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Good morning. My name is [Joelle], and I will be your conference operator today. At this time, I would like to welcome everyone to the Legend Power Systems Q2 2023 Financial Results Conference Call. [Operator Instructions]. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Legend Power, you may begin your conference.
Welcome to Legend Power Systems Fiscal 2023 Q2 Investor Call. We're pleased to have you on the call today to discuss our corporate progress and provide our fiscal 2023 Q2 update representing 3 months ending March 30, 2023. We've had a bit of an unusual event this morning and that the number on the PR apparently is not correct. So we do not have the regular number of people we would have on the call. We've made the decision to proceed with the call, record the call and we'll offer people an opportunity to call if there's additional questions. we appreciate the patience, everybody, once they do hear the call.
I'm joined by Florence Tan, our CFO, Paul Moffat, COO; and Mike Cioce, our VP, Sales and Marketing. 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. [indiscernible], we had additional information about Legend's forward-looking statements and risk factors, please see our quarter and management discussion and analysis, which is filed on SEDAR today under our company profile at sedar.com. And we're going to take a bit of a different approach to today's call.
We have been gathering the most frequent shareholder and investor questions that we've recently received. And we will ask each question and provide an answer. We still will have other question period at the end, and we will provide a few brief summaries before we get into questions. Over the last few years, Legend has transformed significantly from an energy savings company to building our brand as the Active Power Management solution for ensuring optimal power management for buildings.
Our transformation and rebranding has resonated with our target markets and major federal and state agencies and leading commercial building owners are planning to implement the Active Power Management solution. We have created a new category in a market without any direct competitor and our pipeline and order flow is growing, and it will make Legend Power a compelling public company.
When we last raised $10 million, we submitted our use of proceeds summary. I'd like to point out that we've delivered as promised on our use of proceeds and in fact, each key category spend represents are key pillars for growth. We've invested over the last 2 or 3 years to grow by investing over $4 million in the new Gen3 solution. and field and customer feedback is extremely encouraging, and it will create revenue for many years. Over 40% of the last Legend has been invested in creating Gen3. I view this as an asset investment and not just a P&L expense. We have paid inventory of $1.8 million and $1.4 million of it is Gen3 components. All current inventory makes a 100% plus margin cash contribution as it's sold. And we created the category of the brand, Active Power Management, and we're being written into as a standard specification in major electrification and decarbonization initiatives. We simply own the space. We've improved our sales team and processes, starting with insights and developing to a power impact report. We'll continue to securing supply chain improvements to improve margins and time to delivery.
We're reviewing production outsourcing alternatives, to improve margins and time to delivery. We're building a strong engineering team that will continue to enhance existing technologies and build leading-edge energy management solutions. Before we highlight the frequent questions and answers, can I ask Florence to discuss Q2 financial information and then Mike Cioce will provide a brief sales update, and then we'll take -- we'll go into the questions. Thank you.
Thank you, Randy. So during this quarter, revenue recognized was $74,000 compared to $343,000 in Q2 FY '22. Revenue recognized was based on 1 SmartGATE system compared to 4 SmartGATE systems, respectively. Sales pipelines as well as sales bookings backlog are both healthy, and we will see the transition of these revenue recognition over the coming months. Gross margin in the second quarter of fiscal 2023 was negative 7% compared with 17% in Q2 of FY '22. The decrease in gross margin experienced during Q2 of this fiscal was due to additional costs incurred to replace and repair a unit damaged in transit, which the company expects to recover the majority of these costs incurred.
The change in margin for the second quarter was also impacted by an inventory adjustment due to count results offset by a recovery on inventory previously provided for. The gross -- the normalized gross margin for the quarter, excluding these items, would have been 34%. On a year-to-date basis, gross margin for the 6-month period was 20% compared with 18% year-to-date in Q2 of FY '22.
Given the company had taken action last year by increasing sales prices, we've seen a moderate increase in our margins. The company ended the quarter with $1.5 million in cash, no debt and $3.15 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. Thank you, and now over to Mike Cioce.
Thank you, Florence, and thank you, everybody, for your time today. As Randy said, we're going to get into some of the common questions, but I just would like to take 2 minutes for a quick update on our progress. As Randy mentioned, over the last couple of years, our company has invested in and undergone a remarkable transformation. Initially, we focused on selling one system at a time to prove building energy efficiency. Today, based on our investments to date, we've achieved some significant milestones. We're currently averaging 10 or more buildings simultaneously for our customer with each opportunity representing dozens of market systems with energy savings as well as maintenance repair savings as well as just making the buildings better for everyone.
Based on our investments, our third-generation SmartGATE system, it's been a game changer. That expands our value proposition beyond energy efficiency to include substantial savings in maintenance and repair costs. Our customers are telling us that for each dollar of energy savings, they are also seeing a $1 to $2 maintenance repair savings after installing SmartGATE. Based on our investments, our pipeline has grown tremendously, escalating from under $20 million to a staggering $150 million in [over 3] years.
This increase really growing demand for our products and [indiscernible] clients [indiscernible] our capabilities. As with any new technologies, the customers must figure out how to procure and implement SmartGATE. In many cases, the SmartGATE is being included in much large assets. These larger scope project larger budgets and, in some cases, longer time lines. While it's taking a bit longer than expected, our progress speaks for itself, and we'll discuss this in more detail in just a few minutes.
Again, our investments to date have resulted in an Active Power Management written in as a standard specification and major electrification decarbonization initiatives. This means that any bid that wants that opportunity to win must include an Active Power Management system in order to be able to be a winning solution -- a winning bid. When we look at the trillions of dollars a year being spent annually in this segment, it's expected to continue for the next 2 to 3 decades. The investments we have made to date are driving massive demand, which is starting to and will continue to convert into SmartGATE orders. In conclusion, we are delighted with our investments, our expansion, inclusion of maintenance and repair savings and impressive pipeline growth fueled by [the] investments to date. These indicators demonstrate our success to position us as leaders in the field. Thank you for your continued support, and we look forward to answering your questions shortly.
And I'm just going to repeat what I said earlier in the call for those that have come on to the call since then that we're taking a different approach today for the call. We've gathered the most frequent shareholder and investor questions that we received, and we'll go through each and answer each. We'll still offer an opportunity for additional questions from participants at the end. So we're going to move now to the frequent questions and answer ask support. So first of all, we get the question why has it taken longer than expected to achieve sales success? Mike, can you give us some flavor on that?
Yes, sure. So there's a number of things to keep in mind. First of all, as we are making a market and to really drive home what that means, every one of our new customers have purchased an Active Power Management system before. So this is definitely very different than buying an iPhone or even buying a replacement HVAC system. Because of that, they have to learn how to buy it. And again, when you're connecting major building systems to a switch gear, which is the heart of any electric -- of any facility, sometimes those updates and upgrades need to occur. And sometimes, our efforts get rolled into major electrification decarbonization efforts.
What's interesting is, again, we have a very large pipeline that is continuing to grow, and we're simply not getting the [nose] that -- the [nose] is not happening. So our close rates are higher than expected. And what's also interesting is that we also have sufficient late-stage deals to hit our booking targets for the remainder of the year. So we're very confident that while it is taking a little bit longer, we're not getting the nose and we are continuing to grow the pipeline and close business.
Great. And on that topic, with the pipeline growing, how do you see the next 12 to 36 months? Mike?
Yes. Again, keeping in mind that 4 years ago, our pipeline was under $20 million, and now it's over $150 million. And when we look at the fact that the total addressable market of north of $1 million buildings in North America alone is tens of billions, not hundreds of billions of dollars. And when we look at the fact that awareness is continuing to skyrocket, in fact, some local municipalities in Ontario are getting ready to issue RFPs to solve power quality challenges because, again, the power is getting worse and people are starting to realize it's going to have a negative impact on their facilities.
So when we look at that, and we'll also consider that we currently have -- one of the concepts in sales leadership is what's called quota coverage or pipeline coverage. Right now, we have doubled the pipeline coverage for our fiscal '23 bookings, and we have almost doubled our pipeline for fiscal '24 bookings insight today. So when we combine that with the fact that, again, we are being written into specifications. And just to touch a little bit more on what that means being a required specification means that you can't have a winning bid if it's -- if Active Power Management is not in it.
And when we look at the fact that most state and local governments look to the leading players for those best practices, they look to leaders like the city of New York and the federal government in the United States of America. And we are in specification or getting approval for specification with those leaders, which will continue to roll out to other organizations. And that's on the public sector side.
But if you look at the private sector side, we are also engaged in late-stage sales cycles with the corporate leaders or those Oracles that other corporations look to as well. So at the end of the day, the pipeline growth over the next 20 -- next 12 to 36 months continues to look explosive.
Next question we have [indicernible] and for the [indiscernible] may have a few people that may not know [indiscernible]. -- and what's happening with you [indiscernible].
Yes, certainly. So the GSA is the general services administration. We're engaged with them through their Green Proving Ground, which is a limited deployment for developing a full deployment plan for their organization. And as we've already announced, the first site is selected, and we are continue -- continue to support installation in the fall of this year. The second site is -- has been identified, and we're in due diligence, due diligence is scheduled to happen during the month of June. And again, this is just a massive opportunity for us when we look at the scope of the GSA and all of the federal buildings that they own or operate. it's a massive opportunity.
And again, they're also seen as the oracle or as the leaders of that space. And again, when you look at the fact that the ESCO market alone is $10 million to $15 billion a year, that represents a very significant opportunity for us. What's also encouraging with the GSA is just a high level of an excitement from the entire project team not only from the folks at the Green Proving Ground, but also Oak Ridge National Laboratories are the organization that's going to be doing the project testing.
From that standpoint, they're very excited about it because this is one of the first solutions they've seen in a long time that actually fixes power. So they're highly engaged, and we're getting some very positive feedback from them. But what's also exciting is just the feedback from the site teams that we're working with. The level of frustration that they have today over challenges with the power and what is causing the facility to have a solution in site for them is they're incredibly engaged. So we are very well positioned. We've got a lot of activity around the GSA.
Thanks, Obviously [indiscernible]. You got another one on DCAS, Mike. So we do get asked what's happening with DCAS also and for the sake of some new shareholders, same thing. If you could just let us know what DCAS is and then answer the question, please.
Yes. So DCAS is the Department of Central Administrative Services for the city of New York. They are the central group for all the city agencies for the City of New York. So they support the school construction authority, the schools, the design construction services, all of the major groups inside of the city of New York, and they're the central spending authority.
And as we've previously announced, we are an approved solution with them. We went through a rigorous testing process with them, and we've passed that with flying colors. And also, as they have previously announced that they're getting ready to spend $4 billion on electrification and decarbonization efforts over the coming years.
And one of the latest updates is that the specification for Active Power Management is finalized, and it's being actively distributed to addendums for RFPs that are in progress as well as new RFPs. So with that, we see over 2 dozen projects starting this calendar year, representing between 50 and 100 SmartGATEs alone.
So again, the DCAS can certainly continue to be a company maker for us. And again, our investments to date have made us the industry and segment pioneer and frontrunner. So anyone else who is wanting to play catch-up is already 5 to 10 years behind us. And again, keeping in mind that being in spec means that any bid must include Active Power Management system in order to win. And that we are, again, the category pioneer and frontrunner for our Active Power Management systems.
And I'll just add, Mike, that's probably about 4 to 5 years of sales investment to get to this stage. So again, well done, very exciting. The other question we get is, are we making progress with resellers, Mike, comments?
Yes. Absolutely. Yes, we are continuing to be written into proposals with leading ESCO providers across North America. But beyond the ESCOs, we're also working with other distributors. We're also working with other leading electrical organizations, and we're working with some of the largest organizations in North America. One of the partners that we recently announced is an organization who focuses in Ontario on power quality solutions. And they've added us to their offering.
But what they're excited about is it dramatically expands their market capabilities as well as our reach. They have a 20-year history with the local utilities, and they are the go-to solution provider for Ontario manufacturer. But they've been getting more and more calls recently for commercial buildings and their industrial solutions just are not sized for commercial buildings. Adding the SmartGATE to their capabilities dramatically increases their solution capabilities and their market opportunity as well as ours.
So these are the types of partners that we're engaging. We've steadily seen an increase in partner-led pipeline and that's currently accounting for almost 20% of our pipeline today.
That's great. We also get questions about Gen3. And I think really what we get is people asking, we're [fairly] comfortable that you have proven you save energy. And Gen3, obviously, is an improvement over the previous generation. But how about nonenergy efficiency targets and how do we know that we're hitting them? Mike?
Yes, absolutely. And a lot of great progress has been made there based on the investments we've made. So first of all, what we do with the part of the power impact assessment is we capture a baseline for the facility to understand what the incoming power [indiscernible] looks like. And as we've been -- in the past, we've always provided a measurement and verification report. But recently, we've also added a power quality verification report as well, which demonstrates that there's a dramatic improvement in the power.
So we're able to actually show them what their scores were ahead of time. And then post-insulation, what their scores are with a SmartGATE active. Again, the results are incredibly dramatic. Again, not only are we seeing better than a 4.5% energy savings but we're also eliminating over 98% of all of the power [stations] that are getting hit -- that these buildings are getting hit with. And again, in Ontario, it's not uncommon for us to see buildings getting hit with hundreds of voltage fluctuations per year. Any one of which can play havoc on their buildings.
So we are absolutely generating the results there. But what's also interesting is that our customers are telling us what kind of results that they're experiencing. They're telling us that for every dollar in energy savings they see, they also see $1 to $2 of maintenance and repair savings. To put things in perspective, one of our customers who recently deployed 10 SmartGATEs, they were spending $15,000 to $20,000 a month just replacing one category, and that's control boards across their portfolio of those 10 buildings.
In the first 6 months of SmartGate operation, their spend was literally 0. So again, hundreds of thousands of dollars saved because of the SmartGATE. In another situation, we saw -- the CEO saw the results. Not only did they get better than a 15% ROI, which is what they were looking for, but the buildings just work better and that made for happier tenants and happier employees.
And based on that, seeing the results and hearing the feedback from the team, they bought 10 more systems on the spot. So at the end of the day, yes, we are absolutely nailing it on nonenergy performance as well, as well as energy performance.
That's great. Mike, we also get asked because we announced a couple of years ago that we introduced the insight process to measure how power is being used in the building. And then that was refined into a power impact report. How is it going? How's the 2 put together [placed]? .
Yes. So first thing is that going way better than expected. And we need to kind of clarify for everybody insights on the equipment and the power impact report is the service for a customer. So what's interesting, again, one customer can do one power impact report. They might use 5 insights to look at those 10 buildings. But those 10 buildings represent 40 to 50 SmartGATEs.
So when we look at it from a standpoint of is it accomplishing the end goal of identifying and showing the value for potential SmartGATE sales, it's absolutely there. And it's absolutely providing massive value to our customers because they now can see things that they haven't been able to see before. They can see what's driving the challenges that they face with their buildings. So again, when we look at it, we've -- over the previous years, we've identified 300 SmartGATE -- potential SmartGATE sales using the Power Impact report process.
About 90-- we've reached decisions on a little over 90 of those potential, and we have a better than 50% close rate on those just as expected. So we've got about 100 that are actively being presented, and we've got about another 100 that are in progress. So we still definitely see tremendous value and insights, but more important than us seeing it, our customers are seeing it because now they're able to see challenges that they have had with their buildings for decades that is getting worse that now they have a solution to. So it's definitely going better than expected.
Next one. Mike, we also get asked about large deals, we've talked about in different quarters, et cetera. How are the deals going? Are they still active? And are they progressing?
Yes, they are also active and they're all progressing, albeit at different cadence and paces. Each organization meets opportunity. They continue to move at their own situation. Again, we've got some where they want to put SmartGATEs in, but they realize that the switch gear that they want attach to is 20 years past end of life and that they need to look at replacing the switch gear.
We've got some that -- once they see the challenges that are in their buildings, that they realize that a larger effort is required and SmartGATE sits at the heart of that. So when we look at those large deals, they are still active. They are progressing very nicely. And some -- each one of them is moving at its own pace. Again, that's part of the challenge of making a market and the fact that these organizations not only have they not purchased market before but for a lot of these buildings, and a lot of the people that we're dealing with, replacing a switch gear in a building is a once-in-a-career event for building.
It's not like these are replaced like HVACs where you're putting a new one in every 8 to 10 years. we see switch gears that we are being asked to attach to that could be 40, 50, 60 years old, in some cases even longer than that. which means that they need to include the replacement of that as part of the project. So yes, they're definitely active, definitely growing and continue to move forward.
Great. Well, a bit of a rest, Mike. There's a lot of sales questions there. I'll turn to Mr. Mark. A few questions in your area, Paul. And the first one is, how is supply chain management going? And what progress can you tell us about that?
Yes. Sure. Thank you, and good morning, everyone. Just first of all, I want to say as well that I'm very pleased with the investment we're making and that I'm leading in terms of governance, controls, processes and really overall continuous improvement. And it's setting a real solid business foundation and a platform for our growth. So I'm enjoying and we're making great progress on attacking a lot of supply chain, operational production issues.
In terms of supply chain, lead times are definitely improving and so are prices in some cases. There are some exceptions, of course. We've had some transformer lead times increase on us, but we've been able to look at alternate sources and get those reduced. Costs have definitely increased. We -- and I mean everyone knows that costs have increased everywhere over the last year. We have been working with several distributors. We've negotiated reductions on many of our commodities. So I'm very happy that we're developing those relationships further -- and they're even helping with vendor-managed inventory, with forecasting and with ensuring that they have the materials available and ready for us when we need them. I guess the toughest part is the semiconductors, and they're still quoting longer lead times.
And as I've mentioned before, on those critical parts, I placed orders -- well, I placed orders probably 12 or 14 months ago. So I'm respecting those lead times and ordering against those, and we don't have to pay for those until they're received. But I am confident and I am starting to see improvements coming in the near future. In terms of procurement and buying, we now have a strong MRP model, and we've begun to establish a safety start plan. We're being cautious there. We -- in terms of how we spend our money, and we're currently ordering to order right now. But I want to evaluate and understand what kind of flexibility we can obtain at what cost in order to further reduce our lead times. In terms of our backlog, it's been completely provided for, will -- production is currently underway and will be for the next several months. Randy?
That's great, Paul. I guess the sub part of that is we get asked about our progress on margin improvement. And [indiscernible] backed out some of those extraordinary items and talk about 34% margin would have been realized with those back out, which is an improvement. But can you give us some flavor about how you see margin improvement going?
Yes. I'm really pleased with that normalized increase. And we have been projecting those improvements and further improvements as we are realizing gains in both overhead unit hours of production and also materials. So that will be improving and it will improve more so towards our fiscal target and our strategic target as well.
In terms of equipment COGS, those have been reduced by over 5%. There's lots of opportunities we're seeing as well because we have major efforts underway in terms of outsourcing. Both Canada, U.S. and Mexico on subassemblies and full systems. So I'm very excited about the gains that we will see there. And as mentioned earlier, we're seeing those reductions on several of the commodities.
And of course, as our volumes increase, I look forward to the advantage of volume pricing. And as those volumes are increasing, the utilization of our factory and resources is going up. So we are seeing great reductions in terms of overhead allocation to each unit, and that's further reducing our COGS. But overall, I have an active project in place covering many, many aspects of COGS reduction, and we'll see that further reduction, and this will meet our future gross margin targets.
Lots of great work going on there, Paul. Lots of room to bring those margins up to significant levels, which is great.
Absolutely. Great opportunities. Thank you.
And the last question that we received in our numbers here is, how will you -- you'll ensure you have an adequate balance sheet to fuel sales growth? I just wanted to take a couple of different thoughts on that. First of all, when you look at the last raise, as said earlier, of $10 million, $4 million went into Gen3. And that is something that we produced, which is a leading product and a solution that will create revenue for many years. So there's $4 million there. We have $1.8 million in paid inventory which should create cash as it goes out the door, plus the margin increase.
And we've put over $1 million in our sales processes with Insight's Power report. So that $7 million of the $10 we raised, again, $7 million of the $10 we raised is absolutely deployed in the business to grow. It's not just money that was spent on whatever it might be on from an expense point of view. It's absolute key core pillars of growth that we've made the investments that are now starting to pay off significantly. And again, the question is about adequate balance sheet and fuel sales growth. We continue to manage our costs. We continue, if you look at quarter-to-quarter expenses, reduce our operating costs as best as we can. And we see as we additionally increase the margin to grow sales that make more of a cash contribution. We also implemented a 25% deposit on orders. And that's a big swing for us because it's the best deal you can get as an industry loan on a 25% upfront.
Some deals may or may not provide the 25%, but so far, we've been hitting on the deals we brought in the 25% deposit has been coming with the orders. We're also in contact with government agencies about exporting loans and things like that, and we'll have some news report on that as we proceed through the process. We also have had discussions on loans against inventory, loans against large orders. When you've got brand companies like we do and some of these large, large orders, we can finance those, which is key.
But also -- it's -- in our cost structure, we don't have to put a lot of cash out on our deals. We really have the cost of goods, and then we share the installation or -- we don't have to pay out the installation cost, which can be 50%, 60% of an overall deal until it's done. So we're only putting out probably about 25% to 30% of the overall total cost of the deal upfront, which is something to keep in mind.
And also, the Board reviews these alternatives and will make appropriate decisions to ensure -- absolutely ensure that the balance sheet is adequate to be able to fuel the sales growth. So it's something that we're working on a continuous basis. Those are the common 12 questions. We'll give you a second, a chance to ask some additional questions. But I just wanted to add that there's been a significant shift over the last couple of years, a massive shift, in fact, of corporate mind space and effort to climate environmental initiatives becoming top corporate objectives.
We're really seeing every day that the world is serious about taking steps to positively impact climate change. And in all of our markets, we see consistent and systemic change to make buildings less harmful to the environment, combined with improving efficiencies, reducing costs and making a better tenant experience.
And as Mike talked about, with the GSA, DCAS are just 2 examples. Federal and civic government are committed to making it easier for corporations to adopt energy saving, improving technologies for commercial buildings, and they're continuing to introduce programs to support Legend solutions. At this point, [indiscernible], there's a few people on the call who would like to ask a question. we'll be taking them, please?
[Operator Instructions] There are no questions at this time.
Okay. And again, I apologize with the number on the PR that's obviously affected some of the people being able to get in, but we'll address that again. I would like to summarize. I mean, the company has been going through a significant transformation over the last 2 years. This is not the company it was 5 years ago, just an energy-saving company. This is a company that has a compelling solution that is resonate with our markets. And we continue to earn the respect of our target markets and we make them comfortable that Legend is an innovative company to work with. We also continue to build our brand by working with key ecoplayer to ensure that we are aware and ultimately support Legend Power in their client buildings. The Legend Power leadership team is very positive about the future.
We're very excited about what we're doing, and we're each committed to making Legend a leading energy and power management company. We have a committed and talented team, and we're getting stronger with each new hire. We have an outstanding Active Power Management platform. There is nothing else in the world that does what our Active Power Management system does. Markets with high energy costs, they've got power challenges, ESG and climate change objectives and are seeking innovative ways to reduce the energy costs and improve the quality of their buildings' energy.
We believe the futures never looked better for Legend and our stakeholders. The time for Legend is now. I just want to remind everybody that may be listening to this later on in the day or over the weekend that's recorded because the press release had the incorrect number on it as far as a dial-in number, please listen to the recordings. We did put 12 questions that were commonly asked over the last few weeks. But if you have any additional questions, you can contact me, Randy, at (604) 657-1200, that's Randy Buchamer, (604) 657-1200.
On that note, thank you. Have a great legendary day and weekend, and thank you.
Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.