Good day, ladies and gentlemen and welcome to the Energy Focus Third Quarter 2015 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Marcia Miller, Chief Financial Officer. Please go ahead.

Thank you, Nicole. Good morning, everyone and thank you for joining Energy Focus’s third quarter 2015 earnings conference call. Today, James Tu, our Executive Chairman, Eric Hilliard, our President and Chief Operating Officer, and I will report on our results for the third quarter of 2015. The news release with our earnings results, and our quarterly report filed on 10-Q have been posted to our website under the Investors section. As a reminder today, the discussion will include forward-looking statements, including predictions, expectations, estimates and 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 might 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.

Thanks Marcia. Good morning everyone and thank you for your participation in our third quarter of 2015 earnings call. In this call, as usual, I will focus on updating with you our business development efforts and progress, and Marcia Miller will discuss our financial and operational results in more details. We will then open up for questions. As you have read from our press release this morning, third quarter 2015 marked yet another exciting, record-breaking period for Energy Focus. Our total sales grew 151% over the same quarter last year with continuing strong sales to the U.S. Navy combined with a 66% increase in our commercial sales from same period last year. Our profitability also leaped from a year ago. Gross margin improved to nearly 50% from 33% during the third quarter of 2014, while operating margin reached 20%. As we mentioned in the previous earnings calls, over time we expect margins to come down from these fairly high levels as our commercial sales grow at faster rates and make up a growing portion of our sales. That said, we expect gross margins to stay above our long-term target of 35% in the next few quarters. In the meantime, we’re targeting to maintain a minimum operating margin of around 10% on a long-term basis as we intend to invest aggressively to maximize our top line growth in this early stage of LED adoption in the commercial markets, while fortifying our execution capabilities, launching breakthrough products, and maintaining the highest level of customer service. In terms of our progress in our targeted verticals, we remained uniquely and forcefully focused on the limited number of verticals to build initial success, as well as brand awareness and trust. And in the third quarter, we continued to make exciting progress across the board. Our…

Thank you, James. Before I get into the details, I’d like to inform everyone that during the third quarter, we reclassified the results of our former United Kingdom subsidiary, Crescent Lighting Limited, and our former turnkey solutions business, Energy Focus LED Solutions, LLC, to discontinued operations in our financial statements. Crescent was sold for a nominal amount in August 2015, and all outstanding warranty obligations of our turnkey solutions business expired during the third quarter. A table summarizing the preliminary, unaudited reclassified results is included at the end of the earnings release. We are very pleased to report a sixth consecutive quarter of sales growth and strong profitability for the quarter. For the third quarter of 2015, Energy Focus recorded record net sales of $18.3 million compared to $7.3 million in the prior year’s third quarter, representing an increase of 151% year-over-year and a sequential increase of 13% from the second quarter. The growth was driven primarily by sales of Military Intellitube for the U.S. Navy with government products sales growing 182% year-over-year, as well as increased commercial sales, which grew 67% year-over-year and 56% sequentially from the second quarter. For the quarter, sales for the Navy comprised approximately 82% of the total. Turning to gross margins, we saw a 15.6 point improvement in the third quarter from the prior year’s third quarter with gross margins at 49.8% of net sales compared to 34.2% last year. The overall increase in gross margins continued to be the result of improved operating efficiencies in our supply chain, building economies of scale from sales volume increases, and product cost reduction efforts from value engineering processes. Gross margins for the quarter exceeded our long-term target of 35% and we expect them to remain above this long-term target for the next few quarters. As our…

[Operator Instructions] All right. We will take our first question from Colin Rusch from Oppenheimer.

Thanks so much guys. Can you give us an update on the non-military bookings for the third quarter and year to date?

It's included in the press release. We have our commercial products revenue, it was 3.3 million for the third quarter.

Yes. I'm just looking for bookings, like how much booked between the new customers and Cleveland Clinic, you’ve been booking a fair amount of business?

We have a lot of, as James mentioned, our pipeline has grown, but we don't share backlog information. For the most part, I mean, we seek to be a turns business, we stock the most popular SKUs that our customers buy so that we can meet the customer demand relatively quickly.

Yeah. Colin, I think the question is on the Navy side, we do get backlog from time to time, it depends on the timing of these. So we do get a little bit visibility, but on the commercial side, the turnaround is very quick, usually we get the order we ship within a week, two weeks at most. So it’s probably not the best measure or gauge of our activities. The sales pipelines are the real gauge that we are looking internally, which obviously we can share because there is so much uncertainty on the sales pipeline. So I wouldn't use backlog as the benchmark to measure our total progress or momentum.

Fair enough. I just wanted to get a sense of magnitude. Changing gears a little bit, looking at the supply chain, we know that you've done an awful lot in terms of managing your suppliers, can you talk a little bit about innovations that you are seeing within the supply chain that are going to help you drive both quality and efficiency of the product?

Well, obviously, as you know, Colin, the biggest thing that's happening is the company is if you look at the military side because of sales increase, we were able to come back to our supply chain, get much better price transition from the suppliers. That is probably the biggest theme of this company and if you look at commercial sales, we just started to see the pickup in third quarter and I think we are going to see, I believe, we are going to see tremendous price advantage as we grow our commercial sales in the next few quarters. As we have seen from the military side, you see the margins increase at least 20 percentage points over the last year because of the volume increase and to some extent there are also the LED price drops during the period, but I would say that the economy of scale is the biggest story here in the next few quarters. And we just always set up this Taiwan operations centered to make sure that we turn around the inventory and work with our vendors is closely on the customer side in Asia.

Perfect. And then obviously you guys have been doing an awful lot of education of the market over the last few years, can you talk a little bit about the sales cycle and any changes to the sales cycle with your commercial customers, particularly with the retail customers and the healthcare customers over the last quarter or two?

I think it's too early to tell at this point, however what I can say is that as I mentioned earlier that after the win of the clinic, we absolutely have seen strong momentum picking up the interest of other hospitals, and it’s far easier to approach hospitals at this point when you already have one of the biggest retrofit ever in healthcare. That should dramatically shorten the sales cycle. On the retail side, the sales cycle is still low, but again we have been working on this for over a year. So this is why I mentioned that we should start seeing sales contribution in the next few months and quarters from the retail industry. Industrial manufacturing, actually, probably has the fastest turnaround among other verticals, and we just started building last quarter. So we are pretty excited about the progress there and the prospect there, the cycle is not going to be, it will probably be more like three to six months. The one thing that I would mention is the work that we've been doing with letting retrofit companies. We have now worked with -- we increased our number of letting retrofit companies we work with from 6 to 12 over the past quarter. Those are putting us orders as well, and it's important that we continue to build this network of partners because they are originating a lot of orders as well, and again we are going to have to take up two more quarters to build the pipeline from all the different verticals and so I believe that we are just starting to see that in the third quarter that the pipeline building will start contributing sequential commercial sales growth from here on.

Perfect. Thanks so much. I'll hop back in the queue.

And we’ll take our next question from Amit Dayal from Rodman and Renshaw.

Thank you. Congratulations James, Marcia on a really strong quarter. Good morning. In terms of the Navy penetration, James, we are at 30% now. What levels of penetration do you foresee in the next 12 months and as you get closer to completing deployments in the Navy, where do we see some of those revenue gaps, if you will, being filled. Is it going to be the military or do you see more commercial picking up and replacing the Navy opportunity?

I think on the Navy side, we love to keep the sales level around its levels. Obviously, every quarter will be -- they will fluctuate. Again, assuming that there is no serious large-scale budget issues on the Navy side which I am glad to see that we have the resolved the budget issue for the next two years from the Congress. And so we love to keep the core U.S. Navy business steady in the next few quarters as steady as possible, while continuing to drive other verticals, commercial, military bases following Navy. I do see that the biggest growth potential continue to be in the commercial side and we have spent almost 3 years building this business and we are at the inflection point, I believe, to see this sector start contributing serious revenues.

Right. And in terms of your guidance, I know you don't provide backlog related numbers, et cetera, but you've been guiding for around 100% growth for 2015 relative to 2014, that guidance also assumes a little conservative at this stage from a modeling point a few and setting expectations for the next quarter. It continues to be relatively widespread in terms of the beat you are putting up, so what kind of year-over-year growth should we be looking for in the fourth quarter?

We don't -- as you know, Amit, we don't provide quarterly guidance, just because we are still very small on the sales side and the order size is significant sometimes and they can sway a quarter easily. And that's one thing that we have been emphasizing over the past few quarters. That said, we continue to build the sales pipeline, which is what I mentioned that you can see from the third quarter, we build 30% more so of pipeline on the commercial side during the quarter, which is pretty significant increasing in the quarter. That is the best indication of what the sales momentum is going to be a few quarters down. So I was not going to this quality sales guidance. We would not be able to provide a guidance at this point. I think in a few quarters, when our sales are at a much more higher level on the commercial side, then we have the visibility that will not be destroyed by single contract in a particular or a few contracts in a particular quarter, then we can start providing guidance. I would say, if you ask me, probably a few quarters from that by year-end next year. So now as we said that we try to control our expenses versus the sales growth we are experiencing, which is still pretty fast. So I want to mention – as I mentioned and Marcia mentioned as well that we are seeing pretty significant expenses increase now as we started to build commercial infrastructure. So you will see the expenses coming in the next few quarters. In the meantime, we do expect the sales to come in as well from the commercial side.

Got it. And I guess finally on this new opportunity you have in terms of potentially providing a financing facilities for deployments to qualified customers, is – and you have that already happening or is this something that you’re still considering implementing?

Yes, we are prototyping the business by providing financing to qualified customers and we are still in the early stage. I hope we have something to report next quarter, the prototyping result, but it’s – as I said, the next three to six months, we are still in this prototyping phase to see how the model works and how we can help customers, make decisions faster and know that.

Thank you. That’s all I have, James. I’ll get back in queue.

Thank you, Amit.

We’ll take our next question from Allan Snider from Oppenheimer.

Good morning, James and congratulations, that’s what I just wanted to say. And I had one question. It relates the growth that you’re having right now and the awareness that’s being created, General Electric has set up a company I believe called Current and they’ve funded with about a $1 billion. And one of the things they are involved with would be, I assume lighting retrofitting, if I am correct. My question is what are your thoughts on a hospital takeover? Would somebody like GE look at you and think you’re too small or what is your concern about being taken over? I know you have a dream, a vision as to where you want to go with the company, but I think everybody has a price at some point. So could you just address the likelihood of a takeover based on the success that you’re achieving?

Thanks, Allan. I don’t feel that at this point of time, it will be too much of an interest of another company, just because we have pretty limited SKUs in a particular – in a very defined market, the verticals we are working on in the Navy and a few commercial verticals. We’re definitely very focused on what we do and so I believe that is still too early for people to actually want to pay a huge premium. I mean, people would pay whatever type of trading today for sure. When they pay a huge premium that we will accept, I am not sure if it’s time yet. However, if we continue to build the distribution and the client then I think every dollars of the takeover has a bit of creating substantial sustainable value for the shareholders. And we are a publicly traded company, so we have to entertain any attractive offer. So I don’t think we have set any particular pocket any day in mind, how much we should be selling for, but we focus on building the business on a daily basis, on a monthly basis and I believe that it will reflect from our financial performances.

I appreciate that James. And again, congratulations and keep up the good work.

Thank you, Allan.

And we’ll take our next question from [indiscernible].

Hi, James.

Good morning, Bill.

Good morning, and greetings from a savvy Dallas.

We have a lot of schools in Dallas.

There are a lot of schools down here and by the way they just authorized significant bond increases for school maintenance, so that’s something to be looked at particularly in the Dallas area, made the front page this morning. I am just blown away by the fact that you increased gross margins so much, I am an old manufacturing engineer myself and I know how hard it is to push that, so Jason Deist must have done a fantastic job in getting the price of components down to, so that increase could occur.

Thank you.

Yes, and my congratulations to Jason. On the question side, I know you’ve opened an office in Taiwan and I guess that’s in conjunction with Communal?

No, there is nothing still in Communal.

So it’s apart from Communal.

It’s an operational center that focused on engineering, sourcing and quality control.

So it – because at one time, you had an arrangement with Communal to assist you in doing that and you also –

That’s on the sales side.

You also had arrangement on the sales side to give them some incentive for selling your product in Asia. The office that you opened, does that have a component of sales associated with it or was this strictly engineering?

Not at this point.

Not at this point?

But obviously there is a likelihood.

Yes, so it looks like a nice office and it looked quite large. The other thing I am just inquisitive about in the June shareholder meeting, you had indicated that there is a possibility that we would be able to provide lighting for the shipyard aircraft carrier and that you had put forth a proposal on that. Is there any status on that or is that still in the waiting?

I’m going to have Eric talk about that.

Okay.

Hi, Bill. So I’ll address the question on the carrier. So the carrier in the bid process that currently is in place comes from the shipyard itself and so that is still in the works right now. It’s not – there has not been a finalization of that out there. So we are still in progress of that right now.

So, there has been nothing definitive decided then.

Not at this point.

Okay .Well, thank you very much. And congratulations on a great quarter and looking forward to continuing to progress. Thank you.

Thanks, Bill. Thank you.

And we will take our next question from Carter Driscoll from FBR.

Good morning, how are you?

Good morning, Carter.

Just a couple of questions, done a great job answering a lot of the ones I had already, but getting back to your sales strategy, I mean, you have a differentiated strategy in terms of going direct at the commercial market versus number of your competitors. Obviously your limited number of SKUs by definition seems to be more minimal to that. Can you talk about how the direct sales for that end market contributes potentially to you maintaining margins above what the rest of the industry does versus the need to educate those verticals in kind of the early stages of LED and kind of compare and contrast the potential financial objectives versus the strategic ones? And then I have a follow-up.

Yeah, our goal is provide the best product value and service to our customers and by giving obviously that peace of mind that they are seeking. Remember, as I said, these are commercial customers. The first thing they look at the new technology or new product is reliability and risk. If you take that away and you provide the products that address the needs better than everybody else then that’s a very straightforward very simple winning strategy and that’s what we have been following. In terms of the ability to give people the price we can, that is [indiscernible] people in the market or as a [indiscernible] to provide value in the market. The scale is very critical and which is why we stick to a very limited SKU and that gives us the purchasing power of these products so we can lower our cost. So, again, as you said, it’s a very differentiated and unique strategy in the market. The difficult part of our approach, of our strategy is that it takes time and the resources to cultivate the customers, the end customers. It’s the change of behavior and that is always the most difficult thing to do. But once you demonstrate the value to the end customers and they started to convert, then you are looking at whole new world. And I think while we have seen the third the pipeline building and the success we have seen across the board is a testament to that. So we looked for expanding that advantage and continuing to follow the strategy.

As a follow-up to that, as you – when I realize it’s early on in terms of the ramp in your penetration of the few verticals in the commercial segment, but is there a way you think about or potentially rank margin contribution by vertical or I mean are there any material differences that you potentially see or is it really volume driven gain and what you are able to obviously pull in through each individual customer. I mean, we talked about the number of hospitals, number of schools, but are there I am assuming the schools are probably more price sensitive than a hospital or an industrial retail customer, but maybe you could add a little color to that discussion.

Sure. We don’t disclose specific margins between military and commercial. Obviously we have said that before, military margins are higher and there is reason to that, because we have invested a lot over the past years in devising very unique products for the navy. On the commercial side, we actually don’t see much differences of growth in the verticals. It depends on the volume, it’s very volume-driven cost structure and we sort of make it pretty explicit across the verticals and that is the sort of the world we are seeing, where we have very transparent pricing depending on the volumes and we will stick to that. You don’t worry about prices every day. We are not in a price cycling business. We are in the value providing business. And I think one thing pertaining to that is that to build the trust with the customers we need to be able to pass on any cost savings we are able to generate internally to these customers, very -- in the most friendly manner we can and that is why customers believe that they are getting the best value. They know that even if we can reduce cost, on the panel side we will be able to pass the savings to them as we do so.

Do you plan to share most of the savings with them, some of the savings with them, I mean is it – that’s the way you retain that customer that’s so important?

I will say most, we cannot say all, because there are timing issues when you reduce your cost, it’s just the prices, but we do so pretty actively. And we have a minimum margin target that we are maintaining and that is our strategy.

And then maybe you could just address where you stand with some of the penetration in the military bases, maybe across the different components of the US Military and then any particular engagements that you were seeing after the conference you attend in October beyond the Royal Australian Navy?

On the Royal Navy side, we are talking to approximately five countries now actively and again these are long term processes. The Australian Navy is pretty happy with our products, so we do expect to continue to penetrate that particular Navy in the coming quarters. On the bases side, it is still quite early. We are looking at least 10 bases across the country that we are working on, but again the initial phase is the most difficult one, but we have started to peel the pipeline. So this is why as I mentioned that we do expect to see sales coming in by the mid of next year.

And just my final question maybe on the inventory side, maybe for Marcia. As commercial ramps, obviously it’s heavily a turns business, so working cap is – you might see inventory balance go up, working cap issue I guess should be limited to it kind of in a quarter phenomenon. Is that the right way to think about it as the balance goes up, but it is cash collection within a quarter does become a big issue, so you don’t see a lot of Q-to-Q fluctuation?

No, we wouldn’t expect to, again, like you said, there is a big purchase in any particular, but since it’s a turns business and we are, as I mentioned before, stocking kind of what we might call our top 10 list of what customers usually order, I wouldn’t expect there to be any big issues with working capital.

Excellent. Okay, I will get back in the queue. Appreciate all your time today. Thank you.

Thanks, Carter.

We will take our next question from Martin Yokosawa from Torii Asset Management.

Hi, thanks for taking my question.

Good morning.

Good morning. Going back to your outlook for 100% year-over-year, I mean is there something that give a feeling or was there a delay in an expected order or contract that you are proceeding or something?

Can you repeat the question?

I am going back to your outlook of 100% growth which should be pretty easy and –

We like to keep the pockets.

I know. This is in fact so cautionary, it seems like you are seeing you are expecting a delay or there was a delay in order or contract or something and I am just trying to find out.

No, so if you look at -- actually if you look at past few quarters and actually past two years how we portrait our business, we’ve always been on the conservative side. We said that we are going to grow on a compounded basis 50% per year and this year we are going to grow well over 100%. As I’ve mentioned, earlier we are just not in the quarterly guidance phase yet because of the contract timing and given our readily low revenue base at this point. But to your point, to your question, we are not seeing particular large contract delay at this point. We just want – we recently talked 100% growth in 2015 over 2014 was because with already at 50% growth or more by the end of second quarter, so it’s ridiculous to say that we are confident that we are going to reach 50% growth in 2015. So that’s why we elevated the number to 100%. It’s obviously – we obviously plan to beat the number.

Yeah. On the expense side, you said there is going to be a ramp up, margin is going to come down because of your expansion, I mean, what kind of magnitude are we talking about, the increase?

Well, you know like we said we added 25 people in the third quarter and have over 100 employees now, so that's a pretty big growth and as we said before, our sales grew at a faster pace than we were able to build the infrastructure for the commercials, so we are starting to see the growth on supporting the commercial infrastructure now and that will continue for another quarter or two and the growth may outpace the growth in the sales, but over the long term, it's the right decision to invest. That's what the most potential for our growth in the business is.

As I mentioned the -- and I mentioned in the past few quarters as well the penetration rate for this market is so low is just above 1% at this point and we are in such a great position leading the market in a particular product category that investing in future growth is the right way to do, is the right thing to do. Obviously, we don't have ever want to lose money in a particular quarter and which is what I mentioned that we like to maintain at least 10% minimum operating margin, but we would like plough all the investment into growing the infrastructure to capture as much market share and growth as possible. You’re going to have to be very dynamic growth in this industry in the next years and we like to be to be ready to take advantage of the opportunities. I don't think anybody invest in Energy Focus for the dividend or income. So the growth is what we’re looking forward to accomplish and eventually very meaningful market share in LED lighting space.

I understand, I mean, I appreciate that you’re conservative, and I appreciate that you’re taking the money back, and that makes me feel good, but if the market perceives, whatever somebody models and say you come in and for some reason earnings come in below second quarter, I mean your stock is going to go -- it’s going to get devastated, so I mean just without giving some sort of more than 10% operating margin, I mean it's very, you would just open yourself up to quite a fall if something doesn't develop that's [indiscernible].

Sure, and we’ve mentioned that every quarter is a new game, there will be quarterly fluctuations, but what we focus on its year-over-year long-term growth and if you look at those growth rates are still pretty high, and I will say not many companies even in the LED lighting space are demonstrating the kind of growth we have been demonstrating and if we keep pushing forward on that eventually we can feel the infrastructure, the distribution infrastructure that will generate more opportunities in the future.

Agreed, thank you.

And we’ll take our final question from [indiscernible] G2 Investment Partners.

This is actually Josh Goldberg from G2. Congrats on a good quarter. Your announced orders from the Navy in September 11, October 7, you announced another order on December 16 of last year and then announced another order this year. I think it was earlier this year, $6 million order on April 9, and I'm just curious, there hasn't been another order that has been announced to the U.S. Navy, your growth with U.S. Navy continues to be strong. Is there some more orders coming or maybe give us some insight on what's going on with the Navy. It looks like you're obviously retrofitting all the older ships and [indiscernible] I think 33% of them are retrofitted just based on some of the numbers you’ve given out in terms of orders. It seems like the opportunity just in the retrofit area to be north of $160 million of revenue. And obviously, you’re only a third of the way through that and then every new ship it looks like you're going to be [indiscernible] product as well. If you could just size your opportunity and explain why there hasn’t any new orders announced since April that would be helpful. Thanks so much.

We deliberately decided not to announce new orders at the end because it's -- when you -- ourselves are running at a couple million tons a quarter, $7 million order is material -- was material. At this point, it was -- it is still significant but it's becoming a pretty regular practice, but to work with the distributors and work with shift get these orders. Remember, we are getting the orders from the ships not the U.S. Navy itself. We're getting from the ship level, which is, we have reached to 178 ships, so they're making individual decisions. So we have real question, we have got more orders in the past few months of course, that's why we demonstrating on the sales level which is reported. And we expect to continue to get more orders. We just are not announcing new orders anymore on the Navy side. I do want to clarify that when you talk about 30% penetration rate. That's our current generation of product, we do expect to introduce new products in the future when the technology is ready in the next 2, 3 years after we retrofit the ships, but currently with new generation of products I've referred this product life-cycle very similar to the PC industry, you buy a PC in a few years you’ll buy another PC. That's what exciting about LED lighting is not a one-time product sale. The technology continues to evolve in a very rapid pace from both optical efficiency point of view, and also additional intelligence and technologies, well a lot of people refer to the Internet of Things technologies into the lighting. And so there are a lot of opportunities to come after the first generation products are sold. So they’re multiple life cycles to come, so the 30% for our current generation of the product. Does that answer your question?

I guess the point about the DIG that you will continue to see strength down the U.S. Navy volume after this year and this isn't sort of like a peak year of spending for the U.S. Navy. Could you investors some conference on that.

Again, we don't predict sales per se, as we have said many times, but it's our expectation we can continue to maintain around this level of sales and continue the penetration to the core U.S. Navy market, which happens to be the smallest vertical we are working on as you might have seen from our previous presentations. The hospital verticals, military bases, the government market overall, the industrial, K-12 and all these markets have hundred times more, ten to hundred times more market opportunities than U.S. Navy. So the U.S. Navy business will continue to stay on a readily healthy pace and we expect the growth main growth to drive to come from other verticals we are now getting orders from and continue to grow and we expect obviously our new products to be announced -- launched into the Navy fleet in the next few years when this current generation penetrate the fleet completely.

And at this time we have reached the end of our question-and-answer session. Thank you ladies and gentlemen for your participation, have a good day.