in our SG&A expenses. Backlog was $206 million at the end of the second quarter, which is up 5% or approximately $9 million compared to the first quarter of 2023. This increase is largely driven by awards for the GFIM extension, AIMS contract, and G3 analytics. Now turning to expenses. For Q2, operating expenses were approximately $19.2 million, which included R&D expenses of $2.2 million and SG&A expenses of $16.9 million. We want to highlight that SG&A is down $10 million or 37% versus last year, when Q2 SG&A was $27 million. This significant reduction in SG&A was due to the effects of headcount reduction actions taken in third quarter of 2022 and first quarter of 2023 to realign our operating structure in addition to rationalization of our third-party vendor expenses. On a year-over-year basis, total operating expenses were lowered by 70% this year in Q2, or 35%, excluding the goodwill impairment expenses in Q2 2022. Our net box was $16.9 million in the quarter versus $56.8 million in Q2 2022. The current quarter includes a $3.1 million non-cash charge related to the fair value adjustments on warrants that were issued in 2023. Additionally, the company booked a bad debt reserve of 675K this quarter related to the unpaid receivables from Virgin Orbit. Excluding the second quarter 2022 non-cash goodwill impairment charge of 35.3 million, operating expenses have decreased approximately 10.5 million in Q2 of 2023 versus the comparable period. Similarly, our overall operating loss has improved by approximately 50% and $10 million, even after the Q2 2022 goodwill impairment charge is excluded. Adjusted EBITDA was a loss of 3.2 million in Q2 2023, compared to the adjusted EBITDA loss of 7.7 million in the same period a year ago, or 58% year over year improvement. While we are pleased to report this level of improvement, we remain committed to driving improved operating efficiency in the second half of 2023 and beyond, with a focus on gross margin improvement and continued rigor on operating expenses. Q2 adjusted EBITDA was impacted by the additional bad debt reserve and gross margin loss from Virgin Orbit, partially offset by improved performance on our GFIM contract compared to last quarter. In review of the balance sheet, At the end of the second quarter, we had cash and cash equivalents of approximately $29.9 million. The increase was due to a $22.8 million of net proceeds from the registered direct offering we completed in June. We were also expecting an additional $11 million of government receivables in the quarter that will now come in in Q3 due to the timing of payments. Most of these have already been received. As we stated last quarter, We continue to focus on lowering our cash burn in the second half of 2023 to get to positive operational cash flow, which excludes non-recurring and non-operational items such as interest payments, legal and transaction fees, and tax payments for stock vesting. Now turning to our financial outlook. Today, we are reaffirming our guidance of expected 2023 revenue in the range of 155 to 170 million. We continue to expect adjusted EBITDA to be single digit negative adjusted EBITDA in millions for 2023. As Mandy previously stated, we are doing what we set out to accomplish in 2023 and our momentum continues to build. The anticipated GFM extension, AIMS award, and continued partnership and expansion with L3Harris gives us increased confidence in our leadership position within AI. With a stronger balance sheet, better operational execution, the right partners, and a talented team in place, we continue to build and we are looking forward to growth to come. And now I turn to Mandy for final remarks before we turn to Q&A.

Thank you, Julie. We have already made a great deal of progress, and I am extremely excited about what we're building and the path ahead. Operator, we are ready for questions. Thank you.