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spk01: Good morning. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Legend Power Systems Q2 2023 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, press star 1. Thank you. Legend Power, you may begin your conference.
spk03: Welcome to the Legend Power Systems fiscal 2023 Q2 investor call. We're pleased to have you on the call today to discuss our corporate progress and provide our fiscal 2023 Q2 update representing three months ending March 30th, 2023. We've had a bit of an unusual event this morning and that the number on the PR apparently is not correct. So we do not have the regular number of people we would have in the fall. We've made the decision to Proceed with the call, record the call, and we'll offer people an opportunity to call if there's additional questions. We appreciate the patience, everybody, once they do hear the call. I'm joined by Florence Tan, our CFO, Paul Moffitt, COO, and Mike Cioci, our VP, Sales and Marketing. Please note that certain statements in this call may be forward-looking in nature. These include statements involving known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements. For additional information about Legend's forward-looking statements and risk factors, please see our quarter and management discussion analysis, which was filed on CDAR today, under our company profile at cdar.com. And we're going to take a bit of a different approach to today's call. We have been gathering the most frequent shareholder and investor questions that we've recently received. And we will ask each question and provide an answer. We still will have a question here at the end, and we will provide a few brief summaries before we get into questions. Over the last few years, Legend has transformed significantly from an energy savings company to building our brand as the active power management solution for ensuring optimal power management for buildings. Our transformation and rebranding has resonated with our target markets and major federal and state agencies and leading commercial billing owners are planning to implement the active power management solution. We have created a new category and a market without any direct competitor and our pipeline and order flow is growing and it will make Legend Power a compelling public company. When we last raised $10 million, we submitted our use of proceeds summary. I'd like to point out that we've delivered as promised on our use of proceeds, and in fact, each key category spend represents our key pillars for growth. We've invested over the last two or three years to grow by investing over $4 million in the new Gen 3 solution. And field and customer feedback is extremely encouraging. And it will create revenue for many years. Over 40% of the last raise then has been invested in creating Gen 3. I view this as an asset investment and not just a P&L expense. We have paid inventory of $1.8 million. 1.4 of it is Gen 3 components. All current inventory makes a 100% plus margin cash contribution as it's sold. And we've created... The category of the brand, Active Power Management, and we're being written into as a standard specification in major electrification and decarbonization initiatives. We simply own the space. We've improved our sales team and processes, starting with insights and developing into a power impact report. We're continuing securing supply chain improvements to improve margins and time to deliver it. We're reviewing production outsourcing alternatives to improve margin and time to delivery. We're building a strong engineering team that will continue to enhance existing technologies and build leading-edge energy management solutions. Before we highlight the frequent questions and answers, I'm going to ask Florence to discuss Q2 financial information, and then Mike Ciosi will provide a brief sales update, and then we'll go into the questions. Thank you.
spk00: Thank you, Randy. So during this quarter, revenue recognized was 74,000 compared to 343,000 in Q2 FY22. Revenue recognized was based on one SmartGate system compared to four SmartGate systems, respectively. Sales pipelines as well as sales bookings backlog are both healthy, and we will see the transition of these revenue recognition over the coming months. Gross margin in the second quarter of fiscal 2023 was negative 7% compared with 17% in Q2 of FY22. The decrease in gross margin experienced during Q2 of this fiscal was due to additional costs incurred to replace and repair a unit damaged in transit, which the company expects to recover the majority of these costs incurred. The change in margin for the second quarter was also impacted by an inventory adjustment due to count results offset by a recovery on inventory previously provided for. The normalized gross margin for the quarter excluding these items would have been 34%. On a year-to-date basis, gross margin for the six-month period was 20% compared with 18% year-to-date in Q2 of FY22. Given the company had taken action last year by increasing sales prices, we've seen a moderate increase in our margin. The company ended the quarter with $1.5 million in cash, no debt, and $3.15 million in working capital. With this working capital, we continue to proactively focus on the items critical to attaining our growth projections, and we will continue to frugally manage our capital resources, as we always have, and squeeze the most out of every dollar provided by our shareholders. Thank you, and now over to Mike Cioci.
spk05: Thank you, Florence, and thank you, everybody, for your time today. As Randy said, we're going to get into some of the common questions, but I just would like to take two minutes for a quick update on our progress. As Randy mentioned, over the last couple of years, our company has invested in and undergone a remarkable transformation. Initially, we focused on selling one system at a time to improve building energy efficiency. Today, based on our investments to date, we've achieved some significant milestones. We're currently averaging 10 or more buildings simultaneously for a customer, with each opportunity representing dozens of market systems with energy savings as well as maintenance repair savings, as well as just making the buildings better for everyone. Based on our investments, our third generation SmartGate system has been a game changer. It expands our value proposition beyond energy efficiency to include substantial savings and maintenance and repair costs. Our customers are telling us that for each dollar of energy savings, they are also seeing a $1 to $2 maintenance and repair savings after installing SmartGate. Based on our investments, Our pipeline has grown tremendously, escalating from under $20 million to a staggering $150 million in more than four years. This increase results in the growing demand for our products and the clients that put in our capabilities. As with any new technologies, the customers must figure out how to procure and implement Smartgate. In many cases, the Smartgate is being included in much larger projects. These larger scope projects have larger budgets and, in some cases, longer timelines. While it's taking a bit longer than expected, our progress speaks for itself, and we'll discuss this in more detail in just a few minutes. Again, our investments to date have resulted in active power management being written in as a standard specification in major electrification decarbonization initiatives. This means that any bid that wants that opportunity to win must include an active power management system in order to be able to be a winning solution, a winning bid. When we look at the trillions of dollars a year being spent annually in this segment, it's expected to continue for the next two to three decades. The investments we have made to date are driving massive demand, which is starting to and will continue to convert into smart gate orders. In conclusion, we are delighted with our investments, our expansion, inclusion of maintenance and repair savings, and impressive pipeline growth fueled by our investments to date. These indicators demonstrate our success and position us as leaders in the field. Thank you for your continued support, and we look forward to answering your questions shortly.
spk03: And I'm just going to repeat what I said earlier in the call for those that have come on to the call since then. that we're taking a different approach today for the call. We've gathered the most frequent shareholder and investor questions that we received, and we'll go through each and answer each. We'll still offer an opportunity for additional questions from participants at the end. So we're going to move now to the frequent questions and answer portion. So first of all, we get the question, why is it taken longer than expected to achieve sales success? Mike, can you give us a flavor on that?
spk05: Yeah, sure. So there's a number of things to keep in mind. First of all is we are making a market. And to really drive home what that means, every one of our new customers have purchased an active power management system before. So this is definitely very different than buying an iPhone or even buying a replacement HVAC system. Because of that, they have to learn how to buy it. And, again, when you're connecting major building systems, to a switchgear, which is the heart of any electric, of any facility, sometimes those updates and upgrades need to occur, and sometimes our efforts get rolled into major electrification and decarbonization efforts. What's interesting is, again, we have a very large pipeline that is continuing to grow, and we're simply not getting the no's that the no's just aren't happening. So our close rates are higher than expected. And what's also interesting is that we also have sufficient late stage deals to hit our booking targets for the remainder of the year. So we're very confident that while it is taking a little bit longer, we're not getting the nose and we are continuing to grow the pipeline and close business.
spk03: Great. And on that topic with the pipeline growing, How do you see the next 12 to 36 months, Mike?
spk05: Yeah, again, keeping in mind that four years ago, our pipeline was under 20 million, and now it's over 150 million. And when we look at the fact that the total addressable market of north of a million buildings in North America alone is tens of billions, if not hundreds of billions of dollars. And when we look at the fact that awareness is continuing to skyrocket, in fact, some Local municipalities in Ontario are getting ready to issue RFPs to solve power quality challenges because, again, the power is getting worse and people are starting to realize it's going to have a negative impact on their facilities. So when we look at that, and we also consider that we currently have one of the concepts in sales leadership is what's called quota coverage or pipeline coverage. Right now, we have double the pipeline coverage for our fiscal 23 bookings, and we have almost double our pipeline for fiscal 24 bookings in sight today. So when we combine that with the fact that, again, we are being written into specifications, and just to touch a little bit more on what that means, being a required specification means that you can't have a winning bid if active power management is not in it. And when we look at the fact that most state and local governments look to the leading players for those best practices, they look to leaders like the city of New York and the federal government in the United States of America. And we are in specification or getting approval for specification with those leaders, which will continue to roll out to other organizations. And that's on the public sector side. But if you look at the private sector side, we are also engaged in late stage sales cycles with the corporate leaders or those oracles that other corporations look to as well. So at the end of the day, the pipeline growth of the next 12 to 36 months continues to look explosive.
spk03: Thanks, Mike. And the next question we get asked a lot is what's happening with GSA? And the person on the call may have a few people that may not know what GSA is. So could you explain what GSA is and what's happening with GSA?
spk05: Yeah, certainly. So the GSA is the General Services Administration. We're engaged with them through their Green Proving Ground, which is a limited deployment for developing a full deployment plan for their organizations. As we've already announced, the first site is selected and we continue to support installation in the fall of this year. The second site has been identified and we're in due diligence. That due diligence is scheduled to happen during the month of June. And again, this is just a massive opportunity for us when we look at the scope of the GSA and all of the federal buildings that they own or operate. the massive opportunity. And again, they're also seen as the orc wars, the leaders of that space. And again, when you look at the fact that the ESCO market alone is $10 to $15 billion a year, that represents a very significant opportunity for us. What's also encouraging with the GSA is just the high level of an excitement from the entire project team, not only from the folks at the Green Proving Grounds, But also Oak Ridge National Laboratories are the organization that's going to be doing the project testing. From that standpoint, they're very excited about it because this is one of the first solutions they've seen in a long time that actually fixes power. So they're highly engaged and we're getting some very positive feedback from them. But what's also exciting is just the feedback from the site teams that we're working with. The level of frustration that they have today over challenges with the power and what it's causing the facility, to have a solution in sight for them, they're incredibly engaged. So we are very well positioned. We've got a lot of activity around the GSA.
spk03: Excellent. Obviously, the company maker. You've got another one on DCAS, Mike. So we do get asked what's happening with DCAS also. And for the sake of some new shareholders, Same thing, if you could just let us know what DCAS is and then answer the question, please. Thank you.
spk05: Yeah, so DCAS is the Department of Central Administrative Services for the City of New York. They are the central group for all the city agencies for the City of New York. So they support the school construction authority, the schools, the design construction services, all of the major groups inside of the city of New York and they're the central spending authority. And as we've previously announced, we are an approved solution with them. We've went through a rigorous testing process with them and we've passed that with flying colors. And also as they have previously announced that they're getting ready to spend $4 billion on electrification and decarbonization efforts over the coming years. one of the latest updates is that the specification for active power management is finalized and it's being actively distributed to addendums for RFPs that are in progress as well as new RFPs. So with that, we see over two dozen projects starting this calendar year representing between 50 and 100 smart gates alone. So again, the DCATs can certainly continue to be a company maker for us. And again, our investments to date have made us the industry and segment pioneer and front runner. So anyone else who's wanting to play catch up is already five to 10 years behind us. And again, keeping in mind that being in spec means that any bid must include an active power management system in order to win. And that we are, again, the category pioneer and front runner for active power management system.
spk03: And I'll just add, Mike, that's probably about four to five years of sales investment to get to this stage. So, again, well done. Very exciting. The other question we get is, are we making progress with resellers, Mike?
spk05: Comments? Yeah, absolutely. We are continuing to be written into proposals with leading ESCO providers across North America. But beyond the ESCOs, we're also working with other distributors. We're also working with other leading electrical organizations, and we're working with some of the largest organizations in North America. One of the partners that we recently announced is an organization who focuses in Ontario on power quality solutions, and they've added us to their offerings. But what they're excited about is it dramatically expands their market capabilities as well as our reach. They have a 20-year history with local utilities, and they are the go-to solution provider for Ontario manufacturing. But they've been getting more and more calls recently for commercial buildings, and their industrial solutions just are not sized for commercial buildings. Adding the smart gate to their capabilities dramatically increases their solution capabilities and their market opportunities as well as ours. So these are the types of partners that we're engaging. We've steadily seen an increase in partner-led pipeline, and that's currently accounting for almost 20% of our pipeline today.
spk03: That's great. We also get questions about Gen 3, and I think really what we get is, People asking, we're fairly comfortable that you have proven you save energy, and Gen 3 obviously is an improvement over the previous generation. But how about non-energy efficiency targets, and how do we know that we're hitting them? Mike?
spk05: Yeah, absolutely. And a lot of great progress has been made there based on the investments we've made. So first of all, what we do with part of the power impact assessment is we capture a baseline for the facility to understand what the incoming power looks like. And as we've been in the past, we've always provided a measurement and verification report. But recently, we've also added a power quality verification report as well, which demonstrates that there's a dramatic improvement in the power. So we're able to actually show them what their scores were ahead of time, and then post-installation, what their scores are with a SmartGate Active. Again, the results are incredibly dramatic. Again, not only are we seeing better than a 4.5% energy savings, but we're also eliminating over 98% of all of the power fluctuations that these buildings are getting hit with. And again, in Ontario, it's not uncommon for us to see buildings getting hit with hundreds of voltage fluctuations per year, any one of which can play havoc on their buildings. So we are absolutely generating the results there. But what's also interesting is that our customers are telling us what kind of results they're experiencing. They're telling us that for every dollar in energy savings they see, they also see $1 to $2 of maintenance repair savings. To put things in perspective, one of our customers who recently deployed 10 smart gates, they were spending $15,000 to $20,000 a month just replacing one category, and that's control boards across their portfolio of those 10 buildings. In the first six months of smart gate operation, the spend was literally zero. So again, hundreds of thousands of dollars saved because of the smart gate. In another situation, we saw the CEO saw the results. Not only did they get better than a 15% ROI, which is what they were looking for, but the buildings just worked better. And that made for happier tenants and happier employees. And based on that, seeing the results and hearing the feedback from the team, they bought 10 more systems on the spot. So at the end of the day, yes, we are absolutely nailing it on non-energy performance as well, as well as energy performance.
spk03: That's great. Mike, we also get asked, because we announced a couple years ago that we introduced the insight process to measure how power is being used in the building. And then that was refined into a power impact report. How's it going? How's the two put together, please?
spk05: Yeah, so first thing is that it's going way better than expected. And we need to kind of clarify for everybody, insights is the equipment, and the power impact report is the service for a customer. So what's interesting, again, one customer can do one power impact report. They might use five insights to look at those 10 buildings, but those 10 buildings represent 40 to 50 smart gates. So when we look at it from a standpoint of is it, accomplishing the end goal of identifying and showing the value for potential smart gate sales, it's absolutely there. And it's absolutely providing massive value to our customers because they now can see things that they haven't been able to see before. They can see what's driving the challenges that they face with their buildings. So again, when we look at it, over the previous years, we've identified 300 potential smart gate sales using the power impact report process. We've reached decisions on a little over 90 of those potential, and we have better than a 50% close rate on those, just as expected. So we've got about 100 that are actively being presented, and we've got about another 100 that are in progress. So we still definitely see tremendous value in the insights, but more important than us seeing it, our customers are seeing it, Because now they're able to see challenges that they have had with their buildings for decades that is getting worse that now they have a solution to. So it's definitely going better than expected.
spk03: That's excellent. We also get asked about large deals we've talked about in different quarters, etc. How are the large deals going? Are they still active and are they progressing?
spk05: Yes, they are also active and they're all progressing, albeit at different cadence and paces. Each organization meets opportunity. They continue to move at their own situation. Again, we've got some where they want to put smart gates in, but they realize that the switchgear that they want to attach to is 20 years past the end of life. and that they need to look at replacing the switchgear. We've got some that, once they see the challenges that are in their buildings, that they realize that a larger effort is required, and Smartgate sits at the heart of that. So when we look at those large deals, they are still active, they are progressing very nicely, and each one of them is moving at its own pace. Again, that's part of the challenge of making a market And the fact that these organizations, not only have they not purchased Market before, but for a lot of these buildings, and a lot of the people that we're dealing with, replacing a switchgear in a building is a once-in-a-career event per building. It's not like these are replaced like HVACs where you're putting a new one in every eight to 10 years. We see switchgears that we are being asked to attach to that could be 40, 50, 60 years old, some cases even longer than that, which means that they need to include the replacement of that as part of the project. So, yeah, they're definitely active, definitely growing, and continuing to move forward.
spk03: Great. We'll have a bit of a rest, Mike. There's a lot of sales questions there.
spk02: turn to Mr. Moffitt a few questions in your area Paul and the first one is how is supply chain management going and what progress can you tell us about that yeah sure thank you and good morning everyone just first of all I want to say as well that I'm very pleased with the investment we're making and that I'm leading in terms of governance controls processes and really overall continuous improvement and it's setting a real solid business foundation and a platform for our growth So I'm enjoying and we're making great progress on attacking a lot of supply chain operational production issues. In terms of supply chain, lead times are definitely improving. And so are prices in some cases. There are some exceptions, of course. We've had some transformer lead times increase on this, but we've been able to look at alternate sources and get those reduced. Costs have definitely increased. And I mean, everyone knows that costs have increased everywhere over the last year. We have been working with several distributors. We've negotiated reductions on many of our commodities. So I'm very happy that we're developing those relationships further. And they're even helping with vendor managed inventory, with forecasting and with ensuring that they have the materials available and ready for us when we need them. I guess the toughest part is the semiconductors, and they're still quoting longer lead times. And as I've mentioned before, on those critical parts, I've placed orders probably 12 or 14 months ago. So I'm respecting those lead times and ordering against those, and we don't have to pay for those until they're received. But I am confident, and I am starting to see improvements coming in the near future. In terms of procurement and buying, we now have a strong MRP model and we've begun to establish a safety stock plan. We're being cautious there in terms of how we spend our money and we're currently ordering to order right now. But I want to evaluate and understand what kind of flexibility we can obtain at what cost in order to further reduce our lead times. In terms of our backlog, it's been completely provided for. Production is currently underway and will be for the next several months. Andy?
spk03: That's great, Paul. I guess the sub-part of that is we get asked about our progress on margin improvement. And Warren's backed out some of those extraordinary items and talked about 34% margin would have been realized with those backed out, which is an improvement. But can you give us some flavor about that? How do you see margin improvement going?
spk02: Yeah, I'm really pleased with that normalized increase. And we have been projecting those improvements and further improvements as we are realizing gains in both overhead, you know, unit hours of production and also materials. So that will be improving and it will improve more so towards our fiscal target and our strategic target as well. In terms of equipment COGS, those have been reduced by over 5%. There's lots of opportunities we're seeing as well because we have major efforts underway in terms of outsourcing, both Canada, US and Mexico on sub-assemblies and full systems. So I'm very excited about the gains that we will see there. And as mentioned earlier, we're seeing those reductions on several of the commodities. And of course, as our volumes increase, I look forward to the advantage of volume pricing. And as those volumes are increasing, the utilization of our factory and resources is going up. So we are seeing great reductions in terms of overhead allocation to each unit, and that's further reducing our COGS. But overall, I have an active project in place covering many, many aspects of COGS reduction. And we'll see that further reduction, and this will meet our future gross margin targets.
spk03: Lots of great work going on there, Paul. Lots of room to bring those margins up to significant levels, which is great.
spk02: Absolutely. Great opportunities. Thank you.
spk03: Thank you. And the last question that we received in our numbers here is, how we will ensure you have an adequate balance sheet to fuel sales growth? And I just wanted to take a couple different thoughts on that. First of all, when you look at the last raise I said earlier of $10 million, $4 million went into Gen 3, and that is something that we produced, which is a leading product and a solution that will create revenue for many years. There's $4 million there. We have $1.8 million in paid inventory, which are credit cash that goes out the door plus the margin increase. And we've put over $1 million in our sales processes with insights, power reports. So that's $7 million of the $10 we raised. Again, $7 million of the $10 we raised is absolutely deployed in the business to grow. It's not just money that was spent on whatever it might be from an expense point of view. It's absolute key core pillars of growth that we made the investments that are now starting to pay off significantly. And, again, the question is about adequate balance sheet and fuel sales growth. You know, we continue to manage our costs. We continue to look at quarter-to-quarter expenses, reduce our operating costs as best we can. And we see as we additionally increase the margins of gross sales that make more of a cash contribution. We also implemented a 25% deposit on orders. And that's a big swing for us because the best deal you can get is an industry loan on a 25% upfront. Some deals may or may not provide the 25%, but so far we've been hitting on the deals we brought in, the 25% deposit has been coming with the orders. We're also in contact with government agencies about exporting loans and things like that, and we'll have some news report on that as we proceed through the process. We also have had discussions of loans against inventory, loans against large orders. When you've got brand companies like we do, and some of these large, large orders, we can finance those, which is key. But also, in our cost structure, We don't have to put a lot of cash out on our deals. We really have the cost of goods, and then we share the installation, or we don't have to pay out the installation costs, which can be 50%, 60% of an overall deal until it's done. So we're only putting out probably about 25% to 30% of the overall total cost of a deal up front, which is something to keep in mind. And also, the board reviews these alternatives and will make appropriate decisions to ensure absolutely ensure that the balance sheet is adequate to be able to fuel the sales growth. So it's something that we're working on a continuous basis. Those are the common 12 questions. We'll give you a second, a chance to ask some additional questions. But I just wanted to add that there's been a significant shift over the last couple of years, a massive shift, in fact, of corporate mind space and effort to climate environmental initiatives becoming top corporate objectives. We're really seeing every day that the world is serious about taking steps to positively impact climate change. And in all of our markets, we see consistent and systemic change to make buildings less harmful to the environment, combined with improving efficiencies, reducing costs, and making a better tenant experience. And as Mike talked about with the GSA, DCAS is just two examples. Federal and civic government are committed to making it easier for corporations to adopt energy-saving, improving technologies for commercial buildings. And they're continuing to introduce programs that support legend solutions. At this point, hopefully there's a few people on the call that would like to ask a question. We'll be taking them, please.
spk01: Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchstone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. There are no questions at this time.
spk03: Okay, and again, I apologize with the number on the PR. It's obviously affected some of the people being able to get in, but we'll address that at the end. I'd really like to summarize. I mean, the company has been going through a significant transformation over the last two years. This is not the company it was five years ago, just an energy-saving company. This is a company that has a compelling solution that has resonated with our markets. And we continue to earn the respect of our target markets, and we make them comfortable that Legend is an innovative company to work with. We also continue to build our brand by working with key eco-players to ensure that we are aware of and ultimately support Legend Power in their client buildings. The Legend Power leadership team is very positive about the future. We're very excited about what we're doing, and we're each committed to making Legend a leading energy and power management company. We have a committed and talented team, and we're getting stronger with each new hire. We have an outstanding active power management platform. There is nothing else in the world that does what our active power management system does. Markets with high energy costs, they've got power challenges, ESG and climate change objectives, and they're seeking innovative ways to reduce the energy costs and improve the quality of their building's energy. We believe the future's never looked better for Legend and our stakeholders. The time for Legend is now. I just want to remind everybody that may be listening to this later on in the day or over the weekend that's recorded, because the press release had the incorrect number on it as far as a dial-in number, Please listen to the recordings. We did put 12 questions that were commonly asked over the last few weeks. But if you have any additional questions, you can contact me, Randy, at 604-657-1200. That's Randy Buckemer, 604-657-1200. On that note, thank you. Have a great legendary day and weekend, and thank you.
spk01: Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.
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