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

Welcome to the Legend Power Systems Fiscal Q3 2026 Investors Call. I'm Randall Buchamer, Legend Power's Chief Executive Officer. We appreciate you joining us today. We're going to discuss our corporate progress and financial results for the third quarter, which is the period covering the 3 months ended June 30, 2026. Before we begin, please note that certain statements made during this call may be forward-looking in nature. These statements involve 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 regarding our forward-looking statements and risk factors, please refer to our management discussion and analysis filed under the company's profile on SEDAR. I'm pleased to be joined today by Mike Cioce, our Vice President of Sales and Marketing. Paul Moffat, our Chief Operating Officer and acting CFO, is on holidays, so I'll also cover the financial and operational portions of today's update. Obviously, there's quite a bit to discuss this quarter. We're excited because we believe we're starting to see several pieces of the strategy we've been working on for the past year come together. On our last few calls, we talked candidly about the commercial challenges we've experienced through fiscal 2025 and in the first half of 2026. The technology was performing. Customers understood that SmartGATE improved the electrical environment inside the buildings, and we continue to demonstrate energy savings. But we were encountering significant skepticism when customers tried to justify the investment based on energy savings alone. It caused deals to take longer. It caused some opportunities to stall, and it told us very clearly that we needed to do a better job of helping customers understand and quantify the much broader value SmartGATE can deliver. So we responded. Over the last several quarters, we've been repositioning SmartGATE around the broader financial impact of the incoming electrical environment, which includes equipment reliability, maintenance and repair costs, asset life operating cost volatility and premature capital replacement. And we have supported the repositioning in 3 distinct ways. First, by strengthening the technical and financial linkage between actual operating voltage conditions and equipment performance. Second, by expanding use of independent third-party validation and operating data; and third, by analyzing actual operating and financial results from mature SmartGATE installations. And I believe Q3 gave us some really first meaningful commercial evidence that this approach is gaining traction. During the quarter, we announced approximately CAD 1.3 million orders, representing 12 SmartGATE systems across repeat customers, channel-led opportunities and government-related projects. Importantly, we're not viewing those simply as 12 individual system sales. Several of these customers control much larger portfolios, and our commercial strategy remains to establish SmartGATE in initial facility, demonstrate the value, build the confidence and expand across the portfolio. We're also seeing encouraging evidence that the reason customers are buying SmartGATE is beginning to evolve. Historically, many customers entered the discussion primarily because of energy savings. Increasingly, the conversation is about protecting building infrastructure, improving reliability and reducing the financial exposure associated with operating critical equipment under less than optimal electrical conditions. Mike will give you some specific examples of that shortly. We also made significant progress on independent validation during the quarter. In June, we publicly released preliminary results from the government-funded SmartGATE evaluation, the Oak Ridge Labs. Those findings provide encouraging independent evidence around SmartGATEs ability to significantly improve the electrical operating environment at a building while also demonstrating measurable energy and demand benefits. Mike will walk you through specific measured and model results. And more importantly, he'll explain why we believe these findings matter commercially. Then subsequent to the quarter end, we achieved another major milestone with the award of our GSA multiple award schedule contract, GSA MAS. This is really important because the government opportunity now has 2 complementary elements. We have the independent technology evaluation work being performed through the GSA program. We now have an established federal procurement vehicle that can make SmartGATE significantly easier for eligible government customers to purchase. The GSA schedule itself does not guarantee orders, but it removes an important procurement obstacle and gives both Legend and our partners a much stronger platform from which to pursue the government market. We also continue strengthening the way we communicate the SmartGATE opportunity to the marketplace. Last week, we relaunched legendpower.com with a completely redesigned customer experience built around our broader value proposition, and we introduced a new SmartGATE explainer video carrying that same message. If you haven't had the opportunity yet to see the new website, I would encourage you to have a look. The positioning is very deliberate. We're moving from a conversation primarily about saving energy toward a much larger conversation about protecting the capital inside the building. That means helping customers first understand their actual electrical exposure and actively managing the incoming power and ultimately, verifying the operating and financial impact. Mike has been leading much of that commercial repositioning work. And in a moment, he'll take you deeper into the results, the customer examples, the independent evaluation and GSA and how we believe these developments are changing our commercial opportunity. Before I turn it over, though, I want to cover the financial and operational side of the business. There are also several important developments here as well. We significantly reduced our operating cost structure. We continued improving our gross margins and reducing material costs. Recent sales activity has created a 15-system production backlog with production deliveries now underway and expected to continue well into 2027. And throughout that process, we remain intensely focused on cash management, maintaining the lean operating structure required to support the business as order volumes increase. So let me take you through those results, and then I'll hand it over to Mike for the commercial update. Revenue for the third quarter of fiscal 2026 was $216,000 compared to $385,000 in the same quarter of fiscal 2025. The higher revenue in Q3 last year primarily reflected the timing and fulfillment of additional SmartGATE units. Gross margins for Q3 2026 improved significantly to 40% compared with 22% during the same quarter last year. That improvement was primarily driven by reductions in material costs resulting from our ongoing cost of goods sold initiatives. Some of those initiatives have been about 2 years in nature, too, so we're seeing some good results. On a normalized basis, excluding unallocated overhead, gross margins were about 50%. We're also in the final stages of another significant material cost reduction initiative with samples now being produced for final evaluation. If successfully completed, as we expect it will be, we do expect this work to reduce material cost by approximately another 10%, supporting our long-term gross margin objectives. Operating expenses for the quarter were $608,000 compared with $928,000 during the same quarter last year. As a result, there was lower headcount, salaries, consulting expenses and other internal cost reductions. We're currently seeing monthly cash requirements for operations as low as approximately $145,000 per month. Obviously, that represents a very meaningful reduction in our operating cost structure compared to where we were a year ago. Operationally, as I mentioned earlier, we currently have 15 SmartGATE systems in backlog, largely resulting from recent sales activity. Materials for those orders have been placed and production and delivery of backlog systems are ongoing and will continue into 2027. Cash management continues to be a top priority. Accounts receivable associated with the backlog, warrant conversions and deposits from new wins all contribute to supporting our ongoing operational requirements. Inventory has also declined by more than 20% from the previous year as systems are processed, shipped, and we expect inventory levels to continue declining as we work through the current backlog. So operationally, our priorities are very clear: execute the backlog, continue improving production economics, closely manage cash and maintain the lean operating structure necessary to support the business as order volumes increase. With that, I'll turn the call over to Mike to provide some more detail on what we're seeing commercially and why we believe, and more importantly, Mike believes the work we've done over the last few quarters is beginning to translate into improved market transactions. Thank you, Mike. On to you.

I appreciate that. And as Randy outlined, the central commercial issues we've been working to solve have not been whether or not SmartGATE works. The challenge has been giving customers a credible financial framework for understanding the value that extends well beyond energy savings. So when SmartGATE is evaluated only against the utility bill, customers are trying to make an infrastructure investment around a relatively small portion of the total financial impact that electricity actually has on a building. The much larger question is what happens to the millions of dollars of systems like HVAC, elevators, motors, pumps, drives, controllers, life and safety systems, lighting and other critical infrastructure when the incoming electrical environment is persistently different from the conditions that the equipment was designed to operate under. And that's the broader financial conversation we've been building. We believe the pieces required to support that conversion are becoming materially stronger. So as Randy mentioned, during Q3, we announced approximately $1.3 million in orders over 12 SmartGATE sales across repeat customer activity, channel-led opportunities and government-related projects. But the importance goes beyond those 12 systems themselves. Most of these customers are -- that we're pursuing, they own substantially larger portfolios. And our model is increasingly about establishing SmartGATE in an initial building, measuring results, creating that customer confidence and then expanding across the portfolio. We are also seeing evidence that the reason customers are purchasing SmartGATE is changing materially. In July, we announced an initial public sector order in Ontario. One was a municipal social housing project where SmartGATE was specifically identified as the required solution in a public RFP. And that project represents an initial building within a housing portfolio that contains more than 3,000 residential units across more than 40 additional properties. So we also received follow-on orders from 2 additional SmartGATE -- for additional 2 SmartGATE systems from Ontario school districts. These customers had previously purchased an earlier generation of SmartGATE primarily around energy savings. And these new systems are being purchased around a broader set of operating facility expense and capital infrastructure considerations and challenges that they're looking to solve. So to us, that's a very important proof point. It's not simply that Legend changing the language we use to describe SmartGATE, we're beginning to see customers engage with the broader value proposition in a meaningful way. The second important development is the independent government-funded evaluation of SmartGATE that Randy discussed earlier through Oak Ridge National Labs. In June, we released the preliminary findings from that evaluation. At the federal facility being evaluated, the building was regularly operating approximately 32 to 35 volts above the optimized equipment nameplate voltage conditions during normal utility operations. And with SmartGATE, the operating voltage was maintained within approximately 1 to 2 volts of that equipment nameplate. So what's interesting is that when you apply the electrical loss modeling and the elevated baseline voltage conditions created about an additional 15% higher thermal stress, which is equivalent to roughly 7 degrees of Celsius and operating severity. And what's interesting about that is for every 10 degrees material -- every 10-degree increase in operating conditions, material life of those systems reduces by 50%. So it has a meaningful impact on the life expectancy and the reliability of those systems. Separately, the interim measurement verification analysis demonstrated 2.6% energy savings and average demand reductions in about the 2% to 4% range and peak demand reductions approaching 25% during portions of the evaluation period. Facility personnel also reported fewer breaker trips, fewer VFD resets, reduced lighting flicker and fewer HVAC and elevator resets after deployment of SmartGATE. So the larger takeaway is that independent operating data is increasingly supporting the commercial thesis that we've been developing. Utility compliant power is not necessarily the same thing as optimal power for the building equipment operating inside of the building. While the final report remains an important next step, when the initial -- when the final findings remain consistent with the preliminary work, we believe that validation can become a meaningful commercial and channel asset for us going forward. And switching gears a little bit before I get into the MAS award, I think it's important to remember all of our activity with the GSA efforts. And this all started more than 2 years ago. SmartGATE was selected into the GSA's Green Proving Ground from a field of more than 800 companies that applied with only 8 technologies being selected. So what we're seeing now is a progression from selection to field evaluation to preliminary public results and now to an established procurement vehicle. So that validation path is now complemented by the GSA multiple award schedule that we were awarded back on August 11. The schedule gives eligible federal agencies access to prenegotiated market pricing terms and procurement conditions through an established federal acquisition vehicle. It also participates in what's called the GSA's cooperative purchasing program for qualifying public sector entities, which allows public entities other than the federal entities to buy through this agreement as well. As Randy said, it doesn't necessarily guarantee us orders, but it does remove an important procurement barrier. What we now have are 2 complementary assets developing in the U.S. government market. The green proving ground and Oak Ridge evaluation work provides an independent technology and technical validation pathway, while the MAS provides an established commercial procurement pathway. The larger opportunity is connecting those 2 through the federal ESCO and energy savings performance contract market. That market is served by established energy service companies that already develop, finance and deliver infrastructure projects across federal facilities under IDIQ indefinite duration and definite quantity agreements. Rather than building a large federal direct sales force organizing and going after one building at a time, our objective is to make it easier for those existing IDIQ project development organizations to include SmartGATE in the projects they are already pursuing. These 20 IDIQ ESCOs do billions of dollars of project each year across hundreds of individual projects. With each individual project representing the opportunity for multiple SmartGATE sales. So it's an incredible opportunity for us that's being unlocked for us. When the final independent report supports the preliminary findings, we believe we can give those partners a stronger technical basis for including SmartGATE, while MAS provides the cleaner procurement path. And together, those assets can reduce friction around both technical justification and purchasing. And that's where the potential multiplier exists. A productive ESCO or energy performance contract relationship can create exposure to multiple facilities and multiple projects without requiring Legend to recreate a federal sales infrastructure, those organizations already have. So switching gears a little bit and moving to another way that the MAS helps us is with the New York City School Construction Authority. And again, we've heard this over the past several years, but the opportunity really has 2 distinct paths. The first is retrofit an existing portfolio of schools where SmartGATE can be evaluated against specific operating challenges that they have today. And the second and potentially more strategic over time, New York City continues to add school capacity and renovate existing schools. And we now have a SmartGATE specification that can include for new builds and renovation projects supported by the purchasing mechanism of the multiple award schedule. That specification matters substantially to us because it allows SmartGATE to be considered during the design and pre-capital planning process rather than only as a retrofit after the building is complete. It creates a much more repeatable path for the technology to move through an active capital management program. So the opportunity is not simply a handful of individual school projects. Retrofit activity can provide operating proof in existing facilities, while specification-driven inclusion in new construction renovations creates a separate longer-term path to scale. And as Randy mentioned, we've also been sharpening the SmartGATE value proposition. And with the major development, now we're presenting SmartGATE and how we're doing that to the broader market. Again, as Randy mentioned, last week, we relaunched legendpower.com and introduced the new SmartGATE explainer content around the updated value proposition. And this is much more than a simple website redesign. It represents the commercial positioning that we've been developing over the last year. And the headline is simple, protect the capital inside your buildings. Instead of beginning the discussions with a percentage of energy savings, we begin with the millions of dollars invested in HVAC equipment, elevators, motors, pumps, drives, controllers and other critical building infrastructure. And we have simplified the customer journey around 4 steps: measure the exposure, calculate the risk and then that leads to a purchase decision where we can manage the voltage and verify the impact. And our power impact assessment identifies the actual incoming electrical conditions, compares them with the environment the equipment inside the building was designed to operate in. Our capital infrastructure risk assessment framework helps quantify the associated financial exposure. SmartGATE then manages the incoming voltage at the electrical service entrance and the measurement verification document proves the improvement. We're also bringing forward financial analysis from mature SmartGATE deployments. The operating buildings analyzed to date show that the buildings achieve on the low end of a 15% to a high end of 30% lower annual maintenance, repair and replacement spending. And together, when we combine that with a 25% to 45% lower year-over-year maintenance and replacement cost volatility, it creates a substantially improved operating financial environment for these facilities. Separately, our modeling indicates potential life extension of approximately 2 to 5 years for major building systems. Energy savings continue to provide additional benefits, averaging 2.5% to 4% across the broader SmartGATE portfolio. And these results apply to buildings and data sets analyzed and every building is going to be slightly different. But we continue to actually show those actual historical results. It makes it easier for customers to be able to apply those to their existing portfolios. And commercially, this gives us a much more complete conversation with the building owner. We're no longer asking them or encouraging them or allowing them to look at how much electricity SmartGATE is saving solely. We're asking them to look at the total financial exposure associated with the electrical operating environment that supports the millions of dollars of critical building infrastructure. So when I step back, I believe our commercial position today is materially stronger than it was several months ago. We have a clear and broader value proposition. We've been growing real-world customer results and financial evidence -- we have encouraging independent preliminary operating results, and now we have our MAS providing an established procurement pathway into a very large public sector market. We also have specific examples of how scale can develop, portfolio expansions with existing customers, specification-driven opportunities such as New York City School Construction Authority and partner-led access to the federal ESCO and IDIQ market for performance contracting. The next phase is about conversion and scale. Our focus is on turning individual deployments into portfolio and specification-driven deployments, activating the GSA schedule through direct and partner-led opportunities and using the stronger capital protection proposition to move larger enterprise opportunities from technical acceptance through financial approval and procurement. We also remain selective about where we apply our commercial resources. Our priority is not broad spending. It's targeted support behind the channels where we see the cleanest path to repeatable bookings, including specification and design support, field assessments and partner enablement. So we believe the SmartGATE opportunity becomes substantially larger when customers stop looking at it solely through the lens of the electrical bill and begin looking at the total value of the infrastructure and how better power can help protect that environment. And that's the market we are looking to build. Randall, back to you.

Thanks, Mike. Appreciate that. Obviously, I think that recaptures the progress we've made and more importantly, where we believe the opportunity is heading. We've always evolved and refined our value proposition based on what prospects and customers are telling us and where we encounter resistance during the sales process. The changes Mike just described were specifically designed to address the skepticism we were seeing around quantifying and defending SmartGATEs non-energy value. We believe continued refinement and execution of that strategy can lead to stronger buyer conviction, shorter sales cycles and more consistent deal conversion. At the same time, we significantly reduced our operating cost structure, improved our production economics and continue to maintain a very disciplined approach to cash while we work through the current backlog and pursue additional orders. So we believe we are entering the next phase with a stronger commercial proposition, improving order activity and expanding validation framework, a new set of procurement pathway and a much leaner operating structure and stronger margins. With that, Mike and I would be pleased to take your questions.

And there is one already, Mike. Data centers. Wondering about if we're engaged with any data centers and SmartGATE being evaluated for power quality, reliability applications in that market.

Yes, absolutely. That's a great question. And with that being a big topic across the globe, it's something that we're keenly focused on. And when we look at the data center market, we see 3 distinct markets rather than one. When we look at it from the corporate data center environment, we look at it from a colocation or a shared data center environment, and then we look at the hyperscale AI data center environment. Each of those are dramatically different with dramatically different needs and opportunities. So when we look at those 3 submarkets of the main data center market, we see great applicability in 2 of them, and that's on the corporate data center side and the colo side. On the hyperscale side, the environment is going in a slightly different direction. If we look at kind of where the next generation of chips are going, they're being -- they're focusing on 800-volt DC versus AC. So that's a completely different operating environment. So there's some additional investment required to play in that space. So we are clearly looking at the colo data center market and the corporate data center market. And we are actively involved with data center consultants and builders and project managers to find opportunities to be able to deploy SmartGATE through that environment. And there's -- at the end of the day, in those markets, there's a very significant challenge. And again, if you look at the hyperscale data centers, they're looking at it slightly differently. They're looking at it more from the standpoint of what's their cost per megawatt and their cost to be able to bring power into play. So they have a different challenge that they're trying to solve there. So we're focused more on the data centers that are looking at from a colo, where, again, providing the best possible operating environment improves the overall operations of the facility.

Great. Second question, Mike, is that we have obviously been working on the MAS schedule for some time. Could you address any pent-up demand and how you see that going?