Legend Power Systems Inc.

Good morning, my name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to the Legend Power Systems Q2 2022 financial results release and conference call. Note that all phone 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, simply press star then number 1 on your telephone keypad. And if you would like to withdraw yourself from the question queue, please press star then number two. Thank you. Randy, you may begin the conference.

Thank you. Appreciate the introduction. Welcome, everybody. I hope everybody's having a good morning. We welcome you to our fiscal Q2 investor call. I have on the call with me Mike Ciosi, our VP of Sales and Marketing, and Paul Moffitt, our Chief Operating Officer. We're going to go through some bullet point highlights to share with you, and we welcome questions, as we feel questions today may be the best way to address particular questions and issues, et cetera. So anyhow, feel free. We'll give you ample time at the end to engage with us. Mike, obviously, will talk about the sales team's progress, and Paul will talk about the general operations-related update and some of the progress we've made on supply chain and component parts, et cetera. So we've got some good news there. And obviously, I mean, everyone's aware of the macro challenges that most companies are experiencing right now. And we continue to try to make as much progress as we can in many aspects of the business. When we look at things now, we see opportunities to improve the company. We see opportunities that the macro side is growing for us. There is a real need for what we do as an organization. So all those macro signs I'm not going to get into a lot today because I think you're well aware that the macro side is in good shape. I think you're all interested in how we're going to make it work over the next while. So we're really confident that what we're doing as an active power management solution provider, we don't think the time has ever been better. We don't think that the quarter, as an example, speaks for where we are as an organization, and we'll give you some better color on that. We see the acceleration of that 20- to 30-year transformational journey where companies are going to spend trillions of dollars a year, and they're going to try to protect their buildings from de-electrification, decarbonization challenges, and alternate energy, et cetera. And there's no question, legend from all eras, people we talked to were perfectly positioned to be a leading solution in this enormous business transformation. So during Q2, we completed the testing of Gen 3, and we began an aggressive build initiative to fill the backlog. And Gen 3, just to remind you, it's been a three-year project, and it was a project designed to take our core offering of energy savings and make it much more, make it something that could address the common power problems. And it's spot on for where the market's going. The product is transformational. It's a huge achievement for Legend. We ship about 20 Gen 3 solutions near the end of the quarter. You'll see most of those rev-rec'd this quarter. Due to rev-rec conditions and rules, they must be received by the customer before we can rev-rec them. So I have had some questions about rev-rec, but that is effectively where we're at with that. The installations... of Gen 3 units began in Q3. We've had good success. It's very early, but the ones that have gone in performed extremely well, and we're really excited about the potential of the product. We did hit our Insight service commitment targets, and we've mentioned last update that we were looking at our first Insight order outside of the continental USA. We announced that and secured it, and that's led to a 70 Insight commitment over the next several months. Very exciting for us. Mike will talk about the reseller channels, but they're embracing both our SmartGate solutions, our insight analytics, and we're being written to numerous reseller customer proposals as we speak. We're also into numerous deals that will be announced over the next while. We're very happy, personally, what Mike and his team have done to get into the reseller channel and help with that pivot. from direct sales to reseller sales is going extremely well, although the public will get more information on that over the next few months, but there's some great things happening there. Paul's doing a great job getting through some of the supply chain challenges that are unique. And we continue to pivot to make, as the market changes to, you know, to make it doing business in New York and different places from supply chain to retail cash flow, all these things, we continue to pivot and make the business, modify it to make sure we can meet those demands. And we'll go into that in more detail a bit later. Deal flow pipeline growth is great. We're continuing to grow backlog. And we've added all new team members. And again, officially having Paul as a chief operating officer has been really, really something that we needed badly. And Paul is making immediate impact to improve our operations. And I thank him for that. So as a shareholder, you know, you stand back and you say, can you give me some proof points that exhibited during the quarter that I can get some comfort that we're moving ahead? And I would say that the interest in both direct customers and resellers just continues to increase. Mike will give some more color on that. But the transition from a direct sales model to a channel sales model is developing faster and bigger than expected. And the opportunity, in my own opinion, is so much bigger than I first anticipated. We're doing everything to drive the reseller channel. We're training both our own sales team. We're training resellers. We're educating them on the product. We have initial proof of concept installs, some announced, some not announced, but there are many that are with major organizations right now as we speak that will become public over the next few months, and I think you'll be very pleased with the progress we're making. The partner portal and the true cost of power was released this week. These are all tools to help us help our partners be better and represent legend in the marketplace with their thousands of salespeople that they have. We are very early in Gen 3, but we're developing some customer testimonials and case studies. And as we achieve Gen 3 success, we can share those results through case studies to help move some of the people who are waiting for Gen 3 results to give us orders. The insight program is working. We're on track with our 90 insight orders in a quarter. Again, that's 45 smart gate sales within 12 months of presenting the prospect with a power impact report. We're on target for that. We've had a few delays. Some people have written this into next year's budgets. Some people have delayed a few months here or there on different reasons with the economy. But we expect to hit those targets of conversions of smart gates for sure. And on follow-on orders with insights, we're hitting at or very close to 100% conversion when an insight goes in. And of all the insights we've done, and Mark Peterson and I were talking about this the other day, he can only recall one that we haven't had a positive experience moving forward out of the hundreds we've done. So I think that speaks well for itself. And we started to get annual maintenance contracts. which is new recurring revenue streams. That's just a new launch for us during the end of last quarter. And we secured some new business and we're out actively asking for maintenance contracts. Paul will talk about it, but we've done some great things on the production process to help offset higher component costs. And we look to recoup our near-term gross margin due to component cost increases. We're also evaluating options to increase efficiencies, reduce costs, increase margins. We are increasing our prices by 15% on June 15th. Horace, you're on the call. We told you that we were looking at the last quarter. There was an 18% September, 15% now on June 15th. We're protecting the people that have orders and or have proposals up until June 15th. But that will bring us up to a 51% product margin. So again, I know this is something that I've talked to a lot of people about. We will be back up to a 51% product margin. We are getting there. We're doing the things we need to do to make this business work. And, you know, as I started out talking about, the industry backdrop has never been stronger. The product shift is excellent. The macro indicators, the drivers, the messaging, is that we're in the early stages of something really big, and we're right there. We're also managing our cash carefully. We took our costs down by $50,000 a month last month to help. We analyze the cash cycle, the outflows, and make sure sales orders make sense. We're not going to be putting in a bunch of low margin deals and tying up our valuable capital, so we're being very smart with that. We change their payment terms, 25% with the order, 25% on delivery, 25% after an M&V, so that we, at 50% margins, can have 50% of our total cash commitment back to us by the time we install the product. So that's going to dramatically improve our cash collection cycle and the impact on our capital. We wish we could talk about some of the neat meetings going on with Mike and his team, but just something to say that discussions with key industry players are ongoing. Our strategic sales team is working with some of the largest prospects in numerous industries to They're looking at hundreds and thousands of unit commitments over multiple years, and we expect to secure those businesses. And we know that you can expect positive news and some pending wins over the next quarter or two. And I always like to touch on the fact that we've conducted significant market awareness over the last few years, and we're now benefiting from that marketing investment. And that probably has somewhere in the neighborhood of $6 to $8 million of investment that doesn't show as an asset on the balance sheet, for example. The target markets are aware of us. Mike Ciosi says they're leaning in on conversations now, so there's strong interest. And the awareness will increase as we build the business cases out with smart gates and insights and continue to illustrate value to our market. And we will continue I believe, as we have shown you historically, we will continue to prudently manage our business like we have for the last number of years so that we can come back to investors we have with new updates on partners, orders, and wins, and we will make the pivots and decisions we need to make to ensure the company will be successful. And before I turn it over to Mike and then to Paul, I really want to express to you that What's happening out in the macro, the world, is they're looking for products like ours and our Smartgate platform. You are going to see positive, demonstrable proof, quarter by quarter going forward, that there's some great things happening and this company is really going to be something. And combining our new platform with the exciting sales progress, which Mike will talk to, personally as the CEO of the company, I've never been more excited about the organization. We expect to see and act on continued confirmation that the time is now for a legend in our solutions. So enough of my view of the world. The guy that's in the fight every day and doing a great job in his team is Mike Ciosi, VP Sales and Marketing. And after Mike finishes, Paul Moffitt will highlight our operational improvement initiatives. I'll circle back with a summary and we'll take questions. Mr. Ciosi,

Thank you very much, Randy. Appreciate that. And there's definitely lots of exciting things to discuss on the sales and marketing front. So we're excited to have the opportunity to talk to you all today. Again, as Randy said, we are indeed making very solid progress in the market. Customers are definitely leaning in. Partners are leaning in. And we have backlog and we're adding new deals on a regular basis to that. Our Gen 3 installations are getting done. And within, as Randy said, within a few weeks, we should have over 20 Gen 3 systems in service producing compelling results. And again, if you look at some of that early results that Gen 3 is significantly outperforming the previous generation, in some cases, as much as 50% more energy savings. So at the end of the day, we're gonna get into the specifics of some of the progress we're making. While we are off targets in some areas, we are also ahead in other areas. We look at the critical areas. We are reaching our insights targets. And for the engagements that are reaching the 12-month mark from presentation, we are hitting our expected 50% or greater conversion rates. So we're definitely very excited about the progress and the results that the insights-led sales process is generating for us. Now that we have a full year of Insights-led sales process, we've learned a few things that can help us tighten our targets. The biggest key learning that we have is that our customer motions are impacting some of the cycle times. Time from signing to Insights engagement orders to presenting the report can actually vary fairly significantly. Our 12-month target clock starts after we present the Insights power impact assessments. Our timing on insights to presenting the report can be as quick as 30 days and as long as six months, or in some cases, even more. The key learning is that some of the timing on internal sign-offs, requirements, insurance reviews, insurance approvals, and some of those other key tasks to actually install the insights can vary, which can potentially cause some delays. So as a result, we're adding two metrics to our insights reporting, and those are the insights installed and the insights reports presented. And this will allow us to continue to tighten the ways that we manage the business. And that's all part of our customer journeys, right? Because at the end of the day, we are still making a market. This is still the most significant addition to the electric room in many decades. And when we look at the customer journey from going from unaware to aware but skeptical, to willing to give us a try, to getting comfortable, to being confident, and then getting to the point where they need it, That's what we're focused on. We're focused on how can we compress that customer journey by industry, by geographic area, as well as by customer. So we're continually improving the process, making adjustments and corrections to be able to make sure that we're compressing that as much as possible. We're addressing, we're changing our sales processes, our messaging. In addition, we've got some new research and materials that are really helping to accelerate the buying process. As Randy mentioned, we're also continually looking at other changes we can make. For example, we added our first ever true cost of power estimator. That gives not only building owners, but also resellers the ability to be able to go in and put in the attributes of an organization's portfolio to get an estimate of what kind of results they can expect from addressing actual power management and addressing power issues. This is going to be a key driver to getting folks to move forward with power impact assessments. It gives them a strong idea of what the benefits could potentially be. And that's all part of the partner portal, our partner materials, everything along those lines. We also have some new research that is incredibly compelling. When we look at it from the standpoint of where we are today, where we're going to be tomorrow, we're going to be near term. The impact of renewables to the grid is incredibly eye-opening. Right now, today, if we look at our variable renewable rates being under 10%, our average scores fall in at about a 7.2% with about 80% of buildings being negatively impacted. And the number of fluctuations and events that are happening and land at about 38 events annually. When we fast forward and we go to, once we get over 20% variable renewable, those average scores fall off a cliff well into the critical range of 4.7. And well over 95% of buildings were gonna be negatively impacted to some level. And the biggest key learning on that is that the number of fluctuations and events that are gonna be hitting buildings increases tenfold And that helps propel us from a nice to have to a need to have. The ability for buildings to operate as we increase our renewables, our renewable penetration is gonna depend upon having active power management inside of each building in order to be able to protect it. So we're really excited about this new research and the way that we're presenting to market and specifically the way the market is responding to this new messaging. So we're very excited about that new research. And when we add the compelling results from our first rounds of Gen 3s into all this information, we're able to incorporate our expected results into the power impact report and actually show them what those conditions will look like today and what they can look like with active power management. So we're from the smart gate. So we're very excited about that. And we combine that with a new website updates, new videos, infographics, and other client facing materials. We're getting that engagement and we're compressing that customer journey as much as possible. And that's producing the results. If we look at our strategic results, as Randy indicated, we are working with some of the biggest names in real estate and real estate investment trusts, real estate companies, and more on the strategic direct side. That's really allowed us to be able to focus on some of those larger opportunities of types of organizations that, as Randy said, could easily buy hundreds, if not thousands of systems going forward. That's where our strategic direct is focused. When we look at the channel side, we're engaging with more energy ecosystem partners than ever before, ESCOs, distributors, utilities, consultants, We even are in conversations with a couple of equipment manufacturers that are interested in how this can help protect the offerings that they're bringing to market. So we're very excited about that. At the end of the day, as we continue to build our marketing strategies around the new offering with some of the ecosystem partners, it is very compelling. Some are building their marketing strategies and the go-to-market strategies around this market, and some are incorporating it into their go-to-market strategies. So at the end of the day, this is leading to new orders from major ESCOs. It's leading to insights engagements in very meaningful ways. In addition to that, we've also been selected through a GSA program called the Regional Green Proving Grounds, which opens the federal markets to us. So over the coming months, we'll be installing SmartCase with federal buildings. And we've actually been told that there are a number of regional federal facilities that are looking to get SmartCase in. So when we combine that with the results that we're getting from New York, as well as the new systems that we've put in with the Department of Central Administrative Services for the City of New York, We have a tremendous amount of things that are going on. People are definitely leaning in and the future for legend continues to be very bright. And every month that passes, we move closer to attaining that have to have status for large buildings. That's going to continue to propel us to very large chunks of revenue in the very near future. So with that said, I'll turn it over to Paul and field questions afterwards.