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Greetings. Welcome to the Energy Focus, Inc. Second Quarter 2023 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Lesley Matt, Chief Executive Officer. Thank you. You may begin.
Thank you, operator, and good morning, everyone. Before we begin today's call, I'd like to remind everyone that we will make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results realized may differ materially from those stated. For a discussion of these risks that could affect our results, please refer to the section under the headings Risk Factors as well as Forward-Looking Statements in our most recent 10-Q filed with the SEC. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Also, please note that during this call and in the accompanying press release, certain financial metrics are presented on both GAAP and non-GAAP adjusted basis. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at energyfocus.com in the Investor Relations section of the site. Now to the presentation of our Q2 results. I am turning the bends in the home stretch of my first full year as CEO of Energy Focus, and I have not lost sight on my main objectives since joining the organization. The company has been feverishly working towards getting back to its core markets of military maritime in commercial and industrial lighting and controls products, securing the necessary capital, working through significant supply chain constraints in the legacy inventory position and massive cost cutting and rightsizing that pushed the company forward. Although there is still a long way to go, I believe that the second quarter of 2023 results that I'm sharing today are showing progress towards an increase in sales, improving margins, all while controlling costs. I continue to work towards improvement, but significant progress in the core markets we serve is a slow and steady race. I continue to drive the organization to align with much higher goals, and today's results show improvements towards a better version of EFOI.
First, I do want to address the noncompliance with NASDAQ continued listing requirements that had previously been disclosed. As of July 27, 2023, the company received written notification from the NASDAQ staff stating that the company has regained compliance with the bid price rule and the minimum stockholders' equity rule. The work that was done to improve the balance sheet early in the year, coupled with the reverse stock split that was approved at the Annual Meeting of Shareholders, allowed the organization to regain compliance. We continue to believe that the liquidity offered to stockholders of remaining listed on NASDAQ is worthwhile and are pleased with this outcome. Sales for the second quarter continue to lag from my long-term expectations for the business. We have shown a slight improvement over the previous quarter. However, timing of orders and expected inventory did delay some of our anticipated Q2 revenues into the second half of the year. Nevertheless, the smaller sales force has continued to build a backlog of orders on both the military and commercial sides of our business in addition to generating a larger pipeline of revenues for the future. I have continued to monitor and adjust our sales model to ensure that the company can service our existing customers while looking to expand our base and overall revenue. I'm happy to report that Randy Gianas, a seasoned member of the Energy Focus team behind the scenes, will be taking an active role on our sales force. Randy brings with him not only a wealth of operations and product experience from being an integral member of the EFOI team for the last 3 years but has also held various sales-related goals, including owning his own lighting sales agency prior to joining Energy Focus. I'm truly excited to see how our combined experience can drive the company to the next level. Our fresh stock of RedCap, our emergency backup LED tube product, began to arrive in late second quarter. This popular product for the company had faced significant supply chain challenges, and we look forward to supporting healthy stocking levels on this product moving forward.
Additionally, our Power Line Controlled EnFocus switches has faced component supply issues that we believe we have worked through, and we will be able to drive additional demand in the future periods. Fresh stock is now arriving regularly, and we believe we are better positioned for growth in the second half of the year. We continue to focus on product expansion in both lighting, control and energy solution products that will drive revenues within our current market segments. We look forward to sharing new product announcements and timing on availability as we move forward.
I am determined to drive this organization forward. This quarter is showing the beginning sign of the positive improvements towards revenues and increased margins. Although there is still a lot of race left to run, I believe we have learned how to get out of the gate and run towards a brighter future. Let me now review our Q2 financial results. We had net sales of $1.1 million for the second quarter of 2023, a decrease of 29% compared to sales of $1.5 million in the second quarter of 2022. This is driven by lower sales volume on the commercial side.
Second quarter 2023 net sales of military products were $613,000, which is a $107,000 increase over the second quarter of 2022. Military-related sales were flat when compared to the first quarter. Military-related sales have rebounded since the third and fourth quarters of 2022. However, the delays in the supply chain have pushed out some of the revenues originally anticipated in the second quarter for military until later this year. Sales of our commercial products were approximately $442,000 or 42% of total net sales for the second quarter of 2023, down $533,000 as compared to the second quarter of 2022. Commercial sales increased $121,000 over the prior quarter on a sequential basis. Volatility in our supply chain continues to be reflected in these results as we are primarily selling through on-hand legacy inventory. Higher-margin proprietary products like RedCap arrived late in the quarter. Sales in new customer purchase orders for RedCap and add-on purchases increased immediately upon the RedCap arrival. Gross profit for the first quarter of 2023 was $179,000 compared to gross profit of $109,000 in the second quarter of 2022. Sequentially, gross profit improved by $162,000 from the first quarter of 2023.
As a percentage of revenue, gross margin was 17% in the second quarter of 2023 compared to 7% in the second quarter of 2022. The period-over-period increase in gross profit was driven mainly by a favorable impact from lower fixed cost of $0.2 million or 15% of net sales. As compared to the first quarter of 2023, gross margin rebounded significantly from 2%, primarily due to improved sales and product mix along with a favorable impact from the change in inventory reserves due to orders received during the second quarter of 2023, which we expect to fulfill during the third quarter of 2023. Adjusting gross profit margins for excess and obsolete in-transit and net realizable value inventory reserve and scrap and write-offs related to our inventory reduction projects contributed to the non-GAAP adjusted gross profit of 7% for the second quarter of 2023 compared to a gross loss of 5% in the second quarter of 2022. Sequentially, adjusted gross profit improved compared to an adjusted gross loss of 1% in the first quarter of 2023. Operating expenses in the second quarter of 2023 were $1.3 million compared to $2.3 million in the second quarter of 2022. The decrease is primarily attributable to lower SG&A expenses due to a significantly decreased payroll and payroll-related expenses. Sequentially, operating expenses were flat as compared to the first quarter of 2023. Loss from operations for the second quarter of 2023 was $1.1 million, a decrease over the prior year comparable quarter loss amount of $2.2 million. Loss from operations also decreased $103,000 as compared to the prior quarter. Net loss was $1.2 million or $0.42 per share of common stock for the second quarter of 2023 as compared with a net loss of $2.5 million or $2.43 per share of common stock, which is reflective of the impact of the June 2023 1-for-7 reverse stock split in the prior year comparable quarter. Net loss also decreased $166,000 as compared to the prior quarter. Adjusted EBITDA, a non-GAAP measure, which excludes depreciation and amortization, interest expense, stock-based compensation and other nonrecurring charges and/or sources of income such as incentive compensation, was a loss of $1 million for the second quarter of 2023 compared with a loss of $2.1 million in the second quarter of 2022. The improved adjusted EBITDA profit from the second quarter of 2023 was primarily due to improved margin and lower operating costs. Now I'd like to turn to the balance sheet. Cash was $1.3 million as of June 30, 2023, as compared to $52,000 as of December 31, 2022. As of June 30, 2023, the company had total availability of $1.5 million, which consisted of $1.3 million of cash and additional borrowing availability of $204,000 under its credit facility. This compares to total availability of $107,000 as of December 31, 2022. As a reminder, the total availability is a non-GAAP measurement of our access to cash at any given point in time and we believe is a much more relevant metric than simply looking at cash balance or even net debt on the balance sheet. During the first quarter of 2023, we reduced the maximum availability on our lending facility to $500,000 and agreed with our receivables lender to terminate our accounts receivable lending facility. Excess borrowing availability on our credit facilities represents the difference between the maximum borrowing capacity of the credit facilities and our actual borrowings under these credit facilities. During the second quarter of 2023, cash used in operations was $152,000. Cash provided by financing activities during the second quarter of 2023 was $1.2 million, primarily due to the completion of a private placement for the issuance of common stock, which raised $1.3 million in gross proceeds. As noted earlier in the call, in June 2023, we enacted a 1-for-7 reverse stock split as part of our strategy to regain compliance with NASDAQ's bid price rule. With that, I'd like to make a few closing comments. Once again, the results we delivered today are still the beginning of a turnaround for Energy Focus. Although there is tremendous amount of work still to be done, I believe that our biggest hurdles are behind us, and we are focused back on sales, new product development and innovation. I look forward to sharing additional growth and improvements with you next quarter. With that, we would like to open the call to questions. Operator?
[Operator Instructions] Our first questions come from the line of Sameer Joshi with H.C. Wainwright.
Great. Congrats on the continued turnaround. Nice to see margins come through as well. So let me start with there. Do you expect as more RedCap inventory comes in that the gross margin will improve from what you saw in 2Q, 17% going up to, say, some of the historical levels seen in 2020?
Thank you, Sameer, for your question, and I hope you're doing well today. Although we do not provide guidance, I do believe that as we continue to get fresh supply of both RedCap and new products that we will continue to improve our gross margin percentages. I know that's one thing that I've been committed to do, is to improve our overall revenues and our gross margin. And I do foresee it going up. However, I can't provide great guidance on where it will end.
Understood. That's fair. Just digging a little bit in this -- on this inventory. Is that also a bottleneck for sales in terms of -- is -- are your orders mainly for the new RedCap and other products as against the inventory that you already have on the books? How should we look at the sales ramp and inventory going forward?
Sure. So as we look at sales and inventory going forward, RedCap is what I like to call our lead horse in the race, and it pulls along a lot of our other inventory on the commercial side of our business. So as we have healthy stock of RedCap and as we focus so much on our RedCap product, it allows us to pull through some of our other WhiteCap or other more generic product categories because it allows us to offer our customers a fuller basket of products. So as we look at our inventory and where we're at today, the ability to pull through some of the items that we still have on hand at a higher level is all dependent on ensuring that we have our RedCap in stock.
Additionally, I also pointed out our EnFocus switches. Being able to have our EnFocus switches will allow us to sell a healthier level of our EnFocus tube products, which we also have a good inventory level in stock today. So as those products become available in future periods and we have healthier stocking positions and inventory levels, then we anticipate our sales channels to drive better demand and push that through.
Understood. Got it. On the -- specifically on the MMM pipeline, how much visibility do you have in terms of securing orders to, say, within the next 2 to 4 -- 2 to 6 quarters, getting at least to revenues seen in 2022 on an annual basis?
Great question. We do have inventory pipelines and have booked orders going through -- I think our -- yes, Q2 of 2024 today. As we continue to build back that channel and build the demand in that channel, we believe that we'll have better visibility out through future years and future periods. And that will -- and not only our demand in, let's say, Q3, Q4 but into future years. So as we can -- if you recall, about a year ago, the company hired a new military sales leader, and that person has essentially rebuilt that entire pipeline in channel in the past year. Those sales are longer lead, longer lagging, and we continue to see additional orders within those channels. So although we don't have clear visibility where it will go in the next 6 quarters per se, we're getting a better sight and a much, much healthier pipeline quarter-over-quarter.
Understood. And then just last one -- or actually just a couple more. Commercial revenues are making a comeback slowly. Should -- I mean is that a part of your revenue growth strategy going forward? Or how much part would that play? Because I know military seems to be in a good shape for now. But on the commercial front, should we expect to continue sequential increases in revenues?
Absolutely. As we look to bring in healthier stocking levels on our commercial side, we anticipate growing our revenues within that side of the business. I -- that's the side that I'm continually looking to tweak and ensure that we are driving the business forward in. And with new stock and new RedCap to go out -- to go out to show customers, I believe that we'll be able to drive that business forward even more.
Understood. And now the last one. And this is not a significant item, but just was wondering product development costs, relatively flat or just is a bit lower. When should we expect these to turn back on? Like as sales increase, would you start investing more in R&D and product development?
Yes. As we continue to drive our top line revenue, that's where we hope to have a healthier balance in that area and be able to continue that tradition of having new products and innovation. So I do see a small increase in the future. However, we're looking to ensure that it doesn't get out of line with where our top line revenues are.
There are no further questions at this time. With that, I would like to thank you all for your participation. You may disconnect your lines at this time. I hope you all have a great day.