Energy Focus, Inc. (EFOI) Q1 2020 Earnings Report, Transcript and Summary

Greetings and welcome to Energy Focus First Quarter Fiscal Year 2020 Earnings Conference Call. At this time all participants are in listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Brett Maas with Hayden IR. Thank you. You may begin.

Thank you, operator and good morning everyone. Joining me on the call today are James Tu, Chairman and Chief Executive Officer and Todd Nestor, President and Chief Financial Officer. Before we begin today's call, I'd like to remind you that we will be making certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results realized may differ materially from those stated. For a discussion of the risks that could affect our results please refer to the discussion under the heading risk factors our most recent 10-K as well as most recently filed 10-Q with the SEC. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise except as required by law. Also, please know that during this call and in the accompanying press releases, certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release just posted on our corporate website at energyfocus.com in the Investor Relations section of the site. Now, I'd like to turn the call over to James. James, the floor is yours.

Thank you, Brett. Good morning, everyone and thank you for joining our first quarter 2020 earnings conference call. First of all, I hope all of you and your family continue to stay safe and healthy in this challenging social and economic environment due to the COVID-19 pandemic. Like everyone participating in this call, we have been watching the development of the pandemic and following our Coronavirus contingency plan very closely, and responding to changes as timely as possible. We are fortunate that our employees remain healthy and that our factory has remained open throughout the pandemic. In addition, I have to say that despite of the ongoing macroeconomic challenges and stay in home orders, our progress towards building Energy Focus into the next generation of lighting industry leader had not fold at all. Our employees, either at our factory or from home have been working very hard and very smart. I believe that the pandemic has challenged our team to be more creative, more efficient, more passionate, and more collaborative to accomplish our short-term and long-term goals. So for you as an investor of Energy Focus, as both Todd and I and our board of directors are, I'd like to say that the future of Energy Focus is not only much brighter than a year ago when we studied the restructuring and relaunch program, but also better than three months ago. As you have seen from our Q1 earnings release that came out this morning, our sales growth momentum continued to pick up in the first quarter despite of the unprecedented economic challenges posed by the pandemic. It was consistent over the past year since the management change in April 2019. We continue to make incremental by collectively significant progress, month after month, quarter after quarter towards stabilizing and economizing our operating infrastructure, as well as rebuilding and expanding our engineering, sales and marketing capabilities. All the while reigniting our growth and delivering improving financial results regardless of the macro environment. Equally important within the past 12 months, we have successfully transformed Energy Focus from an energy efficiency centric LED lighting company to a broader sustainability enabling force. With the introduction of EnFocus, our patent-pending lighting control platform to bring human-centric lighting to existing building. Despite of all the buzz we might have heard about LED being everywhere and getting cheaper by the day and overwhelming majority of the countries in the world existing commercial building, today are still lit by fluorescent lighting. DOE's latest estimate was that in 2017, only 11% of the country's more than 1.1 billion linear lighting fixtures were lit with LED. Today the penetration rate is likely to be well below 20%. The percentage of lighting fixtures with controls are even lower. That represents 10s of billions of dollars of opportunities in the coming years to upgrade these fixtures to LED and connected lighting just in the United States. Since EnFocus is designed for universal electrical setting to replace fluorescent lamps and switches, it is also well-positioned to enter the international markets that are several times larger than the U.S. market. We are confident that building owners and occupants worldwide will be much more motivated to convert to LED lighting if significant human benefits such as dimming and circadian rhythm, outside of energy efficiency are available and affordable. Within EnFocus, we had to maximize the financial, environmental and human or triple bottom line benefits from LED lighting and capture a meaningful share of the coming retrofit opportunity of LED lighting move on to the next phase of accelerating adoption driven by human-centric planning. Turning to the results for the first quarter of 2020, our net sales of $3.8 million exceeded the high end of our revenue guidance of $3.5 million to $3.6 million and grew 19% year-over-year and 7% sequentially. Increases over the prior period were primarily driven by our expanding number of wins of military contracts over the past six months. We also continue to grow our commercial customer network that added several new colleges and school districts as customers. Sales of our patented emergency backup LED tube, RedCap continue to grow and get just the best quarter sales ever as well. As we mentioned in our 2019 annual earnings call, our military wins over the past six months, including over $2.5 million of globe lights, $3.4 million of military intelligence, and $1.7 million new ship lighting fixtures for allied navy as well as several other smaller ones, were particularly encouraging as we were able to compete favorably through engineering innovation to reduce our product costs, while maintaining our superior product quality against competitors. Well, we have a combination of better product and better costs we should win most, if not all the time. In the meantime, our navy ships benefit from our continuing innovation. Due to these significant wins, we expect military sales to remain strong throughout 2020. And we look forward to winning more new Navy opportunities and contracts when they emerge. For our commercial business, as we warned in our last earnings call due to COVID-19 and the continuing shutdown of non-essential economic activities across most of the country, we had clearly seen sales fall starting in March, not unlike most businesses have been experiencing. As we mentioned in the earnings release this morning at this point, barring and extreme economic freeze that lasts beyond the next few months, we do not expect such softness and stagnation to remain for a prolonged period of time as facilities of our target customers in the government, health care and education industrial sectors are still going to be mostly occupied. Meanwhile, we have been taking this time to introduce the EnFocus lighting control platform which officially launched this past Monday to existing and new customers. We have received an overwhelmingly positive reception on EnFocus so far and the inquiries about this product family are literally growing by the day. We continue to believe that EnFocus is not just a better lighting control platform, but also a unique offering for the retrofit market where affordable, simple and secure lightning controls have not been available before. We expect it will take us to a much broader network of distribution channel partners that we have not tapped into before. Accordingly, we recently took two important steps to strengthen our organizational readiness to propel EnFocus into our most significant growth engine over the next few quarters. First, now with three spending business development team that reach out to national distributors, regional contractors and distributors and small to medium-sized customers that could buy directly from our inside sales team as well as our online e-commerce website. Taken in conjunction with the EnFocus launch, we roll out a new multi-tiered pricing system for our products to both reinforce our brand image of high quality at a great value but also to ensure fair pricing, protect our channel partners' margins and avoid potential channel conflict as we started engaging with multiple layers of distribution partners. We believe that with a broader distribution strategy, EnFocus will be taking Energy Focus to another level of industry leadership not only on product innovation but also in market presence in a timeless manner. As part of our official launch of EnFocus, we have started to provide demos and initiate discussions about project opportunities with our customers for EnFocus over the past few weeks, and we plan to stop providing production samples later this month and shipping EnFocus products to customers in early Q3. As the broader economy reopens and commercial activities start to recover over the past few months as expected, we look forward to having meaningful sales contribution from EnFocus from Q4. Now I'd like to provide some highlights on our engineering efforts and initiatives. One of the most important initiatives we had laid out in the 2019 company relaunch is developing impactful and differentiated products based on LED lighting technology. EnFocus was born and developed under such overarching goal. During the last quarter, in addition to finalizing EnFocus design, and bolstering our patents surrounding this control platform, we have also started to move on to the next generation EnFocus platform that will expand to provide autonomous and wireless lighting control capability, further improve energy efficiency, optimized circadian rhythm lighting and provide a whole new fleet of functionalities surrounding building automation and building management. Equally important and probably an even more urgent priority for us since the beginning of the year is our initiative to develop UV disinfection applications built upon the EnFocus platform. We believe that demand for disinfection technologies and products, which in the past have been a niche market mostly for hospital uses is emerging very rapidly and broadly. Literally all indoor spaces today are opening up as addressable market opportunities for effective and affordable disinfection products. In addition to the fact that Coronavirus is still impacting countries across the world, and might not be going away anytime soon, the world's open awareness and realization that the risk of a pandemic is here to stay will likely push demand for air and surface disinfection products to unprecedented heights and stay permanent and universal to a large extent going forward. The UV disinfection technologies and products we have been developing follow our consistent philosophy of making innovative, high quality and impactful lighting products. We believe our UV disinfection lighting fixture that is designed to provide both general lighting and UV disinfection capabilities based on the EnFocus lighting control platform will be a powerful and timely offering for organizations across all enterprise sectors that seek to minimize virus infection risks. I'm pleased to announce that we have achieved several design milestones and we have also filed provisional patents surrounding our UV disinfection technology over the past month. Currently, we're on schedule to finalize our prototype design within the next month or so and launch the first UV products by early Q4. We are very excited about the timely and significant impact we could make on our customers' daily lives without the UV disinfection technologies and products. We plan to continue to build and expand our intellectual property, core accountability and operations surrounding the UV disinfection thing. I'm sure will have much more to share with you on our progress in the UV disinfection market in the coming months. Now, I'd like to turn to the impact of COVID-19 on our business. As we mentioned from the last earnings call and the beginning of this call, we move rapidly to protect employees and ensure business continuity. To minimize infection risks of our employees and their social and professional contact, we activated our COVID-19 contingency plan or CCP that allows our employees that could work remotely to do so while implementing strict monetary and disinfection measures and procedures for our production facility in Solon, Ohio. We are designated as an essential business so with proper safeguards, our team members at the production facility are allowed to continue working. We expect that all factory will continue to operate in full capacity under COVID-19. Meanwhile, our commercial sales across nearly all the target verticals are being impacted due to facility closures and slow economic activities. On the other hand, although we are seeing lighting retrofits projects being put on hold or postponed, we have not seen opportunities lost due to COVID-19. Again, while economic reopening remains a challenging and somewhat unpredictable exercise, we do believe that the slowdown will be temporary and we are also hopeful that some organizations might actually start to take on retrofit project during this period when building a much less occupied. With regards to our business outlook, although we have started to grow from Q4 2019, we're still early in our long-term growth trajectory and large accounts opportunity could still play out financials because they [indiscernible]. The newfound layer of economic uncertainty resulting from COVID-19 makes it even harder to protect our business several quarters out, especially on our commercial business. Therefore, we are still not in a position to provide annual outlook at this point. However, we will continue to provide quarterly forecasts in the best way we can. Regarding our second quarter 2020, as we stated in the press release, we expect the May sales to be in the range of $4.5 million to $4.8 million, representing sequential growth of 18% to 26% compared with the first quarter of 2020 and a 46% to 56% growth over the second quarter of 2019. Now midway through the second quarter, we have already booked more than 70% of the forecasted sales, mostly from our main business, and therefore we are relatively confident of our Q2 sales hitting the target range. As we stated in the fourth quarter and full-year 2019 earnings call, two months back, we believe that after the restructuring and relaunch efforts during 2019, we had turned the corner and started growing in Q4. We've continued the growth on Q4 2019 into Q1 2020. And despite of the myriad challenges posed by the pandemic, we expect to continue to grow from Q1 to Q2 to build upon the first arrow of our rejuvenated growth from our military business, where we now are more competitive than ever. With the recent launch of EnFocus, we look forward to having the second arrow of growth propel our commercial business, as well as our overall sales from the second half and especially the fourth quarter. With that, I'll turn the call to Tod to review our financial performance during the quarter. Tod?

Thank you, James. Mac sales for the first quarter of 2020 were $3.8 million compared with 2019 first quarter net sales of $3.2 million, an increase of 19.1% year-over-year. The year-over-year increase net sales was driven by timing and military sales and compared to $3.5 million in the fourth quarter of 2019, net sales were up 7.1% on a sequential basis. Sales to our top 10 customers increased 10% compared to the first quarter last year and sales to our top 20 customers increased 16% compared to the first quarter last year. From a mixed perspective, in the first quarter military sales were $2 million representing 54.1% of total net sales, compared to $1.2 million or 37.6% of total net sales for the first quarter of 2019. The year-over-year increase in military sales was primarily due to timing of sales to one customer, which increased 113% compared to the first quarter last year. We also had a new military customer in our top 10 customers with a six-figure or were not present last year. Sales to commercial customers were $1.7 million representing approximately 45.9% of total net sales for the first quarter of 2020 down from $2 million or 62.4% of total net sales for the first quarter of 2019. The year-over-year decrease in commercial sales was mainly due to some delayed orders due to COVID-19 which specifically impacted our largest commercial customer, partially offset by increases from several other top 10 customers. Overall sales to our top 10 commercial customers declined 35% year-over-year and sales to our top 20 commercial customers declined 21%. This was more than offset by our military segment. Sales to our top 10 military customers increased 81% and sales to our top 20 military customers' increase 74%. Gross profit for the first quarter of 2020 was $1 million compared with $98,000 in the year-ago quarter. A significant increase mainly driven by higher military sales and a reduction in cost of sales. On a sequential basis, gross profit was slightly higher compared to $957,000 in the fourth quarter of 2019. As a percentage of revenue, gross profit margin was 27.3% in the first quarter of 2020 compared to 3.1% in the first quarter of 2019, and 27.1% in the fourth quarter of 2019. Adjusted gross margins for access and obviously in transit and net realized value inventory results in adjusted gross margin of 25.2% for the first quarter of 2020 compared to 5.5% in the first quarter of 2019, and 29.2% in the fourth quarter of 2019. We continue to expect our gross margins to be in the mid-20s in the near-term and begin to approach the high 20s or low 30s percentage range as we introduce new products and make further improvements to our supply chain depending on our sales mix in inventory valuations. We may see some fluctuations. Operating expenses in the first quarter of 2020 were $2.3 million or 60.7% of sales compared to $2.9 million or 91.3% in the year-ago quarter, a decrease of $606,000 or 20.9% year-over-year which was driven by lower payroll and stock base expenses offset by slightly higher legal fees and dues. Product Development expenses decreased by $244,000 year-over-year to $282,000 in the first quarter of 2020 as a result of lower product testing expenses due to the timing of new product introductions and lower salaries and related benefits due to the reorganization and realignment of the company last year. Sequentially, product development expenses decreased compared to $249,000 in the fourth quarter of 2019. SG&A expense decreased 9.5% to $2 million in the first quarter of 2020 compared to $2.2 million in the year-ago quarter. The decrease was the direct result of decreases in stock-based compensation which is partially offset by increases in fees and dues for various services. Sequentially, SG&A expenses increased slightly compared to $1.9 in the fourth quarter of 2019. Loss from operations during the first quarter of 2020 was $1.3 million, an improvement of $1.5 million compared to a loss from operations of $2.8 million in the first quarter of 2019. Sequentially, the loss from operations was almost flat from $1.2 million in the fourth quarter of 2019. That loss for the first quarter of 2020 was $541,000 or a $0.04 loss per basic and diluted share, an improvement of $2.3 million compared with a loss of $2.9 million or $0.25 loss per basic and diluted share in the year-ago quarter. Sequentially, this compares to a net loss of $1.3 million or an $0.11 loss per share in the fourth quarter of 2019. Adjusted EBITDA which excludes depreciation and amortization, interest expense, stock base and other incentive compensation and again of $873,000 related to the fair value of one improved to a loss of $1.1 million for the first quarter of 2020, compared with a loss of $2 million in the first quarter of 2019, and a loss of $1.1 million in the fourth quarter of 2019. Now, I would like to turn to the balance sheet. As of March 31, 2020, we had a cash balance of $2.9 million compared to $350,000 at the end of 2019. The increase in cash was primarily due to the issuance of new capital through shelf registered sales equity in the first quarter and cash generated from operations. During the first quarter, we issued approximately 3.4 million shares of our common stock and an aftermarket purchase price of $0.674 per share, and unregistered warrants to purchase up to 3.4 million shares of common stock and at an exercise price of $0.674 per share at 12.5% per one for those proceeds of $275 million. Proceeds from this offering provided short-term funding for our operations and initiatives for growth, as well as required pay down for alien note of $275,000. If the warrants were to be exercised at their exercise prices of $0.674 a share and $0.998 a share for the current warrant holders, these exercises could provide additional capital of up to $2.3 million from the shareholders and another $430,000 from the placement agent for a total of $2.73 million. Subsequent to quarter end on April 17, 2020, the company was granted a loan for approximately $795,000 as part of the paycheck protection program under the Coronavirus Aid Relief and Economic Securities Act. We intend to use the entire loan amount for qualifying expenses as defined under the Act. However, we can provide no assurance the entire loan will be forgiven. We continue to analyze our cash needs, considering sales prospects, current performance of the business and our targets for continual improvement. Simultaneously, we also continue to explore and consider a variety of financing sources should the need arise for additional external financing. Total debt excluding the warrant liability as of March 31, 2020, included short-term credit line borrowings of $790,000, outstanding notes payable of $854,000 for total debt outstanding of $1.7 million. That is against cash of $2.9 million. We have a net cash position of $1.2 million at the end of the first quarter. This compares to $3.4 million in total debt as of December 31, 2019, which is comprised of short-term credit line borrowings of $715,000, convertible notes outstanding of $1.7 million, and notes payable of $1 million netted against cash of $350,000. We had a net debt position of $3.1 million at year end. We increased our total availability from the fourth quarter of 2019 to the end of the first quarter of 2020 from $2 million to $4.1 million respectively, primarily as a result of the increase in our cash balance. Accordingly, as of March 31, 2020, we had total availability of $4.1 million, which consisted of $2 million of cash and $1.2 million of access borrowing availability under our credit facility. As a reminder, total availability is the magazine of our access to cash at any given point in time and is much more relevant metric than simply looking at a cash balance on the balance sheet. While access borrowing availability under our credit facility represents the difference between the maximum borrowing capacity of our credit facility and actual bonds on the credit facility. Accounts receivables were $1.9 million at the end of the first quarter of 2020, compared to $2.3 million at the end of 2019, a decline of $433,000 on higher sales, reflecting more efficient collections. Net inventories declined to $4.7 million as of March 31, 2020, compared to $6.2 million at the end of 2019. The decrease was due to our continued efforts to reduce slow-moving inventory, as well as prudence in ordering inventory needed for future sale. This reduction in inventory was also a tremendous source of operating cash flow for the first quarter of 2020. Accounts Payable declined slightly to $1.2 million as of March 31, 2020, down from $1.3 million as of the end of 2019. Cash generated from operations was $504,000 for the first quarter of 2020, which was largely driven by our effective management of inventories throughout the quarter as a continuation of efforts undertaken during the second half of 2019, which included addressing both slow-moving inventory and more prudent ordering practices for new inventory. Our warrant liability remains manageable and not material. The combination of low failure rates of our tubes has allowed us to continue to experience minimal costs for our warranties and still be able to afford to offer valuable 10-year and five-year warranties to our customers. Energy Focus' hallmark quality remains a strong selling point for our products and is reflected in our ability to offer these warranties. At year-end, I briefly spoke to the impact of COVID-19 on our supply chain logistics efforts. While we are not experiencing any significant disruption in either our supply chain or sales due to the Coronavirus pandemic, we do periodically update our contingency plan, as a result of the virus. As James, mentioned the virus reduced our commercial sales at the end of Q1 and into Q2, resulting in some reduced spending and expenses. But we also have been vigilant with suppliers, ensuring they continue to ship components and products to us during the shutdown in the United States. To date, we have been successful working around any challenges we have faced. But there is risk in the supply chain. However, as the U.S. opens back up, we expect to see more of a return to normal operations in our suppliers and fewer supply chain hiccups. Regarding China, we have not experienced as many supply chain disruptions during the past month to month and a half as we experienced initially, when we had to shift some production outside of the country. We have been able to reliably source a majority of our products, and as we had prior to the pandemic from China. This continues to be a dynamic and changing world that we live in, and our plan is to update in real time as we respond appropriately. With that, we'd like to open the call for questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from line of Amit Dayal with H.C. Wainwright. Please proceed with your question.

Thank you. Good morning, everyone. Appreciate you taking my question.

Good morning, Amit.

Hi, James. So with respect to the guidance, James, for the second quarter, can we assume you are factoring in some level of disruption from the current market environment in that guidance?

Yes, of course. As we mentioned, the commercial sales are still quite uncertain. So I think we - as I mentioned earlier, that we have about 70% of the business up; so we try to be conservative, but reasonably conservative. Not extremely conservative, but reasonably conservative.

Thank you for that. So you're at a cusp of really launching some very unique and interesting products into the market, especially on the EnFocus side, generally, the dynamics of deployment, et cetera. And then, in relation to the UV lighting solutions with disinfection type offerings, so this is sort of a new development, and both are very exciting. But from a distribution point of view, how are you thinking about managing the sales process, and engaging customers, and demonstrating the effectiveness of these solutions when there are all sorts of sort of restrictions at the physical level in going out and typically doing all of this stuff that you - the way you used to do it?

Yes. I mean, that's a very good point. And as I mentioned both in the press release and also in this - earlier in the earnings call, that with the introduction of EnFocus, which is a very unique product platform, we are almost changing - I wouldn't say changing - we're expanding our distribution network a lot more aggressively. As you know, in the past, we are known for working with large marquee customers, and ESCOs, and contractors for their projects, because it's a fairly competitive market, right? We always have a better product, but people want to buy cheaper products, right? In the case of EnFocus, it's actually - the most exciting thing about it is that it's a control platform that is also affordable, is not only high quality, but also affordable and simple. And so, we don't want to be limited to our own sales force. So we opened up for very extensive distribution network, which is why I mentioned about the new pricing mechanism that we have now. So to your point, we are leveraging on our agents, distributors, ESCOs, and contractors. We are talking to a lot of people. We are talking to probably 10 times more people than we had before. And I think that really take us to another stage where we will have a national network of channel partners that we didn't have before, which is actually extremely exciting, obviously, from the sales point of view. And it will bring us much more timely sales reach to customers, but also build the brand awareness, the product awareness in the marketplace. So we are opening up pretty much working with everybody now. As long as we can avoid the channel conflict, that's our goal.

Understood. And just one last question on the EnFocus side. Are you taking pre-orders for this? You're saying you're going to potentially launch this in early Q3, but are you taking pre-orders? Has that book been building? Or you're not doing any of that right now?

Yes, we are just start - we put out the press release on Monday. We just launched this officially, so I would expect that later in second quarter, maybe early third quarter, we will start taking orders. I mean, technically, we can start taking orders. We're just getting ready to ship in third quarter, early third quarter.

Wonderful. And then one last one on the disinfection lighting offering. You mentioned you are trying to patent some part of this solution. Can you give us some color on what that exactly is that you might be looking to patent?

Without going to too much detail yet, because we are still finalizing our prototype design, it's basically a - it will be an integrated general [ph] lighting and UV lighting product. If you look at the UV disinfection market, there are basically three major types of disinfection products. One is pretty much a robotic cleaner that use UV. Nobody can be in the room when you do that UV disinfection because people are not supposed to be exposed under UV. And then you've got the HVAC, and that's the disinfection system that is basically sitting at the entrance and of the exit of the back of the HVAC system to clean the air flowing out of the HVAC. And then you've got the upper room air disinfection system that basically shines the UV light across the room above, I guess, eight feet, right? All of those different disinfection technologies have their shortcomings. So this is why we developed the products that could be integrated into our general lighting, so you can use the existing structure. Basically, spot to retrofit into general lighting and UV lighting under our EnFocus control system. So in this system, you're going to have - without going into the design, you're going to have a dimmable general lighting, color tunable [ph] or circadian rhythm lighting, plus the UV disinfection. And it could be functional when people are inside. It will basically be air disinfection.

So will it be sold as a standalone solution? Or will you offer it as an add-on to the EnFocus as well?

It's an additional application on EnFocus, which is why we're so excited about the EnFocus platform, because they enable an existing building to add on these applications, be it beaming or color tuning [ph] or the UV disinfection.

Understood. That's really interesting. Thank you, James. That's all I had. Thank you.

Sure. Thanks.

[Operator Instructions] Our next question comes from Orin Hirschman with AIGH Investment Partners. Please proceed with your question.

Congratulations on a lot of progress, particularly on the operating side.

Good morning.

Hi, good morning. In terms of the military orders, what is causing the military comeback so strong? And it seems like it's not across the corner to the military divisions or customers or something [Technical Difficulty] based on those statistics.

As we mentioned in this earnings call and also the last earnings call that we - one of the things that we'll be working on is to reduce our costs through engineering, and we've been successful in doing that and dramatically reducing our cost of production of our products. And that enables us to be much more competitive in a market that has now new entrants. And so, that's why I emphasize that it's basically our overall increase of competitiveness of our products in the market. And we're just winning much more than what we did before because of that.

I will also - I'll add to that. This is Tod. In addition, the military in '19 had shifted spending to the wall. And so, that had suppressed some of the sales last year as well.

Yes, a comparable level. That's very effective. In terms of the new contract wins, to your question, I think our improved engineering and supply chain practices is the reason for us to win those new contracts.

Okay. And just again, I know you went through this, but just to try and pinpoint if you can more, in terms of some of the new product shipments, it sounded like chip-four or a second half, and is the disinfection the goal for the [Technical Difficulty] during that timeframe? If you can just reiterate the timeframe.

I'm sorry, I lost your second part of your question in terms of the timing.

The timing of the new products, including the one that includes the UV in the product.

Right. So as we mentioned, the EnFocus is already announced, and we expect to start generating some sales in Q3. And again, because of the economic slowdown right now, we are not putting too much expectation on the amount of sales or in focus in Q3. We do hope that if the economy starts to reopen in the next few months, we should start seeing the momentum picking up and showing folks generally more meaningful sales in Q4. For the UV product, we are slated to launch in Q4. So I would say that there might be some initial sales in Q4, and really starting to pick up in Q1. Again, for the UV products, it's a pretty new category. The market is new. So we cannot predict what the demand is going to be. We do know that - in our process of doing the research and development, we know that there's going to be a tremendous amount of demand there, based on the current understanding. So it's too early to tell how fast that product could ramp up.

And just again, the timing on the UV enabled product?

Q4 launch.

And then just one other follow-up on that product, or two follow ups. Are you capable of manufacturing that product across your existing lines? It's just a variation thereof, and you could achieve nice gross margins on it as well?

That's what we expect, obviously, yes. As I said, the product is built upon the EnFocus platform, so it can be controlled. It has to be controlled through the EnFocus platform. So it is just an extension, a new application on top of EnFocus control system. We look forward to scale the production based on what we have now.

And finally, just on the UV product, how far do the benefits from the UV extend? Meaning do they extend a few inches away from the fixture? And do customers - or if you've done any customer research already, you probably have, but do the customers understand where it fits? Meaning what it's capable of accomplishing, what it's not capable of accomplishing?

Yes. I think if you look at all the UV equipment, what we can claim is obviously that whenever the air flows through our module, we can kill say 99.99% of the viruses and microorganisms. It depends on how the variables and the space determine the impact of the equipment on the space. If you have a very fast air change, for example, then this might reduce the impact. But just like every other UV disinfection equipment, they cannot guarantee how much impact you can have in the space unless you have those direct UV surface disinfection products, which you cannot use when people are present. Our goal is to have a system where it's functional when people are in the building. We didn't develop this just for hospitals. We developed this for pretty much all types of institutional buildings, from hospitals, schools, offices, and commercial spaces. So our design is to achieve certain amount of disinfection capability. And it always depends on how customers use them. That's the one that obviously we expect to do more clinical studies to show that it can the extent of improvement; the virus counts reduction in the room overtime. But what we can say is just like how you buy your air purifiers at home maybe, they will tell you that they can filter 99% of the micro orgasms. But they cannot tell you exactly how clean your room is going to be because you don't know how big the room is going to be and you don't know if there are attracted [ph] inside. So those are the things that will take a little bit longer to prove the exact effectiveness. But again, every space is different. So the only thing we can say is that this unit will be very effective on filtering out the air and cleaning, disinfecting the air that goes through it. And what we try to design is to make sure that in a normal condition, this unit would be very effective in reducing a significant amount of viruses, and microorganisms, and pathogens in the room.

Great. Thanks a lot.

Sure.

[Operator Instructions] Our next question comes from Robert Smith with Center for Performance Investing. Please proceed with your question.

Thanks for taking my question.

Good morning.

Can you discuss specifically the IP protection surrounding the EnFocus line and also what you're seeking in the UV product?

As we mentioned, that we already filed several patents, EnFocus. And as I said, it's an ongoing practice, ongoing exercise. As we develop new technologies incorporated into EnFocus, we'll continue to file more patents. Same thing for UV. UV is earlier. So we filed a provisional patent on our design, and we expect to file more in the coming month as we solidify the design, also increase the sort of technologies involved in the product.

But James, what are the protections around the EnFocus line?

Well, the protection is that it is a unique application and technology because we leverage existing power lines for our communication.

But others can have the ability to have - control the dimmer aspect of it?

Again, we filed the patents to protect what we developed. People can - people get around to actually do the same thing. Anything is possible but obviously, when we filed the patent, we tried to exhaust all the options there to do this. So there's no guarantee that nobody else could do it. But we feel pretty good about the protection of our IP.

So inclusive of the dimmer in the COVID temperature [ph]?

Yes. Especially a way to communicate through the power line, the existing power line, right. It's not reduced signaling [ph] and their labor to install the system. And also, a brand new feature, in the cross-way [ph] section.

That's the primary feature, the power line?

Yes. But also different ways to - I mean, a lot of different type of applications field upon that technology.

Thanks very much. Good luck.

Sure. Thank you.

Our final question comes the line of Edward Gilmore with Little Grapevine. Please proceed with your question.

Hi, James and Tod.

Good morning, Ed.

Good morning. How are you? Congratulations on the progress this this quarter. Just had a quick question. Can you comment on sales efforts towards the academic and university segment? I'm just curious if you're starting to see sales resume in that area. Thank you.

I think you're asking about - can you repeat that question? Just to make sure that I - can you repeat that question, Ed?

Sure, yes. I know in the past, you've commented on some relationships with universities like Penn State University and some other academic institutions. I'm just curious if school is kind of on pause, as administrators are thinking about when they're going to resume in the fall. Are you guys seeing any additional opportunities in that area?

Yes. Again, we mentioned in this earnings call that we're seeing pretty much slowdown in every commercial vertical. College is the same. I do have to say that people are working. People are just not making big decisions, making big orders now. And over these past, I guess, week, two weeks, we start to see people getting more active. And I think schools is one of the verticals that we deal with. We've definitely seen some suspension of activities for now. I don't think colleges are exceptional. Again, we still get orders from colleges. But I think it's just one of those commercial sectors where we just are seeing slow decision making processes right now. Although, again, as I said, we are starting to see activities picking up over the past probably week, two weeks. It's still too early. Tod, do you have anything to add on this?

No. I just think it's - no, it's really delays in the orders that we're seeing, and behavior. It's not a cancellation. So, so far, there's no indication that people are canceling anything. It's just a delay in timing.

Okay. Thank you, guys.

Sure. Thanks, Ed.

Ladies and gentlemen, we have reached the end of our question-and-answer session, and I would like to turn the floor back over to management for any closing remarks.

Thanks, everyone, again for your participation in today's call. We look forward to talking to you in our second quarter 2020 earnings call. Have a great day.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.