Energy Focus, Inc.

Greetings and welcome to Energy Focus' first quarter fiscal year 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Brett Musk of Hayden IR. Thank you. You may begin.

Thank you, Operator, and good morning, everyone. Joining me on the call today are James Tu, Chairman, 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 on Our Most recent 10-K, as well as the 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 note 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. which is 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-at-home orders, our progress towards building NH Focus into the next generation lighting industry leader had not stalled at all. Our employees, either at our factory or from home, have been working very hard and very smart. And 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 NH Focus, As both Todd and I and our board directors are, I'd like to say that the future of image focus is not only much brighter than a year ago when we started the restructuring and relaunch programs, 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 continues to pick up in the first quarter. in spite of the unprecedented economic challenges posed by the pandemic. As consistent over the past year since the management change in April 2019, we continue to make incremental but 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 InFocus, our patent-pending lighting control platform to bring human-centric lighting specifically to existing buildings. Despite of all the buzz we might have heard about LED being everywhere and getting cheaper by the day, an overwhelming majority of the country's and the world's existing commercial buildings 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 LEDs. Today, the penetration rate is likely to still be well below 20%. And the percentage of lighting fixtures with controls are even lower. That represents tens of billions of dollars of opportunities in the coming years to upgrade these fixtures to LEDs. and connected lighting, just in the United States. And since Insocus is designed for universal electrical settings 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. markets. 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 steaming and circadian rhythm outside of energy efficiency are available and affordable. Within FOCUS, we aim to maximize the financial, environmental, and human or triple bottom-line benefits from LED lighting and capture a meaningful share of the coming retrofit opportunities as LED lighting moves on to the next phase of accelerating adoption, driven by human-centric lighting. 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 to $3.6 million and grew 19% year-over-year and 7% sequentially. The increases over prior periods 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. And sales of our patented emergency backup LED tube, RECAP, continue to grow and register 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 gold blinds, $3.4 million of military intelligence tubes, and $1.7 million new ship lighting fixtures for a foreign airline navy, as well as several other smaller ones. We're 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. When we have a combination of better products 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 warning call, due to COVID-19 and the continuing shutdown of non-essential equipment, economic activities across most of the country. We have 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 an 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, healthcare, and education industrial sectors are still going to be mostly occupied. Meanwhile, we have been taking this time to introduce the InFocus lighting control platform, which we officially launched this past Monday to existing and new customers. We have received an overwhelmingly positive reception on InFocus so far, And interest and inquiries about this product family are literally growing by the day. We continue to believe that InFocus is not just a better lighting control platform, but also a unique offering for the retrofit market where affordable, simple, and secure lighting controls have not been available before. And 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 InFocus into our most significant growth engine over the next three quarters. First, now with three expanding business development teams that reach out to national distributors, FGOs, 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. Second, In conjunction with the InFocus launch, we roll out a new multi-tier 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 conflicts. As we start engaging with multiple layers of distribution partners. We believe that with a broader distribution strategy, InFocus 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 InFocus, we have started to provide demos and initiate discussions about project opportunities with our customers for InFocus over the past few weeks. And we plan to start providing production samples later this month and shipping in-focus products to customers in early Q3. If the broader economy reopens and commercial activities start to recover over the past few months, as expected, we look forward to having meaningful sales contributions from in-focus from Q4 on. Now I'd like to provide some highlights on our engineering efforts and initiatives. One of the most important initiatives we have laid out in the 2019 company relaunch is developing impactful and differentiated products based on LED lighting technology. InFocus was born and developed under such overarching goals. During the last quarter, in addition to finalizing InFocus design and bolstering our patents surrounding this control platform, we have also started to move on to the next generation in-focus platform that will expand to provide autonomous and wireless lighting control capabilities that further improve energy efficiency, optimize circadian rhythm lighting, and provide a whole new suite 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 initiatives. to develop UV disinfection applications built upon the InFocus platform. We believe that demand for disinfection technologies and products, which in the past have been a niche market mostly for hospital users, is emerging very rapidly and broadly. Literally all indoor spaces today are opening up 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 sudden 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 use have been developing follow our consistent philosophy of making innovative, high-quality, and impactful lighting products. And we believe that our UV disinfection lighting fixture that is designed to provide both general lighting and UV disinfection capabilities based on the InFocus lighting control platform will be a powerful and timely offering for organizations across all enterprise sectors that seek to minimize virus infection risk. 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 are 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 with our UV disinfection technologies and products. And we plan to continue to build and expand our intellectual property, core competencies, and operations surrounding the UV disinfection thing. I'm sure we'll 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 the 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 sanitary and disinfection measures and procedures for our production facility in Solon, Ohio. We're designated as an essential business, so with proper safeguards, our team members at the production facility are allowed to continue working. And we expect that our 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 writing retrofit 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 projects during this period when buildings are much less occupied. With regards to our business outlook, although we have started to grow from Q4 2019, we are still early in our long-term growth trajectory. And large accounts and opportunities could still sway our financials significantly. The newfound layer of economic uncertainty resulting from COVID-19 makes it even harder to project 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 net 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 broke more than 70% of the forecasted sales, mostly from our military business. And therefore, we are relatively confident of our Q2 sales hitting this target range. As we stated in the fourth quarter and full year 2019 earnings goal, two months back, we believe that After the restructuring and relaunch effort during 2019, we had turned the corner and started growing in Q4. We continued to grow from 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, build upon the first arrow of our rejuvenated growth from our military business, where we now are more competitive than ever before. With the recent launch of InFocus, we look forward to having this second era of growth to prepare our commercial business as well as our overall sales from the second half and especially fourth quarter. With that, I'll turn the call to Todd to review our financial performance during the quarter. Todd?

Thank you, James. Net sales for the first quarter of 2020 were 3.8 million, compared with 2019's first quarter net sales of 3.2 million, an increase of 19.1% year-over-year. The year-over-year increase in net sales was driven by timing of military sales. When 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 enter our top 10 customers with a six-figure order 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 increased 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. Adjusting gross margins for excess and obsolete in transit and net realized value inventory reserve 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 and 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-based 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 was 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 for 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 a gain of $873,000 related to the fair value of warrants, 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 a shelf-registered sale of equity in the first quarter in cash generated from operations. During the first quarter, we issued approximately 3.4 million shares of our common stock and an at-the-market purchase price of 67.4 cents per share in unregistered warrants to purchase up to 3.4 million shares of common stock and an exercise price of 67.4 cents per share at 12.5% per warrant for gross proceeds of $275 million. Proceeds from this offering provide short-term funding for our operations and initiatives for growth, as well as a required pay down for our earlier note of $275,000. If the warrants were to be exercised at their exercise prices of 67.4 cents a share and 99.8 cents 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, and 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, the total debt outstanding of $1.7 million. Vetted against cash of $2.9 million, we had 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 $2.1 million of cash and $1.2 million of excess borrowing availability under our credit facilities. As a reminder, total availability is a measurement of our access to cash at any given point in time. It is a much more relevant metric than simply looking at a cash balance on the balance sheet, while excess borrowing availability under a credit facility represents the difference between the maximum borrowing capacity of our credit facility and actual borrowings on the credit facility. Accounts receivable 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 sales. 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 inventory 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 cost for our warranties and still be able to afford to offer valuable 10-year and 5-year warranties to our customers. Energy Focus's hallmark quality remains a strong selling point for our products and is reflected in our ability to offer these warranties. At UN, I briefly spoke to the impact of COVID-19 on our supply chain and 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 end of 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 the risk 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 on our suppliers and fewer supply chain hiccups. Regarding China, we have not experienced as many supply chain disruptions during the past month, a month and a half, as we experienced initially when we had to shift some production outside the country. We've been able to reliably source the 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 I plan 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. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone indicates Ron is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, as we poll for questions. Our first question comes from the line of with AC Wainwright. Please, do with your question.

Thank you.

Good morning, everyone.

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

Yeah, of course. As we mentioned, the commercial sales are still quite uncertain. So, you know, I think that we, as I mentioned earlier, that we have about 70% of the business books. So we try to be conservative about but reasonably conservative. You know, not extremely conservative, but reasonably conservative.

Thank you for that. So you're at a cost of really launching some, you know, very unique and interesting products into the market, especially on the Enfocus side, with changes in 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 also sort of restrictions at the physical level in going out and typically doing all of this stuff the way you used to do it.

Yeah, I mean, that's a very good point. And as I mentioned, you know, both in the press release and also in this earlier in the earnings call, that with the introduction focus, 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. You know, in the past, we are known for working with large market customers and some ESCOs and contractors for their projects because it's a fairly competitive market, right? We have always had a better product, but people... want to buy cheaper products, right? In the case of InFocus, it's actually the most exciting thing about it is that it's a control platform that is also affordable. It's 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 are opening up for a 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 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 takes 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. 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 site. Are you taking pre-orders for this? You know, 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 are you not doing any of that right now?

Yeah, we are just, as we put out the press release on Monday, we just launched this officially, so I would expect that, you know, 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.

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 into too much detail yet, because we are still finalizing our prototype design, it will be an integrated general 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 uses UVs. Nobody can be in the room, right, when you do that UV disinfection because people are not supposed to be exposed on the UV scene. And then you've got the HVAC induction disinfection system that is basically sitting at the entrance of the exit of the dock 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's basically... shines the UV light across the room when, you know, above, I guess, eight feet, right? All those different disinfection technologies have their showcomings. So this is why we developed the product that could be integrated into our general lighting so you can use the existing fixture, you know, basically a spot to retrofit into general lighting, UV lighting, under our in-focus control system. So in this system, you're going to have, without going into the design, you're going to have a beamable general lighting, color-tuneable or circadian rhythm lighting, plus the UV disinfection. And it could be functional when people are inside. So you will get the air disinfection.

So will this be sold as a... standalone solution, or will you offer it as an add-on to the InFocus as well?

It's an additional application on InFocus, which is why we're so excited about the InFocus platform, because we enable any existing building to add on these applications, right, be it dimming or color dimming or UV disinfection.

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

Thank you. Sure. Thanks. Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Warren Hirschman with AIGH Investment Partners. Please begin with your question.

Hi. Congratulations on a lot of progress, particularly on the operating side. 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 to the military divisions or customers. It sounds like it's based on the statistics.

Yeah, as we mentioned in this earnings call and also the last earnings call, one of the things that we've been 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 a new entrance. And so that's why I emphasize that it's basically our overall increase of competitiveness of our products in that 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 Todd. 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.

Yep. Comparable levels. That's really a factor. 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 it if you can more, in terms of some of the new product shipments, it sounded like you keep four for a second half, and is the disinfection also during that time frame? If you can just reiterate the time frame.

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

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

Right. So as we mentioned, the infocuses are already in launch, 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 for InFocus 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 for InFocus to generate more meaningful sales in Q4. For the UV products, we are ready to launch in Q4, so I would say that there might be some initial sales in Q4 and really started to pick up in Q1. Again, for the UV products, it's a pretty new category. The market is new, so we can't, we cannot, you know, predict, you know, what the demand is going to be. We do know that, you know, in our process of doing the research and development, we know there seems to be a tremendous amount of demand there. That's our, you know, the current understanding. So it's too early to tell, you know, how fast that product could run.

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

Q4, launch.

Q4. And just one other follow-up on that product, or two follow-ups. Are you capable of manufacturing that product, you know, 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. Yeah, as I said, the product is built upon the InFocus platform, so it can be controlled. It has to be controlled through the InFocus platform. So it is just an extension, a new application on top of InFocus control systems. So yeah, we definitely 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 to extend a few inches away from the fixture and our customers, the customers, or if you've done any customer research already, you probably have, do they the customers understand where it fits, meaning what it's capable of accomplishing and what it's not capable of accomplishing.

Yeah. I think if you look at all the AUV equipment, what we can claim is obviously that whatever 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 to determine the impact of the equipment on the space. If you have a very fast air change, for example, this might reduce the impact. But just like every other UV disinfection equipment, they cannot guarantee how much impact you can have. have in the space unless you have you know those direct UV surface disinfection products which you cannot use when people are present our goal is to have a system where you know it's functional when people are in the building we didn't develop this just for hospitals we developed this for pretty much all type of institutional buildings from you know hospitals schools offices and, you know, commercial spaces. So, you know, our design is to achieve certain amount of disinfection capability, and it always depends on how customers use them, right? That's the one that we expect to do more clinical studies to show that it can, you know, the extent of improvement, the virus count reduction in the room over time, Um, but what we can say is just like how you buy your air purifiers at home, maybe, um, you know, they will tell you that they can filter 99% of the microorganisms, 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 track inside. Right. So, um, those are the things that will take a little bit longer to, 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 will be very effective in reducing a significant amount of viruses and microorganisms and pathogens in the room. Thanks so much.

Sure. Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Once again, if you would like to ask a question, please press star 1 on your telephone keypad. One moment, please, as we vote for questions. Our next question comes from the line of Robert Smith with Center Performance Investing. Please see 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, we already filed a petition There are several patents in focus. And as I said, it's an ongoing practice, ongoing exercise as we develop new technologies incorporating into InFocus. We'll continue to file more patents. Same thing for UV. UV is earlier. So we filed provisional patents on our design, and we expect to file more in the coming months as we solidify the design and also increase performance the 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 to leverage the existing power line for communication.

Mm-hmm.

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

Again, you know, we file the patent to protect what we develop. Can people get around to actually do the same thing? If anything is possible, but obviously when we file the patent, we try to exhaust all the options there to do this, right? Um, so there's no guarantee that nobody else could do it, but, uh, we feel pretty good about the protection of our IP.

So inclusive of the, uh, the dimmer and the color temperature.

Yes. Especially a way to communicate through the power line, um, existing power line, right? That reduces significantly the labor to install the system. And also, you know, a brand new fixture, you know,

Yeah, that's the primary feature of the power line.

Yeah, but also different ways to, I mean, I want a different type of application built upon that technology.

Thanks very much. Good luck. Sure. Thank you.

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

Hi, James and Todd. Thank you for calling, Ed. Good morning. Sorry. Congratulations on the progress this quarter. Just had a quick question. Thank you. 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.

Yeah, the... I think you're asking about... Can you repeat that question? Just to make sure that I... Can you repeat that question?

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

Yeah. Again, you know, as we mentioned in this earlier call, we're seeing pretty much a slowdown in every commercial vertical, right? Um, the, uh, college is, uh, the same. We, I do have to say that people are working, right? People are just not making big decisions, uh, making big orders, uh, uh, now, um, over the past, uh, I guess, uh, week, two weeks, we started to see people getting more active. Um, and I think schools is, One of the verticals that we deal with, we definitely see 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 like one of those commercial sectors where we're just seeing slow decision-making process right now. Although, as I said, we have done this big activities picking up over the past probably week to week. It's still too early. Todd, do you have anything to add on this?

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

Yeah. 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.