Greetings, and welcome to the Energy Focus Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Jim Warren, Senior Vice President and General Counsel for Energy Focus. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Joining me on the call today is Stephen Socolof, Chairman and Interim Chief Executive Officer; and Clifford Griffin, Senior Vice President, Corporate Controller and Chief Accounting Officer. Before we begin today's call, I'd like to remind everyone that, we'll be making certain forward-looking statements. These statements that are based upon information that represents the company’s current expectations or beliefs. These 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 Securities and Exchange Commission. 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 releases, 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. I'll now turn the call over to Steve.

Thank you, Jim. Good morning, everyone. To remind you, while we have been communicating over the last few months, we have been pursuing initiatives to improve the energy focused business through: number one, bringing more value added differentiated products to the marketplace; number two, aligning our team around near term opportunities with an emphasis on execution; and number three, streamlining our expenses to reduce our cash burn. Our goal was to position the company for improved financial results in the second half of this year. Now, let me review where we stand on each of these initiatives. First, we have made significant progress on new product development. Our RedCap Emergency Lighting products continued to be unique in the market and see strong demand. We were supply constrained by chip shortages, which you'll see had an impact on our results. Fortunately, we believe we've alleviated that problem with some great engineering work that expanded the available chips we could use and we have now secured additional supply. In a few months, we expect to have out our next generation version of this product. A revamped line of traditional tubular LED products, which we call our white caps, also are planned to be available for sale later this quarter. We anticipate these updated offerings will dramatically reduce inventory and logistics complexity and product cost, reducing risk of shortages and improving margins. Finally, we are beginning to see a ramp up in sales of our in-focus control products. We have several versions of switches and lamps for both retrofit and new applications. We already have a dozen customer deployments and are building marketing case studies and go to market plans. We believe this innovative power line control product line that it's simple to deploy even in retrofit applications, simple to manage, and reliable…

Thank you, Steve. Net sales of $1.5 million for the second quarter of 2022 decreased 28.6% compared to sales of $2.1 million in the second quarter of 2021, mainly due to delayed funding related to military projects, utilizing our products, as well as fluctuations in the timing and pace of commercial projects, and the lingering macroeconomic supply chain impact as a result of the COVID-19 impact. The sales cycles for the military are dependent on many factors, including government funding, U.S. Navy award and new ship construction schedules and the timing of vessel maintenance schedules when compared to the 0.9 million of sales in the first quarter of 2022, net military sales declined to $0.5 million in to second quarter of 2022. Sales of our military products decreased mainly due to the continued delays of government funding for certain projects and the continued delayed timing of orders. Sales of our commercial products were approximately $1 million or 65.9% of total net sales for the second quarter of 2022, down 103,000 as compared to the second quarter of 2021. Commercial sales were slightly below the prior quarter on a sequential basis. Volatility in the opportunities and timing related to larger commercial projects, as well as supply chain impacts from the COVID-19 pandemic continue to be reflected in these results. As Steve mentioned, we are focused on sales execution, including the expansion of agency relationships and introduction of new products to improve our position in the commercial market. Gross profit for the second quarter of 2022 was $109,000 compared to $393,000 in the second quarter of 2021. As a percentage of revenue, gross profit margin was 7.4% in the second quarter of 2022, compared to 18.9% in the second quarter of 2021. The year-over-year decline in gross margin was primarily driven by…

I want to thank Cliff and others for joining us to achieve our vision. As I said earlier this year, we prioritize positioning energy focus with new products, a reduced cost structure, and strong team to start to show improved results in the second half. Here we are, we are hard at work. We look forward to providing good news as we move forward and speaking to you again in the quarter. With that, we'd like to open the call to questions. Operator?

[Operator Instructions] Our first question comes from the line of Amit Dayal with H.C. Wainright. Please proceed with your question.

Thank you. Good morning everyone. So Steve, just to begin with, from a revenue execution perspective, do you feel with the visibility you have now or currently that 3Q and 4Q, you could start seeing improvements relative to 2Q 2022?

Yes, Amit. As I said, we actually got off to a good start with the backlog from Q2 that we've already shipped about 70% of. And I think that gave us a good head start. As I mentioned on the military side, we've already received orders so far this quarter that exceed what we shipped last quarter, and we're starting to see some good progress in terms of our RedCap sales, given that we now have – we're now well stocked with RedCap. And later this quarter, we'll have our [white caps] [ph] in. And as I said, we've got our first dozen customers deployed with and focus switches and we've got really good feedback from those, and our sales team is really excited to be out selling these new products in the market.

Understood. Could you remind us what the backlog is or was at the end of [2Q 2022] [ph]?

I don't think we reported that.

Okay. Understood. How much are you expecting to, you know, get from the remaining inventory that you have left? Do you have anything on that side?

You're asking for the 7 million of thereabouts of inventory in our book?

The stuff that you are, sort of, you know, unloading, like, how much should investors, sort of expect you could get for all of that?

Yes, that's a good question. As I said, we've had a lot of inventory running about [$7 million] [ph] on the books for a couple of quarters now. And so, we've been going through a major inventory review of the salability and putting in place price sheets getting information out through our salespeople to our channel and trying to get that inventory moved as quickly as possible.

Okay. And operating costs are down, sort of 20% from levels seen in the beginning of the year. Is that going to, sort of stay at those levels or do you foresee potential cuts beyond the 20% level?

On the cost structure side?

Yes, yes.

Yes. And by the way, I just wanted to clarify when I'd say 7 million of inventory, I'm talking about net of reserves. So, we've also been as we mentioned, cleaning out our reserved inventory as part of our [base consolidation] [ph]. On the cost structure, I think we've made really good progress. I think we're very focused on continuous improvement there. And there's – as we all know some significant level of inflation in the world today and we are committed to continuing to reduce cost as we go forward.

Okay. Yes, that's really all I have. I’ll take my other questions offline. Thank you so much.

Thank you, Amit.

There are no other questions in the queue. I'd like to hand the call back to management for closing remarks.

Again, I really appreciate your attention on the call and participation. As I've said for the last few months, we've been very focused on coming into the second half of the year, well positioned for a substantial improvement in our business and results. And appreciate your support and we look forward to communicating our progress as we go forward. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.