James Tu - Executive Chairman Eric Hilliard - President and CEO Marcia Miller - CFO

Craig Irwin - Roth Capital Partners Carter Driscoll - H.C. Wainwright Amit Dayal - H.C. Wainwright Larry Litton - Second Line Capital

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 extremely competitive due to our successful history with the Navy on Military Intellitube as well as our significant scale and cost advantage in LED tube manufacturing here in America. During the quarter, we also completed our first shipment to the Royal Australian Navy, or RAN. As we mentioned in a press release we made in July, we are working diligently to expedite penetration into the RAN fleet which includes 12 frigates, 6 submarines and a wide range of combat survey patrol and support ships. In addition, we are in active pursuit of LED lighting opportunity in five allied countries’ navy. In the coming Pacific 2015 International Military Maritime Conference to be held in Sydney Australia in October we are also planning to have a very significant presence, including a highly visible booth in the US [indiscernible] as well as slew of sponsored events, speaking arrangements, presentations and meetings with navies from over 10 allied countries. As we have repeatedly said, our sales lead times are usually long ranging from six months to well over a year, especially when it comes to selling to foreign country governments. That said, we have uniquely qualified products with an extensive installed base and an impactful long term performance record for the allied navy flees which together have a total addressable market growth for the US Navy at around 250 million in our estimate. And we fully expect to expand our leadership in LED lighting from the US Navy to a significant number of foreign navies over the next few years. The second vertical we have been working on since the beginning of 2015 is the US Military bases which are approximately – there are approximately 200 on US soil with an estimated total addressable market around 500 million. During the quarter we continued to engage with various command centers and technical entities involved with making lighting standards and decisions for army bases and we are aiming to obtain our first orders from army base by the end of 2015 or early 2016. We also engaged with our advisors and pundits during the quarter to advocate for the benefits of tubular LEDs against florescent light and the navy has subsequently issued an order later in July to allow tubular LED lighting in navy bases and facilities. We firmly believe that the navy’s pioneering commitment to energy savings and sustainability and their positive experiences with and passion for our military LED products will spread over to the bases for our commercial products and we shall see progressively more active LED adoption in the bases starting in the next few short quarters. We have obtained accelerating the success in the US Navy market by establishing our credibility by first spreading awareness in the navy leadership [indiscernible] and simultaneously working closely with the few ships that turn into sources of testimonials and enthusiastic advocates for us. Now we are focusing our resources on penetrating a number of phases to demonstrate our technology and value against florescent lighting and we believe that these efforts will instigate systematic interest across all the bases and yield substantial long term opportunity. The third vertical we are very excited about and have been working on since 2014 is healthcare. Most hospitals run 24/7 and therefore payback of our LED tubes for most hospitals across the country is now well within two to three years. We are currently working actively with over 10 large hospital systems in Northeast and Midwest regions, each representing sales opportunities in the million. In the coming months, we will be aggressively expanding our sales force for the healthcare vertical which includes 4,000 hospitals with 8 billion square feet of space across the country and a total addressable market over $3 billion. The fourth vertical that’s starting to gain traction with is the K-12 market. We made a conscious decision to take on this market aggressively from the beginning of 2015 as we believe that the health benefits of our LED lightings against florescent lighting for school age children are overwhelming and Energy Focus has the social responsibility as well as enormous business potential to actively promote awareness in adoption of LED lighting in the schools. Our exclusive partnership with U.S. Green Building Council for Green Schools or green effort represented an exciting breakthrough for us to access Green Apple’s 3,000 strong member schools across the country, directly for those advocacy and business development purposes. We are focusing on collaborating with Green Apple in the reaching a critical mass of awareness and adoption in New York and Washington DC regions first. In the meantime, we have already received orders to retrofit 22 school districts year-to-date in various states. These new installations will lower the carbon footprint and energy bills of the schools and provides a healthier environment for tens of thousands of school children. Just like other verticals, we believe that these early adopters will also turn out to be our strongest evangelists to help us broaden the awareness of indisputable benefits of LED lighting and accelerate the penetration into the nation’s 13,500 school districts which also has several billion dollars of total addressable market for us. The fifth vertical we have recently started entering is industrial and manufacturing. Our LED tubes can both retrofit linear florescent lighting fixtures, but also with our tube housing fixtures replaced high intensity discharge based high based fixtures which are common in manufacturing and warehousing places with energy savings in the 60% to 80% range. The tremendous power savings on top of prevailing generous LED fixtures in many areas of the country lowers the payback of our LED offering to one to two years and therefore makes the industrial sector an appealing and ready market for us. According to DOE’s estimate, Department of Energy estimate, there are estimated 22 billion square feet of industrial space in the U.S. representing several billion dollars of opportunities for Energy Focus. At this point, we are focusing on the opportunities in Midwest region, where the authenticity of manufacturing facilities is high. We believe that we will start seeing initial orders in this vertical in the coming quarters. The last vertical we are just starting to cultivate is the national retailer industry which covers 20 billion square feet of space across the country with an approximate total addressable market of over $5 billion. Thus far, we have only reached out to about 20 chain store operations, with 50 retrofit opportunities under development throughout the network.. As we follow the rule book to penetrate every other vertical we enter, we plan to build a more solid and substantial track record for this vertical through a few marquee account wins first, then accelerate expansion of our sales teams towards the end of 2015 and early 2016. We do expect some initial modest sales from this vertical starting in the fourth quarter of 2015. Together, these six verticals in the U.S. represent equity market opportunities of well over $10 billion for Energy Focus to tap into within the next few years. While it is tempting for us to expand even more rapidly than we have been growing due to the sheer size of the market potential, we have deliberately chosen to attack each vertical methodologically. Focusing first and foremost on pertaining and accumulating wins with significant end users within the verticals and then expanding progressively accelerating fashion, region by region and eventually building and solidifying Energy Focus as the trusted brand to provide high-quality LED lighting product with unparallel service and total cost of ownership within the vertical. The lighting industry is experiencing an ever greater vacuum of trust as the incumbent lighting company that have dominated the lighting landscape for the past decade struggled to cope with the aggressively changing nature of LED lighting technology. Energy Focus’ vision and primary goal is to become the leading force to establish the new sustainable order in the enterprise lighting market, while create positive health and environmental impact. Our financial results are a direct reflection of our clear vision, product focus, unique strategy, seamless teamwork, and relentless execution across departments of all levels to realize this vision. According to the latest Department of Energy LED lighting market status report, penetration rates for linear fluorescent sockets at the end of 2014 was at an CPM [ph] level of 1.3%. Furthermore, fluorescent lights, high-bay fixtures and parking luminaires together account for 64% of potential energy savings from LED adoption in all lighting applications. We now have focused corporate positioning, a unique go-to market strategies, resilient and entrepreneurial culture and industry leading set of technologies and products to fully capture and realize the explosive economic and social potential lying ahead. Now I like to turn the call to Marcia for more specific financial performances of the quarter. Marcia?

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 13.4 point improvement in the second quarter from the prior year’s second quarter with gross margins at 45.9% of net sales compared to 32.5% last year. The overall increase in gross margins continued to be the result of improved operating efficiencies in our supply chain, building economics of scale from sales volume increases, product cost reduction efforts from value engineering processes as well as changes in product mix where turnkey solution sales historically carried lower margin. 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 remainder of 2015. As we said in the past, we do not compete fully on the basis of price, but rather on the total value we provide our customers over the life of the product and we will not sacrifice quality just to cut costs. However, as our sales mix changes to include higher volume growth of our commercial product than our core Navy products, we would expect gross margins to start dropping from their current levels, although we have not seen or expect significant margin pressure yet from either military or commercial products. Operating expenses increased by $1.8 million to $4.6 million in the quarter compared to $2.7 million in the first quarter, I’m sorry, in the second quarter of 2014. $1.4 million of the increase is due to higher selling, general and administrative expenses related to higher performance incentives tied to our improved financial results, higher consulting costs for various sales and marketing related services to support our growth, higher severance and settlement charges, higher recruiting costs to build our sales and marketing infrastructure and higher costs to build our brand awareness through industry related trade shows including [indiscernible] which we attended in May in New York City. We are maintaining an aggressive hiring campaign for our sales, marketing, engineering and production teams and expect personal expenses to continue to grow, although we expect operating expenses will grow at a lower rate than our sales. Product development expenses increased $454,000 from the prior year due to higher engineering costs as both legal and outside testing fees we incurred for our Commercial Intellitube product line we announced in April. We expect to continue to expand our R&D team and increase our total dollar investments in the development of our LED lighting technologies, and products in the form of both human and equipment capital. Included in the quarter is $923,000 estimated provision for U.S. federal and state income taxes representing an annual effective U.S. tax rate of 21.4%. Because of the Company’s historical net operating losses and the annual limitation under Section 382 of the U.S. Code for the availability to utilize these NOLs due to our historical changes in ownership, the computation of our interim estimate for income tax expense is complex and relies on estimates of future results as well as estimates related to our final 2014 tax return filings, which have not yet been completed. We continually review and update these estimates during the year and will adjust our year-to-date estimated provision for federal and state income taxes as additional information becomes available. Our 2015 year-to-date sales were $29.8 million compared to $11.6 million at the same period of 2014, an increase of 156%. Our first half gross margins were $13 million or 43.8% compared to $3.6 million or 31% for the same period in 2014. Net income was $3.2 million for the first half of 2015, compared to a net loss of $4.7 million for the first half of 2014, which included a non-cash charge of $2.3 million to write off the unamortized discount associated with last year’s conversion of convertible notes into common stock. As James said in the press release, this quarter marks the fifth consecutive quarter of solid growth since the first quarter of 2014 as we continued to successfully execute our transformative plans and growth strategy. Additionally this quarter, we posted our second consecutive quarter of profitability. Accordingly we have added comps to our business as we continue to build out an infrastructure that will support our continuing rapid growth. Moving to the balance sheet, we ended the quarter with $10.2 million in cash and $455,000 in credit line borrowing for a net cash position of $9.7 million. This is $2.6 million higher than our cash balance net of credit line borrowing at both March 31 and December 31, 2014. The inventory balance stood at $9.8 million at quarter end, which is an increase of $2.6 million from December 31, but a decrease of $1 million from the end of the first quarter. We believe that we have sufficient inventory on hand to meet our continuing growth and are not planning for inventory levels much higher than they have been in the past couple of quarters. Our accounts receivable balance was $2 million at the end – I am sorry, $2.5 million at the end of the quarter compared to $3.1 million at both March 31 and at year-end. Day sales outstanding were 16 at quarter-end, a 12-day improvement from 28 days at the end of 2014 and a 9-day improvement from the end of the second quarter. Turning to the cash flow statement, for the second quarter cash provided by operations was $2.7 million and was $424,000 for the first half of 2015. For the second quarter, cash provided by operations was the result of net income as well as lower inventory and accounts receivable balances, partially offset by decreases in accounts payable. We are pleased to be generating cash from operations as our quarterly sales have now surpassed the breakeven level and as our margins stayed strong. And we are working hard to make an efficient use of our working capital. The first half of 2015 has shown strong sales momentum and margin performance and we look forward to continuing solid performance for the last half of the year. With that, I’d like to open the call for question. Operator, can you assist them please?

[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.