Good morning, everyone. My name is Mike Cioce, and I would like to welcome everyone to the Legend Power Systems Q2 2024 Financial Results conference call. All attendees have been placed on mute to prevent any background noises. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, please enter it into the Q&A tab on the toolbar below the speaker screens. I will now turn it over to Randy Buchamer, President and CEO of Legend Power Systems, to begin the conference.
Welcome to the Legend Power Systems Fiscal 2024 Q2 Investor Call. As Mike said, I'm Randy Buchamer, I'm Legend's Chief Executive Officer. We're pleased to have you join us today to discuss our corporate progress and financial results for the second quarter of fiscal 2024, which were the three months that ended March 31st, 2024. 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. You can see what's on the screen, but for more information about Legend's forward-looking statements and risk factors, please see our management discussion analysis, which was filed on SEDAR yesterday.
I'm joined by Florence Tan, who is our CFO, Paul Moffat, our COO, and Mike Cioce, who you've already been introduced to, as our VP Sales and Marketing. Florence will provide some financial highlights and an overview of Q2. Paul will again discuss our continued focus on our progress conserving cash, speeding up cash flow, reducing operating costs, reducing our cost of goods, growing margins, and improving supply chain and production capabilities. Mike will highlight pipeline and positive sales progress. He'll update you on the U.S. GSA Green Proving Ground partnership, and the significant progress made at Department of Citywide Administrative Services, DCAS in New York. And as I mentioned last call, we believe both of these accounts will be company makers for Legend.
We received shareholder feedback over the last while, and we know that you're interested on sales updates and cash, and we will be addressing both those today. Q2 was a record quarter for received purchase orders, as we start to see some of the deals we expected in, to be actually coming in. We had deposits obtained with each purchase order, and the customer mix included a large follow-on order from an Ontario-based multiple property owner, a U.S.-based ESCO, installing several high schools in New Mexico, with further schools to follow up. The first GSA system was shipped into New York, and the second GSA site was confirmed in Washington, D.C.
Interesting enough, Mike and his sales team were asked to do a rush order on systems for one of the ESCOs, and Mike secured a rush order fee of $150,000 from an ESCO, which is our first time doing so. We have 23 systems to ship and rev rec in the coming six months. Sales funnel is growing. We have visibility on several large pending deals, and the City of New York, first batch of RFPs are now being analyzed and starting to be awarded to vendors, and we expect our first school purchase order in the next week or so.
One thing I found interesting was that if we took all the purchase orders that were received during the quarter, and if they were able to be revenue recognized during the quarter, we would have been profitable and positive cash flow for the quarter. We also have strong visibility on numerous large deals that we've been working on for some time. None of the deals have gone away. Some have been deferred, but the deals have involved dozens of systems, coordination of installation costs and timing, multiple layers of decision makers, and the process order procedures have been extensive. The deals are there. Our timing on the completion of the deals has been off in some cases, but we'll press release any order achievements as they happen, and Mike's gonna put some more color on those items, too.
We're really delighted, and we thank Paul and his team directly to report significant improvement on our product margins. We had a 46% margin during the quarter on limited sales, but nonetheless, and it's one of the questions I've been asked, we expect margins going forward around 45% and expected to grow as we go forward. Paul will confirm our commitment and expectation for margins during his update. We also reduced our monthly operating cost to about $310,000 a month. There's been strong progress, continues to be made in all areas of the company, and we now have a break even that is between $8 million and $8.5 million annual sales. That'll depend on product mix and margins, but that is the range.
Our cash balance has increased, and we received an additional $750,000 of deposits a couple of days after the quarter. They therefore were not included in the Q2 financials. We have sufficient cash through fiscal 2024, and by our continued policy of securing deposits, we'll have cash well into calendar 2025... and we see ourselves on an ongoing basis, based on the sales forecast, becoming self-funding. We continue to decrease the time to collect receivables, and we focus on growing our system backlog and getting as many systems as we can out the door as quickly as possible to collect cash. We also have had discussions with EDC, Export Development Canada, and they're willing to finance sales deals and/or finance U.S. customers' SmartGATE purchases up to 20%, so I'm sorry, up to 80% of the contract value.
Over the last few years, just to remind you, we have invested over CAD 5 million in our Gen 3 solution, another CAD 5 million building out the U.S. sales operation, and creating awareness and support for our active power management platform, which again, we have no equal. The CAD 10 million invested is fully paid for without any debt, and now we're beginning to see strong payback on our investments, which will begin to show more in our results going forward. The CAD 10 million in product market investments will drive returns for many years. Q2 results reflect the positive work that's been going on at Legend for some time, and although significant progress has been made reducing our backlog, revenue recognized was minimal, despite the 23 system backlog. You will see a significant improvement in rev rec in the next quarter.
We continue to receive outstanding customer feedback regarding the excellent performance of the Gen 3 solutions. Large follow-on orders are in progress, and we have visibility on pipeline conversion with large sales. We continue to believe we will get customer upfront deposits. We're actually at 100% deposits with orders now, and that helps significantly with our cash flow. Combining deposits with conversion of prepaid inventory and delivered system, we do expect continued cash growth. So although the progress isn't reflected in the last financial statements for the quarter, we believe we have imminent order flow while carefully containing costs, growing our cash, increasing our margins as we manage through the next couple of quarters. Expected cash deposits, inventory conversions will firm up the balance sheet. We believe, as a team, we've passed the critical stage in having to prove our solutions work.
We've successfully completed technology evaluations in numerous markets and continue to do so with federal government, et cetera. And we're focusing on helping partners and prospects develop large, multi-year, multiple million-dollar deployment plans. The order visibility is clearer and stronger than it's ever been. Florence, can you please provide the financial updates for the quarter?
Sure. Thank you, Randy. During this quarter, revenue recognized was $124,000, compared to $74,000 in Q2 of FY 2023, and our gross margin for the quarter was 46%, compared to -7% in Q2, fiscal 2023. We're seeing our cost management and factory utilization measures start to yield our targeted results, and we continue to seek opportunities for further gross margin improvements, which Paul will be giving a more detailed update on the efforts achieved during the quarter. Deferred revenue as at March 31st, 2024, was $222,042, compared to $210,000 in Q2, FY 2023. Our backlog is progressing and continues to grow. We'll see the transition of these revenue recognition as the orders are fulfilled.
The company ended the quarter with $514,000 in cash, no debt, and $1.9 million in working capital. As Randy had mentioned, subsequent to the quarter, the company received over $750,000 in deposits on signed sales orders. Along with orders that we've received subsequent to March 31st, an additional working capital to invest into the business, we continue to proactively focus on the items critical to attaining our growth projections. We will continue to manage our capital resources, as we always have, to support our sales growth plans and deliver for our shareholders. I'll pass it now to Paul, our COO, to provide some operational highlights.
Thanks, Florence, and hello to everyone on, up on the call this morning, this afternoon. My primary focus continues to be on cash and cash flow management, as well as continuous improvement in all aspects of the business. We continue, as Randy mentioned, with very low operating margins. We're maintaining that low level, and that's flowing through to the bottom line. I have avoided, we have avoided in supply chain, any upfront deposits from our major suppliers, or in fact, from any suppliers, which, which is new. I think we're becoming a going concern now with our suppliers as we're increasing orders, and they see our backlog and our forecasts in a very strong position. So this is, of course, conserving our cash, and extending our cash throughout the year.
Receipts of large material orders I've scheduled over the backlog, production schedule, so we will not be invoiced for those materials until we need them. Again, conserving our cash. If I look at a conservative view of the sales bookings forecast, and Mike will share a little bit more with you, along with the deposits with- that we will receive associated with those- and along with the receivables, I will get, Legend will receive from the backlog. We have growing cash throughout calendar 2024 and into 2025. So completion, shipment, and installation of that backlog will provide a further $1.3 million in net cash, and this is includes a very minimal offset as we're taking advantage of development, as Randy mentioned, and inventory that we already had.
In addition, we've made a lot of gains on assembly and test cycle time. A bit of learning curve, obviously, our continuous improvement efforts. So I'm really proud of that. I'm really happy to see that we're able to increase our production rate. We are going to have a very consistent production cycle, over the next nine months, and as we win new orders, even beyond that. This is really gonna smooth out and highly utilize our factory. I see margins will be maintained and will grow. I'm very happy that, we're moving in the right direction to hit our gross margin targets, and a solid backlog is helping us to do that. We, as I mentioned, with those increased production rates, I'll be able to realize, the invoicing milestones even sooner.
So that means cash sooner into the business. And I'm happy to see that cycle time reducing at both assembly and test. If we look at our key strategic initiatives, and I've talked about these before, a very good progress there. One of the things I'm most excited about is our turnaround time on the Insights metering to the Power Impact Report. And what this means basically is when the customer signs up for Insights metering, so they can understand the true power quality of their building, they're educated, they understand, they're excited to receive that information.
We've made a greater than 40% improvement on the turnaround time between that point and when we present the Power Impact Report, which is really bringing forward the solution, the SmartGATE solution, the platform solution to the customer when it's fresh in their minds. So that's really gonna help on sales and sales support, and this has been a cross-functional departmental effort. We continue to offer and sell maintenance programs for recurring revenue, a great plus to the business. We are selling our installation smarts for extra value to the business as more and more contractors, third parties, ESCOs, customers are installing themselves. So great revenue adds there. We are looking at our next level capacity development of our 4,000-amp system.
As we know that, you know, come summer months or so, opportunities and customer expectations will be on larger capacity, 4,000-amp systems. So in that sense, we ordered some sample components to begin testing, and we expect once we've received that customer order, that development of the 4,000-amp system would begin probably in the summer timeframe. Strategic planning process is going really well. We continue with that in our rolling forecast and our variance analysis. It's improved our short and long-term responsiveness. It's allowed us to make quick decisions on changing environment conditions. So, so, you know, a great add to our business management system as we mature and grow. Factory utilization has improved, of course, cost of goods have reduced.
Really pleased with the resulting 46% gross margin in the last quarter, up tremendously from prior quarter and prior year. Again, as I mentioned before, I see that continuing to be very strong and moving towards our ultimate targets. Multiple suppliers have reduced lead times, the market is improving in terms of lead times, but because we have some critical orders with our customers that we needed to achieve, they stepped up. They've been partners. I've been working closely with them, and we've had a turnaround time to an ESCO of less than 10 weeks, which has been incredible. So I'll use that relationship, that relationship building, to work on setting expectations with my suppliers for Legend, and you know, developing then supplier-level agreements with them ultimately. So I'm really pleased.
The entire team's continuing to look for cash flow opportunities, continuous improvement opportunities, productivity opportunities. You know, we're becoming or we are a self-funding business, which is fantastic. Really excited about it, and we're well-positioned for all this backlog. Thanks to Mike and the team for bringing it in, and the growth that's ahead of us. So, thanks everyone for that, and I will pass it over to Mike.
Thanks, Paul. I appreciate that. And hello to everyone. It's a pleasure to talk to you all again today. We're excited about updating you on the latest happenings with Legend Power sales. Last quarter was a bit of a mixed bag for us. On one hand, we had a record bookings quarter for signed deals with deposits, and that also included the largest deal in our company's history, along with significant new deals and new geographies and new segments. So there's certainly a lot to be excited about. However, we recognize that we didn't hit our overall target and fell short of our goals, and we're always looking for ways to improve that going forward into the future. With that said, here are some highlights from the quarter as it's been mentioned.
One of our major deals involved a customer purchasing 10 systems. Excitingly, this is one installment of annual purchases they plan to make over the next few years. They're rolling out our technology across their portfolio and annual batches, so we're very excited about that. As it's been mentioned a couple times as well, we did secure a significant order with an ESCO in the U.S. Initially, we discussed 10 systems with them, but because of the tight time constraints that we were working on, we landed on four systems. Phase two of this project will include the remaining system, and what's also exciting is that's already leading into new deals with this particular ESCO. Additionally, in Ontario, we completed our first Gen 1 to Gen 3 upgrade order with the Ministry of Education School District in Ontario.
Thanks to available incentives, older systems also qualify for upgrade incentives, making it more affordable than ever for our existing customers to upgrade. We have an active campaign reaching out to school districts who own about 100 previous generation Legend Power Systems Harmonizers in the Ontario education market, and we're seeing co-funding rates ranging between 20% and 40% of the total cost for those upgrades. So, the path has never been clearer on those types of upgrades. Additionally, one of our customers added maintenance plans to all of their SmartGATEs, which is exciting to see, 'cause that does boost our recurring revenue very nicely, so we're very excited about that. So in addition to the bookings results that we had, we're making progress on a lot of other fronts.
We have a large DoD installation for the U.S. government, which has just made the decision to move forward. The contracting mechanisms are in place, which is a large task that the team has done a great job on, and we're just waiting final funding to be able to move forward with that. We're also advancing with the GSA's Green Proving Ground program. We've delivered the first system to site, and installation plans are actively underway. The second site is finalized, and we're targeting Washington, D.C., within the Federal Triangle for an installation this fall. So that's an incredibly exciting development that we're excited to be moving forward with the GSA.
In the New York, as we mentioned before, again, the New York School Construction Authority, the first project that includes a SmartGATE, has recently been awarded, and as mentioned, we're waiting for the paperwork to flow from the city to the contractor to then to us to finalize those deals. What's also exciting is that this project involves a switchgear manufacturer, which turns their standard switchgear into a smart switchgear using the SmartGATE, which not only has a broad-based application for the City of New York, but also much broader application for overall electrification efforts as well. Additionally, we still see deals progressing in the commercial real estate segment, and the ESCO segment, the big box retail segment, multifamily segment, and new deals are regularly entering the pipeline.
So the health of the sales and marketing engine at Legend Power is very healthy, and we will continue to update you as the ink hits the paper on these exciting deals with top-tier firms, which are some of the largest names in the industry. So while we didn't hit our overall targets, there's significant momentum, and we're incredibly excited about the future of Legend Power. So thank you, and I'll hand it back to Randy.
Well, thank you, Paul, and thank you, Mike. The three of you continue to deliver the results we need, and exciting, very exciting what's going on. Just make some quick comments, and then we'll take questions. We continue to see the alternative energy growth and the increased problems with the grid. We read about that every day, and that's where Legend plays. That is our marketplace, and the need for Legend solutions is growing every day. There's a continued massive shift of corporate effort to climate and environmental initiatives, and they're becoming top corporate priorities. The business world is committed to taking the steps to positively impact climate change. In all of Legend's markets, we see consistent and systemic change to make buildings less harmful to the environment, combined with improving efficiencies, reducing costs, improving power, and making a better tenant experience.
We continue to earn the respect of our target markets and their ecosystems and make them comfortable that Legend Power is an innovative company to work with. We continue to build our brand by working with key ecosystem players to ensure they are aware of and support Legend Power. The Legend Power team is very positive about the future for Legend, and we're each committed to making Legend Power a leading power management solution company. On that note, we would invite questions, and Mike will facilitate that process.
Again, if anybody has any questions, please feel free to put those into the Q&A tab on the Zoom toolbar below the speaker screens. So there's a question that's come in that says: "What is meant by large follow-up orders progressing? How large and how many, and what types of clients? What is the timeframe for follow-up orders?
Go ahead, Mike.
Okay, great. I'll be happy to handle this one. So, when we look at follow-on orders, keep in mind that the way things typically proceed is that people will take a sip of 1 to 4 to 5 systems. Once they get a comfort level, they look for broader scale deployments. 'Cause again, the customers that we're focusing on initially, they have hundreds and hundreds of buildings, so they're not necessarily looking to do them one at a time. That once we prove out with them, they're looking at broad scale deployment. And to give you some ideas on that, I think the order that we got this past quarter is very representative of it, where a customer is looking and saying, "Okay, let's do 10 a year.
Let's do 10 a year for the next couple of years until we move through our portfolio." So, when we see those types of customers moving forward with those types of follow-on orders, that's those are the types of deals that we're talking about. And again, I think it's safe to say that most of our follow-on orders are going to be in the seven-figure range, where we'll see some moving into the eight-figure range. And again, when it comes to timeframe, that's always a, it's always a tough one to ascertain. We work with our customers on what their buying cycle is. Again, the thing that's very exciting is that we're not seeing deals go away. We're not seeing deals die.
You know, they're taking longer to come to fruition, but again, it's just a matter of getting the funding in place to be able to move forward with those. So that... So hopefully that covers off the-
The next one, the current size of the purchase order pipeline, Mike?
Yeah, the current size of the purchase order pipeline, we look at it with a couple of different lenses. We have risk adjusted, and we have straight pipeline. When we look at the straight pipeline over a multi-year period, we're well north of $150 million in conversations that are underway. When we risk adjust that and we look at it over a shorter period of time, we're measuring those in the tens of millions to dollar range. So, if we look at the total deals that are proposing right now, we are approaching the $50 million mark for deals that are actively being presented.
Excellent. Had some questions by email. I'll just read out the basics of the question. It's for Mike. With the changing energy landscape of AI and the energy transition, are customers thinking differently about the financial benefit from deploying SmartGATEs? And it also adds that you mentioned buyers have changed their view on energy costs from declining by 5% to now increasing potential significantly, making the financial support for the product even stronger. Comments, Mike?
Yeah. We've definitely seen, over the past five years, a dramatic shift in customer sentiment around that. Again, as we continue to expand our value proposition beyond energy savings, again, we go back a couple of years ago, when we were talking about energy savings only, and we were putting rate escalators on that to show them the long-term value. We had a number of customers whose mindset was that energy rates are gonna go down, and I think that that has completely gone away, and people acknowledge that the energy rates will continue to increase. And as energy rates continue to increase, it only strengthens our value proposition.
As we continue to be able to monetize and to be able to show our customers real results, that the energy savings are dwarfed in comparison to the maintenance and repair savings, that's only gonna continue to strengthen the value proposition and to be able to, to increase the viability of the SmartGATE deployments that we're, that we're working on.
The other question, funny enough, another sales one, Mike. With the recent $2.5 million order coming from a commercial real estate company, can you describe what features, both financial and non-financial, these customers are looking to SmartGATE to provide?
Yeah, absolutely. And again, it's the culmination of a corporate effort to really build out the next generation of platform that we have today. And when we look at it, we're looking at it from an energy savings perspective, a maintenance and repair cost perspective, as well as an asset optimization perspective. And people acknowledge that what's happening with the electrification efforts is increasing the demand for electricity, and utilities are looking to meet that increased demand with low greenhouse gas-intensive energy, like wind, solar, and batteries. And as the proliferation of wind, solar, and batteries continues to deploy, you're starting to see a whole lot more volatility on the grid. The instability is rising greatly, and that's causing a lot of concern for people that own and operate buildings, and critical infrastructure.
So, they're really leaning into the energy savings is nice to have, but at the same point in time, we have to have buildings that work. And when you deploy very energy efficient systems, those are more sensitive to electrical fluctuation. And as the utilities continue to decarbonize their grids, you're seeing more instability and more fluctuation. So you're seeing those competing forces, and companies and organizations that own and operate buildings are really seeing the value of the SmartGATE as the great balancer of those two efforts, of their efforts, as well as what's happening on the grid.
Thanks, Mike. Getting asked the same question a couple times, I'm happy to answer it, and you can add additional comment, but it's about the first RFPs with DCAS. Do we expect orders from this opportunity by the end of this year? Just want to refresh how that works for everyone who understands the mechanics behind DCAS. So City of New York sent out RFPs for electrical room upgrades, switchgear upgrades, et cetera, not just for a SmartGATE. Those RFPs went out to multiple vendors and people that can be contractors and look after electrical room needs for DCAS and the schools. We're one component of that that's spec'd in. So what's happened is, the first batch of RFPs are coming back in.
One has been awarded for a school to a third-party contractor that will be dealing direct with Legend. That's imminent for us. We'll announce that as that comes in. That will come with deposits. That's the good news, because City of New York does not give deposits, but because we're working through the contractors on the overall upgrade of their electrical rooms, we can and will ask for the deposits, which is great for cash flow. So that came across a couple times. Anything you want to add to that, Mike?
No, that's spot on, Randy.
Okay. The next one is: "To what extent does closing the New York City deal knock down barriers and open up opportunities in other U.S. cities? Also, does closing the federal GSA contract help facilitate state-level government deals?" There's a lot in there, Mike, but there's some good updates I think we can give with that, and I'll turn it over to you.
Yeah, absolutely. When we look at what we're doing with the GSA and the City of New York, as those are two leading entities, a lot of other municipalities, states, and local authority, they look to those organizations for procurement excellence. And what we've done with the City of New York is definitely helping us to gain momentum with other or with other entities as well. And what we're doing with the U.S. federal government and with the GSA in particular really can be a door opener for us. What we're working towards with the GSA is what's called a GSA Schedule, and the GSA Schedule is an approved product category with pricing that then other public entities can leverage.
No two ways about it. The part of the reason why we're so excited about what we're doing with the GSA and with the City of New York is that directly opens the door to other purchasing organizations, so we're super excited about what's happening there.
Florence, do you want to add anything there?
No, I think Mike covered it.
Okay. There was a couple other questions that were already answered in my update, but I'll just summarize them again, so we're clear. The gross margin percentage, we talked about being 46% on limited sales. But as I mentioned, nonetheless, it's demonstrative of the progress made, and we are looking in at 45% gross margin range going forward. The next question was about operating costs. I talked about CAD 310,000 on a monthly basis, which, depending on product mix, size of system, et cetera, makes a break even somewhere in about the CAD 8 million-CAD 8.5 million.
This question was asked about the break even and wanted clarification that if we land and continue to land $2 million orders each quarter, that we're setting ourselves up for 3-4 quarters out to be cash flow positive. Yeah, and that's the timing of the business, just the cash cycle. As I mentioned during my update, if you took the orders received last quarter and rev rec them all in the quarter, we would've been cash flow positive and had an income, so that answers the break even question. That is the list of questions I have. I'll just take a second and make sure if anybody has any more they want to send, either by email or on the screen. Looks like we may be out of questions.
You know, what I'd like to do is just again reconfirm that, how committed this team is. I mean, where I'm most proud is when you're behind the eight ball, people leave, quit, don't believe. This team has worked through adversity and proven what they can do, and I think it is the most exciting time for us. There's no doubt the opportunity is large, and the order flow will grow, but, I mean, this team has worked through challenge after challenge, adapted, even taking the 25% deposits to improve on cash flow and getting customers to buy into that, as a team effort has been phenomenal. We're focused on sales objectives. As you heard, we're closely managing cash, as we always have.
We are continuing to reduce our costs, increase our margins, and get the sales deposits to give us the cash flow. We're excited because we believe the sales progress that you've seen will continue to grow, and there's no doubt with some of the deals we have, large orders are on their way. That's the most exciting thing that we can pass on today. Timing is always an issue, but there's company makers out there that are working with us. For example, I was talking to someone yesterday. Mark Petersen, our Vice President of Engineering, spends 50% of his time each week dealing with people at GSA about the opportunity. Our sales person yesterday, Brian Hashimoto, updated the board and said, "I'm getting asked by GSA for other opportunities to improve their power." It's happening all over the place, and the future looks great.
It looks really, really strong for us. And as I said before, since I've been here, it's never been better. So thank you, and have a great legendary day. We appreciate your support. Thank you.