Good day, and welcome to the Energy Focus Second Quarter Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Marcia Miller. Please go ahead.

Thank you. Good morning, everyone and thank you for joining us for Energy Focus’ Second Quarter 2015 Earnings Conference Call. Today, James Tu, our Executive Chairman and Eric Hilliard, our President and Chief Executive Officer and I will report on our results for the second quarter of 2015. The news release with our earnings results and our quarterly report filed on Form 10-Q have been posted to our website under the Investors section. As a reminder, today's discussion will include forward-looking statements including predictions, expectations, estimates or other information that might be considered forward-looking. These forward-looking statements are subject to numerous risks and uncertainties. We encourage you to review our most recent filings with the Securities and Exchange Commission, including our 10-K and 10-Qs for a complete discussion of these factors and other risks that may affect our future results or the market price of our stock. We are not obligating ourselves to publicly release any revisions to these forward-looking statements in light of new information or future events. Now, I’d like to turn the call over to James.

Thank you, Marcia. Good morning, everyone, and thank you for your participation in our second quarter 2015 earnings call. In this call I will focus on updating with you our business development effort and progress and Marcia Miller will discuss about our financial and operational results in more detail. We will then open up for questions. As you have read from our press release this morning, Energy Focus registered yet another quarter of record financial results. Our total sales grew 148% over the same quarter last year and 26% from first quarter of 2015 and gross margin improved to 46% while operating margin reached a record 19%. I’d like to thank all our employees again for their passionate commitments and extraordinary performance that contributed to our strong financials. Now I would like to update with you the progress we have made in specific verticals we are targeting now. Our first vertical that is still responsible for over 80% of our sales during the quarter is military maritime. During the second quarter we continued to experience strong orders and delivery of our Military Intellitube products to the US Navy. We expanded our product reach to 175 ships and the total penetration of our Military Intellitube on the fleet to just over 20%. The pipeline of opportunities from the US Navy remains robust as the Navy now is in full swing for LED lighting adoption for the fleet. In the meantime, we continue to accelerate our development for new military LED lighting lamps and fixtures for new ship construction which we believe will bring additional sales to us in the coming years outside of the retrofit opportunities. In addition, we started coating project for Military Sealift Command and Coast Guard ships with our commercial Buy American tube which we believe will be…

Thank you James. We are very pleased to record fifth consecutive quarter of sales growth and strong profitability. For the second quarter of 2015, Energy Focus recorded record net sales of $16.6 million compared to $6.7 million in the prior year’s second quarter, representing an increase of 148% year-over-year and a sequential increase of 26% from the first quarter. The growth was driven primarily by sales of military Intellitube for the U.S Navy with government product sales growing 419% [ph] year-over-year and 30% sequentially from the first quarter. Prior to 2015, we have reported two segments of our business, the product segment and the solution segment. However, during the second half of 2014, we began shifting our focus away from providing turnkey solution, so we can mine our resources with developing and selling LED products into the commercial and government markets. If we exclude revenue of $1.1 million recorded for turnkey solutions in last year’s second quarter, net sales would have almost tripled for the second quarter year-over-year. As we mentioned in the press release, this month we disposed of Crescent Lighting Limited, our wholly-owned subsidiary in the United Kingdom. After selling our pool and spa product line in November 2013 and transitioning away from the turnkey solutions business, Crescent which serves a niche portion of the specifiers market was the last legacy business that was not core to our tubular LED retrofit strategy. Net sales for Crescent are reported with our commercial sales and were $2.6 million in 2014 and $923,000 year-to-date through June 2015. Excluding CLL’s sales for the second quarter of 2014 and 2015, commercial sales would have increased to 24% compared to the prior year. We do not expect the disposal of Crescent to be material to our financial results. Turning to gross margins, we saw…

[Operator Instructions] And we will take our first question from Craig Irwin with Roth Capital Partners.

Hi, good morning and congratulations on the strong results.

Good morning, Craig.

First question I wanted to ask James is, 175 ships just over 20% penetration, does that include the merchant marine ships that you were looking as an adjacent opportunity to the core military opportunity?

No, these are all for combat ships.

Okay, excellent. Do you have an update on the number of merchant marine ships that you’re already on and the approximate penetration there?

I think we mentioned in our last call that merchant marine is not an immediate opportunity for us just because we are focusing more on penetrating the core US Navy ships, but also as I indicated in the call earlier that we are focusing on expanding to foreign navies as well as [indiscernible] in Coast Guard, these are more immediate opportunities. Merchant marine is just not a market that at some point we will take on, but these are sort of the low-hanging fruit that we are looking at now.

Okay, so is it fair to think about this as really an opportunity you can effectively target the back-end of 2016 and in 2017, as you –

Yeah, I want to say that the merchant marine market is very fragmented and there is really hundreds of companies out there that run these ships. So this will be a latter part of the 2016 effort.

Okay, excellent. Just to follow-up on the foreign Navy spend, how would you quantify the opportunity there, is it roughly equivalent to the size of the US opportunity given that the several foreign fleets that are friendly and like to use US technology?

Yeah, based on our research, we believe that the market is actually bigger than the core US Navy market, but we are looking at this as a – we are looking at the allied navies, which are 36 countries, we are targeting them first and the markets we believe are close to $250 million as I’ve said earlier, just like the size of the US Navy, and it could potentially be larger.

Okay, excellent. And then I know that the Admiral of the US Navy has mandated LED lighting new built ships, can you update us as to whether or not that’s an opportunity for you or is that something you would maybe look to target later?

Sure. We are working – as I said earlier again, we are working on developing products for this particular channel and we expect to start competing in the new ship construction pretty soon.

Excellent. So then just changing subjects a little bit, your military housing opportunity that you’ve been targeting, can you update us on the approximate number of bases where you have done trials? Can you update us whether or not you would expect to show up on the GSA schedule for potentially serving these bases? And where you stand as far as the overall process of developing orders from that market?

Yeah, as I mentioned earlier, we are working with a few bases at this point. Again, we just, as I said earlier, the Navy just qualifies [indiscernible] for the bases use, this already last two weeks. So this is very early stage, but as I said – indicated that we have already working with both Army and Navy bases in the first six months, so we do expect some early orders in later part of this year and we do expect pretty significant acceleration of opportunities in 2016.

Thank you. And then last question if I may. The adjacent commercial opportunities, do you think it’s fair to characterize them as maybe at a similar stage to where the military was for you back in 2013 or how would you look at the potential ramp right there, is this something that could take off faster than the military did for you?

That’s not a bad analogy, I mean, if you look at the 2013, we did about $3 million, this year we will do obviously more than that in commercial. And in 2014, we did about $17 million in military and this year obviously we are running over $40 million right now. So I do think that we are probably around -- compared with the Navy, we are probably in the first year of actual sales. And next year, obviously we expect the sales growth to accelerate. Obviously, the commercial markets are much larger than the Navy market. So there are definitely no shortage of opportunities out there, it’s about how fast we execute.

Thanks again for taking my questions and congratulations on the strong performance.

We will take our next question from Carter Driscoll with H.C. Wainwright.

Hey guys.

Good morning, Carter.

Congratulations Marcia on your appointment as full time CFO.

Thank you very much.

First question, could the GSA ever become potentially a vertical at some time?

Yeah, it is, but there is work to be done. We need to make sure that the GSA is open to tubular LED solutions and this is what we are working on in DC and Eric is with us, so, Eric, do you want to chime in?

Yes, I think -- thanks Carter, this is Eric. The GSA itself as a vertical, they obviously are very large landowner in the United States, one of the largest and they’re in commercial grade building. So, when we look at the opportunity of the market, we view them as a commercial grade building part of our market even though they are the owner of the land or the property. Currently, the GSA is -- has building construction guidelines and those guidelines are very specific on the technologies that there are lot to acquire. So, we have to work with them to make sure that our technology aligns with their expectation. And as we do that, we align ourselves through strategic advisors in Washington DC to align ourselves with that vertical itself. So, yes, in the coming period, we do expect that that does become apply and we continue to pursue that market.

Sorry, do you have something to say?

If you look in our press release, we would be mentioned about the by American and made in USA products. So, obviously, we are pushing for the government entities to prefer these products. We do have a very sizeable probably the largest or one of the largest LED tube manufacturing operations here in North America. So, we definitely are a champion for by American and made in USA products.

You’re not so to position yourself. I completely agree with you on that. Would it potentially require, Eric, a recalibration of the Intellitube to specifically address GSA or do you believe you might be able to pull it over as it is?

No, I think the technology is fine. It’s really has to do more with administrative guidelines in altering specifications like this today for building and construction. We experienced it in the DoD in the past, we have experienced it in another markets in the past where the technology is still relatively new as compared to a lot of the regulatory guidelines and regulations were written around for resin technology. So, you just sort to have to go in and just place the incumbent technologies and it’s just an administrative effort really.

Okay. My next question, just trying to drill down into the commercial opportunity. Obviously, it’s -- as Craig was mentioning, trying to make it parallel to where you were in terms of the U.S. Navy opportunity couple of years ago, but the composition of the commercial sales right now, could you give rough parameters on your target markets, schools versus those military application that you might be qualifying more as commercial versus the industrial? I know obviously you got to be reaching over from school branch, but any helpful -- anything would be helpful for this quarter and where you may be you see it going over the next couple of quarters. As it gets more diversified, do you see more even mix? Is that heavily weighted towards one of those sub-verticals right now?

Yeah, Carter, I mentioned earlier, these verticals that we -- I’ll touch upon, these are true opportunities for us and we’ll stop seeing maybe trickles over revenues from these verticals. Remember, we did about $2.4 million in the second quarter for commercial. It’s still very small business for us compared to military, but -- so -- and any of these opportunities I have mentioned are very sizeable compared with our revenue base right now. So, we certainly, again have no shortage of growth opportunities in the next few quarters from these main commercial verticals. You will hear announcements if we have significant wins obviously, but I wouldn’t say they are multiyear development. We will start seeing growth in the next few quarters.

Okay. And I know you’ve been targeting the hospital market very aggressively and you mentioned I guess ten large chains that you’re targeting for, I’m going to say, operators that you’re targeting in the Northeast and Midwest. Can you talk about maybe how many on average hospitals each of those operators might have?

It’s a pretty wide range, but we are only pursuing hospitals with over $500,000 of opportunities for us. We are manufacturing. So, we’re taking very unique approach to go direct to the customers. And the only reason we are doing this is because we like to be able to educate the customers with our technical knowledge and just work with the large customers, so they get better deals and they get better service. So, we are only targeting larger hospital systems. The largest could be over $10 million, the smallest of that right now is at least $500,000 or more.

Okay. Let me talk about pricing, as you’re shifting I guess over the -- trying to sell into the Coast Guard and some of the other military branches, do you expect to be similar to the Navy? Obviously, you’ve had longer history with the Navy specifically and I know you’ve given one price cut, but have been very strong to hold -- very positive to hold your margins at a very high level. Maybe just comparing things fast, where you expect the margin profile to be as you expect to penetrate some of the other military branches?

So, the Coast Guard is actually buying our military Intellitube and other military products. The military – this combined did not require military spec products. So, we actually sell them -- we’re actually selling them by American commercial tubes. So, to your question about margins, as Marcia indicated earlier, when commercial revenues about to grow faster in percentage wise than the military product line was that being margins falling back to 35% to 40% range. How fast does that happen? I -- we can’t predict on a quarterly basis. As I said, some of these commercial orders are large and they constraint the quarter easily and the margins easily. But as we have repeatedly said, our goal is to maintain 35% long-term margin and you will get to think when the margin drop because that means our sales are growing fast on the commercial.

Absolutely. But just maybe a point of clarification, so if you are a selling a military base a commercial product, would that be characterized -- would that be grouped under your military segment or your commercial segment? Is it by product or by market?

We are looking at reporting by products. So, if we sell a commercial product to a military base, it will be under commercial products.

Got it. Thanks very much. I’ll be back in queue. I appreciate your time.

Thanks again, Carter.

And we’ll take our next question from Amit Dayal with H.C. Wainwright.

Thank you. Congrats guys -- how are you guys? I apologize for any background noise, I’m calling from an airport. In terms of your outlook James, you raised your outlook from 60% year-over-year growth to 100% year-over-year growth. Can you provide a little bit more granularity in terms of and maybe backdrop or any other metric that gives us some sense of visibility around shipments as that come through and then for the rest of the year [indiscernible] fourth quarter, did you see sort of an even distribution between revenue generation in those quarters or will the third quarter be stronger than the fourth quarter? Any color on these terms to help with in the modeling, et cetera.

So, I’ll answer your second question first, right. So, we don’t expect too much seasonality at this point, given that the sales level is larger now and a bit more diversified. Remember, the ships are buying these tubes now, over 170 of them, right. So, and then we’re getting into the commercial markets. So, they are actually giving us small orders here and there. So, we don’t expect a lot of seasonality going forward. I think there is growth momentum with all the seasonality. Now, that goes to your first question about the growth. We do expect strong growth continue -- at year-over-year at this point. Our 50% growth target is a long-term average. There might be years that we are growing faster than that and there might be years that we’re growing less than that but on a long-term basis, we -- that’s how we plan every year to grow at least 50%. This year, it happens that we are able to grow much faster than that. So, we’re sticking to our 50% long-term growth target. The 100% is only for this year and we hope we can do that every year, but that is so far, that 100% growth is based on the outlook this year. Now, the backlog is not a very good parameter to predict our sales, because we can ship products pretty quickly once we get the orders. So I wouldn't use backlog as the benchmark to predict sales.

Got it. And in terms of your penetration rate, you said you penetrated 20% [ph] of your Navy opportunity in the US. Are we fully deployed in that 20% or is there room to further spell in to that 20% penetration?

So 20% is a measurement of the number of sockets we have penetrated against all the sockets out there. So it should be in that. Yeah.

Okay. Got it. And on the margins side, you’ve sort of given us a sense of where these things will fall as your commercial business grows, but in the near term, should we continue to expect 40% to 45% at least over the next two quarters?

Yeah. I mean, again as we said, it really depends on the product mix. We’re working hard to always be able to maintain our margins by selling again on total value to the customers, not just on price. Having said that, we of course want to be competitive as well and we’re always looking for ways to cut costs out of our product, but we will never sacrifice quality in just that.

Just last question on capacity, it looks like you’ve been looking to -- I think you’ve seen your capacity, at what levels of utilization [indiscernible] when will this new capacity come on line, any color on that?

So are you referring to the fact that we have more production space?

Yes.

Okay. Yeah. So we were able to sublease -- sublet some space from one of the other tenants in our building that’s leaving and again it just allows us more room to be able to grow the business and our Made in America, which is primarily the product that we ship to the US Military, you can see the growth has been pretty explosive and so we need the room.

I understand. I was just trying to get a sense of whether you’re at full utilization levels with the current capacity?

No. We’re running one shift. I mean we’ve got lots of room to expand.

Yeah. So we won’t really need too much CapEx et cetera for expansion in that place?

If we do something with CapEx, it would be to the change the way we’re manufacturing our products, not to add the space, it would be machinery type of thing.

Right. Got it. Thank you so much. I’ll get back in queue.

Thank you, Amit.

We will take our next question from George Gaspar, private investor.

Yes. Good morning and congratulations on a great quarter. Got a question regarding how does Intellitube, your technology separate you from other LED providers that might be in your space and is it the technology itself, is it key to performance of the product, or at price or it’s a combination of everything.

George, I would say it’s a combination of everything. I’ve always said that our initial focus is on LED company, competing with all the largest companies, existing largest companies. So we have to offer something groundbreaking, otherwise we can’t win against them and we’re winning against these companies in the markets that we’re competing with. So I will say it’s a combination of technology, which as you probably read from our supplemental filings that we have added patents and Intellitube is a patented technology, it’s the only UL approved tubular LED that can be used for Direct-Wire and Direct-Fit. So it works with or without wallet and we’re the only one that can provide that and it’s a worldwide patent. And we also have -- because we have a very focused product strategy, we focus on LED tubes, replacing for resin. We have a very larger economy of scale in both military and commercial, so we’re able to have a pretty competitive cost advantage against other companies that produce 100 times more different SKUs than we do, or 1000 times for that matter.The third reason, I think it’s important is that we have -- as I mentioned, the Buy American and Made in USA products are a key differentiation for us in the military and government space. There was a question about GSA. We have not even included GSA in one of the verticals that we’re focusing on targeting and GSA is a very large market on its own, so we’re ready, we like to be able to win in the military markets first and then move on to GSA market. So I think it’s a combination of the factors that make us very competitive in the marketplace.

Good. And then on the product, is moisture content capacity important for the generation of your penetration on compact ship side?

Yes. It’s of course very important. It’s actually the proof for our military imperative, so yeah, that’s why it’s military spec.

And how many patents do you have covering your technologies?

Today, we have 84 -- 82, 84. Yeah, we have -- we continue to increase that. So I think… Yeah.

Okay. Thank you.

Thank you.

We’ll take our next question from Larry Litton with Second Line Capital.

My questions were answered. Thank you.

Good morning.

Good morning. No questions from me anymore.

Oh, okay. That’s easy. Have a good day.

Thanks.

[Operator Instructions] And we’ll take another question from George Gaspar, private investor.

Yeah. Thank you. Could you outline, this growth is very impressive that you’ve headed in to, and what kind of an employment situation do you have currently in your operations in Ohio and what do you perceive that you have to do moving forward to enlarge your capacity either physically or through qualified employment?

So, our manufacturing is done right here in our Solon facility. We have about 30 full time employees in the manufacturing organization. We also supplement that with contract employees. So there is probably about double that number of people that are actually in the production, manufacturing operation. So it’s very scalable for us. We can add people easily through contract manufacturing, and -- or I’m sorry through contractors and then once we’re ready to bring employees on full- time, we already know who we want to bring in, because they’ve been with us for several months already.

I see. Okay. And then how much of your business is done through resellers as opposed to direct marketing on the company’s part?

That’s an interesting question, because most of the sales are being done directly. Although we do have fulfillment partners that just fulfill our orders to the end customers, but the actual sales are made to the end customers, predominantly most of our sales are made direct.

I see. Okay. Thank you.

Thank you.

And I will conclude the question-and-answer session. With no further questions, I’d like to turn the call back over to James Tu for any additional or closing remarks.

Thanks, everyone again for your participation. We look forward to talking to you again in our third quarter 2015 earnings call. Have a great day.

And that does conclude today’s conference. Thank you for your participation.