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

Good morning. My name is Sylvie, and I will be your conference moderator today. At this time, I would like to welcome everyone to the Legend Power Systems Fiscal 2022 Financial Results Conference Call. [Operator Instructions] Legend Power, you may begin your conference.

Good morning, it's Randy speaking and I want to welcome everyone to the Legend Power Systems Fiscal 2022 Q4 Year-End Investor Call. We're obviously very excited and pleased to have you join us today to discuss our corporate progress and provide our update. I want to remind everybody that any forward-looking statements and discussions we're having today our discussions only and make your decisions based on actual results as are reported. I'm joined today with our CFO, Florence Tan; our COO, Paul Moffat; and our VP, Sales and Marketing, Mike Cioce. Florence will provide a financial update and highlights for the overview of the Q and the year. Paul will discuss the key initiatives we have taken to address the core challenges that we discussed during our last quarterly call with you, and I'd like to just provide a bit of a summary and [indiscernible]. We continue to see energy and related power improvement initiatives grow and received strong funding. The macro adoption rates continue to improve quarter-by-quarter. The growth in the use of alternative energy products continues to create increased grid vitality and power problems. Gen3 is working great in the marketplace and exceeding performance targets and individual corporate expectations. Constant improvements to the technology ensure that the solution we have today will continue to be the industry best. We passed the critical stage of having to prove our solutions work. We've successfully completed technology evaluations in numerous markets. And we are focusing on helping partners and prospects develop deployment plans. We have many prospects deciding on where and how to deploy SmartGATE and our order visibility is clearer and stronger than ever. Individual order discussions now can exceed tens of millions of dollars and have multiyear deployment plans. Mike Cioce will update on the sales team's quarterly sales activity achievements and more detail on the USA GSA Green Proving Ground program partnership. He'll also provide details on the significant progress made at Department of Citywide Administrative Services, also referred to as DCAS. We believe both GSA and DCAS have a potential to be absolute company makers for Legend. During last quarter's call, we discussed our key improvement areas and Paul will provide detail on what steps we have taken to ensure we achieve our improvement objectives. Just to recall, what the key improvement areas are; manage our cash and reduce our monthly operating costs. We've reduced our annual cost of operations by about $1 million. Our capital expenditures are on hold unless critical. We've implemented additional price increases and we have lowered our component purchasing to necessary only levels. We've improved our cash flow cycle by implementing things like our new payment plan with orders, which you'll recall we mentioned last quarter is 25% with order, 25% of delivery, 25% after the M&V, that's the measurement and verification process and 25% after 30 days. And it's interesting to note that we are receiving the 25% deposits and building our cash. Cost of goods and supply chain, Paul has led numerous initiatives to prove this area, and he'll discuss them shortly. Margin improvement is ongoing and we are forecasting for future delivery products that we have in our backlog, 40% margins and improving on our installation margins. And we implemented additional price increases during the quarter. So what I'd like to do is have each of the leadership team members speak about those areas in more details. So I'd like to turn it over to Florence to start. And Florence, if you could please provide the financial highlights. Thank you.

Thank you, Randy. During this quarter, revenue recognized was $578,000 compared to $193,000 in Q4 in fiscal '21. Revenue recognized for the year ended September 30, 2022, was $2.1 million based on 19 SmartGATE systems and 15 completed SmartGATE installation compared to $2.7 million for fiscal '21 and 35 SmartGATE systems and 21 completed SmartGATE installations, showing an increase in average unit sale price year-over-year. Gross margin in the fourth quarter of fiscal '22 was 11% compared with 4.7% in the prior quarter. Gross margin for the year ended September 30, 2022, was 10% compared to 21% in fiscal '21. We continue to experience margin challenges as global supply chain constraints continue to negatively impact inventory component pricing. With that eventual normalization of supplier order fulfillment and scaling of Legend's sales and revenue will help to bring margins in line with long-term average results. The company had taken action in that regard by increasing sales prices last quarter. And we've seen a moderate increase in margins quarter-over-quarter. The company ended the quarter with $3.09 million in cash, no debt and $5.14 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. We're very excited with what this new year will bring and are very optimistic about the future. Thank you and now over to Mike Cioce, Legend's VP Sales and Marketing.

Thank you, Florence. I appreciate it. I'm excited today to talk about a lot of the progress that we've been making. New orders are flowing in regularly. Systems are being installed regularly. Results are flowing in. And as we share those results from our latest SmartGATE deployments, they're generating more purchase confidence in our growing pipeline. So when we look at that, that's helping our deals and adoption to continue to grow. Some of the more noteworthy topics are the previously announced Federal GSA Green Proving Ground program. That program is progressing as expected. Right now, the hardest challenge we have is quelling the interested buildings down to the limited deployment test that we have, so again, a fantastic interest from the GSA team. Again, not only is this program interested in energy efficiency and carbon reduction. But the big driver is stabilizing the incoming electricity to create a more stable operating environment. So we're very excited that they've signed on to that as well. When we also look at some of the more noteworthy announcements, we've recently announced our results with the City of New York, also referred to as DCAS. So we have proven that we are a critical part of an electrification strategy through our energy saving, carbon reduction as well as the stabilizing of the incoming electricity. And that's particularly noteworthy with the New York School Construction Authority announcing $4 billion worth of electrification across the New York City schools. So when we look at the fact that again, not only do we save energy. But we regulate the incoming power and create a more stable operating environment. We're very confident that we will have a large number of buildings coming from that program. Also working with our -- with the New York City design and construction services to become part of their design standard as well. We have also recently announced our significant progress in our ESCO efforts with hundreds of systems being proposed. So while normal orders continue to flow in, they're doing so for a larger number of systems and buildings. Our most recent win was for 10 buildings around $1 million. And this is a far from the $40,000 to $60,000 one school at a time approach of legible. So the new deals are getting bigger. We have multiple deals that are north of $10 million. These larger deals are complex from an approval, code review, scheduling and represent billions of dollars' worth of buildings. It's not like placing an order for 500 iPhones and delivering the pallet that our solution is much more complex than that. So on the channel side, we are also working on finalizing several more large partnerships that will add thousands of feet on the street who can bring this market solutions and value to even more customers. So when we look at all these things and we look at the momentum in the market, not only at the federal level, but also at the state level. For example, New York already has a law on the books requiring the New York State electric grid to be 70% renewable by the year 2030. And many states are following same. The biggest growth is going to be in renewable energy will be wind and solar. And with wind and solar doubling every year within the next 2 to 3 years, the already challenged New York electric quality will be dramatically worse. Our estimates are that there will be 10x more power fluctuations for the people that are consuming that power than -- in the past. And the SmartGATE is the best way to mitigate this unstable power. And we are proving to be the design standard at the city, state and federal levels. This will create unprecedented demand for our SmartGATE solutions. And we are very well positioned to turn this demand into record growth in the coming years and decades with our proven platform and results. So at the end of the day, the future for Legend Power is brighter than ever. So I'll turn it over to Paul.

Excellent. Thank you, Mike, and welcome, everybody. As far as operations goes, I'm very happy to say we've made considerable strides in our journey to an evolved business management system. And I'm certainly excited about the feedback that I'm receiving from the entire team because it is a cultural entire team effort. So with added transparency around roles, responsibilities, deliverables, targets, the Legend team has a much better understanding of what success means, not just in the customers' eyes, but in the eyes of our peers and our internal customers. And with that comes, a lot of clarity and a lot of efficiency and so satisfying our customer requires, satisfying our internal customers. And I know that the processes that we've improved and the KPIs that we've added are geared to achieve this. We now have a full suite of KPIs as part of our business management system and Legend dashboard that are really the backbone of our continuous improvement initiative. And they target time, cost, quality, objectives across all departments. Challenges, obviously, certainly exist and they always will, but they're upfront, they're visible. We know who owns them. We know what actions are being taken to improve them. And we plan with what we know today as we work through continuous improvement. Our top near-term focus, my top near-term focus in the operations team is cash flow and cost reduction, certainly in the near term. Turnaround time and on-time delivery are measured not just to the end customer, but within our value stream, upstream through all processes in the company. So doing things better and faster, not only delights our end customer, but it delivers our cash sooner. Cost reduction plans are well underway, encompassing all avenues of opportunity. Quick wins are being seen on the installation side of our deals following release of our new installation price model. And this model is much more or more so open book and includes standardization of time and materials for a better understanding of what installation costs should be for each system type and for the unique style of buildings that we're working with. And many of our contractor partners have already signed up and accepted this model. And we're seeing great efficiencies and reduced costs as a result, as much as 10% and we do expect to see more. Materials continue to be a challenge as inflation can, of course, outpace our ability to cost produced through design and negotiation. We are, however, preparing for volume pricing and greater strength in supplier partnerships that will favor lower costs as the company grows. I do see supply chain improving somewhat. I am seeing some log jams free up. We're not out of the woods. We have procured our critical long lead time components in the right quantities for our forecast. And we've done that directly from manufacturers to ensure we're well cube for the allocation of those parts. And in fact, with those manufacturers, I'm actually seeing some of the most critical components free up and aligning well with the deployment of projections you've heard from Mike. Engineering continues to strengthen our product and system functionality. The Gen3 system is performing amazingly well now and in the future. Over-the-air enhancements will lead to greater installation efficiencies, including improved commissioning and the ability to upgrade future features remotely. And this, in turn, really supports the rollout as well of our product platform to all those channel partners that Mike has described. So our operations foundation is definitely solidifying. We have the right design and the right plans, doing things right now for scalability and growth. And these designs facilitate continuous improvement in that very scalability. So I look forward and I'm very excited about the next steps in Legend growth. Thank you. Randy, I'll pass it back to you.

Great. Thank you, Paul, and Florence and Mike. Hang on with your updates today, but for your ongoing efforts during the year and all the time and effort you put in to make Legend successful. Just to summarize on the macro perspective, the alternative energy growth and the increased problems with the grid to ensure that our solutions have a huge marketplace. There is continued massive shift in corporate effort climate and environmental initiatives becoming top corporate objectives. The world is seriously committed to taking steps to positively impact climate change. In all of our markets, we see consistent and systemic change to make buildings less harmful to the environment, combined with improved efficiencies, reducing costs and making a better tenant experience. The U.S. government is committed to making it easier for corporations to adopt electrical energy saving technologies for commercial buildings and continue to induce programs that support Legend Solutions. And clearly, the world is looking for products like Legend SmartGATE active powered platform and we're poised for significant growth. All of us have much to look forward too. We expect to see continued confirmation of the times now for Legend and our solutions. And during these uneasy financial market times, it's comforting to know that Legend continues to take every necessary step available to save our cash and leverage our working capital while maintaining our aggressive sales efforts. We continue to earn the respect of our target markets through ecosystems and make them comfortable that Legend is an innovative company to work with. We continue to build our brand by working with key ecosystem players to ensure they are aware of and ultimately support Legend Power in their clients' buildings. The Legend Power leadership team is very positive about Legend's future. And we're each very committed to making Legend Power a leading energy management company. At this point, we would be delighted to take any questions you may have.

[Operator Instructions] And your first question will be from Horst Hueniken at Hueniken Asset Management.

Firstly, I'd like to congratulate the Legend Power team on the progress made with DCAS to-date, as you've disclosed on December 8. That said, I have a question. What needs to happen for SmartGATE units to be written into the design standard for the school construction authority and must Legend Power wait for this design standard before DCAS flow orders market units?

First, thank you, first, for your question. I'll direct it to the follow that's dealing with DCAS on a regular basis, Mr. Cioce.

Yes. Thanks. As far as getting into the design standard, that is well underway. And we hope to have that -- that firmed up in the very near future. As far as the way the New York City has to work is they don't necessarily put in a product they put in a category. And right now, with us being the clear leader in the active power management category, we're very positive on that. And again, we've already proven out the technology with them. So we are well down the road on that with them. As far as that is not a required step for orders to start flowing in, we're already working with a number of facilities that are separate from that design standard and that electrification work, that's being done. So it's -- not required for us to be in the design standard. The design standard puts us into thousands of buildings. And that's where we get super excited.

Just for the portion that you mentioned isn't subject to the design standard, what steps need to occur for orders to actually start flowing here. Can you just give us a sense?

That's the traditional sales model where they go through and they decide the facilities we go through, the insights process. We give them the full visibility to what would be happening. They build their construction plans and they execute on those. So we're well underway in many of those and orders will be coming in shortly.

Thanks for the clarification. I appreciate it. Keep going.

Horst I just would add one other point to that is there's really 2 segments with DCAS that we're working within the educational market, new builds and then retrofits. So there's a slight difference there. We expect to be a standard offering in new builds and we expect much the same on the retrofit side. So you can expect some news as we proceed with DCAS over the next while. The other thing is just for everyone to appreciate the education market and the $4 billion that is funded by DCAS for upgrades, is just one of the verticals that DCAS looks after. So, when you look at hospitals, you look at police, et cetera, we're also building a track record and looking for business from those 2. So there's a lot more than just the education market. There's a lot more than just $4 billion.

Next question will be from Jeff [indiscernible] investor.

Thanks for taking the time to do this, again. I got a couple of questions surrounding GSA. I don't remember the exact date, but a number of months ago, you announced the GSA program and something in regards to Oak Ridge Laboratories, testing SmartGATE a period of time. And I think you indicated something to the extent of the year or so. In today's press release, the operational highlights for Q4, the first point talks about GSA. And the language here says that the SmartGATE Systems were evaluated and aid in the development of specs and standards for GSA 1,800 federally owned buildings. Perhaps I'm implying to -- I'm thinking too much here about what's implied. But what you announced a few months ago suggests that there's a testing period. And what you said this morning says that there is, some concrete results that have already resulted. Can you please expand on that?

Yes. Jeff, I'll turn it over to Mike in just one second, but just to clarify on that. We have passed the evaluation of whether the product works. We're now moving to the next step of developing a deployment plan. So effectively, what is happening with GSA, we were agreeing to a couple of locations to put product in for them to understand all the implications to deploy the product on a national basis, so just to be clear between those 2 documents. We aren't in the proven works where we are helping them evaluate an appropriate deployment schedule. And I'll let Mike add any color that he sees there.

Yes. That's a great distinction there, Randy. And yes, again, when we look at the Green Proving Ground process that was represented for the GSA as a whole and there were hundreds and hundreds of companies that have participated in that. And we were and one of the handful of final companies to make that cut and to move forward with the program. Many of the providers that are included in the program are, having to prove out their technology. Because of the fact that we have so many deployments and we've proven that that it works, what they're proving out is their deployment model because when you're looking at a deployment model with all of the tens and hundreds of thousands of facilities that the GSA operates, they've got to go through and prioritize those. They've got to do the design work to get those deployed. And that's what they're testing right now. They're going through that process of how quickly can, they move through that. So right now, with the limited number of slots that we have, it's oversubscribed. They have more interest from the facilities managers than they have in this limited deployment. So from that standpoint, we're very excited about that. So as far as the Oak Ridge Labs, so Oak Ridge is actually going to be studying the system to validate the -- to validate how the design strategy works for the intended results, which are not only electric savings, greenhouse reductions, greenhouse gas reductions, but also in the stabilization of the incoming power. But again, when they look at the change in inertia that comes as a natural part of wind and solar, there's great concern about that. And that's what -- that's part of the scope of what Oak Ridge Labs is going to be doing. Does that help?

Yes, Mike yes, it does. I appreciate that. Just a follow-up on that. You've said in your opening remarks, you said that the biggest challenge actually you have with GSA, you didn't use the word shortage, but I think that's what you implied of SmartGATE Insights, I believe. So I guess my question is; how many insights do you have currently deployed amongst the GSA sort of network at the present time?

Yes. We're not in a position to be able to disclose how many we have deployed. And if that's the way that it came out, that's certainly not -- that was not the intent. What we're doing right now is we are going through and assessing a number of buildings in order to be able to select the vital and final few that we will be deploying the SmartGATE too. So we're using the Insights as part of the process for determining the site selection for the full-blown SmartGATE platforms.

So Jeff, to put it in perspective, the Insights probably be done early in the new year and we expect to deploy systems in the June timeframe for the deployment plan development. And the other thing I would just that Mike touched on with Oak Ridge, the report of the efficacy of our product and the suitability of the product, et cetera, will be a document that we can share with all our customers and prospects. So the neat thing about that is we'll have one of the top organizations in the world for our marketplace. And we'll be able to freely use their report that we expect will be very positive.

Right. Okay. I appreciate that. Last question for me, surrounding margins. It seems like you guys have a lot in the hopper here and 2023 is shaping up to be potentially very key for you guys and getting a bunch of orders potentially from a number of sources. You touched, Randy, on the backlog, the gross margin about 40%. Maybe that bumps up when you scale even with 25% upfront. Can you walk us through just briefly what happens if you are successful and get a number of these multiple hundred unit kind of orders? It seems quick by quick math, there's a little bit of a gap between what you get paid upon order and your cost to build and put these units together.

Yes. Well, I'll take away the word if, and I'll replace it with when because we have good visibility on order flow and commitments. So we have a plan in place. It's a bit of a balance, obviously, by where some of the supply chain challenges we've had, it has been a blessing to some degree because it allows us to push some orders out when margins can be better achieved at a higher level. To be clear, we start to see more sun coming through the clouds as time goes on. Our product, as Mike said, isn't an iPhone has to deliver 2 days later. It's something that has to be scheduled. And we need to make sure that we work on a time from our customers. So when we're getting these multiyear orders in large orders, they're not something that we have to do in 6 months, Jeff. Some of them will be 2, 3 years. And then be scheduled because you've got to shut buildings down, et cetera. Don't forget a lot of our business will come from ESCOs. ESCOs have schedules and clients that they deal with. What that all means it comes back to is. And it was what Paul was talking about is supply chain management, et cetera, managing our working capital. By implementing the change 25% down with the order, which we're getting, that will help very much on that premise and then 25% on delivery, we'll have 50% of the cost of the units it physically hits the building. So we're looking at different ways to handle the growth. The question can be turned in different things, Jeff, from working capital to production capabilities offshore. The answer is we're looking at all aspects. And everything we can do to ensure that we can meet the schedules and the expected plot of business that we'll have, we'll make sure we can deliver on it.

Is it possible and feasible, maybe socialize this already, Randy, presuming that you get some orders from some pretty large entities. Have you talked any sort of lenders -- debt lenders about having a secured PO and being able to tap into some credit as opposed to equity to finance that growth?

Yes. Sorry, Jeff. But, of course, I mean we can go on about government programs. We can talk about factoring. We can talk about inventory factoring, BorgWarner type programs. We can talk about factoring receivables. We are well aware and looking at all aspects to ensure that we can manage the business coming in. What we're excited about is it used to be when this business coming in and there's been a shift in the marketplace; can you handle all this business? So it's exciting. But absolutely, we are looking at every aspect, anything that we can use to leverage our working capital to grow and conserve our cash and be able to meet the demand of the marketplace that we expect. And Paul has gone through some of the things he's doing. Paul, is there anything else you want to add to that?

Yes. Yes. Thanks, Randy. Certainly, our growth is going to be critical capacity planning, resource planning. Materials are somewhat still going to be a challenge. But as we're seeing the deployment plans or potential deployment plans from these organizations, I am matching and creating a capacity plan and model to support that. And in fact, at a 75%, 80% utilization rate, so with lots of burst capability. But that indeed will involve other partners, suppliers, contract manufacturers. As we move toward a final solution, we'll go through a lot of hybrid plans in terms of how we accomplish, this by initially outsourcing many of our subassemblies and then eventually outsourcing the majority of the product to large-scale manufacturers and all of these plans are in the work.

Jeff, just before you leave that, just one other thing to share with you, so you kind of get into our mindset. So we think the inventory, I mean we've got about $1.8 million in inventory, about $400,000 of that is previous generation. And we're in discussions with one of our customers that -- looks like they're going to take all, that inventory. So from a cash contribution, those are $0.90 contributions on every dollar. In other words, that's all prepaid inventory. On the $1.82 million in inventory, we only own $95,000. So every time we sell a Gen3, there are some minor incremental components and things to finish units. But the net cash contribution of what we have currently inventory with some modest component purchases puts somewhere in the neighborhood of north of $5 million into the company. So don't forget, we're sitting with $1.82 million in paid -- virtually paid inventory.

[Operator Instructions] And at this time, we have no other questions registered. Please proceed with closing remarks.

Some good questions there and obviously, good insight to a lot of things that we're looking at and working hard on. So I appreciate those questions. Just to summarize, I mean, we've got a really committed talented team. We're getting stronger with all our new hires. We've got an outstanding active power platform, adequate working capital, looking alternatives to fund growth, markets with high energy costs, power challenges, ESG and climate change objectives. And those markets are seeking innovative ways to reduce their energy costs, improve the quality of their buildings' energy. We believe the future looks really good for Legend Power and our shareholders. We believe the time is now for Legend, very exciting time, but we also want to wish all of you Happy Holidays and a fantastic 2023. Thank you for your past support. And we look forward to delivering for you in 2023 and beyond. Thank you and have a great legendary day.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Happy Holidays.