Legend Power Systems Inc. (LPS) Earnings Call Transcript & Summary

Hello. My name is Philip, and I will be your conference operator today. At this time, I would like to welcome everyone to the Legend Power Systems Q4 2020 Financial Results Release and Conference Call. [Operator Instructions] Mr. Vanry, you may begin your conference.

Thank you. Good afternoon, everybody, and welcome to Legend Power Systems fiscal year 2020 investor call. I'm Steve Vanry, Legend's Chief Financial Officer. We are pleased to have you join us on the call today to discuss our corporate progress and financial results for fiscal 2020. And as a reminder, our fiscal year-end is September 30, so about 4 months ago. 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 more information about Legend's forward-looking statements and risk factors, please see our year-end management's discussion and analysis, which was filed on SEDAR today, actually just a little while ago, under our company profile at sedar.com. I will now pass the call over to Legend's CEO, Randy Buchamer, for an overview of our fourth quarter and fiscal year. Go ahead, Randy.

Thanks, Steve, and welcome, everybody, to our fiscal 2020 Q4 investor call. The team is pleased to have you join us on the call today to discuss our corporate progress and provide you with fiscal Q4 investor and financial market business updates. You've heard from Steve, our CFO. He'll give you additional financial information later on; and Mike Cioce, our VP, Sales and Marketing. If you look back at the year, we posted lower revenue, but we have far more sales opportunities in multiple regions and verticals than at any time in Legend's history. We've all experienced the pandemic slowdown impact on business, but we absolutely moved our business fundamentally ahead during 2020 in so many ways. I'll leave Steve again to talk about the financial changes the last year and how we proactively managed the business on a cost basis through the pandemic as best we could. Mike Cioce will report shortly regarding the significant investments achieved during the year to increase the size of our sales pipeline, improve our sales team, sales processes and reduce the length of our sales cycle. Lots of exciting stuff definitely on the sales side. And since we have a few new investors on the call, I'd like to quickly just review what Legend Power was and what we transitioned to in 2020 and where we're going. Legend originally addressed the problem with utilities delivering too high a voltage to commercial buildings by optimizing the voltage in a building to achieve maximum energy efficiency and equipment performance while reducing carbon emissions. But many decision-makers regarded Legend as a simple payback story. What does it cost? How much does it save? And how long is the payback? Although we have no direct competitors, we competed for budget dollars against other energy saving offerings. Regardless, we still installed 300 systems with our base value proposition. Over the last 2 years, based on customer feedback, we needed to offer more than just energy savings, and we have enhanced our platform to do so much more. We developed a new platform, SmartGATE, to save energy and address the common power problems occurring in buildings. Over the last couple of years, we invested several million dollars to develop a new and expanded Legend SmartGATE platform and educate our target markets about our solutions, and we are seeing a significant increase in interest and order flow. During 2020, we introduced our analytics product, Insights. It performs detailed power analysis to identify problems and opportunities to improve power quality and efficiencies in commercial buildings. Insights analyzes over 200 power parameters, which form a power impact report, where we present our findings and recommendations to our prospects. In this way, we are pulled into our customers' business, instead of trying to push our products to the prospect. This is a huge improvement how we sell and, as we still help customers save energy, where we can do so much more for our target markets. Mike will highlight our significant progress with the Insight acceptance and deployments. Again, excellent progress during the year. During 2020, a massive shift continued, and climate and environmental initiatives became top corporate objectives. The world started to take serious steps to positively impact climate change. In all of Legend's markets, we saw consistent and systemic change to make buildings less harmful to the environment, combined with improving efficiencies, reducing costs and making a better tenant experience. Listening yesterday to President Biden's address, he stressed that electrical energy saving technologies for homes and commercial buildings will be supported by government programs to encourage adoption. This is exactly where Legend Power and our solutions play. Really exciting times. Regardless of the region, company has appointed senior leadership to address ESG and building energy improvement efforts, and everyone is looking for new and innovative energy technologies, leading unique technologies like Legend SmartGATE platform. So clearly, the world is looking for products like Legend SmartGATE platform. We are poised for significant growth, combining our new platform with exciting sales progress, which Mike will speak to, and the excellent adoption of Insights as a leading product. All of us have much to look forward to. Quite simply, each of you can expect to see continued confirmation that the time is now for Legend Power and our solutions. We've invested to grow by improving our sales team, processes and building a strong engineering team that will continue to release leading-edge energy management solutions. We will continue to improve and expand our sales team to ensure we achieve our growth targets. We continue to earn the respect of our target markets and their ecosystems and make them comfortable that Legend Power is an innovative company to work with. We continue to build our brand with key ecosystem players to ensure they are aware of and ultimately support Legend Power in their clients' building. Again, Mike will share how excited we are about our growing reseller and ESCO markets. And if there's one thing that's changed in the last 12 months is the reseller and ESCO opportunities are huge for us. The team is very positive about Legend's future, and we're each committed to making Legend Power a leading energy management company. I'll turn the call over to Steve, again, our CFO, who will provide that financial review, followed by Mike Cioce, VP, Sales and Marketing, to speak about the excellent product and sales improvements we have made and our target markets' response to each of the leading solutions. Steve?

Thanks, Randy. I'll keep this brief. I'd just like to touch on 2 points. First, the pandemic, it's been talked about a lot. I think everybody knows what we went through. But certainly, 2020 presented some significant challenges for Legend, but we weathered what hopefully was the worst of the storm. Our staff unanimously agreed to temporary wage reductions. The company applied for various government assistance programs. All of what we applied for, we received, which was great. We pared back nonessential spending. And I guess we effectively learned to survive and maybe thrive during what was pretty unusual circumstances. So hats off to everybody on our team. And then point number two, and I guess this is really the good news side of it is in spite of our reduced burn rate, we've managed to maintain existing sales cycles, crystallized sales wins and significantly add to our pipeline of new business opportunities. In particular, as you've heard, SmartGATE Insights service is proving to be a real game changer, so it's driving significant new sales potential, which is nice to see. We continue to advance engineering of new and innovative product developments, so that hasn't slowed down. We expect these will enhance our basic energy savings capability and add a suite of unrivaled energy management features as well. With regards to working capital, so all our hard work has paid off. So between March 31, 2020, and as of today, which is effectively 10 months, our working capital position has only dropped by about $1 million. Thus -- this puts us in a good position. And with the momentum generated by our SmartGATE Insights service and projected near-term sales wins, we feel pretty comfortable about our position for the balance of calendar 2021. The resurgence in sales activity for Legend has been broad based and includes increases in both our direct efforts and reseller engagements and in several verticals and geographic regions, which is nice. Based on the activity in our sales funnel and with the stabilized North American economy, we are experiencing a return to growth for Legend and are approaching 2021 with great optimism. So I will pass it back to -- or I'll pass it over to Mike Cioce, who's Legend's VP of Sales and Marketing. Mike?

Thanks, Steve. Appreciate everyone's time today. As we look back at fiscal 2020, obviously, as Randy and Steve indicated, the global pandemic has definitely impacted our business. However, we did the right things to reduce costs, but we also kept the business moving forward. With clients and potential clients who are delaying these decisions, we engage with them and continue to work with them in a meaningful way, and those time investments are now paying off. They're leading to deals in New York, leading to deals in Boston, leading to deals in other markets as well. In subsequent quarters, we'll be able to share more details about those deals, but I want you to know that our company is growing its sales, our activities are healthy and, most importantly, our prospect engagement is stronger than ever. And these investments will lead to good growth numbers in the coming quarters, and we're really excited about where we are in the direction that we're heading. So let me give you a few examples. We had very aggressive quarter goals for the first quarter for the number of Insight reports we run, and we beat that number. We have even more aggressive goals for Insights placements during the second quarter, and we are tracking well against those goals. Our goals are to push future quarters' expectations to 90 Insights reports per quarter, keeping in mind that based on our history, we expect to continue to turn 50% to 60% of these Insights into full SmartGATE system sales over the coming 12 months. Also as Randy indicated earlier, we've come a long way from a simple payback energy savings product and are engaging in meaningful discussions about our solutions full big picture and long-term value. The one thing to keep in mind is that Insights deployments are the best barometer for what's happening in our business. Insights are customers' way of telling us that they want to understand the real impact of energy on their buildings and businesses. They know that electrification and decarbonization that everyone is talking about, they're playing havoc on the grid and their buildings and will continue to do so until they do something about it. The leaders in the space knows that this is coming straight at them and will continue for decades, and tens of trillions of dollars will be spent. As more and more organizations become aware of this, our demand will only increase. Right now, 70% to 80% of the buildings we assess have solid economics for purchasing a SmartGATE system. Let me say that again. 70% to 80% right now has solid economics, and this will go up over time. Keeping in mind that electric demand is going up, not down, electric heating, electrical vehicles and more are shifting from carbon-based fuels to less greenhouse gas intense methods, and this increased demand will be met with renewables like wind and solar as much as possible. And it's a simple fact that increased wind and solar on the grid will reduce stability and increase problems for building owners and operators. These are the challenges we correct, while saving energy along the way. The need for Legend increases every year and will continue to do so for decades. Again, this is not a problem that goes away in a year or 2 or 3. This is estimated to be a 2- to 3-decade journey, where $60 trillion to $70 trillion will be spent along the way. Again, $60 trillion to $70 trillion over 2 to 3 decades. And that's why our customers are engaging with us. They're either engaging with Insights or, quite frankly, their best shot of predicting these real impacts to their buildings. Another example is the way our partners and customers are responding to the information provided by Insights. It's not only going to drive our revenue up, but also represents a significant recurring revenue opportunity for Legend. A great example of this is we were recently presenting our Insights findings with an ESCO partner. Two particular schools out of the 5 that we were looking at with them had significant power problems, yet were in the permissible limits from the utility. I meant they had 3 to 4x the number of expected fluctuations and other issues that were so significant that the equipment that they were getting ready to deploy the school would see a 40% to 50% reduction in expected lifetime. That would put their brand-new equipment and their future margins at risk of not lasting the duration of the agreement, and it's a multimillion-dollar, decade-long agreement, which is just not an option for them. And the value of Insights showing them that they had significant risk without Legend simply makes us a must-have for them and their customers, keeping in mind that, again, we still save energy along the way. So when you look at how the SmartGATE Insights can cover challenges on the grid seeping into buildings, the need to continually monitor this risk is high, and that's where our recurring service-based monitoring and reporting solution will add tremendous value to our customers and our revenue over time. This is not only going to help us drive sales, but also interest from other channel partners like ESCOs, facility managers and other service providers. We already have partners today that are driving significant revenue for themselves based on the information provided by Insights and, of course, Legend offering is a good part of that revenue opportunity for them. And knowing that our platform is expandable to address the future needs that surface on the grid, it's just more fuel for the Legend growth engine. So there are just a few examples, but the hardest part of giving these updates is not giving you all of the specific examples because I can't just yet, but we will on a quarter-by-quarter basis as we release the news. Just know that there's a lot of really great things happening here at Legend, so just keep watching your favorite news feeds, and lots of more good stuff is coming. Randy, back to you.

Thank you, Mike. It's always exciting to hear about all the good stuff you and your team are doing on the field. We appreciate it, and thank you, Steve, for the update. I just want to take a moment from the team's perspective and share an outlook going forward with Legend. Now as we mentioned earlier, the systemic change is occurring to address climate change and energy efficiency are really mainstream and long term and tremendously positive for Legend. I really appreciated yesterday when President Biden's commitment was to support the electrical energy technology for commercial buildings. It just highlights how the time is now for Legend. Our target markets are looking for innovative and entrepreneurial technology companies like Legend, and our message is strongly resonating. We're securing business with many of the most successful organizations in our target markets, the industry leaders that everyone looks to for energy management solutions, and we're working with all of them right now. Expect continued news highlights our wins, as Mike mentioned. And the reseller and ESCO channels are continuing to accept and adopt Legend SmartGATE solution as a core reseller and ESCO offering for their markets. There is no direct competitive offering to Legend that the ESCOs can utilize. It is Legend's game, I can't stress that enough. We are very excited about the ESCO markets. We've opened relationships with the best resellers and ESCOs in North America. We're writing business with many of them. And just alone, the ESCO business is $15 billion industry. And you can expect constant proof that we are growing these massive partners and markets go forward. Our investment in people and building relationships in New York is now bearing fruit. We're an accepted energy solution with all the agencies, both state and civic, that make technology decisions for environmental products. Again, you can expect to see a continual, demonstrable proof that our sales are growing nicely in New York. We've also established a presence with Insight deployments in other major Eastern U.S. cities. This is going to be a big year for our U.S. expansion. The next generation of our SmartGATE platform is being delivered to market, and we are establishing a strong positioning as a leading electrical management company. We'll continue to enhance the SmartGATE platform, as Mike said, to address additional power-related challenges and cement our positioning as the solution for managing power and commercial buildings. The interesting thing with all the changes with EV for cars, all our estimates, we're right there to address and provide solutions for all those new technologies. Government, free enterprise, resellers, ESCOs and senior ESG leaders and business throughout North America need Legend solutions to achieve their goals. They need Legend, and they're going to get Legend. We'll now take questions.

[Operator Instructions] And there are no questions at this time.

I could take a couple of questions, this is Randy again, that I've been asked lately. One of the questions I was asked was how prepared are you for Biden's announcement of made in U.S.A. This is something we've addressed a few years back. Our 2 major components of our system are U.S.-produced. Many of the other smaller components are, too. And we assemble the product. We don't manufacture. So today, we believe, until there's further language in what Biden is looking for, we're over 50% U.S. manufactured, and we sell in a U.S. company. So we're in good shape. It gets to the point where we have to assemble in the U.S., we can do that very quickly, very little capital because we don't need specialized equipment, and we don't need special apparatuses or rooms, et cetera. We just assemble. So good shape there. That's one of the things we've been asked. Second question I got asked by people the last little while was during the pandemic, are you getting nos or what's happening. What we're seeing is some delays, but a lot of people putting orders in for business that, as we go quarter-by-quarter, you will see. So the answer to that is we're not hearing nos at all. We're either getting yeses or we're getting we'll do it a little bit later, but we're not being turned away from business during the pandemic. One of the other questions I got asked about going into building and things in New York, we are fairly good in that situation. But once in a while, there's a building that will lock out, but electrical energy is an essential service, so we've been quite lucky with that. So we're feeling good about those things. So there are about 3 of the major questions I've been asked the last week or so. Just share those, and why don't we give it one more chance to see if there's any questions that anybody might have.

I see [ Jeff Cowal ] is waiting with a question, I believe.

Jeff?

Things are sounding pretty good. I'm wondering if we could get, Randy, a little bit of color on -- in the press release, you referred to a goal of 90 engagements per quarter. I presume that's for Insights. I think Mike mentioned the word deployment. Can you just clarify? Is an engagement considered a deployment of an Insight unit?

So to make it clear, the SmartGATE platform is a solution that goes in, and the Insights is the analytic product that goes into the electrical room for 2, 3 weeks and looks at over 200 different parameters. And then we take that and we produce a report and sit down with the prospect and say, "Here's what's happening in your building, good and bad." I will add that there -- people are used to engineering reports. They're very expensive, tens of thousands of dollars, and they're very technical. So ours is a very easy English with red, green, colored, et cetera. We go through that with the client, and then that leads to SmartGATE deployments because that's a solution for the problems we've gone over with them. So to be clear, Insights is the analytical tool that is the front end of the sales cycle, gathers the information. We sit down with the customer and review it, and that leads to a deployment of SmartGATE. And as Mike touched on it, we are actually putting more Insights in as a service. And then the Insight product goes into the SmartGATE system and stays there as an ongoing analytical tool for the customer and recurring revenue stream for Legend.

Okay. Randy, the figure that was mentioned by Mike that you're getting a conversion ratio of about 50% to 60%, I think he said. So can we infer that if your goal is 90 of these engagements for the quarter that you're going to sell a minimum of 45 SmartGATE platforms for the quarter. Is that a reasonable way to think about it?

No. I'll walk you back, so it makes more sense. You're close. So we expect to put 90 Insights in per quarter as our goal. If you take a sample of what we've done to date, we are getting about a 50 or a little higher conversion rate. So for every one Insights that goes in, a half SmartGATE is sold. We expect, because it's been statistically sound to sample population we've looked at, that, that is an expectation that's very realistic, but it won't all happen in the quarter. What it means is within the 12-month period or calendar year, because some people will look at the Insights product, look at the information, order a SmartGATE, but not put it in for 6 months, 9 months, 2 months. So what we'll find over time is how much of that goes into the quarter. We have found, so far, a really strong conversion rate and a much shorter sales cycle. So give us a little more time, and we'll be able to give you some more information on those conversions. But it is 90 Insight engagements a quarter. We expect to get 45 SmartGATE units out of that, that will be installed within 12 months.

Okay. I appreciate the clarification. And the -- I've seen a couple of different numbers, I think one in the deck and maybe one in the press release. If you can maybe talk to sort of what the average -- and I know it depends on the size of the building, Randy, but what would the average sale price be based on the last few quarters or so? What would you say is a realistic number to be modeling out?

Yes. You take about 110 to 115 because we're starting to see more business in the U.S., and obviously, that brings the number up. If you go back a few years when we were doing some of the schools, the number was smaller. It was closer to that 60,000 range. But if you use about 110, 115, that is what we're seeing and expect as far as the large buildings. And some of the smaller ones bring it down a bit, but it will average out to that number overall, we expect.

Okay. Last question, and then I'll jump back in the queue, Randy. You just mentioned in that explanation of how the cycle sort of works, that there is a component of reoccurring revenue. Can you just flesh that out a little bit for us?

Sure. Historically, what the company has done is sold a unit to -- for a building, and it was a capital cost. And our definition of recurring revenue was that we were dealing with companies that had hundreds or thousands of buildings. Therefore, we have recurring multiyear revenue streams by putting additional systems in. If you go to more of a traditional model of recurring revenue, what we've done is by having the Insights product that is an analytical tool and a sales tool upfront in the sales process, it will get embedded, as I mentioned earlier, into our SmartGATE platform solution that resides in the customer's electrical room. And we have fees that they pay to, one, use a license for the Insights, have it updated and different things. There's different parts of the model, but that's where the -- sorry, reoccurring revenue comes from.

Is it too early to say what -- like give us an idea of metrics of that component of recurring revenue?

Can you clear what you mean?

Well, let's say you installed a unit for $110,000. I assume there's some install there. Like at the end of year 1, what sort of recurring revenue? Or is that already kind of embedded in the $110,000? I'm just a little confused about when you -- when somebody says recurring revenue, I envision a yearly or a monthly fee that's associated with the product that you've installed.

Correct. So we will put a system in at an average cost of $110,000, and that will probably be roughly $70,000 for the product and $30,000 to $40,000 for the installation. We'll have paid a fee for the Insights, and then the Insights software and hardware will go into the SmartGATE solution, a platform that stays there. And there's a recurring fee for them to utilize the Insights on a regular basis and get the reporting that the Insight gives us. And Mike, if you want to add anything, feel free.

Yes, sure. I can add a little more clarity to that as well. When we look at our recurring revenue streams, we have multiple ways that a customer can continue to engage with us. We have the Insight subscription, as Randy was mentioning. We also have different levels of maintenance agreements that can be added on as well. And depending upon the scope of the recurring agreement that we have going with them, it can range from $1,000 a year on the low side to $4,500 to $5,000 a year, depending on a number of factors. So again, we try to do business the way our customers prefer to operate, and a lot of them did choose to do maintenance contracts. But again, the baselines for the recurring -- the component of the Insights data access, think of it as an IoT stream of data for what's actually happening with your -- with the incoming power. That's high value to folks that have ESG reporting requirements. So the recurring fee there can very easily be justified as well. Does that help answer your question?

Yes. That was great.

[Operator Instructions] And there are no further questions at this time.

Well, then we'll wrap it up. I think we've gone through a different times here with the pandemic, and it's affected most business revenue streams. But we hope what we've done today is share with you that 2020 was a growth year in many ways, and we really do see a continued fantastic opportunity for Legend Power. We've got the people. We're committed. We're getting stronger with each new hire. We provide outstanding energy savings. We've got sufficient working capital. We've got markets with high energy costs, power challenges, ESG and climate change objectives and Presidents of the most powerful country in the world who tell them they must do it. So they're seeking innovative ways to reduce their energy costs and meet their ESG goals and improve the quality of their buildings' energy. We believe the future looks very good for Legend Power and our stakeholders. We believe the time for Legend is now. Thank you, and have a great legendary day.

That does conclude today's conference. Thank you for participating. You may now disconnect.