Frank Lamanna - Chief Financial Officer James Tu - Executive Chairman

Craig Irwin - ROTH Capital Allan Snider - Oppenheimer

Good day. And welcome to the Energy Focus Incorporated Third Quarter 2014 Earnings Release Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Frank Lamanna. Please go ahead.

Thank you, [Lendy] [ph], and good afternoon. Welcome to Energy Focus’ third quarter 2014 earnings conference call. Today James Tu, our Executive Chairman and I will report on our results for the third quarter of fiscal year 2014. The news release with our earnings results has 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.

Thanks, Frank. Good morning, everyone. And thank you for your participation in our third quarter 2014 earnings call. As you know, we completed our equity offering, as well as our uplisting to the NASDAQ during the third quarter of 2014. Since then our average daily trading volume in dollars has gone up close to 100 times, compared with the trading volume before the reverse split there, capital raised and the NASDAQ listing. So we have quite a number of new investors that just joined us over the past few months. I’d like to welcome all of you who are new to Energy Focus, and also express my gratitude as always towards the investors that have been with us over the years. I am happy to report another quarter of solid growth and strong margins highlighted by very strong sequential sales growth in our military business unit and continuing sales growth in our commercial tube sales. And as our gross margins stayed strong at 32.4% versus 32.5% last quarter, despite of the Nashville operation reporting negative gross margins during the quarter, as we have transitioned out of the solutions business and minimal sales were recorded. Excluding the solutions business, our gross margin was at 34.5%, already at the upper end of our target 30% to 35% range. Notably, the company achieved positive operating cash flow during the quarter and excluding the solutions business that we have materially scaled down, we have also achieved positive operating margin. We were able to do so through the combination of sales growth, strong margins and controlled overhead expenses. Now, I would like to turn the call to our CFO, Frank Lamanna for more specifics on the financials. After which I will update with you briefly on the key milestones we made during the quarter.

Thank you, James. Good morning, everyone. Before I discuss the financial results for the third quarter of 2014, I would like to inform everyone sales, gross profit and operating results that I will discuss will exclude the results of our pool product business, which was sold in November 2013. We have eliminated all net sales and expenses associated with the pool business on a historical basis and classified those activities as discontinued operations. For the third quarter of 2014, Energy Focus had net sales of $7.9 million, compared to $4.8 million in the prior years third quarter, representing an increase of $3.1 million or 63.5%. Current quarter product segment net sales were $7.7 million, compared to $2.7 million in the third quarter of 2013, an increase of $5 million or 181.5%. Within the product segment, government net sales increased 748.9% to $6 million, from $707,000 last year and commercial sales increased 13.6% as we continue to build our pipeline. For the nine months ended September 30, 2014, net sales increased 30.6% to $19.5 million from $14.9 million last year. Gross margin in the third quarter of 2014 was 32.4% of net sales, as compared to last years third quarter gross margin of 19.3%, a 13.1%, excuse me, a 13.1 percentage point improvement. In the third quarter of 2014, product segment gross margin improved 8.3 percentage points to 34.5%, compared to 26.2% of sales in the third quarter of 2013. Our improvements in gross margins are results of our continuous operational efficiency efforts, as well as the growing economies of scale from sales volume increase. For the first nine months of 2014, gross profit was $6.2 million or 31.5% of net sales, compared to $3.1 million or 20.4% for the same period in the prior year. Operating expenses were $2.9 million in the third quarter of 2014 compared to $2.6 million in the same quarter of 2013 or increase of 10.4%. This increase is primarily the result of increases in sales commissions due to increased sales volume and stock-based compensation expense. During the first nine months of 2014, operating expenses were $8.1 million compared to $7.7 million in the first nine months of 2013. For the third quarter 2014, net loss from continuing operations was $403,000 compared to a $1.9 million loss in the third quarter of 2013. The product segment generated income of $1.4 million in the third quarter of 2014 compared to segment income of $114,000 last year. The solution segment incurred a loss of $380,000 in the third quarter of 2014 compared to $296,000 segment loss last year. For the first nine months of 2014, net loss from continuing operations was $5.1 million compared to a net loss from continuing operations of $4.5 million in the first nine months of 2013, included in the 2014 net loss for one-time expenses of $2.7 million which were related to the conversion of convertible notes. Excluding these one-time charges, the net loss from continuing operations was $2.4 million. On the balance sheet, we continue to show improvements in our capital position. At September 30, 2014, cash and cash equivalents were $6.7 million compared to $2.9 million at December 31, 2013. Cash used in operating activities for the first nine months of 2014 was $2.7 million, an improvement of 35.5% from the prior year’s period. In the third quarter of 2014, cash flows from operating activities were positive $164,000. Working capital increased to $8.9 million compared to $5 million at December 31, 2013. Our long-term debt outstanding at September 30, 2014 was $249,000 in our debt ratio, which is total debt over total assets improved 5.7% at September 30, 2014 from 31.8% at December 31, 2013. Additionally, we also showed improvement in our measure of short-term liquidity of quick ratio to 1.5 each at September 30, 2014 from 1.17 at year end 2013. In conclusion, with the support of our valued investors in this successful capital raise of $5.2 million net expenses, Energy Focus is laying a foundation for the future. We are beginning to realize the benefits from our continuous improvement initiatives to increase our working capital efficiencies as evidenced by the $164,000 of cash provided by operations in the current quarter. These milestones will allow us to focus on our future growth plan, which includes investing and expanding our sales force and branding initiatives, increasing inventory to shorten delivery lead times and improving our operating infrastructure. Now I'll turn the call back to James.

Thank you, Frank. Now, I’d like to share with you some highlights of our business during the third quarter from three assets, sales, product development and operations. Before I go into the details of uptick, I’d like to reiterate, especially to the investors that have joined us over the past few months. Our vision is to be retrofit LED lighting leader for our business or businesses. Our strategy which is quite simple is to be an absolute leader in each of the markets which chose to begin by offering our industry-leading tubular LED products at the highest performance and lowered cost for all institutional clients. Our plan to succeed in accomplishing our vision is simple. First, execute our strategy by staying laser focused and excelling in every element that is required to make us the market leader, be it technology, product or service. And second, by creating an environment, where all our employees can win by moving for work 20 miles per day. We are not shy and where eight players aspire to join us to make a difference in our client’s bottomline and world’s sustainability effort. Now, I’d like to provide an update first on our sales initiatives. Energy Focus now have five sales teams focusing on the following markets -- the military and maritime market, the ESCOs, national retailers, the Midwest region and for Northeast regions. In the military and maritime business, we tripled our unit shipments of our M1 IntelliTubes from the second quarter of 2014. And as we announced in the past two months, we have obtained a 7.7 million purchase order from the U.S. Navy, followed by a 7.9 million order, and all these orders will be shipped by the end of June next year. Even after these shipments, the penetration rate for our tubes in our navy fleet is just above 10%. So we expect continuing growth in sales for our navy business. In addition, I’m happy to announce that we are making significant progress with both, the U.S. Costar, as well as the Military Sealift Command or MSC, which is the largest fleet of the core ships owned by the U.S. Navy and is operated by commercial maritime company. We have started working with these commercial maritime operators. And while the lead times have finalized, sales are long. We do look forward to meaningful levels of sales through the Costar and MSC, as well as initial sales to the commercial maritime market in the first half of 2015, providing further boost to our overall maritime sales in 2015 and beyond. In the ESCO market, we will continue to aim to be the leading LED tube brand and the vendor for the ESCO industries as well as the U.S. government. And we believe that we are on track to grow our sales in this market from this quarter on. Over the past few months, EFLS and ESCO sales team composed of six sales people now, each targeting a number of countries leading ESCOs. And with the closing of our Nashville office, we are now able to work with all the ESCOs and lighting retrofit contractors without any potential conflicts. By focusing on providing them the most reliable and cost effective LED products in the market. We are now working with 12 out of 16 of the largest ESCOs in the country in various projects. And with the opening of our Washington DC office, we expect further penetration in the ESCO market. Meanwhile, we also successfully listed our products on the GSA Schedules, which makes them readily accessible to GSA fulfillment channels for all buildings and agencies throughout the United States. Additionally, we are now a qualified vendor and popular and have already received orders from these new sales channel for a number of school districts in Texas. We are now currently in discussions with multiple states school buying consortiums like [indiscernible] and we expect to joint full services with most school systems to enhance the lighting performance and energy efficiency for our nations’ classrooms. Last but not least, we have been working assiduously to leverage our navy credentials and government contacts to facilitate our entry into the military basis market. And we hope to have exciting progress to report in the next quarter or two. Our commercial market operations have developed into national accounts and regional markets. In the national account operation, we target the nations’ 2,500 largest retail chains, each with 100 or more stores. Specifically, at this moment, our national accounts sales team composed of five dedicated sales people over 50 large national retailers and we are in active discussions to retrofit up to 4,500 locations across six of these retailers. Again, these are larger accounts that won’t move quickly in adapting new lighting products. But each of them is worth million to tenth of millions for us and most of them are now highly interested in LED lighting retrofits due to both energy savings and sustainability accelerations. So we do expect meaningful sales from the national account business in 2015 and beyond. In the regional markets, our sales team target large opportunities in their regions directly in hospitals, universities, school districts, retail chains or industrial buildings. Our regional sales teams also reach out and collaborate with qualified and enthusiastic regional ESCOs, lighting contractors and specialty distributors to address additional opportunities these partners bring to us. At this point, we have two regional teams focusing on Midwest and Northeast, with six sales people in the Midwest team based in our Cleveland headquarter and two sales people in Northeast team based in New York. We continue to see sizeable untouched opportunities across the board and are expanding our sales teams in these regions. We also fully expect to expand into additional territories, with strong payback factors such as higher utility rate and utility retailers in the quarters to come. Overall, the number of our in-house sales personnel grew over 50% from the end of second quarter, from 7 to 17 today and we plan to continue to expand the sales team in a relatively brisk pace. We are doing some methodologically. We have also significantly strengthened our sales training programs and sales support systems to deepen our sales expertise and customer service quality in our targeted market. So we expect our sales growth momentum to remain strong. On the product development side, we continue to increase the efficiencies of our military and commercial tubes. The latest version of our two-foot military IntelliTube now consumes nearly 10 watts as opposed to 13 watts before, a 23% reduction in managed consumption for the same amount of light. So despite the fact that Energy Focus is still the only approved LED lighting supplier to the Navy, we do not slowdown our product enhancement effort. In the meantime, our production team has done an absolutely superb job in continuing to lower our material and production costs. And we have passed these savings onto the US Navy. So not only is the Navy paying less for the tubes, they are saving even more energy. We are also developing and enhancing additional military grade products that help us to complete our product portfolio to address the broader Navy, oil drilling and commercial marine markets. On the commercial tubes, as we announced in the press release last month, we have launched the industry’s most efficient LED tube, our 500D Series, which replaces 4-foot fluorescent T8 tubes that consumes 28 to 32 watts, or T12 tubes at 40 watts was just 11 watts of power, with much better quality of life. That translates into 60% to 75% energy savings. In fact, at this point, our lowest efficiency tubes over 120 lumens per watt range, still higher and most of the tubes being sold by our competitors today in a market. Again, we are able to achieve such progress in advanced despite being solely focused on developing and selling the highest performance and lowest cost LED tubes. As in the military and maritime market, we continue to develop new tube products to further improve our core commercial TLED portfolio. In fact, we are very excited about some of the products in our development pipeline that will expand our product leadership as well as addressable markets. You will hear from us in separate releases as we launch these new products. On the operations, in addition to expanding our hiring activities throughout the organization and production capacity for our military products, we previously announced we completed a series of capital market initiatives, including a 10-for-1 reverse split, NASDAQ listing and equity raise that narrowed the company $5.2 million. We ended the quarter with $6.7 million in cash and zero debt. And as we stated earlier, we have positive operating cash flow during the quarter. And excluding the solutions business, we were already running at positive operating margin. As our sales continue to grow, we expect operating margins to expand. Clearly the changes the company has instigated and strategies implemented over the past 15 months have now brought the company back to life and positioned us for sustainable growth. I would like to thank all of our employees for their dedication, ingenuity, and perspiration, as the company went through initial upheavals, never ending chaos and now onto a unique growth trajectory that most of the LED lighting companies could only end before today. We are only at the very beginning of our journey towards becoming an impactful and trusted lighting industry leader. And given the competitive and disrupting nature of LED lighting technology, there is no room for complacency. With much to learn and much to improve upon to consistency attain our 50% plus year-over-year growth target we are reaching a sustaining profitability. With that, I will turn the call back to the operator to open it up for questions.

[Operator Instructions] And our first question comes from Craig Irwin with ROTH Capital. Please go ahead. Your line is open. Craig Irwin - ROTH Capital: Thank you and congratulations gentlemen on the strong quarter.

Thank you, Craig. Craig Irwin - ROTH Capital: James, one of the things I appreciated in your prepared remarks is actually the Frank assessment of the past history of company four-year tenure. And many of those -- many of us that have followed the company for years and years will remember the past management team really talking about military, military, military every quarter, but through the second quarter of this year, according to the federal procurement systems out there where we can track this is in the last several years about $15.5 million in total revenue? Yet, in this current quarter you booked orders equivalent to the total history of what’s been shipped to the military? Can you talk a little bit about what’s changed as far as product mix, the sales approach, the receptiveness of the military to LEDs that’s allowed you to get this traction that was lacking in the past?

That’s a great question, a long question. I think the key is, is being able to sort of attack, “attack” the channel from top to bottom and as I have said, stated in the past, we have -- now we’ve just opened DC office but we have paid multiple, multiple visits to the navy at various navy decision making teams and circles to spread so adoptable of LED lighting and how much energy they are able to sale. That just take time and that takes concentrated effort and that’s really what we have been doing in our military team over the past 15 month non-stop, its still ongoing. In fact, Eric is not here today, because he is talking to customers. And so, I think one is the concentrated effort and the other thing is, obviously, having a strong distribution network and that’s what we have built over the past 12 months really. As I have said before, we now have more than 40 reps out there selling tubes our military product. So those are the really two efforts that we have made in the past year or so, that make a difference. And on the commercial side, we’re doing the same thing right now. As I said, we increase our sales force by 50% over the one quarter. And we’re continuing to explore a new channel, new distribution channels. And in the meantime, when we do -- when we are doing all these sales effort, we really, really put out engineering teams together and focused on developing products that are proven for practical for our customers and that, obviously, had made a huge difference as well, that as you can see, we were launching building products and we don’t stop, because of our competitors, we just -- we are on our own. We try to be the best we can. Actually, I don’t know if that answer all your questions. Craig Irwin - ROTH Capital: No. That definitely does, that definitely does. And then, just talking specifically about the military again, about the navy actually, in your prepared comments, you mentioned roughly 10% penetration once you shipped your $15 plus million these orders into the directly addressable opportunity at the navy and those of us sort of followed navy procurement patents over the years, the navy, when it goes to 10%, it very rarely stops at 10%? Can you talk about the potential cadence of orders from the navy? If you would expect the change out of the fleet incrementally over a series of years or is this business that’s likely to ramp as the navy does its scheduled refurbishment of and turnaround of the fleet out there?

Yes. Craig, obviously, we would love to speak navy accelerate the adoption of LED lighting. Particularly, given that, now that our tubes are already owned over 160 ships and the sailors are all like the lighting, the quality and the savings are there. So we do have plans internally to accelerate the adoption and our goal is to be able to have a pretty consistent growth, even after a pretty much 400% growth over last year. We like to continue to grow the business. We believe that we can see continuing growth in this particular business over the next few years. It doesn’t take 10 years to finish the adoption. Our goal is to make it much shorter. And again, it’s a very large organization, as you know U.S Navy, so we can’t predict exactly how long it takes for the adoption to be completed. But as I said, we have an internal team that’s focused solely on accelerating the adoption and so far I think, if you look at our [indiscernible], milestones and accomplishments, it’s paying off. But again, it so early and as you see in any kind of disrupting technology adoption, once you paid 10%, the growth actually accelerate in that flow. So I think, there is always a perennial balance that we have to achieve within a company, growth and stability and that’s what we try to accomplish Craig Irwin - ROTH Capital: Excellent. Then last question, if I may, James. For your two product in the commercial channels, can you maybe frame out for us what the pipeline looks like, what the approximate number of maybe Tier 1 retail channel customers you could be talking to? And how this business could potentially take shape, if you were to pick off a Tier 1 customer over the course of the next few quarters?

We have specific targets, the retailers that are more susceptible to a more -- are open to LED lighting because as I have said, before the core lighting industry has been sort of dominated by the incumbent lighting companies, the Philips of the world, the Philips, GE and Osram. For us to be able to standout, competing with this incumbent, we do need to have some initial success. So we try not to waste our time on very, very long lead-time customers and focus on the people, the companies, the retailers that are open minded and have evaluated different LED lighting products and they found that we do have the best product in the market. And we are working closely and directly with them. So, I can’t tell you any name at this point but they are holding retailers, they are automotive products, retailers, they are different retailers that we are working on. And as I mentioned, we now have five people in the national accounts team, focusing on this particular markets. And almost all of them were hired over the past four months. So this is a very exciting market for us and we are definitely investing in growing it. And I think what you are going to see is that, we will have some wins and then those wins will turn the flywheel at some point because we do have the products that the retailers need and want. It just takes time for us to penetrate. And the first 10% is only the hardest as I’ve just said, we are in the right stage. Craig Irwin - ROTH Capital: Great. Congratulations again on the progress.

Thank you, Craig.

And we will take our next question from [David Herdman] [ph]. Private Investor. Please go ahead. Your line is open.

Congratulations on the great performance. The only think I am a little confused about is, when I check your website you have the -- under the products you have the oil and gas and the commercial maritime as products coming soon. But you are predicting sales already in the first half of 2015. Is your website just not up to date yet or one of the products actually being introduced is I guess my first question?

I will have to get back to you. I am not sure it’s exactly, what product you are talking about.

The non-military, maritime and your oil and gas that you been, I guess, the support ships for the oil and gas and the platforms you were talking about before?

Yes. It’s -- again, that’s part of our product development as I’ve just mentioned in my script. It’s under development. And we’d like to see sales first half of next year.

So your website says the products are coming soon, I mean, can you give us some kind of color of when the products might be coming?

As I said, it will be first half of next year.

Okay. And the other question is on the same. I guess, what’s my question, what I am trying to get at is, I guess, the hold up before was that they weren’t approved yet or something you had to get approval, some kind of certificate or something? I was wondering if that was approved yet on not.

I am not sure what kind of approval you are talking about, but for the commercial….

commercial maritime.

For the commercial maritime, the certification is called ABS.

Right.

And yes, we -- our two products already got the ABS. I believe that we’re probably beyond the first one or the leading one, that’s got the ABS.

That’s great news, okay. That was what I was wondering. So you’re all clear then to go move forward than when you think you are ready.

Yes. As I mentioned, we’re working with the commercial maritime company already. And again, none of these help like come immediately. They take on average six to nine months, right. So we definitely look forward to potential sales pick up as we go into the sales process.

Very good. Thank you very much. And congratulations.

Thank you, David.

[Operator Instructions] We’ll go next to Allan Snider with Oppenheimer. Please go ahead. Your line is open. Allan Snider - Oppenheimer: Good morning, James, and congratulations on a wonderful turnaround here.

Good morning. Allan Snider - Oppenheimer: I just have a couple of questions. I won’t take much time. I wanted to know if you have made any progress talking to foreign navies. That was first question.

Yeah. We are in active discussion with one navy, but just to keep in mind that the US Navy has purchased more than the next largest navies in the world. Allan Snider - Oppenheimer: Sure.

So you’re looking at the biggest piece of navy here online. Allan Snider - Oppenheimer: Right.

So I would not put too much expectation on the sales prospect of foreign navy. As I mentioned, the MSC and Coast Guard markets are large and actually together they are bigger than navy business. Allan Snider - Oppenheimer: Sure. I understand.

So that’s our most immediate growth area. And our goal is to be able to expand from our core market which is the Navy into MSC and the Coast Guard in the commercial marine market. Allan Snider - Oppenheimer: Sure. I appreciate that. My other question, James, relates to, you had put out a release sometime ago that you were now designated as a preferred provider for the world’s largest real estate manager. Could you expand on that and tell us whether you have met with some success? Or how -- can you comment on how’s that going?

Yeah. Obviously, as we said, it’s one of the largest privately held real estate management company. They don’t own the buildings. They sold -- they have about 500 million square feet. They don’t own the buildings so they -- we are the preferred LED vendor for their --for the landlords or their customers. We are working on product that’s going to address that market more quickly. And at some point, we’ll announce that once it’s ready. Allan Snider - Oppenheimer: So do you anticipate that this type of business might materialize, let’s say within the next six months? Is that reasonable assumption?

I don’t know. We are looking at so many verticals now and most of them were contributing to our topline. That’s all I can say. Allan Snider - Oppenheimer: There are so many things that are happening at once. I guess it is difficult to hear…

That’s why we are number one on the product side. We stay focused on the tubular LEDs, but on the market side, we stay focused on being a leader in the marker we choose to be in. And that’s what I just said. Allan Snider - Oppenheimer: Of course.

That we obtained a leadership in a particular vertical before we move on to the next. Allan Snider - Oppenheimer: Absolutely.

And that’s what we’re trying to do here. Allan Snider - Oppenheimer: Makes a lot of sense. Well, I appreciate it. It has been a long road for the company and your change of management and your team, and you’ve assembled and everything is seemingly fit at the place in them. Looking forward to more progress and it’s a pretty exciting stuff. So I want to thank you.

Thank you, Allan.

And it appears we have no further questions at this time.

Great. Thank you everyone again for your participation. We very much look forward to talking to you again in our fourth quarter 2014 and annual earnings call. Have a good day.

This concludes today’s program. You may disconnect at this time. Thank you and have a great day.