Legend Power Systems Inc. (LPS) Earnings Call Transcript

Great. Good morning. Thanks, Mike. Welcome to Legend Power Systems Fiscal 2025 Q3 Investor Call. I'm Randy Buchamer, Legend's CEO. We're pleased to have you join us today to discuss our corporate progress and financial results for the third quarter of fiscal 2025, which were the 3 months ended June 30, 2025. 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 Power's forward-looking statements and risk factors, please see our management discussion and analysis which was filed on SEDAR yesterday under the company profile at sedarplus.com -- sorry. sedarplus.ca. I'm joined by Florence Tan, our CFO; and Mike Cioce, VP Sales and Marketing; and Paul Moffat is on holidays during this call. Florence will provide a financial overview of the quarter. Mike will update you on the strong Gen3 solution market performance, customer acceptance and the growing sales funnel. And the sales team has secured several outstanding partners, and are keen to grow their businesses with Legend solutions. We've been frustrated with U.S. government flip-flops on programs and policy changes that have deferred significant orders. But I want to be absolutely clear today we have not lost nor do we expect to lose any U.S. government business. We have experienced delays, but we do expect good order flow. We've operated in a very tight cash environment for the last couple of years, and Q3 was also a tight cash quarter. We continue to make the necessary expense and operational cost reduction changes for this environment. We continued to lower our component costs and we continue to lower our component costs and increase our system margins. We're on track to achieve 50% plus margins during the next year. We managed our backlog by leveraging existing inventory to continue fulfilling commitments. We currently have a 15 system backlog and expect all systems to be shipped by calendar year-end. I also want to acknowledge the dedication and resilience shown by the Legend team during the last quarter of challenging times. It's been commendable, and we thank the Legend team members for their ongoing support. We see opportunity more than ever before. SmartGATE interest is strong. We're close on numerous large multiple year deals and infield system performance has been absolutely outstanding. We're transitioning from commitments for dozens of SmartGATE annually to hundreds per year. This shift is underpinned by strong execution, proven solutions and a growing pipeline of opportunities. We are extremely confident that our progress is not just upward but transformative. Importantly, while the green investing sector has faced political challenges, Legend Power Systems value proposition transcends political narratives by delivering lower cost, increase profitability and reduce risk. We provide enduring value rooted in traditional business fundamentals. We see a bright Legend future, and the Legend team is absolutely focused and committed to make Legend Power a success story. Florence, please provide the financial highlights.

Thank you, Randy. During this quarter, revenue recognized was $385,000 compared to $1 million in Q3 of fiscal '24. The third quarter reflected lower revenues due to deal timing as we still have a significant backlog, which we expect to be fulfilled in calendar 2025. Our gross margin for the quarter was 24% compared to 50% in Q3 of fiscal '24. Gross margin percentage has decreased due to this quarter's production utilization as well as some rush orders in the prior year, which attributed to the higher margins in Q3 of 2024. The company ended the quarter with $215,000 in cash, no debt and $156,000 in working capital. The company received $214,000 of outstanding trade receivables and deposits from sales orders subsequent to June 30, which further strengthens our working capital position. We continue to focus on priorities critical to attaining our projections, while managing our resources to support our sales growth and to deliver for our shareholders. I'll pass it back to Randy for some operational highlights.

Actually, I think we'll go right to Mike, if we can, for our sales update.

Excellent. Yes. Thanks, everybody. Appreciate your time today. So let me start off with saying this, that it's got to be clearly understood that the market sees the need for what it is that we provide that they see the need for SmartGATE. And when we look at it, there's portfolio managers, engineering firms and national service companies, and we're hearing it everywhere that we're solving the exact problem that people are struggling with. In fact, just a few days ago, a top power quality engineering firm told us this market has exactly the functionality of the market needs and that the problem it solves is both real and massive. To give you an example of that on one of our companies that we work with, they -- the lifetime maintenance plans for HVAC electrical systems were one of the profit leaders over the last 18 to 24 months, they've actually seen that shift. They're now operating at a significant loss. And what's driving that is the increased call frequency and repair expenses that are associated with these contracts. And they believe SmartGATE can not only help restore those margins but also drive new revenue for them and dramatically improve their customer satisfaction and they're moving to act on it, which is important. So the feedback is clear that SmartGATE addresses a critical and growing pain point and lead us across multiple sectors are starting to recognize it. The challenge isn't product market fit, it's awareness, proof and delivery friction, and we're working on all 3 of these. So let me give you some idea of some strategic wins and some market activity that we've got going. First of all, we're on the cusp of closing a nice 7-figure opportunity with a new commercial real estate company based out of Texas. All signs point to eminent execution, and we're in discussions to finalize all the final considerations. The technical and the financial decision makers are aligned, and this will be a flagship case in one of the fastest-growing commercial real estate markets in the U.S. We're also very close with a new multifamily portfolio in Canada, and they're nearing contract signature, pending final M&V verification of similar buildings that we have underway. So when this deal closes, this deal would add yet another large private multifamily customer to our customer roster. So we're very excited about that. We're also preparing to present closing materials for an iconic commercial real estate property pilot. This is one of the highest visibility opportunities in Class A commercial office space and the engagement is progressing with executive level sponsorship, which is very exciting. We're also seeing some very significant momentum in the airport space. As you recall, several months ago, we did announce an engagement with a very major airport in the Northeast. We've completed 50% of the assessments for that particular airport and the others are installing this weekend. And we presented the Power Impact Report to that customer, and they were very excited to see the results of the next round. And that has actually led to 7 other significant airports that we're engaging with. In fact, next month, we're actually scheduled to begin the process with 2 new airports as well. The thing that's exciting about this is these are mission-critical infrastructure environments, and they validate SmartGATE as a reliability and resiliency tool, not just the power condition or energy savings measure. So we're very excited about that. During last summer, we actually went to a letter of intent with the Department of Defense base and that is advancing nicely. We now have been ranked #3 on their national priority list. And this is a high potential anchor deal that can pave the way for broader Department of Defense adoption, and further acceleration through our General Services Administration multiple award schedule once that's finalized, and we're going to talk about more about that in a minute. In fact, with the initial prioritization, we've actually been asked to present to 30 other bases, our SmartGATE solution because of the preliminary findings and the accept around the first Department of Defense that we're looking at. So moving on to our momentum with our multiple award schedule. It's been a long time coming and after 8 months of waiting, we finally received our feedback on our application, and a number of additional documents were requested, and 3 items that needed some correction, and those have all been submitted and provided, and we expect final disposition shortly. And this is going to have a dramatic impact on the future of Legend because this type of contract is not only used to streamline federal purchasing but also at the state and municipal levels of government as well. And this preapproved status and terms allow government sector deals to move much faster with much greater visibility. So we're very excited about that. As I also mentioned, but there's a major HVAC and electrical franchising company that's focused on looking at how SmartGATE can turn the tides on some of their product offerings. We've agreed to terms with them, and that will make the SmartGATE and the Power Impact Report available to their 150 franchise locations. So this agreement is under final review, and we expect to complete this shortly. And the thing I'd like to add about this is it's more than a channel expansion. It's a direct response to a financial pain point that they're experiencing that their leadership is urgently trying to solve. Again, historically, the lifetime maintenance contracts have been their most profitable offering for other franchisees. But over the last 18 to 24 months, they've seen that start to degrade to the point where they've flipped and they're no longer contributing to profit that they are actually losing money on these deals. And this is really being driven by increased equipment breakage, increases in repair and labor costs and also just the failing electrical infrastructure. So SmartGATE gives them a path not only identify that, but to reverse that trend. Because stabilizing the voltage and improving the systems operation gives them a higher value offering for their end customers. And it's a way to reduce service calls and equipment failures. And it's a platform that enhances not only the franchisee margin retention and top line revenue, but significantly enhances that customer's operating environment. Because again, if they're feeling that on the HVAC side, they're most likely feeling that on the lighting and on the elevation equipment on the motors, pumps and drives and other critical infrastructure. And this has a lot of opportunity. These agreements represent probably roughly around 35% of an $800 million business, that is, again, flipped to being a loser that they're counting on the SmartGATE, turning the tide on that and actually returning them to profitability. And the franchisees want this. Their customers need this, and they believe that we are the answer. It's a powerful validation of our relevance and our commercial potential. And this is, again, inside one of the largest facility management networks on the continent. So we're very excited about that. Another strategic partner that's coming online is a 9-figure power quality and energy solutions firm whose president's literally said your product seems to be -- seems too good to be true. They've been working in this space for decades, and they've been focusing on the harmonics and power factor side, but they haven't found a reliable solution for the voltage side of it. So we're working with their engineering team not only validate the performance but bring them deeper into the sales process. And they're currently focused on those solutions and then adding voltage regulation and the types of solutions that SmartGATE is going to significantly extend the range of their customers and the engagements and the revenue potential that they offer. So they're very excited about partnering us and we're going through the due diligence process on that. In the past, I'm sure you've heard about the GSA what was formerly known as the Green Proving Grounds, which has now been reconfigured to be the Technology Proving Grounds and we are back on track with them. In fact, GSA has confirmed that they want to finish the installation of the first SmartGATE by the end of September. So that's super exciting for us because that final confirmation is going to come from the contractors and the facilities that's going in. But again, it's a clear project time line that demonstrates the GSA's urgency to moving forward. So what's also exciting is that Oak Ridge will continue testing for a full year because everything is all set with the funding and the separate budget for that. But they will also provide an initial reporting in 90 days and as well as a robust reporting at the end of the 1-year period. What's exciting is that GSA has agreed to monitor this market unit for that initial 90-day period and when the performance aligns with the stated outcomes, they're going to officially endorse the technology and they would recommend it for broader adoption across the GSA facilities and inclusion in the ESCO contracts that they do. Again, a full report and final test will be provided by Oak Ridge. But they plan to publish a report on their website and they'll give us a public link, so we can make that available to all of you. And this will serve as an authoritative third-party validation about technology. And again, what's exciting is the GSA really opens the door to some very strategic opportunities because most of the contracts run through energy service companies are ESCOs. And the GSA is actually committed to introducing us directly to the network of ESCO partners that they work with and communicating the GSA runs our product based on our performance. And this endorsement and the resulting ESCO relationships represent a major opportunity for us. considering that, that market is measured in billions of dollars per year. So a very nice market segment for us to go after. And also strengthens our credibility in broader markets where the GSA recommendations carry some significant weight. So no 2 ways about it. There's a long-term upside potential for this program, and it can be substantial. And that the successful demonstration could position us for significant expansion beyond both GSA and the wider ESCO ecosystem. So we're very excited about that. What's also interesting is that if we pull back up and we take a look at the market positioning in general, we're not just being taken more seriously. We're being pulled into the right conversations. Earlier this quarter, I was invited to be 1 of 3 global panelists on a commercial property management podcast that focuses on the intersection of AI, on-site generation and grid volatility with an emphasis on how these trends are impacting broader real estate portfolios. Again, this wasn't a sales pitch. It was about thought leadership and being recognized as someone who has the answers for where the market is going, and that's exactly where we want to be. So at the same point in time, we have all this going on, we are focused on scaling. And one of the bottlenecks that we are still resolving is the installation cost and some of the time line and certainty. If we look at our average installation costs, they now surpass about 150% of the SmartGATE hardware costs, which is more than we saw in the earlier generations. And again, we're seeing some longer lead times in some of these third-party quotes. So we're working to compress those. So the operations team and the sales team are working very closely together to compress that. because again, there's friction there. And for new customers, we need to take that friction out. So -- because they do experience a turnkey solution and they want a single act of choke for the first couple solutions -- first couple of systems. So we're focused on solving that. So with that said, there's been some clear patterns that are emerging. And then once customers have gone through the process and they've experienced the benefits, they become far more comfortable with owning their own installation themselves. This not only lowers the cost barriers, but also improves gross margins and accelerates follow-on orders and cash flow. So we're working closely with the ops team to improve the scoping, the workflow and streamlining the process to avoid some of the lags in the cycles. Again, we're also focused on the sales and operations and tightening up that entire process. as our deal volumes continue to grow and more installations occur, we're using that day to improve processes, reduce the prices and build customer trust. This operational learning curve is shortening, and we're feeding a virtuous cycle because more activities drive more results, which drives more comfort, it drives more deals, which again drives more results and more activity. And that's the flywheel we've been building, and it's starting to spend faster. So we're very excited about that. We've now reached a point where we're not just chasing projects. We're shaping expectations, guiding portfolios and influencing capital planning. SmartGATE is still underknown but it's no longer unproven. And the market is starting to pay attention and the right customers and conversations are happening more frequently with higher urgency and higher stakes. So we still have work to do, but we're doing the right things, and people are noticing. The momentum is building, and we're working through everything that we need to work through to drive significant revenues, and the future of Legend is brighter than it's ever been. So with that said, Randy, I'll toss it back to you.

Great. Thanks, Mike. What we hope to do this morning, it's difficult when you just look at financial reports, to get a proper indication how well the company is proceeding in the marketplace. And hopefully, today, we ask Mike to go into little more detail and that you appreciate, there's a lot going on that you don't see in the financial statements. We're very excited about a lot of these huge opportunities, and we really see a lot of these things starting to fall in place over the next number of weeks and months that we'll provide that demonstrable proof that we've been talking about for some time. We know we've got a proven technology. We know we've got a growing pipeline and acceptance level. We've got a clear path to revenue growth over the next few years, and we believe we're poised to redefine the future of power management. And we believe that for people like yourselves that are invested and put your trust in Legend Power the extraordinary promising future as we break through some of these large deals and build the company rapidly. On that note, you've heard a lot of information from Mike this morning. So we'd like to thank you for your trust and partnerships. But we -- at this point in time, would be pleased to take any questions.

[Operator Instructions]

Well, we're waiting for a few questions, Mike. I'll just introduce a couple that I've been asked directly. I was asked the other day a little bit about some of our supply chain, et cetera, how we're making out there. So just a quick update. We have opening relationships with several new suppliers that have the potential to take our 2 top components or transform and closure costs down by 50%. We have done a lot of testing over the last number of months and expect to conclude that analysis shortly. But we see some good progress there. We have found that we are having a better response in supply chain as far as getting components. We are also better utilizing the existing inventory we have. So that's sort of 1 of the questions that I have had. Another question I have had is about cash. And as Florence said, there was additional cash has come through the quarter on deposits and on AR collections. I mean we are tight on cash. We manage our cash as well as any company I've ever seen. We're very frugal. And we will continue to do what we've done in the last number of years is as we continue to build sales and get deposits we will collect our receivables as quickly as possible. We'll manage our cash. It is our belief that with the news and progress that we will show over the next period of time, that there are opportunities for the organization to increase its cash. So we're excited to get some of those opportunities over the line and deposits, et cetera. And so a couple of quick questions that I have that. Mike, do we have any questions?

Yes. We've had a couple of questions that have come in. The first question is, do you expect the multiple award process to be completed in calendar 2025? Would you like me to handle that one, Randy?

Yes, please.

Yes. We certainly -- we do expect that. However, we all know that governmental processes are a bit unpredictable. So we're excited by the fact that we've -- they've been very active and very engaged over the past couple of weeks to finalize everything. So we do see that, that has -- gives us good reason for hope, for sure. Another question that has come in is, how important is Oak Ridge reports with respect to nonenergy savings validation? And if you don't mind, Randy, I'll go ahead and handle this one as well. So Oak Ridge -- the Oak Ridge report is going to be crucial to that because, again, to have a third-party globally respected firm like Oak Ridge National Labs, that can articulate the value against reliability and lifetime is it's going to be very strong for Legend. So there's no 2 ways about that, that it goes beyond the GSA, it goes beyond governmental spending in general and will be a major influence in the market in general because it's going to shift the conversation from here's what we tell you to here is what a globally respected third party tells you. So that's going to play a major role in our growth. One of the other questions that came in, Randy, is what is the latest update on potentially manufacturing SmartGATE in the United States?

Yes. And it's obviously a topic we've talked about the last few quarters. I think it was very topical about February when a lot of the changes came in the U.S. that were tariffs, different things, et cetera. The answer is we've continued to look at partners that can work with us. The change has been that there are people, obviously, we can work with. But we're also looking at different programs where we can get some funding and some help. And that seems to have flattened out a little bit. So there's some clarity on that. But it's an ongoing process. I don't see us doing anything with manufacturers in the U.S. probably until at earliest about years this time just because the way we're set up with our production, the businesses we have that we need to deal with, et cetera. All I think we'll provide some clarity over the next while of where we want to be where the best strategic location is, but there are numerous people that can provide the service and work with us, and that won't be an issue. It will be more where do you want to be, how do you want to be and how do we get the best cost and strategic advantage there. So stay tuned. We'll have more news on that as we go forward.