Earnings Call Transcript - EFOI Q1 2020

Operator, Operator

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. 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.

Brett Maas, Host

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 in 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.

James Tu, CEO

Thank you, Brett. Good morning, everyone, and thank you for joining our first quarter 2020 earnings conference call. First, I hope you and your families are staying safe and healthy during this challenging time due to the COVID-19 pandemic. Like everyone on this call, we have been closely monitoring the pandemic's developments and implementing our Coronavirus contingency plan, responding to changes as quickly as we can. We are fortunate that our employees remain healthy and that our factory has stayed open throughout the pandemic. Despite the ongoing macroeconomic challenges and stay-at-home orders, our progress towards establishing Energy Focus as the next leader in the lighting industry has remained strong. Our employees, whether in the factory or working from home, have been dedicated and innovative. I believe the pandemic has pushed our team to be more creative, efficient, passionate, and collaborative in achieving our short-term and long-term goals. For you as Energy Focus investors, I want to emphasize that the future of Energy Focus is significantly brighter than it was a year ago when we began our restructuring and relaunch program, and even better than it was three months ago. As seen from our Q1 earnings release this morning, our sales growth momentum continued to improve in the first quarter despite the unprecedented economic challenges presented by the pandemic. This trend has been consistent over the past year since the management change in April 2019. We are making steady, meaningful progress month by month and quarter by quarter in stabilizing and optimizing our operating infrastructure while enhancing our engineering, sales, and marketing capabilities. We continue to reignite our growth and deliver improving financial results, irrespective of the macro environment. Equally crucial is our transformation over the past 12 months from an energy efficiency-centric LED lighting company to a broader sustainability-focused force. With the launch of EnFocus, our patent-pending lighting control platform designed to provide human-centric lighting in existing buildings, we believe we have a strong position in the market. Even though LED adoption is increasing, the majority of commercial buildings worldwide still rely on fluorescent lighting. The latest estimate suggested that only 11% of the over 1.1 billion linear lighting fixtures in the U.S. were lit with LED, with the current penetration likely still below 20%. The percentage of fixtures equipped with controls is even lower. This represents a significant opportunity for upgrading to LED and connected lighting in the coming years, particularly in the United States. Since EnFocus is designed for universal electrical settings to replace fluorescent lamps and switches, it is well-suited for international markets much larger than the U.S. We are confident that building owners and occupants worldwide will be keen to adopt LED lighting if human benefits such as dimming and circadian rhythm adjustments, beyond energy efficiency, are accessible and affordable. With EnFocus, we aim to enhance financial, environmental, and human benefits from LED lighting and capture a significant share of the forthcoming retrofit opportunities driven by human-centric planning. In terms of our financial results for the first quarter of 2020, net sales of $3.8 million surpassed our revenue guidance of $3.5 million to $3.6 million and represented a 19% year-over-year increase and a 7% sequential rise. The growth over the prior period was primarily fueled by our increasing military contract wins over the past six months. We also continued to expand our commercial customer network, adding several new colleges and school districts. Sales of our patented emergency backup LED tube, RedCap, reached record levels this quarter. As mentioned in our 2019 annual earnings call, our military achievements over the past six months included over $2.5 million in globe lights, $3.4 million in military intelligence, and $1.7 million in new ship lighting fixtures for allied navy, alongside several smaller contracts. These results are encouraging, demonstrating our ability to compete effectively through engineering innovation that reduces product costs while maintaining superior quality. With better products and costs, we expect to secure the majority of contracts. We anticipate strong military sales throughout 2020 and are optimistic about pursuing new Navy opportunities as they arise. In our commercial business, we noted in our last earnings call that due to COVID-19 and the ongoing shutdown of non-essential activities across most of the country, we began to see a decline in sales starting in March, similar to most businesses. However, we believe that barring a severe, prolonged economic freeze, the current softness in sales will not be long-lasting, as the facilities of our target customers in government, healthcare, and education sectors are still largely occupied. During this time, we've introduced the EnFocus lighting control platform, which launched this past Monday. The response has been overwhelmingly positive, with inquiries increasing daily. We maintain that EnFocus is not only a superior lighting control platform but also a unique solution for the retrofit market, providing affordable, straightforward, and secure lighting controls that have been lacking. We expect that this will lead us to a much larger network of distribution partners that we haven't previously engaged with. To advance our efforts for EnFocus, we have established a dedicated business development team reaching out to distributors and contractors. Along with the EnFocus launch, we introduced a new multi-tiered pricing system to reinforce our brand image, ensure fair pricing, protect our partners' margins, and avoid potential conflicts as we engage with multiple layers of distribution partners. We believe this broader distribution strategy will elevate Energy Focus in terms of product innovation and market presence. In conjunction with the official launch of EnFocus, we have begun providing demos and discussing project opportunities. We expect to deliver production samples later this month and begin shipping EnFocus products in early Q3. As the economy reopens and commercial activities recover, we look forward to EnFocus making a substantial sales impact in Q4. Now I'd like to address some highlights regarding our engineering initiatives. One key initiative from our 2019 relaunch is developing impactful, differentiated products based on LED technology, which led to the establishment of EnFocus. In addition to finalizing EnFocus' design and strengthening our patents, we are also working on the next generation EnFocus platform, which will enhance autonomous and wireless lighting control capabilities, improve energy efficiency further, optimize circadian lighting, and provide new functionalities related to building automation and management. A crucial priority since the beginning of this year is developing UV disinfection applications on the EnFocus platform. The demand for disinfection technologies, once primarily for hospitals, is rapidly expanding to encompass all indoor spaces. The ongoing impact of Coronavirus reinforces the need for affordable disinfection solutions, likely propelling demand for UV disinfection products to new heights as awareness about pandemic risks grows. Our UV disinfection technology aligns with our goal of delivering innovative, high-quality lighting products. I am proud to announce we have achieved several design milestones and filed provisional patents for our UV disinfection technology in the past month. We are on track to finalize our prototype design soon and aim to launch our first UV products by early Q4. We are excited about the significant positive impact our UV disinfection technologies can have on our customers' daily operations. We will continue to build and expand our intellectual property and capabilities in the UV disinfection sector, and I look forward to updating you on our advancements in this area in the coming months. Turning to the impact of COVID-19 on our business, we quickly acted to safeguard our employees and ensure business continuity. We implemented our COVID-19 contingency plan, allowing employees who could work remotely to do so while enforcing strict monitoring and sanitation measures for our production facility in Solon, Ohio. As we are recognized as an essential business, our production facility continues to operate with proper safety measures. However, our commercial sales across most verticals have been affected due to closures and slow economic activity. While we have seen lighting retrofit projects delayed, we have not lost opportunities because of COVID-19. We believe the economic reopening will be challenging but temporary, and some organizations may even pursue retrofit projects during this period of reduced occupancy. Regarding our business outlook, while we have started to grow from Q4 2019, we are still in the early stages of our long-term growth journey, and significant accounts could take time to reflect financially. The new layer of uncertainty from COVID-19 makes it difficult to forecast several quarters ahead, especially on the commercial side. Therefore, we are not ready to provide an annual outlook at this time, but we will continue to offer quarterly forecasts to the best of our ability. For the second quarter of 2020, we expect May sales to range from $4.5 million to $4.8 million, showing sequential growth of 18% to 26% compared to Q1 2020, and a 46% to 56% increase year-over-year. Having already booked over 70% of our forecasted sales, predominantly from our main business, we feel confident about meeting our Q2 sales targets. As indicated in our previous earnings call, following our restructuring and relaunch efforts in 2019, we believe we have made significant strides and expect our growth to continue from Q1 to Q2, particularly from our competitive military business. With the launch of EnFocus, we look forward to boosting our commercial business and overall sales in the second half of the year, especially in Q4. Now, I'll turn the call over to Todd to discuss our financial performance during the quarter.

Todd Nestor, CFO

Thank you, James. Net 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 in 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 mix 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 which 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 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. Adjusted gross margins for accessories and obviously in transit and net realized value inventory resulted in an 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-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 expenses 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 million 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-based and other incentive compensation improved to a loss of $873,000 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 at an aftermarket purchase price of $0.674 per share, and unregistered warrants to purchase up to 3.4 million shares of common stock at an exercise price of $0.674 per share at 12.5% per one for those proceeds of $2.75 million. Proceeds from this offering provided short-term funding for our operations and initiatives for growth, as well as required pay down for an alien note of $275,000. If the warrants were to be exercised at their exercise prices of $0.674 a share and $0.998 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 measure of our access to cash at any given point in time and is a 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 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 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 while still being 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.

Operator, Operator

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

Amit Dayal, Analyst

Thank you. Good morning, everyone. I appreciate you taking my question.

James Tu, CEO

Good morning, Amit.

Amit Dayal, Analyst

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

James Tu, CEO

Yes, of course. As we mentioned, the commercial sales are still quite uncertain. So I think we are trying to be conservatively reasonable. Not extremely conservative, but reasonably conservative.

Amit Dayal, Analyst

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, 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 restrictions at the physical level in going out and typically doing all of this stuff that you used to do?

James Tu, CEO

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, with the introduction of EnFocus, which is a very unique product platform, we are almost expanding our distribution network a lot more aggressively. As you know, in the past, we were known for working with large marquee customers, 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, the most exciting thing about it is that it's a control platform that is also affordable, is not only high quality, but also simple. And so, we don't want to be limited to our own sales force. We opened 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 from the sales point of view. And it will bring us much more timely sales reach to customers and also build brand awareness and 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.

Amit Dayal, Analyst

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?

James Tu, CEO

Yes, we are just starting. We put out the press release on Monday. We just launched this officially, so I would expect that later in the 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 early Q3.

Amit Dayal, Analyst

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?

James Tu, CEO

Without going to 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 UV. Nobody can be in the room when you do that UV disinfection because people are not supposed to be exposed to UV. Then you've got the HVAC disinfection system that sits at the entrance and exit of the HVAC system to clean the air flowing out. And then you've got the upper room air disinfection system that shines the UV light across the room above 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 to retrofit into general lighting and UV lighting under our EnFocus control system. So in this system, you're going to have dimmable general lighting, color tunable or circadian rhythm lighting, plus the UV disinfection. And it could be functional when people are inside. It will basically be air disinfection.

Amit Dayal, Analyst

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

James Tu, CEO

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

Orin Hirschman, Analyst

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

James Tu, CEO

Good morning.

Orin Hirschman, Analyst

Hi, good morning. In terms of the military orders, what is causing the military comeback to be so strong? It seems like it's not across the board with the military divisions or customers or something based on those statistics.

James Tu, CEO

As we mentioned in this earnings call and also the last earnings call that one of the things 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 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.

Todd Nestor, CFO

I'll also 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.

James Tu, CEO

Yes, at 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 are the reasons for us to win those new contracts.

Orin Hirschman, Analyst

And just again, I know you went through this, but just to try and pinpoint if you can further, the new product shipments, it sounded like Q4 for the UV product during that timeframe. If you can just reiterate the timeframe.

James Tu, CEO

Right. So 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 for EnFocus in Q3. We do hope that if the economy starts to reopen in the next few months, we should start seeing momentum picking up, and showing folks generally more meaningful sales in Q4. For the UV product, we are slated to launch in Q4. 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, based on our research and development, there is a tremendous amount of demand there. So it's too early to tell how fast that product could ramp up.

Orin Hirschman, Analyst

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

James Tu, CEO

Q4 launch.

Orin Hirschman, Analyst

And then just one other follow-up on that product. 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?

James Tu, CEO

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 the EnFocus control system. We look forward to scaling the production based on what we have now.

Orin Hirschman, Analyst

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, do the customers understand where it fits? Meaning what it's capable of accomplishing, what it's not capable of accomplishing?

James Tu, CEO

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 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 cannot be used when people are present. Our goal is to have a system that is functional when people are in the building. We developed this for pretty much all types of institutional buildings, from hospitals, schools, offices, and commercial spaces. Our design is to achieve a certain amount of disinfection capability. And it always depends on how customers use them. That's the one that obviously we expect to conduct more clinical studies to demonstrate the extent of improvement; the virus counts reduction in the room over time. 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 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 how many activities are occurring inside. 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 claim 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 normal conditions, this unit would be very effective in reducing a significant amount of viruses, microorganisms, and pathogens in the room.

Orin Hirschman, Analyst

Great. Thanks a lot.

James Tu, CEO

Sure. Thanks.

Operator, Operator

Our next question comes from Robert Smith with Center for Performance Investing. Please go ahead with your question.

Robert Smith, Analyst

Thanks for taking my question.

James Tu, CEO

Good morning.

Robert Smith, Analyst

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

James Tu, CEO

As we mentioned, we have already filed several patents for EnFocus. And as I said, it's an ongoing practice and exercise. As we develop new technologies incorporated into EnFocus, we will continue to file more patents. The 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 and increase the technologies involved in the product.

Robert Smith, Analyst

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

James Tu, CEO

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

Robert Smith, Analyst

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

James Tu, CEO

Again, we filed the patents to protect what we developed. People can 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. So there’s no guarantee that nobody else could do it. But we feel pretty good about the protection of our IP.

Robert Smith, Analyst

So inclusive of the dimmer in the COVID temperature?

James Tu, CEO

Yes, especially a way to communicate through the power line, via existing power lines, right? It's not reduced signaling and their labor to install the system and also a brand new feature.

Edward Gilmore, Analyst

Hi, James and Todd.

James Tu, CEO

Good morning.

Edward Gilmore, Analyst

Good morning. How are you? Congratulations on the progress 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.

James Tu, CEO

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

Edward Gilmore, Analyst

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 schools are 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?

James Tu, CEO

Yes. Again, we mentioned in this earnings call that we're seeing pretty much a 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. 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're just 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 or two. It's still too early. Tod, do you have anything to add on this?

Tod Nestor, CFO

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.

Edward Gilmore, Analyst

Okay. Thank you, guys.

James Tu, CEO

Sure. Thanks, Ed.

Operator, Operator

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.

James Tu, CEO

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.

Operator, Operator

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