Greetings, and welcome to Energy Focus First Quarter 2023 Earnings Call. [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. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Joining me on the call today is Lesley Matt, Chief Executive Officer. 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 otherwise required by law. Please note that during this call and in the accompanying press releases, certain financial metrics are presented on both U.S. 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 will now turn the call over to Lesley.

Thank you, Jim. Good morning, everyone. This is my third earnings call since joining Energy Focus in September of 2022, and what a ride this has been thus far. My main objective since joining the company has been to bring it back to its core of -- markets of military maritime in commercial and industrial lighting and control products, secure necessary equity capital via a strategic investment, work through significant supply chain constraints in our legacy inventory position and massive cost-cutting and rightsizing to propel the company forward into the future. In my first call, I have stated that I was cautiously optimistic that I would be able to show progress in 6 months' time. I believe that the first quarter 2023 results that I'm sharing today are delivering on that promise to do more with less sales are beginning to rebound while operating costs have plummeted. Although I have my sight on the company's strategy aligned with much higher goals, today's results show the beginning signs of what I expect this progress towards a brighter future for EFOI. We started the year off with a critical win in January of 2023, where we were able to secure a strategic investment from Sander Electronics. In addition to funding provided by this investment, we welcomed our new Chairman of the Board, Jay Huang, who has brought with him expertise in manufacturing, electronics industry knowledge and excitement around product development back to the organization. We are also excited to have Mr. Wen-Jeng Chang join the Board this quarter and look forward to his contributions as an experienced financial and transactional adviser. The funding provided by the Sander investment has contributed to approximately $4.8 million in balance sheet improvements in Q1, including over $3 million in fresh capital, plus $1.7 million in debt…

[Operator Instructions] Our first question comes from the line of Sameer Joshi with H.C. Wainright.

Yes. Glad to see progress on all fronts, including financing, restructuring and also on commercial performance. So good job on that. I just had a few questions. The gross profit improvement that we have seen, is it likely to stay in the next few quarters? Or was there any other onetime item that helped improve the gross margins?

So our goal is to improve our gross profit overall by introducing new products into the market, which will improve our overall margin as we move into future periods. So this is just the beginning of improvement on gross profit.

Understood. Got it. And so just to segue based on that response is that the inventory is at around $4.9 million. Is there a risk of this becoming stale or a requirement need to impair this anytime soon?

That's a great question. Right now, unfortunately, for us, a good portion of our inventory valuation is on our EnFocus tube products. However, as I mentioned in the presentation, we are still waiting on inventory for the switches. So the tubes don't sell as well without the switches. So I do not believe that this product will become stale as we have the 2 products in the stock, and we're just waiting on those switches to get really moving on those EnFocus power line control products.

Lesley, can I add one thought?

Absolutely, James.

Sameer, thank you for the questions. On the gross profit improvement, no onetime charges reflected in this quarter. And then on the -- like the inventory, the net inventory cost, I believe last quarter, we had the question of has inventory been mark-to-market. And to kind of answer both questions at the same time, the flat but positive gross profit margin is a sign of us delivering on the answer to that question, which is we took those charges in the past. The inventory is carried at what's salable. And then going forward, we're constantly monitoring that and looking to grow gross profit margin as our higher-margin products improve the mix down the road as supply chain backfills.

Yes, yes. And I understand -- I think I had asked this question last quarter. And it's good to see that $488,000 reduction. I think that should be considered a step change down, right? I mean that just is going to be there absent in the next few quarters. The next question is on -- I guess you answered it partially, Lesley. But going forward, should we see a sequential improvement in the top line? I know the new hire on military sales is a good step in the right direction. But how do we see product mix and revenues sequentially growing over the next few quarters?

Sure. So again, as we continue to do 2 efforts, one is bring new products to market that have higher profitability and better margins for the organization, and two is improve our cost standards on our existing products. That will help to grow our overall profitability in future periods and a better and healthier mix between both military and commercial sales. Again, our commercial margin was through sell-through products. So it had very little because of the impairment charges that we had put. And a lot of our military products, the sales that happened in Q1 were at contract pricing, many of them. And the cost of materials had slightly increased based off the old -- based off just what's happening in the world today. So our contract pricing is somewhat stale. So it's mixing the contract pricing sales with other higher margin sales of the same products to create a healthier balance.

Understood. Got it. And then just last one on the GaN power supplies. Do we have a time line on this in terms of development milestones as well as maybe commercial sales down the line?

Sure. So as you may or may not be aware, the power supply product is a much higher technical sale, and it requires a lot of development time and attention in order to be able to fully put it into market. We're currently working with our development team today to ensure that we meet all compliance and regulatory standards so that we can launch that product successfully, hopefully, before the end of the year. And another nice thing is we actually have a potential customer lined up for those products once we are able to launch them. So we are very excited to be able to officially announce that as available into the market.

Yes. Actually -- and I just have a follow-up on that. So this is a new product development effort. There are other products that are being developed. Should we expect R&D to increase from -- I mean you have reduced this in recent quarters, but going forward, should we see a slight pickup in R&D spend?

There could be a potential slight pickup. However, with our strategic investment partner, Sander Electronics, they've been working in conjunction with us to help bring some of these products to life. And that has helped us maintain the low R&D costs because we are working in conjunction with their teams on many of these new product developments.

[Operator Instructions] There are no further questions in the queue. I'd like to hand the call back to Lesley Matt for closing remarks.

Thank you, operator. Jim, I think you had one item.

Yes. Lesley, I just wanted to clarify 1 or 2 numbers from an earlier presentation. For adjusted EBITDA, a non-GAAP measure, we actually did even better than what we said the first time. Our loss was $1.2 million for adjusted EBITDA for the first quarter of 2023. And then for prior period, net sales, it was $2.1 million in the first quarter of 2022. So I just wanted to clean that up. But otherwise, back to you.

Thank you, Jim. I apologize in advance for fumbling over my words potentially with those items. Again, thank you, everyone, for your time and attention today. And once again, I appreciate your continued support of Energy Focus. And please remember that our annual meeting is on June 15, and we hope you review the materials if you are a shareholder and vote yes to the reverse split. Thank you again, and have a wonderful day.

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.