Knightscope Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 15, 2024

There are 3 speakers on the call.

Operator

Welcome. Thank you, everyone, for attending the Knightscope Town Hall as well as the 2024 Annual Stockholder Meeting. We are grateful to each and every one of our investors and genuinely appreciate you taking time to tune in today. Let me get straight to the point. Almost every company goes through difficult times, and the last couple of years have been quite challenging for Knightscope as a public company.

Operator

I can tell you it's an odd situation because internally, we believe we're doing profoundly better than when we were private. But as I often say, I believe Wall Street can be, quote unquote, wrong in the short term and typically, quote, right in the long term. In the meantime, we'll continue to relentlessly work the issues. And I am confident, highly confident, we'll have a very, very bright future. This too shall pass.

Operator

We're making solid progress on our all our internal goals and key ingredients to reach profitability. And I'm excited about the future of Knightscope and driving long term stockholder value. A good amount of that has to do with the sweeping changes we're making to the business. Honestly, some days, it feels like we're changing everything except the color of the logo. Our aim is to leave no stone unturned, and we are focusing on various opportunities to improve the company and its financial position.

Operator

We still have a lot of work ahead for us, and we believe that we just need to focus on execution. As Knightscope's largest stockholder, I have an unwavering belief in and support for the Knightscope team. Jeez, our team shows up every day, no matter how hard or how complex the challenges we face may be and just keep pushing forward our progress towards a brighter future. That relentless nature is what helped actually helped get Knightscope off the ground 11 years ago and led to us being one of the 5% of startups that succeed in getting off the ground and staying off the ground. Listen, the sky is blue.

Operator

Tomorrow is just another sunset away. We just need to work the solutions, including instilling investor confidence and executing our plans. We have a plan. We have the right team working the plan and are making progress every single day. I believe the future is extremely bright for Knightscope, and I love our company, our team and our investors.

Operator

I don't want to be working on anything else, and it's my honor and privilege to be fighting for Nightscope in our country every single day. Today, I'll focus on my 4 personal reasons why I'm long on Nightscope and absolutely and certainly short on the criminals: market, technology, operations and people. So let's get into that now. Market. Investors love to hear, love to hear that there is a large market ripe for disruption, especially if there is a unique technology and a business model to go with it.

Operator

Well, in our case, we believe we're not just targeting a very large market, but one that has a recurring need. The public safety, law enforcement, and security markets are not only ripe for disruption, but we believe they're ripe for disruption utilizing robotics, AI and automation. So let's work through maybe 3 different angles on sizing what we believe can be a multibillion dollar opportunity. So first, we often say or I often say robots will be everywhere. We believe the market potential is very large.

Operator

And in our case, we think it's a market that will not only will not collapse as crime is an ongoing recurring problem, unlike markets that can disappear. Think about typewriters, pagers, fax machines, flip phones, and station wagons. Remember, a property crime occurs every 4 seconds in our country and a violent crime every 26 seconds. We do not have to live this way. I believe every American has a basic and fundamental right to live in a safe community in a safe country.

Operator

2nd, another angle will be some sort of unique triangulation or taking a few different data points to help draw a conclusion. So let me give you some numbers. There are approximately 1,000,000 law enforcement professionals, about 1,500,000 security guards, approximately 300,000 law enforcement vehicles and about 80,000,000 security cameras in operation in the U. S. The answer in my eyes is certainly not small.

Operator

It requires a large technology portfolio that we're just getting started building. So I don't believe it's tens or hundreds or thousands of robots. Millions is where we're focused in the long term. 3rd, you can take a percent augmentation approach to some of the numbers above. And long term, in our eyes, there's a potential for a $40,000,000,000 recurring revenue opportunity once everything's in place.

Operator

And you can download the deck at nightscope.com/rise if you want to take a closer look, but here's a screenshot of the relevant slide for you. Now that you understand this is huge opportunity, how do we tackle it and what progress have we made? Well, here's some things for you to think about. Potential for recurring revenue. Well, with our Machine as a Service subscriptions, we're demonstrating that a recurring revenue business model for a recurring societal problem can work and has already generated 1,000,000 and 1,000,000 of dollars of revenue.

Operator

High margins. We've demonstrated greater than 60% margins over a 5 year period by analyzing data from numerous of our longest serving clients for autonomous security robots, which is a major, major milestone confirming our projections with real world results. Now we just need to scale things up. Renewals. Clients have renewed our subscription services, including for 2, 3, 4, 5, 6, 7, even 8 years.

Operator

8 consecutive years. Clients don't stick around that long without us providing real value for them. Dwindling competition. We believe every major effort by a competitor, either a major corporation or a startup, has effectively failed thus far, granting Knightscope a genuine first mover advantage. FedRAMP.

Operator

We believe we're currently the only autonomous security provider authorized to do business with the U. S. Federal Government. And we have successfully deployed our first K-five gov machine at a U. S.

Operator

Department of Veterans Affairs Hospital in Texas. Super excited about that. Moat. We've begun to build a strong moat with a combination of approximately 3,000,000 hours of operating in the field, the FedRAMP authorization I just mentioned from the U. S.

Operator

Federal Government, a growing technology and advanced technology portfolio and more than a decade of real world experience. Prime Fighting wins. Our machines have done a lot of good for society already, and we're just getting started. We've helped apprehend and armed gunmen, helped with a domestic abuse case, aided a victim of kidnapping, helped issue an arrest warrant for a sexual predator, stopped numerous car thefts, and the list goes on and on and on. You can check it out at nightscope.com/crime.

Operator

We envision that in the future, we'll be required to have autonomous security, no different than having a, I don't know, a smoke alarm or a fire detector. And that will be the tipping point for robots to be everywhere. RTX, our newly established risk and threat exposure department, has proven to be a resounding success with our customers and keeping your loved ones safe. And the number of robot selfies continues to grow. So to sum it up, what's not to love?

Operator

A massive market with a real problem every American can relate to, a potential path to recurring revenue with potential for high margins at scale proven technology and a competitive landscape where none of our competitors have not yet succeeded. Interesting times. Let's move on to technology. Knightscope is a technology company focused on public safety, building new tools to fight against those that seek to cause harm to everyday Americans. What we have achieved is not only technologically extremely difficult to build, but even more challenging to operate 20 fourseven, 365 across an entire nation.

Operator

To emphasize this fact, literally 3 major corporations and just as many funded startups have failed, given up or gone bankrupt. We now have a real advantage. We believe we got it working, now we just need to optimize. Now it's time to scale things up with a focus on driving growth, cost reductions, efficiencies, process improvements, etcetera. Kind of maybe the less glamorous stuff, but extremely important.

Operator

And we'll continue to build our moat as we develop our portfolio of software, hardware and unique services that combined together will uniquely position us as leaders of public safety technology. We believe that in order to address the nation's public safety problem, we need to put at least 1,000,000 machines in network that can see, feel, hear, smell, speak and autonomously cooperate. They need to work 20 fourseven, 365 and give the 2 and a half 1000000 officers and guards real tools for them to be able to do their jobs effectively and keep you and your loved ones safe. I'll say it again. I believe that robots will be everywhere.

Operator

And anyone who thinks that that is not the case is in for a very, very rude autonomous awakening. To give you a flavor of the future that we're planning for Knightscope, I thought it'd be helpful to highlight our current portfolio of technologies and equally as important, as a technology company, share what the future might hold for Knightscope. We currently have 8 different machines and devices in the field as well as 2 software platforms. K1 Hemisphere, when size and price matter, the K1 Hemisphere can be had for as low as 0.75 dollars per hour, including being monitored remotely by our RTX team. K1 Tower has been popular at ingress and ingress points where there is a good amount of human or vehicle traffic.

Operator

K3 Indoor has been proudly patrolling indoors at a large hospital in Houston for many, many years. K5 Outdoor, our most popular ASR and now on our 5th generation of the technology, providing both physical deterrents to negative behavior, but also given an officers and guards eyes, ears and voice on the ground in multiple locations at the same time. K1 Blue Light Tower, a beacon of public safety across schools and corporate campuses. K1 Blue Light Emergency Phone, it's a compact emergency calling solution very popular in parking structures. The K1 Call Box, thousands and thousands of these deployed for emergency roadside assistance and remote locations.

Operator

Hey, listen, no cellular, no problem. That's our thing with our K1 call boxes. The K1 retrofit kit, it's an opportunity to upgrade solar power, wireless connectivity with self monitoring software and and on the software side of things, we've got the NightScope Security Operations Center. This is our browser based user interface that provides a unique format for humans to interact with our autonomous security robots and the over 90 terabytes of data they generate annually. Knightscope Emergency Management Systems or CHEMs launched a year ago that helps monitor nearly 10,000 fleet of K1B devices in the field operating 20 fourseven.

Operator

Additionally, and through strategic partnerships, we've added automated gunshot detection, 100% automated for indoor or outdoor usage reporting a gunshot within 2 seconds, providing the 3 d shooter location accuracy within 2 meters. Autonomous drones, our partnership with our friends at Dragonfly forming a unified offering both in the air and on the ground. And the recently announced K1 laser using lasers to fight against criminals, especially for perimeter security. The K1 lasers operate under adverse weather conditions and low or no light, reliably delivering advanced details at the 80,000,000 plus security cameras in the U. S.

Operator

Cannot. All of these actions enhance our offerings for our clients on our mission to better securing our country. This is just the start of what we anticipate will be a wide, a very wide portfolio of technologies to better protect the places people live, work, study and visit. We plan to do that by building new technologies organically through partnerships and through acquisitions. In the near future, we're focused on 2 key strategic initiatives.

Operator

First one being platform commonality to drive engineering efficiencies, improve quality, speed up manufacturing throughput, increase economies of scale and drive innovation, we must, we must consolidate our wide ranging of technical architectures, hardware, software, firmware, telecom and electrical systems into a single common company wide platform. To that end, we've kicked off a very ambitious project called ICM or Intelligence Control Module that we intend to eventually become the backbone of the entire lineup handling all things AI, all things video, audio, lighting control and telecommunications. We believe this software firmware hardware platform designed to provide a seamlessly unified customer and operating experience across all our products will not only drive significant, significant cost reductions, but numerous benefits in manufacturing, quality and operations at scale. We're targeting the ICM to go into production during 2025. Portfolio expansion.

Operator

In the medium term, we intend for the aforementioned ICM module to go into the future K1 Supertower and the all new and super exciting K7 ASR that we highlighted during our Innovation Week. Concurrently, we intend to tackle additional growth and future K15 tactical vehicles. Although the industry is not yet ready for this level of technology, Knightscope seeks to become that trusted advisor, that trusted technology advisor over time for our clients to help bridge the gap between those on the front lines and cutting edge new technologies. We need to work in the future to deliver the future. This is an exciting time where we think technology can genuinely and positively help society, help our communities and help your community and your loved ones.

Operator

And we believe all that we envision is technically possible with the right people, cash and time to execute. So you may be asking, what about artificial intelligence? How does AI play a role in Nightscopes future? Well, first, some of the basics involved in AI already have been implemented at Nightscope and working in the field. I often kid around or tease folks, like, do you think there's like a little guy inside our robots and pedaling away like crazy to get the machine to move around by itself?

Operator

That's all AI. That is real world practical implementation of AI and so is autonomous recharging, facial recognition, license plate detection, people detection, object tracking, all that is AI. We intend to integrate AI into everything we do as we have already, and it is part of our core. The exciting part in my mind is the latest breakthroughs in AI are only going to accelerate our efforts at Knightscope. When we say we need a 1,000,000 machines in network and they need to see, feel, hear, smell, speak and autonomously cooperate, we believe that will all all of it will be accelerated dramatically by AI.

Operator

So let's go through them. What do we mean by see? Well, process vast amounts of video data for object and scene classification to detect humans, vehicles, animals, bicycles, behaviors and threats. Feel, run machine learning models on live streaming thermal data or analyze emotions in a crowd of people or detect a fire. Hear, automatically conduct sound classification and localization for acoustic event detection, which could include gunshots, cars starting, glass breaking, a yell for help or an accident.

Operator

Smell, figuratively place a dog's nose on a chip to detect pathogens or chemical, biological radiation or other similar risks. Speak, utilize generative AI to allow the public to conduct a value added conversation with the robots, which could be used for basic information, directions, call for help or details on a point of interest. And what do we mean by autonomously cooperate? Well, utilize AI to enable autonomous cooperation, swarming, data transfer and data sharing for scene or incident analysis, planning and investigation amongst all the machines. For example, imagine the FBI putting up their most wanted list and the machines being able to track that suspect down anywhere in the country within minutes.

Operator

Here's another example. We need to build a state of the art AI driven mission control software platform to be able to facilitate cooperation between all these machines. Today, there's a standalone user interface for each of the autonomous security robots, our K1B portfolio, the drones, automated gunshot detection and the recently announced K1 laser. For our clients and our team to get the most out of all these systems, we need them to be able to effectively communicate, share data, plan missions, conduct investigations and autonomously cooperate with each other. That is going to be a hell of a software marvel to build.

Operator

We think the opportunities with AI are endless and the possibility to build game changing technology for the benefit of our communities and our country is invigorating and what gets us up every morning here in Silicon Valley. Operations. The team spent years years getting all this stuff to work, and we were not necessarily focused on optimizing for material costs, labor efficiencies, processes, etcetera. Honestly, the priority was just to get all this stuff to work and prove that a client would pay for it. Now having done that, we can now focus on refining.

Operator

The work to optimize things is not glamorous, as I mentioned, but it is a known quantity. We know what to do and are doing it. Now we simply need to increase revenue, reduce costs and scale up, after which we believe the profits will come. Let me provide you some specifics so you get a better understanding of flavor of where we're focused and the progress we're making. Reduction in machine downtime across the fleet through design changes, material changes, improved quality assurance, burn in testing and software and firmware improvements.

Operator

Reduction in service costs through more carefully managing the service process, documentation and escalation procedures, reduction in service costs through outsourcing technician work and eliminating our fleet of trucks, Reduction in false positives through improvements in machine learning and algorithms as well as diagnostics. Reduction in the bill of materials through changing suppliers, changing materials, eliminating parts and significant design changes. Reduction in labor hours through improved processes, documentation and use of contract manufacturing for select sub assemblies a reduction in number of facilities through ongoing consolidation a reduction in cellular costs through contract negotiations and technical changes as well as an increased usage of private LTE, reduction in operating expenses through numerous optimization techniques, elimination of processes and headcount optimization. At the same time as we're making all those reductions, we've also made the following improvements: improvement in purchasing controls and improvements in production planning and sign off authorities improvements in production throughput where for example, we used to ship maybe 1 k5 perhaps every week or 2 and now consistently shipping about 3 a week, improvements in QA processes throughout the production process, end of line tests, documentation again and again and again, strict controls on authority to ship, improvement in decision making by eliminating a significant portion of the management team, improvement in root cause analysis by driving decisions based on improved collection of data from the field and not just going to fix the problem and not analyzing it, improvement in client retention through both upgrades to the 5th generation K5, but also implementation of the aforementioned RTX team or the risk and threat exposure team.

Operator

Improvement in team alignment, which is really important, where we now have a solid cadence of engineering and production changes underway. We want to work to squeeze out as many efficiencies as possible, cleaning house, improving business and technical processes while focusing on the bottom line. As a result, we think that these improvements will begin to show up in the financials in the coming months, quarters and years, setting ourselves for what we believe will be profitable growth and in a very exciting future. People. One of the keys to success here is the Knightscope team.

Operator

We've made a lot of changes, but not limited to cutting a third of the management team to streamline decision making, recruited an all new Board of Directors, on track to cut up to 30% of the payroll expense and we're focused on building a very cohesive team, 1 team, 1 fight. And did you know that a third of Knightscope employees have been with the company between 3 11 years? Frankly, that is a bit of a miracle here in Silicon Valley where typically folks last maybe a year or 2 max at an employer. These are smart driven people that could work anywhere, but they're giving that their all against all odds to make Knightscope successful and achieve our mission. My bet is and will always be on the Knightscope team.

Operator

I also consider our thousands of retail investors part of our team. Without your steadfast support, we wouldn't have been had the fuel to build the company and get this far in the 1st place. A heartfelt thank you to you all. My motto has been life is short, do what you love and make a big impact. And what I love is working on our honorable mission here at Knightscope that everyone says is impossible.

Operator

That fuels a deep fire within me and the entire team. This country gave my parents a chance for a better life coming from South America and Asia. My mom was from Bogota, Colombia, and my dad was from outside of Shanghai, China. And they met in the melting part of New York City where I was born. And here in America, they were able to build a positive life together and provide me a chance to grow, learn and succeed.

Operator

I feel a deep need to repay that debt to our country. I believe in America, and I believe we can make it the safest in the world. But for that to potentially happen, I need you to continue to believe in NightScope and the NightScope team. Together, we can do this. What many investors don't understand is that after 9eleven, I committed to dedicate the rest of my life to better securing the U.

Operator

S. And so the drive here is deeply personal with me. We're not going away, no matter how hard so many tried to trip us up. I'm willing to do whatever it takes so long as it's legal, ethical and moral to force a win for our country and for our stockholders. If we can't run, we will walk.

Operator

If we can't walk, we will crawl, but nothing is going to stop us from moving forward. And I mean nothing. Having put in over a decade working the same problem over and over and over again gets us several steps closer to a victory. What is crazy, it's actually indeed possible to achieve the mission, as crazy as that might sound, in making the US the safest country in the world sounds outrageous. But that deep change in public safety requires investment and building of new technologies.

Operator

You're not just going to download the solution off the cloud and the federal, state and local government are not going to fix this problem. It requires real work by serious people backed by serious investors and I know we can do it together. Listen, Americans love a comeback story and I hope you'll be a meaningful part of it. So join us and be a force for good. Onward.

Speaker 1

Thanks, Bill. We know that this journey is challenging, but Knightscope is well positioned for long term success. With that, let's jump into our Q2 financial performance results. I'm Apoorvith Debedi, EVP and CFO at Knightscope. For the Q2 of 2024, we reported total net revenues of $3,200,000 This represents a decrease of $400,000 or a 10% decline compared to the same period prior year, primarily because the gain in our services business was offset by lower year over year product revenue.

Speaker 1

Services revenue increased by $100,000 to reach approximately $2,000,000 for the quarter, primarily due to ASR subscriptions and as more clients in the K1B product line signed up for recurring maintenance. However, total product revenue, which currently consists mainly of the K1B products declined by 500,000 dollars coming in at approximately $1,300,000 because a large one time sale in the prior year did not repeat. Moving on to costs, if you recall, the company made a few strategic changes in the Q1 aimed at setting a path to profitability. Many of these were directly aimed at reducing our cost of goods and our cost of services. We also acknowledged that these initiatives would initially result in higher short term costs and that we also expect the disruptions in the impacted activities at the business to directly affect our P and L throughout the year.

Speaker 1

As a result, we fully expect 2024 to continue to be a transition year. Our cost of revenues came in at $3,800,000 which is an increase of approximately $200,000 from the prior year. This was driven primarily by cost savings that include $500,000 in lower cost of materials and $400,000 in headcount savings that were offset by $600,000 in higher third party costs, dollars 300,000 in scrap fees and $200,000 in other costs associated with the transition. On to gross profit, this quarter, we recorded a gross loss of $600,000 dollars a significant change from the gross profit of $9,000 reported in the prior year Q2. The decrease in gross margin was driven by $400,000 in lower year over year revenues and $200,000 in higher cost of revenues.

Speaker 1

It's important to note that our gross loss would have been between $100,000 $300,000 if we exclude the one time scrap fees of $300,000 and the one time transition costs of $200,000 Moving on to OpEx, total operational expenses came in at $6,200,000 for the quarter ended June 30. Excluding the $300,000 in restructuring charges that we took, our OpEx was flat to prior year as it came in at $5,900,000 for this quarter. Overall, we saw headcount savings of $600,000 offset by $400,000 in higher third party expenses, primarily legal and financial support costs and $200,000 in higher R and D costs related to product development as the firm explores a new generation of product design. Restructuring charges of $300,000 were primarily related to severance costs and moving fees as we closed down the Irvine, California facility to move our production to Mountain View, California. Loss from operations of $6,800,000 was approximately $900,000 higher than prior year because of the drivers discussed earlier.

Speaker 1

It's important to note that excluding the one time restructuring costs of $300,000 and the scrap fees of $300,000 and investment in new product development of $200,000 our OpEx or operating loss would reflect to prior year on $400,000 in lower revenues indicating that the company is working hard to deliver on its operational efficiencies. Net loss of $6,300,000 for the quarter came in approximately $1,500,000 higher than prior year, primarily due to the $700,000 increase in other expenses coupled with the $800,000 higher OpEx versus prior year. The increase in other expenses includes $500,000 in higher non cash warrant valuation losses and $200,000 in interest on the bonds that we closed in the Q1. Finally, Knightscope's basic and diluted net loss per common share was $0.05 as compared to a loss per share of $0.08 prior year. With that,

Speaker 2

I'll pass it back to Bill. Good afternoon, everybody. Thank you so much for joining the Knightscope Q2 Town Hall. I'm Stacy Stephens, the Executive Vice President and Chief Client Officer here at Knightscope. I want to thank Bill and Apoorv, they're going to be joining us live momentarily.

Speaker 2

I want to go through some quick housekeeping measures. 1st and foremost, all of your questions, please put them into the chat window so that we can address them. If it's stuff that it's just comments and things like that, I'm just if you see your comments disappear, it's only because I'm deleting them so I can keep track of the questions. And then I will tee those up for Bill and Ipur, so you guys can ask them the live questions. So, let's go ahead and get started.

Speaker 2

Bill, why don't you and Apoorv talk about some of the highlights and accomplishments for the quarter that we're talking about right now, just so people kind of know some of the positive stuff. Obviously, we got to go through all the financials and everything else, but it's not all doom and gloom. So let's talk about some of the positive changes that have been made. Bill?

Operator

Hey, good to see you, Stace Napoorv. Thanks, everybody. Only a few hundred people on line with only a few hundred questions. So we're going to be here a little bit. We'll try to answer as many as possible.

Operator

As we mentioned, we're this year is a kind of a clean house turnaround year to make a lot of fundamental changes. We expect that those numbers will be choppy. It's not going to be a linear kind of progression as we make substantial changes throughout the entire organization. As I mentioned in the video, some days, honestly, it feels like we're changing everything except the color of the logo. But I think Apoorv and I and the team are pretty excited despite all the red stuff that you see on the share price side of things.

Operator

I think the future is looking pretty good and we're excited to move things forward. There are things that are less obvious that don't show up in regulatory filings. Obviously, we're not going to share any material non public information here, but we may highlight a few things. Sometimes in all the regulatory filings, things get lost or frankly, a little too complicated. But I'll turn it over to Paul if you want to kick off some things that will help answer a ton of questions that are flying in here on things that we have changed that may not be so obvious for folks?

Speaker 1

Absolutely, absolutely. We started off this quarter by focusing on cleaning up our cap table, primarily when we looked at our balance sheet. If you look at prior years, you saw that there was this on our shareholders equity section, there was just about $34,000,000 in preferred shares that kind of sat there. And what that did is that's normally not common when you are a public company. Most preferred shares convert automatically into common upon an IPO or liquidation event.

Speaker 1

In our case, because we did a direct listing, that did not occur. So that kind of made us a little bit of anomaly in being a public company. So the first thing we did in Q2 was convince all the majority of the preferred shareholders to vote to convert. By doing so, a couple of things happened. 1, we got we aligned ourselves more with the public company structure.

Speaker 1

Secondly, we also were allowed to or able to put that $34,000,000 into our step stockholders' equity number. So that wasn't before that wasn't being calculated. So we had this negative stockholders' equity or stockholders' deficit on our balance sheet. By making that change and cleaning that up, we were able to now show as you guys can probably see on our recent filings, we had $11,200,000 of shareholders' equity. Now what's good about that is that, 1, it cleans up our balance sheet.

Speaker 1

2, on a NASDAQ perspective, it allows us to show qualify for or continue listing under their stockholders' equity requirement. NASDAQ has 3 requirements, revenue requirement sorry, market cap requirement and equity requirement and a net income requirement. We were previously only able to qualify under the market cap requirement. Now we have this equity requirement, which is great for us. On top of that, we also on NASDAQ moved to capital markets tier, which better aligns for our company.

Speaker 1

We raised over $5,000,000 in funding. We continue to do so. I see many questions on how do you continue to stay funded. We have an active ATM program that we use whenever we can, and we continue to find that to be useful. It's the cheapest form of capital that you can get without going into some of the more exotic types of fundings that are available sometimes.

Speaker 1

We have some of the best quarter this quarter. Actually, in terms of revenue, it was the best quarter in the last few quarters, 40% growth versus prior quarter. Again, this is some of this is choppiness that we're seeing, timing, but we think we're taking the right steps to get there. And then some of the things, Bill, maybe you want to talk about our partnerships and product developments and some of the things we're doing on the experience side?

Operator

Yes. I think we need to obviously get the revenues up and the cost down and you can't just put band aids on some of this stuff, some of this through acquisition or through our own organic technology development. We're a technology company and there are significant opportunities as we scale up where perhaps we were 3 d printing stuff before. Now we should do something a little bit more efficient and low cost and better for higher volumes and get some consistency. One of the things I'm super excited about is the intelligence control module, because if you look at the all the products that we have that are behind me here, we have different architectures, different software, different firmware and everything else and that requires a lot of staff and a lot of engineering, maintenance, service support, production, QA and it's a huge drag on throughput, on addressing service issues, service costs, etcetera.

Operator

And so with one felt swoop, we're looking to commonize that across the entire platform so we can build faster, we can QA faster, we can ship faster, we service a lot less and then that starts and has with the K5V5, replacing the K5V3, I saw a question on here, well, how are you going to do all this with no massive incremental resources? Well, if we can be a lot more efficient with what we're doing here and not have people working on older technology that needs a lot of babysitting and we can permanently fix that stuff, that alleviates and relieves the team to go work on actual new product development. And I think that's going to be certainly one of the most exciting things for me. I used to be an engineer in a former life, gets me kind of excited, but it's going to have a dramatic effect, I think, on overall quality, throughput and our financial performance. So there's as we keep saying, this is going to be a little choppy because you're going to make a change like that, but it doesn't necessarily time with when we're going to shut down a certain facility and then when that lease is up versus when you terminated that person.

Operator

And so it's going to be a little messy. But overall, I think we're trending in the right direction and we're going to take some lumps along the way, but we need to set this up for long term success. And I think we've got the right strategy with the right team. Now it's just time to execute.

Speaker 2

Let's get into some of the questions then.

Operator

Yes, because there is a lot of questions. And thanks everybody for tuning in. I know all of you are pretty busy in a pretty busy live. So we are grateful for that. The 2 videos that we just played will show up on YouTube here in a couple of hours or so on our YouTube channel, and we'll post them on social media.

Operator

So in case you missed something or you wanted to go back or like, what did DuFour say? Rewind, you'll be able to do that here shortly. But let's get to the questions you've got here.

Speaker 2

All right. So just so everybody knows I'm not going to be coming back on video just simply because I'm navigating multiple screens here and I don't want to be a distraction. Starting at the top, what were the orders for, I'm assuming this means hemisphere, H1, K1 hemisphere versus a year ago?

Operator

A year ago, we didn't have it in production. So it's been an initial growth driver. I think we're also learning where the best applications might be. We've had apartment complexes, warehouses, monitoring mailboxes for HOAs, and there's more coming. So we've delivered more than a bunch and there's a bunch more to go out.

Operator

And we want to make improvements to that. But I think there's a genuine market there for the hemisphere. It took a little longer than we wanted to get out the door, but I guess versus yet last year, last year was 0.

Speaker 2

For those of you raising your hands, please just put your questions into the chat window. We do not have the video enabled this time like we have in times past. So raising your hand unfortunately will not get us to be able to interact with you correctly. What percentage of sales are ASRs versus the blue light products?

Operator

So obviously, we would refer you to for the specific numbers to our regulatory filings, but and this varies every quarter, but plus or minus just to give you a flavor, about and Apoorv is going to correct me here in a minute, about 2 thirds of the business is K1B related and about a third of it is ASR related. It will be fascinating what that looks like 3 or 5 years from now, depending on how things mature, but 2 thirds versus 1 third. Did I get that right?

Speaker 1

Yes, you did. It's about 68% for this quarter. And the reality is our K1 base of customers is much higher. So the sales team does a really great job of going out and selling to existing clients, selling more services and continue to expand on that just because of the branding. The ASR side is still new technology and we continue to sell those as well.

Speaker 1

But from a revenue perspective, the check sizes sometimes seem to be bigger on the K1B.

Speaker 2

How much cash on hand on the balance sheet at the end of Q2?

Operator

Again, we refer you to the regulatory filings for the exact number. But I think the cash on hand over the last 18 months or every filing that we've had has oscillated somewhere between $2 plus 1,000,000 to maybe $5,000,000 and kind of oscillates along the way. And everyone keeps like, oh, well, you guys don't have enough cash, don't have enough yes, we need more funding, but, you know, I've heard this line of attack of you're going to run out of money. We're not running out of money. Everyone needs to just calm down.

Operator

And we have been public for 2 and a half years, haven't run out of money. We are private for 9 years, haven't run out of money. We continue to try to raise capital as efficiently as possible and try to reduce our burn. And I would remind folks that 3 major corporations and 3 funded large startups have failed at this. And so there is a level of technical difficulty to get all this stuff to work and commercialized.

Operator

We're at the bleeding edge of technology and everyone expecting some sort of overnight change very quickly done in 30 days and everything is going to be fine is kidding themselves. This is going to take some time, but I think the fundamental thesis of what we're trying to do and where we're going to go and now really focused on profitable growth is really important. And I said in the video, just restate it for the group here, 1st 10 plus years, we're focused on just getting the technology to work. Remember what I just said, half a dozen companies failed at this and including 3 major corporations. And probably I'm going to guess $250,000,000 to $500,000,000 burned and nothing to show for it.

Operator

That speaks a little bit to the level of difficulty here. Now that we've got it working, now it's time to do the blocking and tackling like, okay, can we optimize what material we use for that part? Did we pick the right architecture? Maybe we should change how we build these machines. So now we're in the optimization mode now that we've proven that there is a market there.

Operator

Now we just need to do it more efficiently. And this is going to sound a little odd. That's actually the easier part, right, where there's not a, I don't know how to get from A to B. I don't know how to cost reduce that part. That's not the case.

Operator

So it's just work that needs to get done. And folks, I just ask you to continue to be supportive and be patient. We are working very hard to turn this into a big success. And like I often say, Wall Street is typically, in my opinion, wrong in the short term and right in the long term. And our goal here is to make for a lucrative business, but also make a big impact on the country.

Speaker 1

And I'll just follow-up, Bill. It was $2,600,000 of cash at the end of the quarter. Again, as you mentioned, that's kind of where we hover just between the $5,000,000 and $2,000,000 every quarter. Yes.

Operator

I think maybe now would be a good time to talk about cleaning up some the balance sheet and some toxic financings that were put in place. And without getting too much into the weeds here, we had a convertible debt offering or financing that was done a few years back and had a lot of toxicity that was not helpful overall. And then there are some blockers in those agreements that precluded us from doing normal financings or raising capital that like any other company would be able to do. You can refer to the 8 ks that we filed maybe a few weeks back. We have now kind of cleared that up, and now we have freedom to raise capital in any form that we deem favorable for our shareholders and not pigeonholed only to be able to rely on 1 or two forms of capital.

Operator

I don't know if you want to add anything else to that, Apoorv?

Speaker 1

Yes, absolutely. I think I saw a question come up earlier about this. It's very important to kind of talk through this. So what we did is we had this fund that we had given warrants out to as part of their convertible note. It was $1,300,000 warrants struck at $3.25 What we found is that as we looked through the details of this transaction was that the warrants themselves were actually extremely toxic for the company.

Speaker 1

Toxic how in that they have these clauses, there's a one clause called the reset clause. So basically, if we do financing, their warrants, the strike price comes down to whatever we finance at. The second part of that warrant language was that as if we do a financing event and the price of the stock, the strike price drops, we have to keep the value of that arrangement the same. So if you think about $3.25 1,300,000 shares or warrants equals $3,700,000 of value, right? We would have had to essentially award them $3,700,000 worth of warrants divided by whatever the strike the new strike price is.

Speaker 1

And as we looked at that, we thought that in terms of dilution, that's a highly dilutive instrument and we had to get rid of that not only for ourselves but also for our shareholders who are concerned about this dilution. So yes, we the 8 ks states that we were able to basically convince and get an agreement with the fund to extinguish the warrants. They also had things like participation rights. So if we did a funding deal in the future, they could step in and participate, which we didn't think was a great idea for us. And as a result of that, we were able to convince them to take about $3,000,000 of this debt that we have on our books, but get rid of those warrants.

Speaker 1

And we think it's the best deal that the company could come up with and do. And now it frees us to go out and have the freedom to do, as Bill said earlier, to go out and get other types of funding, to be able to attract other investors, to work with partners and our bankers to capitalize the company in a way that's potentially less dilutive than what that arrangement was contemplating.

Operator

All right. Stacy, what you got next? They keep flooding in.

Speaker 2

Can you give me a status or give us a status, sorry, of the investigation into the possible legal actions of the short seller?

Operator

This is regarding the Capybara suit. We it's an ongoing investigation and an ongoing lawsuit. There is no update to provide other than that. When and if something does change, we will certainly let you know, but nothing new to report.

Speaker 2

Most of the NYSCO press releases mentioned new contracts or new sales, but it gives zero indication of impact on profit loss.

Operator

Okay. So the announcements is a fun internal discussion because we have a lot of investors, which is awesome. But we also get a lot of input and opinions. And in some cases, folks are like, I don't want to hear anything until like it's actually deployed and money is coming in the door. Okay.

Operator

Well, that's the financial statements. Well, I want to know where these are deployed. Okay. Well, that's a different thing. Well, I want to know when a contract is signed.

Operator

And so we've played around with different when and how we do this. But what we kind of the best thing was for us to announce when we have a new contract. And that in a lot of cases is not for the Investor Relations perspective, is actually to help the sales team. So that if the contract happened in, I don't know, North Carolina, that might help the client development team that might be talking to another prospective client in that area. So we typically do the announcement of that.

Operator

Then there's this whole long process of getting the site ready or doing site surveys or what have you, building all the machine or devices and then deploying it. So there is a time difference between when it shows up in the financials and when we announce. What we're hoping to do as we increase production is 1, to get rid of finish retiring all the V3 K5s that have been a financial drain and operational drain on us. 2nd, clear out as much of the backlog as we can and we made a good amount of progress on that. And the third is to actually build some finished goods inventory.

Operator

So one of the ways to improve the financial performance of the company is thinking through the order to cash, when you get an order and when do you deliver. And you don't want this to be a very long period. So if we had some finished goods inventory or sub assemblies completed, the dream here is get a contract on Friday and ship the next Friday, So we're working our way towards that and that's one of the other reasons why we're focused on throughput and cycle times and efficiencies and in some cases having to redo the technology so we can actually see that. But all those contracts that we signed, especially since the Porvoo got on board here, very much focused on making sure it's lucrative for the company, makes sense for us to do. And frankly, in a lot of cases, going back to some existing clients where we have some very ancient old contracts that need to get redone.

Operator

So we're going through that process as well.

Speaker 2

Okay. So we're getting a lot of questions about specific numbers. How many robots? How many blue lights? How many where is the profit?

Speaker 2

Where is this? Where is that on the numbers side? As Bill said earlier and Porv also echoed, if you're looking for those specific numbers, be sure to go to the Knightscope Investor Relations site and look at the SEC filings, the 10 Q was filed yesterday. So we got to make sure that you're pulling that information directly from the legally available

Operator

Yes. It's ir.nightscope.com. Ir.nightscope.com. And then you can just click there and all the regulatory filings are there and all the specifics are there to a nauseating level of detail with 32,000 footnotes to go along with them. It's an arduous process to do all this stuff.

Operator

So we if you have that level of interest, kindly ask you to go please look at the numbers directly.

Speaker 2

Yes. Just didn't want anybody thinking that was when they see their question disappear, that's the reason because you can find that without taking this time. Next question is, given that you'll probably do a reverse stock split, okay, that's an assumption, sorry, but that's not a definite yet. What actions will Knightscope take to prevent the stock from being driven back down to a penny stock by sellers and or short sellers after the split?

Operator

Okay. So Purv and I will do this one together and I know it's a top of mind for everyone. So we have until October 4th. Sorry.

Speaker 2

Also, Bill, just reading the next question and it dovetails into this, also explain what the vote was because I think there's still misconception as to the vote being for the split versus the option.

Operator

So a few bullet points on this and we're going to take a little extra time because there's a flood of questions on this. 1, we have a deficiency notice with NASDAQ that basically in order to cure, we need the stock price to be over $1 for a minimum 10 trading days in a row in order to cure that. We have until October 4 as negotiated with NASDAQ to do that. And you've got to kind of back up from that time and there's some processes and the like to enact it if we decide to go forward. So that's bullet point 1.

Operator

Bullet point 2 is the Annual Shareholder Meeting. The formal part is actually tomorrow at 1 Pacific. And that's kind of the formal forum where we count all the votes for all the resolutions that are in the proxy statement. With respect to the reverse stock split itself, what NASDAQ requested and we agreed to and the Board agreed to is we are requesting the shareholders to approve and delegate the authority to do a reverse stock split to the Board. It is not to enact the reverse stock split.

Operator

So this is basically the shareholders saying, okay, looks like we may have to do this. We support management and the Board. Here's the authority to go do this only if you have to do it and you have no other choice. And we still obviously have some time before that. I, as the on the personal side, as the largest shareholder, I am the significantly not interested in doing a reverse stock split unless we absolutely have to.

Operator

And the primary reason is a majority of the time and we can argue as to how often. So a minority of the time, it goes fine. And the stock may trade up after a reverse stock split. You can look at the numbers, I don't know, 10%, 20%, 30% of the time, let's just say, big round numbers. It works out fine and actually in favor of the shareholders.

Operator

But there is that 50%, 60%, 70% of the time, like it doesn't work well. And in some cases, the companies did it to themselves. Like they did a financing right on top of a reverse stock split or put out a bunch of bad news or whatever it is and kind of shot themselves in the foot. And then every company is different, right? There's all kinds of circumstances.

Operator

So we're trying to avoid this if we can. So the vote tomorrow is to give the authority to the Board and delegate if we need it. And then there's a ratio as to what that number should be. Is it a 5 to 1 or 50 to 1? And that's another thing that the Board will need to decide based on market conditions and the like.

Operator

I'll pause there, Apoorv, if you wanted to kind of add anything else to that.

Speaker 1

Yes. I think the goal here is not to rush into a reverse stock split, right? Someone just asked how can investors help prevent this. Really, it's about 3 things, right? 1, buy more shares 2, hold those shares 3, direct your brokers to basically that they should be prevented or stop them from borrowing your shares to short sellers.

Speaker 1

One of the things we did this deal that we put together with the fund to the promissory note fund actually would will help us in the long term against further dilution of that share price. One of the things that kept happening is because they were all because they had this exploding warrant feature, they could always just continue to short sell because they knew that they would get their shares back from us whenever there was a financing event. Now effectively by doing this deal, we've been able to effectively stop them from actively short selling our shares. So those type of things are things we're hoping to continue to keep doing. They take time unfortunately, but we have until October 4.

Speaker 1

Actually, we probably have about, we'll say, until mid September to get the share price above $1 organically. After that, we'll have to make some tough decisions. But again, our goal is not to go down that path. Our goal is to continue to be successful organically.

Operator

And there are several questions related to what are you guys doing about it. There's effectively only 3 things that we can do. Again, we don't directly control the share price. Not to be funny about it, but you all do. It's supply and demand.

Operator

If a bunch of people buy more shares and very few are selling, then likelihood the price goes up and the opposite is likely true. The 3 things that we can do, we are doing, improving the financial performance of the company and setting ourselves up for successful long term growth. And then lastly, just communicate, communicate, communicate. The more we inform you, the more we answer your questions, the more we spend time like this, the better you're informed. And then you can decide if you believe in the management team, do you believe in the market and do you believe in the technology and either decide to hold your shares, buy more shares or decide you'd rather sell them.

Operator

And that will have a direct impact on the price. So this is not just a NightScope team on their own is going to turn this around. We're going to need the active support of our investors and supporters and fans and the like to make this a success. But again, this is a kind of two way street. It's not just us and we are working very hard to do our part.

Speaker 2

All right. Next up, can you describe the background of your sales force?

Operator

So our Head of Sales, Jason Gonzales, has been with us now, geez, 6 years. He's ex Honeywell. He's a COO of a garden company. We've got folks that have spent almost their entire career selling K1 kind of blue light tower stuff. Most of the folks on the team in some form or fashion have law enforcement, security or military veteran background.

Operator

I think on the K1B side

Speaker 2

Sorry, as well as technology.

Operator

Yes, obviously, and as well as technology. I think on the K1B side, the sales process is a lot more straightforward. I don't want to say commodity like, but the transaction is easier, the implementation is sometimes a little bit of a project. The ASR side of things does require a very technologically astute salesperson that also understands public safety, law enforcement and security. The complexities of the technology and the questions you get from clients and where it's applicable and the lot is somewhat intense process.

Operator

And having personally sold a few of these, it can be a bit challenging.

Speaker 2

How does Natsco plan to help mitigate the risk of school shootings? Love that one.

Operator

So I think there's 2 answers. 1, more technically focused and then the other one's cash or budgets. So the technology side of things, I think you need to provide more of a deterrence. Putting up a camera somewhere above your head is not going to deter anybody from doing anything. So that's why the robots can be very important.

Operator

Doing automated gunshot detection, adding visible weapon detection in the future and treating that school, I like to think like the the McCormick and Data Center. In my view, only the people authorized should be there, meaning the parents, the faculty and the students, anyone else should be flagged. And there's technologies to be able to do that both outdoors and indoors. I think my bigger concern, especially K-twelve, put the universities aside, is the budgets. I mean, to be frank, we as a country don't pay our school, our teachers anywhere near what they're actually contributing to society.

Operator

And in a lot of cases, the teachers themselves are covering for school supplies and all kinds of needs that the students have. And where exactly is that school supposed to come up with a 6 figure or 7 figure budget to now properly harden and secure the facility. So I think there's a fundamental budget problem and both a budget problem and a technical solution. And I think as NightScope grows, at some point in time, not now, we're going to need to spend some time in Washington, D. C.

Operator

And speaking to Congress. And there's no way the I forgot how many it is, 22,000 schools are going to fend for themselves and figure this out by themselves. I think the private schools might be a little bit different, but budget's a huge, huge problem.

Speaker 2

How is the fact that many cities are not enforcing and prosecuting criminal activities, I. E. Shoplifting, etcetera, impacting the sale of the robots? So I'll speak from a law enforcement standpoint.

Operator

I think you need to answer this one because I'm going to lose my temper.

Speaker 2

I'll speak from a law enforcement standpoint for a moment on that. First and foremost, the number of cities that are doing that are very, very, very small in the grand scheme of things. Secondly, we've not seen an impact primarily because our focus on end users, the primary is not law enforcement. They are secondary, tertiary as far as the targets are concerned for many of the same reasons as the schools that Bill just mentioned a moment ago. So, we're not seeing a lot of that, but what we are seeing are private companies taking the security more seriously now and being more proactive about how they are able to collect information and deliver that information to law enforcement professionals so that we have, we law enforcement have better tools to investigate those crimes and prosecute them when able to do so.

Speaker 2

So, we've not seen that impact and I haven't I'm still obviously very close to the sales process and everything that's going on there. But I've not seen anybody say, oh, well, this is not important. It's quite the opposite. Anything to add, Bill? Okay.

Speaker 2

How do you get the t shirt that you were wearing in the video?

Operator

Oh, that one I made personally for our internal for our employees. So that one's not in the store. But if you're interested in getting some swag, go to nightscope.com and just hit the swag button. There's a bunch of stuff there. And at some point in time, we'll put up some new stuff as well.

Operator

And I'll think about maybe seeing if we can add that one, Stacy.

Speaker 2

What efficiencies are being implemented in Q3 to reduce cost and improve earnings per share?

Operator

Executing all the stuff that was in the video. We don't want to keep hammering the same thing over and over again, but with massive change in telecommunications. And what does that mean? Okay. Well, imagine you had 4 cell phones and you wanted to live stream high definition video of YouTube kind of 20 fourseven.

Operator

The bill you're going to get from Verizon or T Mobile or Sprint or whoever is going to be rather large at the end of the month. So we go through terabytes of data a year, a month actually. And we made a ton of significant technical changes and contractual changes that are going to go literally straight to the bottom line. There's some headcount impacts that we'll start hitting. There are some throughput QA type of things and kind of reduction in costs.

Operator

In a lot of cases, it's not always the bill of material that is important, like how much does it cost to build a machine or the labor hours. But remember, these things are running 20 fourseven. And the field service work, the maintenance and service, the parts, the shipping of parts, if stuff's breaking like it costs a lot of money, and that was a huge driver for why we wanted to retire the K5V3 some time ago, because it was costing a lot of money to build, taking too long to build. And by the way, when it's out in the field, it's kind of eating up a lot of the team's time, back to someone's question on how the heck are you going to go work on new stuff, and eating a lot of monies. So we're still in transition, right?

Operator

We've retired well over 50% of the V3s. There's still more to go. So I think that will also go end up going to the bottom line. Apoorv, anything else you want to add?

Speaker 1

Yes. I mean, I think obviously somebody mentioned this, right? We're taking a multipronged approach. And I think Bill had put together a 2024 path to profitability, which I think would be a great framework for you guys to look at on what we're trying to do. If you think about it, we need top line growth.

Speaker 1

That's going to continue to happen as we invest in sales and invest in our products and invest in our the suite of product designs and product development that we're working in. Simultaneously, we have to cut costs. It still costs us quite a bit to build these things because we're doing it by hand, because we're doing it at low scale. So changing that out and as we continue to start investing in that scale, we'll start to increase our margins and those margins will help drive some of that path to profitability. Finally, becoming more efficient on the OpEx side, right?

Speaker 1

I think we did a really good job, Bill, of cutting our headcount and our expenses down. If you look at just the second quarter, I think we saved over, I think, dollars 500,000 in just cost where we thought it was a good idea to do so. And we'll continue to evaluate those. So again, it's both. It's got to grow the top line, you got to decrease your costs, and you got to run lean, and we'll continue to hit on those fronts while introducing products that we think are going to be successful in this industry.

Operator

Yes. And I was just glancing on one of the questions earlier was some folks are worried that we might have terminated folks that were spent a lot of time with us during Innovation Week. I think from memory, I don't think anyone that was on camera has left the team. So everyone's kind of waking up every morning, putting their heart and soul into the company and taking all the inbound beatings that we get. I don't think you probably want to see my inbox.

Operator

I can take the criticisms and all that. Don't appreciate the death threats. I can pass on those, but we are working genuinely very hard to make this a big success. It will take some time. We do have a path.

Operator

We are not going to run out of money and we're doing an honorable thing for the country and this will work out. It's just going to take a little bit of time to get a very difficult set of technologies to work at scale now that we've got them working in low volume.

Speaker 2

What do what's your IP or patents deck?

Operator

We've got maybe a dozen patents. I'm not a huge fan of patents. This is not the pharmaceutical industry where your recipe is like the most important thing and you're going to protect it for 17 years. Like the technology changes so fast. When we first started, I often say we had 1 Intel i7 or i8 in CPU in the machine.

Operator

We're like, how the heck are we going to use all this stuff? And now we don't have enough compute. And we've got like 2 NVIDIA GPUs, a CPU, and we're wanting to add more capability. And a lot of cases, the technology changes so fast that it's not really worth spending staff time, legal time to go get a large portfolio of IP or patents rather. Could we have patented probably 100 items?

Operator

Sure. Not good use of shareholder money.

Speaker 2

I'm surprised we still get this question. How do you plan to incorporate AI into your business? Sorry, not poking fun at the question. It's a legitimate question, but I just don't think people will realize how much is already there.

Operator

Yeah, there's I think maybe there's a different way to answer the question. So there's a ton of AI just to get the machines to do what they do today, right? They move on their own, they're replanning, they're remapping, they autonomously recharge on their own. There's no one sitting around remote controlling them. So this is the automotive equipment of level 5 completely hands off.

Operator

So there's a ton of AI to be able to do that. It requires AI and machine learning to detect a license plate and then read the license plate. It takes AI to detect a person. It takes AI to do facial recognition, for example. If you're speaking of generative AI, I think now that I think there still needs some work on telecom speeds and the speeds of the LLMs.

Operator

But I think enabling the machines to be able to have a thoughtful, relevant conversation with someone would be something that's certainly on our roadmap, where instead of just pushing a button or just looking for an alert or something, you can actually have a conversation with the machine. And that could be a citizen out in the wild, out in public somewhere or could be internally for us, for our own risk and threat exposure people to have a dialogue with the next future version of a user interface, where instead of typing away, what we're looking for and for an investigation is to be able to do that real time via speech. So there's a ton of opportunities. But yes, I think for a technology company that's in Silicon Valley that got AI working before it was a huge big thing, it is a little awkward to get still that question. But we'll continue to answer and continue to communicate.

Operator

Is

Speaker 2

so just a quick time check. We had 35 minutes left in the scheduled time. Bill, I know you typically say, hey, we'll stay till we get all the questions answered. If I have a guest

Operator

on the I will stay. Let me look at my calendar. I will stay if we have to punt the next meeting. But Apoorv, if you need to go, I think sometimes you're a little busy.

Speaker 1

No, I can stay for the next half an hour, but after that, I'll probably

Operator

I think there's so many questions that we're happy to stay on. And if folks are willing to, we're happy to invest the time.

Speaker 2

So we may need to do some speed round type answers then.

Operator

Okay. FedEx, let's go.

Speaker 2

Is privacy a big market adoption concern? If so, how are you addressing them? What are other adoption headwinds?

Operator

Not really. We're typically operating in public and privacy typically is more of a question that we get from the media than we get from clients. And then remember, contractually, the client owns the security related data. All the machine data is owned by us. Other headwinds, I think to be fair, one of the reasons we have the robot roadshow going across the country, we've done now, Stacy help me here, more than 120 stops?

Operator

Over 125. 125 stops is that education curve, is getting people comfortable. They can watch a video, they can get on a Zoom, PowerPoint people to death, but they still want to see the robots in action. And that mobile trade show can be really helpful in the marketing and sales process. So I think just there's still that comfort level needed for some folks.

Operator

I would think that would be a little bit of a headwind.

Speaker 2

All right. What's happening with the Dragonfly partnership?

Operator

So Dragonfly owes us a prototype of what they think could work for us. They had filmed something that I think we put on our social media that they're working on it. So once they're ready to go, then we'll be ready to go.

Speaker 2

Has Nitezco considered going into the residential market?

Operator

We're already in the residential market in a lot of cases, if you mean an HOA or an apartment complex. If you meant like literally consumer, residential, someone's specific home other than a large estate for a multimillionaire or a millionaire, we haven't really spent too much time there. We do need to be careful here. We intentionally did a big focus on business to business. Now we're adding business to government.

Operator

Business to consumer is a very, very, very different business, maybe requiring different technology and certainly different sales, marketing and distribution techniques. So that likely is on our roadmap, but likely last.

Speaker 2

What do you consider to be the biggest obstacle preventing the stock price from going over $1 a share?

Operator

People buying shares. I mean, I can't I can't legally tell people to go buy shares. But to answer your question, why would a share price in general go up is because a bunch of people all bought shares roughly in the same timeframe and very few people sold shares for any company, not just Knightscope, share price would likely go up. And we don't control that. We don't control behavior of everyone on this call or other investors that we have.

Operator

But I think we have, I'm going to guess, 15,000 investors or 20,000, something like that. If everybody went and bought or sold would have a material impact on the share price or getting new investors. I think one thing that we at Knightscope need to improve as we make more progress in our financial performance is attracting larger institutional investors. And this is a big challenge for any company less than $500,000,000,000 market cap is getting large institutions to participate. I think we're 90%, 95% retail last time I checked.

Operator

I think as we grow and improve our financial performance, we obviously will be spending a lot more time on attracting some larger institutional investors. I think that's something we certainly want to do.

Speaker 2

Has any company approached us for potential acquisition and or significant investment?

Operator

I don't think I legally can answer that. Can I answer that, Apoorva? I don't think I can answer that.

Speaker 1

Yes, I would.

Operator

Well, a different way to answer is the company is not for sale, but I am an officer of the company and I work for you, the shareholders. So I have to look at every single offer, every single opportunity to maximize shareholder value. So legally, I have to look at everything. But I don't think legally I can comment one way or the other. Please don't infer something for me not answering.

Operator

It's just we need to be careful how we answer questions.

Speaker 1

I mean, I think, Bill, the company is we're a business, right? So I think as a business, it's we have to be open to anything and everything, right? And we are. But whether anything materially is happening or not, it's something you're absolutely right. When the time is right and if there is something to be announced, we will do so.

Operator

On the flip side, we have stated since we went public that we are always actively looking at acquisitions. And obviously preferably accretive that can help on the top line revenue side, on technology, etcetera. And so we continue to have those ongoing discussions which we had previously disclosed. Accounts receivable has gone up significantly. What is the strategy to collect on AR?

Operator

Would

Speaker 2

there be a better source for cash other than using the ATM?

Speaker 1

I can answer that question. Yes, we have. So basically, the AR increase is a reflection of kind of some of the things that were happening when the finance team was getting reorganized. We had a transition that occurred in the Q1 when I joined. And as part of that, we were slow to jump into the AR side.

Speaker 1

Since then, we have a team in place that's focused primarily on AR. They work closely with the sales team. They work closely with our CX team to reach out to clients, to work with clients to get the AR down. One of the other things to think about is on the AR, there's a portion of that AR that actually is related to our case, what we call the municipal clients that we are working through to actually, what I would call rightsize the relationships or at least the business aspects. As Bill mentioned a while ago, some of these contracts are 10, 15 years old.

Speaker 1

And some of the terms, including payment terms, are were designed in such a way that although they might have been profitable to the company 10 years ago, they are no longer profitable or sustainable. So we are working closely and partnering with our clients on the municipal side to right size some of those contracts, and that's taking a little bit of time as well. Because again, as you guys might know, working with governments is not as easy or quick as resolving things on the commercial side. But we hope to get those resolved. And by doing so, not only will we obviously shrink our AR down, but also set up the business such that those contracts become profitable in long run.

Operator

All right. Let's do I think we're doing both of us. Let's pick up the pace on the length of the answers. Otherwise, we're never going to get through all these and we really want to answer.

Speaker 2

What's the status of the New York City robot installation?

Operator

As disclosed by the New York Times, the city is looking at redeploying it at a different location, which has its own complications, because the first location took, I don't know, a long time and dozens and dozens and dozens of people. So we're kind of going through that process again.

Speaker 2

Oh, it's me now.

Operator

Yeah, we got to do short. Come on, man.

Speaker 2

I was confused by the short answer. I am a scouter. Daryl, thank you so much. Wondering if you will get into alarm systems. Short answer, no.

Speaker 2

Sorry, I'll be blunt about it, but no, that's not our bailiwick. Please explain the discussion surrounding future stock split. We already did that one. During your previous town hall, it was mentioned manufacturing was being consolidated into Mountain View and the goal was to ramp up production. What's the status of the consolidation and ramping up?

Operator

As we disclosed in our 10 Q, we have not only started the process, but pretty much finished up shutting down the Irvine, California facility, consolidating everything into KHQ or Knightscope headquarters in Mountain View. And that process is underway to have improved labor flexibility. So ASRs and K1Bs can be built depending on what orders are coming in or what the priorities might be. There's a significant changes required in quality control. There's some engineering stuff that needs to get done, but that first huge step has already been taken.

Operator

The balance of the facilities are warehousing type of things, our smaller offices in a couple of instances or more. There's really annoying language contractual from some government stuff that may require some stuff to stay open. But we've been working through the process. So the big one kind of got done already.

Speaker 2

What is the company doing to increase institutional awareness, so that the to avoid the stock continuing to struggle, so that the institutions begin investing?

Operator

We need to improve the financial performance of the company. Institutions typically want to see a $5 above stock price. So we've got some work to do. I've been keeping almost half a dozen analysts up to speed. And hopefully, we get an additional equity analyst to cover the stock.

Operator

And then after we get through this cleaning house period, Apoorv and I will be spending some time with the typical conferences and the like to improve the awareness.

Speaker 2

How can the portfolio be expanded when there are no human or financial resources to undertake this?

Operator

Through partnerships, through acquisition, through deletion of dumb processes and so that people can actually be working on stuff that's productive and improvements through quality. If the team is not having to babysit and, you know, maintain and service and support stuff, they can be working on new things. And then being very careful what battles we pick and what we want to work on, so being kind of very surgical. I'm not going to kid you. It is tight.

Operator

We don't have as much resources as we want to work through this. And the aforementioned toxic financing was a huge blocker for us for a very long time to be able to get the additional resources. But the work is being done. So we're scrappy entrepreneurs, we kind of figure it out.

Speaker 2

What is being done to take key products international?

Operator

Nothing. Absolutely not. I worked on as I've also mentioned, I've worked on 4 continents. I kind of know exactly what needs to get done. That is not the additional operational, financial, legal, insurance and liability risk we want

Speaker 2

to be doing right now. Can you offer any update on the bond offering?

Operator

The bond was closed during the Q1 and was disclosed in the prior 10 Q that got completed. I think we raised $4,200,000

Speaker 2

or so. What are you doing to sell more of your tech and services out in the marketplace?

Operator

We need to overhaul the marketing sales process. I mean, no different than what we were just talking about, how do we more efficient on the manufacturing side of things or how we making the product better or whatever. We're looking and turning everything looking under every rock. And actually, Stacy is working on improving the upfront process on lead generation, how the website flows or doesn't flow. When does the client experience analyst get involved and part of the sales process so that the sales team can be spending more time doing sales and not operational, kind of sometimes back office or project managing work, a bunch of stuff to accelerate.

Operator

And then we need to recruit, recruit, recruit. So if there's anyone on the call here that has some awesome sales candidates, please send them to nightscope.com/careers because we are recruiting.

Speaker 2

What is being done to mitigate cyber attacks?

Operator

Having spent 3 years going through the, as I often say, nightmare cybersecurity process with the U. S. Federal government, they put a lot of conditions on us, and we need to work to comply with those and they're exorbitant. 2nd, we are ramping up a cyber team that Mercedes Sori is leading. 3rd, one of the other reasons to redo the entire technology stack is in order for instead of just having one product that is suitable for federal use is to have the entire portfolio be compliant.

Operator

So there's a lot of strategic reasons as to how we approach that.

Speaker 2

Is the ATM still active? How many shares are selling weekly? How many shares outstanding now?

Operator

We refer you to the 10 Q or 10 ks. We don't do a play by play on that. That would not be appropriate. The ATM is available to us, but I'll turn it over to

Speaker 1

Apoorv. Yes. Again, it's difficult to give you a week by week just because that's not how we how the ATM is intended to be used. We use it when our bankers advise us and they use the ATM when they think the time is right, when the stock is doing certain things. So we don't generally disclose week by week information, but you can definitely I think in our disclosures, we disclose how much we raise in a given quarter.

Operator

Yes. Short answer is, it requires people and some real estate. But other than that, we're happy to have that problem. And we're actually working on that, but yes.

Speaker 2

And also most of the federal contracts like that will also phase it out. There will be a delivery schedule and things like that, that kind of come into play as well. Would appreciate some elaboration on changes in the Board, strengths, weaknesses, what has been gained or lost?

Operator

I think as Apoorv eloquently put it, there's a time and place for certain skills. We're grateful for the original Board that helped us get through public listing in the 1st couple of years. We're on to a new phase. We've got Will Billings, who's very extremely strong financial acumen. If you want to read their bios, please go to nightscope.com/board.

Operator

There are very few people in the world that have scaled up autonomous robotic technology and military leads an entire organization that's been doing that for quite some time. So we've got the technical background. And then Bob Mocne is a former senior federal government official focused on the Department of Homeland Security. And as we continue to work on growing in the federal space is super important. So we're part of the turnaround and work that we're doing is in better aligning the governance structure.

Operator

And if it helps, like I worked with Bob some time ago and so has Stacy. Apoorv has worked with Will, both are ex GE Finance people. So these are strong caliber folks, and we expect real financial results by making strategic decisions and improving our operations.

Speaker 2

All right. Other than the current legal process taking place, is there a strategy to eliminate the shorts?

Operator

Improve the financial performance of the company and try to instill confidence from our existing investors and get new investors. I mean, there's the shorting I mean, one of the reasons the South Koreans made shorting illegal is I'm not going to get into that. There's only certain things that we can do. It's a very opaque process. One thing that we can't provide financial advice, but as Apoorv mentioned earlier on the call, if you don't want your shares being used to short, you can literally call your broker up and tell them like call up Charles Schwab or Robinhood or E*TRADE or whoever you use and tell them that you would not like your shares to be lent out for shorting.

Operator

And that also can be helpful. But again, we can't provide financial advice. We're just providing a fact there for you.

Speaker 2

Can you provide some color on the future outlook for government and military contracts?

Operator

Huge opportunity, going to take a very, very long time. But I think the positive thing since we're in this for the long haul is once you're in, it's kind of hard to get kicked out. I think having spent a good amount of time looking at not on stuff on the battlefields, but military, border patrol, NASA, FEMA, GSA, FPF. I mean the list is very, very long and a humongous amount of opportunities for us. But it is very hard.

Operator

And I think the opportunity is there. It's going to take some time. But we got our foot in the door. Or as one of our directors on the team said, we didn't get our foot in the door. We got a whole body in the door.

Operator

So we're working on it.

Speaker 2

Can you talk about some of the companies, competitive companies, large and small that have failed on the robot side?

Operator

Sure. Sharp failed, Switch failed and Amazon failed. I believe Cobalt Robotics obviously has disclosed that they're no longer doing robots. Gamma 2 and I'm losing track of the rest. But I think it speaks if you have a half a dozen teams with 100 of people and 100 of 1,000,000 of dollars spent and they couldn't get it to work, I just ask you all for a little bit of grace and cut us a little bit of slack, not a lot, just a little bit to understand that the technology is extremely difficult to build and to operate.

Operator

And we're now last team standing, and we intend to make it to the finish line. But we do need your support to be able to do that.

Speaker 2

If blue lights account for 68% of the sales, what is the profit breakdown? And if robots are a drain, is it time to shift focus to the blue lights?

Operator

That's not a short answer, but I'll try really fast. So selling the K1B stuff outright as a product has a positive gross margin, servicing the K1 blue light stuff needs a massive amount of work and that's part of the cleaning house part that we've been working on. So we're working to get that to profitability. The ASR side of things can be profitable, but you need a certain critical mass for it to operate. So what I mean by that is, for example, we have a full time 20 fourseven staff to monitor the machines.

Operator

So if we double, triple the number of machines, do we need to double, triple that team? No. So because it's a kind of a subscription basis, the economics look a little sorry, the accounting looks a little odd. But there is not, I think, a need to do that, especially since looking at our clients that have been around for half a decade plus. If you actually look at those margins, which we have, they're 60% plus.

Operator

So it takes time and it needs scale and no different than frankly a SaaS company.

Speaker 2

Why don't both the CEO and CFO buy some shares? Purchase of shares by insiders would give confidence for the investors to buy more shares.

Operator

Yep. So I had 7,000,000 shares. I didn't sell a single share in the public listing, haven't sold any shares since then. And you can check out the regulatory filings. I did buy more shares recently for my personal account.

Operator

To me, this share price is absolutely ridiculous. Mike, you're, I don't know, 1 5th, 1 6th the invested capital. You're at a price that's below the Series A preferred, if I'm not mistaken, 10 years ago. If I didn't have my entire net worth in this, would I buy more? Sure.

Operator

And already have done that. So hopefully, folks will take that as a positive indication. And my confidence in the team and the business going forward.

Speaker 2

Is your gunshot detection currently available? Yes. Anybody interested? Please go to naxbook.com/discover, fill out the form and we will demo it for you. Sort

Operator

of. Careful with that one.

Speaker 2

Could you incorporate 3 d printing to lower costs and massively produce more machines?

Operator

No, because 3 d printing we already use. It actually costs more and it actually takes more time. It's very helpful for prototyping. But in terms of throughput and cycle time, not and in a lot of cases, a lot of our parts are very big and it causes another problem. So we're actually actively as part of the bill of material cost reduction exercise, how do we delete a bunch of these 3 d printed parts because it costs a lot of money.

Operator

Also, I think

Speaker 1

from my understanding, the 3 d printed parts, especially at the size that we're trying to build them at, tend to there's some structural issues sometimes that arise when basically you're kind of gluing and layering each part, each layer of that part. And I think 3 d printing is good to your point for prototyping, but not necessarily for what we're trying to do. But that technology is also evolving. So obviously, if it becomes feasible.

Operator

Trust me, I'm a fan and I keep nagging the team. I had the team spend 4 months looking at even buying our own setting up our own 3 d printing in house and just the math doesn't work. But let's move on because I know there's more questions.

Speaker 2

Is it difficult to get cities with major serious crime to order robots to help their police force? Yes, absolutely. It is.

Operator

I mean, that's another huge challenge is just getting not intended to be a negative comment, bureaucrats and the local state federal government to rethink how they do public safety. And that I think someone asked about a headwind is you're trying to change an entire country's way of doing things. And yeah, because what we're doing right now is not working. You don't have to believe me, a violent crime occurs every 26 seconds and a property crime every 4 seconds and that's normal. Sorry, that's not okay.

Speaker 2

Can you discuss how you plan to reach net positive EBITDA and profitability within the previous timeline? I mentioned, are we still on track?

Operator

I think we have some difficulties there because of the aforementioned financing problems with that blocker in terms of the toxic financing. Now that we've got it resolved, we're trying everything to make up for the lost time because I think someone some people have mentioned here in the chat, there's you need resources to do this stuff, right? And so I think one of the things that we really want to focus on is showing a steady improvement. We'll see how things turn out. But I don't know, Porf, if you wanted to add anything.

Operator

We're often careful to not be providing forward looking statements or guidance, but

Speaker 1

Yes. Sorry, can you repeat the question, Bill? I was trying to answer

Operator

Timing of profitability.

Speaker 1

Yes. I mean, look, I think we are on a path to get there, right? It will be, I think, for now, premature for us to give an exact timeline as we're cleaning up many of the aspects of the business, both on the operational front as well as on the capital front as well as on the capital front as well as on the balance sheet front. I think what we're asking for, as you mentioned earlier, is continue to support us, be patient, and we're going to continue to execute. At this point, we don't give out that level of guidance.

Speaker 1

So but we are working towards that and our goal is aligned with our investors is to get to profitability as soon as we can.

Operator

Yes. So I think there's 3 things we can do is grow the top line, lower the variable costs and lower the fixed costs. I think we're at a point where there's some more fixed costs that we can reduce, but there's a certain amount of money to be able to be public, to run the company, to do everything else and you can't just kind of cut your way to profitability, it's just not going to work. So then you need to work on variable costs and operating expenses and the like associated with the machines, which we're actively working on. We need the top line to grow.

Operator

I think there's a lot of people asking, well, at these kind of percent of revenue losses, how do you fix this? Remember, you need a critical mass to run the company. But after that, it starts adding up very nicely. It's not like we triple the size of the company and we have to triple the cyber team, right? So as the top line grows, this will start looking more and more attractive.

Speaker 2

Who is your IT compute platform, AWS, Azure or other?

Operator

We're on AWS for 11 years. And thank you to the Amazon AWS team. They've been really supportive and helpful.

Speaker 2

So here's a very, very sticky one, but I'm going to ask because we answer all the questions that come in. How about replacing the CEO?

Operator

How about it? Feel free. Give it a shot. Find someone that's willing to work 60, 80, 100, 120 hours a week to do the irrational, illogical things to force a wind to happen, who will sit here for hours on end and take whatever questions are at hand, make himself or herself available, is fluent in law enforcement and security and automotive, knows the entire technology stack, understands the investor relations side of things, actually sold stuff and can run a very complicated organization. And even when turnaround experts have come in, have been unable to resolve the matter.

Operator

And 11 years later, when everyone said the company would never make it, would never be able to build these products, would never have any of the autonomy working, would never be able to scale up to any regard, Nobody else has been able to do that, including those 6 major companies and startups that have failed. So I think if you wanted to do that, you're going to have an impossible recruiting problem. Like, it's going to be very difficult to find somebody to do the job with the passion that I and the team have. And it's not just me that we've got a relentless group of people that have been at it for a very long time. And if you want to try, give it a shot.

Operator

By the way, I have 10x voting shares, so that will be another discussion to have. I'm happy to take accountability for all the mistakes that have been made. I'm also happy to get criticized. I'm happy to be responsive and be respectful and civil with folks. I will I try very hard to answer the thousands and thousands of questions and messages I get.

Operator

I can't always answer all of them, but I hope the spirit is there and you need to decide what you want to do. Do you want to bet on this management team who has forced us to build the team and willed it into existence and now know that more we have forgotten why most people know how to do this? Or do you think the market opportunity is there? Do you believe in the technology? If you don't, please sell your shares.

Operator

And if you think that, okay, this team has gone through the most difficult times, no matter what it took, when everyone said it would fail and somehow they kept pushing forward, like I appreciate you placing your bet on the team just like I have. My entire net worth is in this. I'm not going anywhere. So I will fight to the very end to make sure that we get done what is supposed to get done.

Speaker 2

Thanks, Bill. I feel that running with such a line of products, they may be running themselves too thin. What is the main focus? Public safety, that's the main focus, using technology, Short answer.

Operator

I'd modulate there a little bit. There are a lot of SKUs. And so we've had some investors go away, you're building too many things and you're spread too thin. So one of the reasons when I mentioned in the video platform commonality is kind of really important so that you can fix the spread too thin, but at the same time have a wide breadth. You're not going to fix and deliver the mission with one single product and you're going to keep going to that chief security officer or that chief of police with your one little solution and that's going to fix the problem.

Operator

It's not going to work. Criminals and terrorists can be anywhere, so we have to be everywhere. But the key here in the little Jedi mind trick is how can you be everywhere and do it efficiently. And that's what this whole ICM platform commonality is really kind of important.

Speaker 2

The next is actually a comment, but I think it begs a rebuttal to an extent. At the end of the day, this vision is great. However, without a solid partnership with another company or VC Group and an infusion of cash, the stock will continue to go down.

Operator

I think there's some misunderstanding in that question. 1, VCs typically don't participate in public companies. 2, they're typically wrong 9 times out of 10, although they walk around like they have an attitude that they're right 9 times out of 10. I live here in Silicon Valley, and I can say that. VC is not going to fix this, neither is a private equity shop or a hedge fund.

Operator

A strategic partner, possibly, we have had 3, 2 or 3 that have invested in the company prior or still investors. Actually, I think all 3 of them are still investors. In some cases, they can be super helpful to a point in a certain area, like Konica Minolta, where all of a sudden we had 2,000 service technicians accessible to us when we were still in California and didn't know how to operate across the country. So that can be helpful. But there are very few that are focused on the problem that we're working on.

Operator

And autonomy is not something that's been solved. So that's likely not a place. The law enforcement security sector is very, very fragmented. We have partnered with some of the large guarding companies that usually there's an actual conflict of interest there. So we're continuing with without saying anything out of turn, always looking for additional partnerships like we've announced this last few months between automated gunshot detection, the K1 laser and DragonFly.

Operator

And there's always an opportunity. We haven't found a solid one yet. I think I actually had this discussion with the PORVE last night. To me, I think the more exciting one is going down the acquisition route to be able to bring in additional resources, fix some gaps, catch up on some technologies that we're super interested in. And live here in Silicon Valley, 22,000 startups, literally 95% of them fail.

Operator

So there's always interesting things to look at. But I maybe said a different way and I'll shut up is trying to just grow this organically by itself without some inorganic growth is likely not going to work for where we want to go.

Speaker 2

How would these changes allow you to become profitable if you continue the current business model of leasing expensive equipment at a loss?

Operator

We don't lease expensive equipment. It's a full subscription. So lease implies that someone has a financial interest in a particular asset. And as I mentioned, it requires scale. And as we scale up, the financials will follow.

Speaker 2

I want to know about where the data is delivered after being collected and what's the response time of each robot to human response?

Operator

The data is problematic. So there's all kinds of data. Some of it stays on the robot. Some of it goes up in the cloud. Some of it gets deleted off the robot.

Operator

So crudely speaking, as I mentioned earlier, the private, like security related data is owned by the client. And then the machine related data is owned by us. Response times, the machines do things in milliseconds. We now stood up an RTX team, the risk and threat exposure department, that's helping our clients be able to utilize their technology so that things are much quicker. And that's helped not just our clients who are inundated with alerts.

Operator

If you imagine trying to manage a large enterprise with all kinds of alarms and gates going off and what have you, they're short staffed. So adding that extra layer helps and also helps us operationally as well.

Speaker 2

In the recently filed 8 ks, kindly explain the reason for the non disparagement clause and confirm that actual or did money actually flow to Knightscope or is Knightscope simply adding $3,000,000 of debt to its balance sheet?

Operator

Akhoor, do you want

Speaker 1

to Yes, I can answer that. The non disparagement class and I kind of added it earlier is really it's a typical clause that most when you negotiate with parties, they neither party wants the other party to say anything negative about them publicly. And I think that's just a clause that's normally there. In this case, investor was extremely interested in making sure that they had their clause, and we don't have a problem giving them that. In terms of the $3,000,000 yes, we do have the debt in place.

Speaker 1

We did not receive cash for it, but what we got in return was extinguishment of the warrants, the extinguishment of their participation rights and some of the many other obligations that the company had previously signed up for as a result of that agreement. We believe that it's a really good agreement for us. It opens up not only does it open up us open us up for getting better funding, but also opens us up to work with better types of investors as we go out and partner with them to grow the business.

Speaker 2

Okay. Has there been any attempt to integrate threat information from social media platforms, particularly for K-twelve schools?

Operator

We actually looked at that a long time ago. And then the social media platforms, if I recall this correctly, stopped providing as much information as one would need to do that, right? And we haven't looked at that for a very, very long time. Probably at some point in time, we should go back to that, but we haven't looked at that for 5, 7 years.

Speaker 2

Any plan to be a platform as a service versus software as a service? I think maybe there's a miscommunication there.

Operator

We're already more of a platform as a service. So we call it machine as a service. So you get the machines, the software, the maintenance, the decals, the training, the user interface, the RTX team, everything's included in that subscription.

Speaker 2

How many shares need to be bought and held to get the stock price to $1 I. E, this many people on the call and I don't know. I don't know

Speaker 1

if that's a question we can answer.

Operator

I don't think we can answer that.

Speaker 1

The noise required for that would be super intense.

Speaker 2

Can you repurpose and license your technology to other companies for additional revenue?

Operator

No.

Speaker 2

Can we write in William Santanderly for President and the General Election in November? Of course, you can write in anybody.

Operator

Thank you, It's been a long few months, so I appreciate that.

Speaker 2

Does Chase or Fidelity lend out shares to be sold or shorted?

Operator

We don't know how each broker does things, but almost every broker has that ability. So if you don't want them doing that, you need to call your broker directly.

Speaker 1

It's a question you should definitely ask your broker directly. And sometimes it's just a setting in your dashboard when you log in. But we wouldn't have a way to answer that question. You can easily ask your broker.

Speaker 2

How long does the robot need to be in service to pay for the production cost?

Operator

Well, a year plus or minus depending on the robot, and we're trying to improve that. So one way to think about it, as I often say, is we try very hard to get the 1st year's revenue to pay for the machine. And then the 2nd, 3rd, 4th, 5th year, you're generating margin. And that's why the operating costs are really important. So the telecommunications cost every year, the cloud costs, the maintenance costs, the service costs, the service parts, all that is almost in some cases more important than the cost of the machine.

Operator

If you want the details of that, you can go to nightscope.com/rise and download the latest investor deck. One of the slides actually gives you an example, so you can see that in graph form.

Speaker 2

What's the headcount of the R and D team?

Operator

You would think I'd have this memorized. So the team, we went down from maybe 114 heads at the peak to now 70 plus and now we're kind of recruiting. It's a little weird to answer your question only because the R and D team does a lot of operations work. So we don't have folks only exclusively working on research only or development only. They're helping our clients, improving tools, fixing issues and the like.

Operator

So I don't know, couple dozen.

Speaker 1

I will add Bill that engineering is one of our largest departments. So we do focus on R and D technology. I mean, we're a technology firm. So again, to your question, I don't know if we have specifically that many people that are dedicated directly just to R and D. If you think about where we look at engineers, I'm looking right now, we have what is it close to more than almost half of our or more than half of our headcount is engineering across the KNOT team, across the deployment team, across the manufacturing team.

Speaker 1

It's engineering is a big part of our culture.

Speaker 2

How many I guess, talk about the backlog. I actually had 2 questions about that. So we previously talked about there being a backlog and where are we on that?

Speaker 1

It's about just under $3,000,000 of backlog and it's split probably half and half between the two. We do disclose it in our 10 Q, if you just go open it up

Operator

and just

Speaker 1

do a switch on backlog.

Operator

Historically, we were in the $5,000,000 to $6,000,000 range. So we've cut it by more than half. Still got some work to do, but the team's cranking away.

Speaker 2

What's the main reason for the termination of some of the contracts using the technology?

Operator

Off the top of my head, company went out of business, company closed the facility, they opted to go back to human guards, I think a lot less now than before. We probably we or a third party sold it to someone that we shouldn't have sold it to. So the not funny, but funny example for me is the worst client we could possibly have is like the Chief Innovation Officer at some major corporation who has budget and needs something shiny. And then come time for renewals, like, well, you didn't solve any of our problem a problem. Well, you didn't have a problem in the 1st place.

Operator

You just wanted a robot. I think that we've fixed now with a very poignant sales process of our long list of deployment checklists, site surveys, technical reviews, like why do you need this robot? Do you have a budget? So that's another process improvement that the team has made.

Speaker 2

Stay motivated, Bill. If you are however forced into a reverse split, how severe of a split are you thinking it would be?

Operator

I don't think I can legally answer that 1. 2, in the proxy statement, there's a 5 to 1 up to 50 to 1, and that's up to the Board to decide. And then to be fair to the board, it's kind of when you make the decision because the stock price obviously fluctuates and that can have an impact. And there are other market or business conditions that one would need to think about. So again, we're trying very hard to avoid that altogether, but it's obviously very challenging.

Speaker 2

With the other companies failing, so I think this goes back to the competition, surprised that Wall Street doesn't recognize or reward that, can you comment?

Operator

There is going to be a collective, how many folks, there's a couple of 100 folks on here, roll of the eyes with the first answer. As much as certainly our world revolves around Knightscope, you would be shocked as to the number of people that don't know who the hell Knightscope is and what do we do and you know, nice prototype when are you launching kind of thing for the amount of advertising, robot roadshows, webinars and everything we do. I don't know how many investors and how many funds and how many frankly, people in law enforcement and security have never heard of us. I know that sounds ridiculous to everyone on this call. I've been an investor for 5 years.

Operator

Like how can they possibly not know about Knightscope? And that's one of the reasons we ask you to please, you know, send out a newsletter, forward it on to someone. When we post something on social media, please share it. Invite people to webinars, send them to the website, help us get the word out because as silly as it might sound, there's a lot of people that don't see that. I think the share price doesn't help.

Operator

Again, large investors typically looking at stuff that's maybe $500,000,000 to $1,000,000,000 $1,500,000,000 market cap. They're typically not looking at companies less than, I don't know, arbitrarily $20,000,000 $25,000,000 of revenue. So we'll get there. But it's been a bit of a challenge. I think at the end of the day, it's going to be very hard in the future for Wall Street to just ignore a growing company in the middle of autonomy, robotics and AI and working on the nation's most difficult problem, just ignore it.

Operator

And so I think in the future that's going to change dramatically. And for those that have supported and stuck with us, hopefully that'll be a good tailwind.

Speaker 2

What happens if the company gets delisted?

Operator

We don't have we don't really spend too much time on that because the NASDAQ has told us exactly what we need to do to not get delisted, which is unfortunately, if we have to enact this, the reverse stock split. So we're not spending any time on the company not getting not staying on NASDAQ.

Speaker 2

What are your thoughts?

Speaker 1

I think I would say, we have a the listing is not even on the horizon. We work closely with NASDAQ. We have a path. We don't expect that to be anything anytime in the near future or ever really.

Operator

Stacy, I'm going to cancel the next Stacy, I'm going to cancel the next meeting and there's like 160 people

Speaker 2

still on

Operator

here and there's still

Speaker 2

questions coming in.

Operator

So, I'm going to cancel the next meeting so you can keep going.

Speaker 2

Got it. What are the top products and what are the top markets for the products? What will it take to successfully penetrate the markets?

Operator

I think we've had a lot of success. If you go to nightscope.com, you can see the verticals. But the ones I would highlight would be certainly a lot of hospitals, a lot of casinos, corporate campuses, commercial real estate. I think those would probably be the first that come to mind. And for those of you that have been with us for a long time, you've heard me say this before.

Operator

It's got like really hard to get the 1st casino. It's really hard to get the 2nd casino. Getting the 3rd, 4th, 5th, 6th casino gets a lot easier. And that's what we just keep kind of pounding away. And I think one of the reasons I get really excited and get maybe a little prickly when books are like, I don't think you're going to make it, it's not going to work.

Operator

It's like, yeah, but we have clients that have renewed for the service on the ASR side for 2, 3, 4, 5, 6, 7, 8 consecutive years. If you think some major hospital or major corporation is just going to pay us for half a decade plus and we're not providing them value and we know that there is margin there, like there is a business there. Crime's not going away. We got the technology working. We just need to improve and scale things up.

Operator

And now that we've got some of these headwinds, which someone is asking about headwinds, that toxic financing that we spoke of earlier was a massive headwind for us. And now that that's out of the way, I think we're going to be in good shape in the coming years.

Speaker 2

Is robots being damaged an issue?

Operator

I'll be honest with you. I thought it was going to be a lot worse, a lot, lot worse than what we've experienced. There's been a handful of locations that are highly, highly problematic. And honestly, it wouldn't matter if it's a robot, your car, a human, a gate or a camera, it's going to get destroyed. Like, I don't want to say it looks like a war zone, but kind of looks like a war zone.

Operator

So it's not really the robot in essence. I thought it would be a lot worse. It does happen. It's a cost of doing business. Like does a cop car get graffiti?

Operator

Sure. Does a gate get broken? Sure. I think it's kind of just part of it and we kind of need to deal with it, but also be careful where we put these.

Speaker 2

If we were to get delisted, would we hold the same number of shares until we are relisted?

Operator

We so we already just covered that. We're not getting these listed. We have a path forward. We have a very good relationship with NASDAQ that dates back to 2017. They've been profoundly supportive of us and very helpful.

Operator

We're not getting delisted. We have a path. But hypothetically or just for your awareness, I think one thing people freak out is delisting. It doesn't mean your shares are taken away from you. NASDAQ and the NYSE and the OTC, it's just a place where people trade stuff.

Operator

It could be Facebook, like you could be trading different kinds of furniture. It's just a forum to trade stuff. So if we move to a different exchange, you still own the shares that you own. It just would be trading somewhere else. So no one's going to take anything away from you and we're not getting delisted.

Speaker 2

How many people are in sales now? How many more are you hiring?

Operator

We've got roughly about a half a dozen in marketing and sales. We probably need to look, Paul is going to knock me over the head. We probably need to double or triple that, but we're working on it. So we're actively recruiting both more senior kind of director level positions and more junior kind of inside sales and lead generation and marketing folks?

Speaker 2

Wouldn't long term growth be better if the company replaced the CTO since there continues to be issues with the tech and it would save the company money?

Operator

First of all, we don't have a CTO position. 2nd, as part of this cleaning house and reorg and all this other stuff that we've done, all the engineers report to me directly. And I know Apoorv and a few folks are not happy with this, but I've got I've lost track, maybe 15 direct reports. So the person that's making the changes and improving things is me personally. And so it has the management attention.

Operator

Part of the problem is some of these technologies are extremely difficult and require someone that's actually gone through numerous new product development cycles. And replacing one particular person is not going to fix the technology. You've got mechanical, firmware, software, process, operating system, cyber, all kinds of issues. And there is not one reason we don't have a CTO is good luck trying to recruit that person. That person doesn't exist.

Operator

You also need to be fluent in all the K1B stuff, all the telecom stuff. And we've got 2 software platforms, PEMs and the K SOC. It's unmanageable to have one person manage all that. So I have 3 solid engineers and senior engineers that I work with directly so that we can better manage this and improve things, and the team's delivering. So and I've got direct insight to that.

Speaker 2

This is a rather long one, but I'm going to try to give it all out. Okay. There are a lot of manufacturers, engineers and resources that have time available or machine setting stateside that are willing to set a lower rate or help intellectually or point to top tier suppliers or coders because we all have a stake in seeing a positive outcome. Is there someone or a resource we can go to help align our talents to see a positive result?

Operator

I appreciate the gesture. One thing that we have been doing because some of the stuff gets really gnarly on the technology side, we have been kind of laser hiring individual contributors, consultants on kind of a specific subject. But I don't have a good I don't have a quick answer for that. I'm just thinking how you implement it, and it's kind of hard because the technology is extremely difficult. I may flip the question a different way.

Operator

What can our investors do to, you know, kind of help? The best thing you can do to help us is get the word out, get people to go to learn about the technology, have them go to nightscope.com/discover and fill out the form and do a deep dive and see if we can actually be helpful for them. So kind of anything on the revenue side of things would be super helpful to the team. I think the second thing you can do is on the recruiting side. We time is money and recruiting can be tedious and more volume of possible candidates that we can get would be super helpful, especially if they're qualified.

Operator

So please send them to nightscope.com/careers. And then again, I can't tell people to go buy the shares, but I can tell you to communicate with folks. And if they want to learn more about the company, just have them download the investor presentation and you can download that at nightscope.com/rise. And those are kind of the big three things you can do. The rest of the stuff is highly specific and sometimes with the best intentions can cause more difficulties and not I'll pause there, but I appreciate the gracious thought.

Speaker 2

If you get a senator to see the common sense of supporting your technology, that's an appropriations bill law to support the industry. Agree or disagree?

Operator

Having worked in Washington, DC, up and down both the Senate, the House and the White House in a past life, if the question was a Senator, no, that won't work. You would have to have a coalition of folks in the in the House and the Senate and the White House and the appropriate agencies. And that is on our to do list. Once we've scaled up large enough in the private sector to go do what you're suggesting. But that is a very expensive, time consuming and laborious process.

Operator

And Stacy, you know, you've had similar experience as I have with this. And that's a 3, 5, 7 year commitment. And I think the best thing that we can do is scale up the company and then go have that conversation doing that now. It would not be time well spent. I want to put it that way.

Speaker 2

Regarding sales, what about Amazon, Walmart, etcetera, distribution centers?

Operator

I can't speak to specific clients for obvious reasons. Distribution centers are certainly an opportunity. Some very large companies are can be extremely difficult to deal with, and sometimes it's frankly not worth the effort. I'm not speaking to any particular company, but distribution centers is certainly an opportunity for us.

Speaker 2

How does the NightScope team feel about the recent CrowdStrike outage? And what impact, if any, does it have on short or long term strategy?

Operator

Fortunately, no effect on us. And we're a lot of our technologies on Ubuntu and all the CrowdStrike stuff is on primarily around Windows related stuff, which we don't use.

Speaker 2

Are there any lease expenses still from the closed locations?

Operator

Yes. So we're still working through those. It's not an insignificant amount of workload to shut down a location. So we're working on it. We've got a few down.

Operator

We've got a lot more to go. But in a lot of cases, we need to prioritize production versus having people go out and doing inventory counts and the like. It'll get done. It's just going to take some time. And as we warned you, there's not going to it's not a cliff.

Operator

You don't just show up to 12 different landlords and just say, hey, we're going to be out of here tomorrow. So it's being worked on.

Speaker 2

Have you asked the Carnegie Tech team to evaluate the IT aspect of your business? The team knows them, but are you using them?

Operator

So I'm a Carnegie alum. I spoke at one of their conferences. We've met with folks and one of the professors there has been sending over recruits for many years. Nothing in particular to do there. There's been some spinouts that were interesting.

Operator

But remember, the university is mostly R and D focused on the word R research, like more pie in the sky scientific basic stuff and we're doing very little research and a lot of development. Like if we can't ship it in the next 3, 6, 9, 12, 15 months, we're probably not working on it.

Speaker 2

Right. Please discuss executive compensation as well as incentives, bonuses for profitable earnings per share as well as clawback reduction for non profitable quarters. How is executive team financially held accountable?

Operator

So there's an independent Board of Directors. They make up the compensation committee. They look at other comparables for other firms the size of us and with the risk of us and also retaining talent. We've got recruiters climbing all over this place trying to steal our talent. So as much as people are like, oh, you should just pay everybody $1 it's like, okay, good luck retaining the talent to be able to do that.

Operator

The new board is very much focused on equity incentives and long term decision making. And all that comp is spelled out in our regulatory filings and management can provide input, but the decision is done independently. And those directors literally and legally represent the shareholders. So they need to do what's in the best interest of the shareholders.

Speaker 2

Is there a public relations plan to include your local congressional delegation and an update on how the company is making communities safe?

Operator

There is not because of the aforementioned work required at the federal lobbying level is an abyss of workload and money and having had some experience to do it. But doing that is not going to get you the bang for the buck that you're looking for in the short term. I'm not saying we won't do it. We've had obviously some conversations with folks, but there's a time and place and now is not the time or place.

Speaker 2

Are there still issues with the supply chain? Is Knightscope able to acquire all the materials needed to manufacture the units?

Operator

Unfortunately, all the COVID related nightmare on supply chain issues has significantly subsided. So we didn't I don't think we even flagged that as a risk factor anymore in our filings.

Speaker 2

Are you utilizing Atom Beam in your storage and transmission functions?

Operator

No.

Speaker 2

Any pending government contracts in the works?

Operator

We're always working on contracts, government, private or the like and we wouldn't be able to disclose anything in advance.

Speaker 2

Can you do a robot roadshow in the Denver, Colorado area? Yes, we have and we will come back again should we have a host willing to bring us in. So if you go to nightscope.com/roadshow, there is first off, there's a calendar of all the upcoming events. And secondly, if you have a host location where we can bring in the roadshow pod, which takes up approximately 6 parking spaces, and you will allow us to be there for a day, then we will use your location for a stop.

Operator

Anywhere in the continental U. S, you can be a host. You could be the cool person that brought the robots into town. And Stacy manages that directly. So he's always hopeful to have a host and some support.

Operator

So that's another way you can actually help.

Speaker 2

Tom is promoting the fact that he would like us to come to Australia and he's ready to help. Unfortunately, Tom, we're just not there. Very much appreciate the support and the enthusiasm now. Okay. Sorry, I'm you caught up with me.

Speaker 2

So I'm trying to find another question that's not yet been answered.

Operator

I'm still in shock. We've been on here for like how long and there's still 100 plus people on here. You guys and gals are awesome. Like seriously to spend this amount of time with us and to ask all these probing and thoughtful questions, we don't take your time lightly. So, thank you.

Speaker 2

So, Charles asked a question. I actually love this question because it's fortunate assumption. 120 roadshow stops, that's expensive and not working. Yes, Stacy. Let me shed some light on the difference.

Speaker 2

A typical trade show will cost me well in excess of $150,000 Each one of our roadshows costs a minuscule fraction of that and the majority of sales can be attributed directly to roadshow stops. So, sorry, that is an incorrect assumption. It is the absolute best thing that we have as a marketing tool. We get rave reviews everywhere we go. So,

Operator

And then just to be helpful with for Stacy's benefit, I think there's a lot of investors that have a different perception of what the roadshow should be. They're thinking they're going to show up to a location and it's like a huge party or a rave and like there's all kinds of retail media and politicians there and it's like a huge monster event. In some cases that has occurred. Well, majority of the cases is we're trying to close a prospective client that has an actual need and we just need to make sure that their top decision makers are there. And it's not intended to be some party or festival.

Operator

And it's more for specific people. And if there's an opportunity to meet with the media or a local official or whatever, sure. But that's not the primary reason this mobile trade show keeps going around the country.

Speaker 2

Is Knightscope considering collaboration with Tesla since Tesla mentioned that they are planning to create products that seem to be similar to Knightscope products? Or if not considering collaboration, how do you plan to keep your market advantage? We can't comment

Operator

Good luck to the legacy Good luck to the legacy automakers. Like it's going to be really hard, you know, decade or 2 coming up for you. How do we kind of from a competitive standpoint, I think we've talked about a few times the last couple of hours is we've been at this for a very long time. We've learned a lot. There's that 3,000,000 hours of field experience of, you know, we can look at a new design and go, yeah, that's not going to work or some new competitor, you know, might show up.

Operator

Yeah, that's not going to work because X, Y and Z. And, I think we just need to kind of focus on our clients and not so much the, potential competitive noise. 2nd, I think that we would be profoundly arrogant and naive and genuinely stupid to think we're going to secure the U. S. By ourselves.

Operator

So I, in a weird way, would welcome other players who are working on public safety and law enforcement because the country really needs it and there's more than enough problems to go around.

Speaker 2

How is the FedRAMP approval process going? Are you able to accept other government contracts outside of the VA?

Operator

So long as the other agency is willing to accept what the VA has done, then yes. We're having ongoing discussions. There's a ton of opportunities. I don't think we would have spent this amount of money and time and frankly, headache to work on all this stuff if there wasn't a genuine opportunity. But working with the feds is very, very difficult.

Operator

And frankly, some of the very large law enforcement agencies and large corporations can be just as difficult. I kind of joke sometimes with the Upwork who unfortunately had to go. He's kind of tied up with some other things that he needs to do. But maybe we should just sell to easy clients and not have to go through all that, but some of those volumes are a little bit lower, but stuff that we've worked about.

Speaker 2

All right. Speaking of acquisitions, has the case business gone up or down since

Operator

acquisition? Let me do the math in my head real quick. I think the answer in any form would be up.

Speaker 2

For the marketing aspect, why haven't you offered the presidential candidates some of your tech robots for the rallies and conventions to keep candidates safe and better recognize potential threats? I think if you had our robots at the conventions or rallies would cause millions of photos and videos.

Operator

The technology is more appropriately used for monotonous 20 fourseven, do the same thing over and over and over again. It is not necessarily great for one time events, parades, rallies, sporting events and the like. This is intended to be used in places where you're just going to rinse and repeat and do the thing over and over and over again.

Speaker 2

So, in the same vein, how could Nightscope Security Solutions have helped prevent or mitigate incidents like the assassination attempt? Same answer is in small short events at this stage of the game, it could it's not an appropriate technology for deployment there.

Operator

Questions keep coming in. I'm amazed. Thanks folks. Let's keep going. Usually Are you going to pass out on me, Stacy?

Speaker 2

No, I'm good. Usually, I see companies go public after they are profitable. Do you regret going public early? Asking after looking at the challenge to attract more investors.

Operator

My wife asked me this question a lot. Do I regret? There's a few mistakes that we made that, you know, in hindsight, would have not done. 2nd, and I've said this publicly before, so I guess I could repeat it. I didn't think at the time we could have continued to raise more capital while we were private in the manner that we were raising the capital.

Operator

And despite the chaos in the market, you know, one of the nice things about being public and this is not a 100% truthful, but, you know, in theory, one should never run out of capital. It's the cost of capital. When you're private, it can be a binary situation where, you know, you've got a company that found themselves in a very set of very difficult set of circumstances and there's only 1 or 2 routes for them to raise capital. And if they both say no, game over. Like I mentioned, 22,000 startups in Silicon Valley, 95% fail.

Operator

And part of it is they can't get any more funding. One of the nice things about being public, there's all kinds of permutations of all kinds of very clean, sane capital, very complicated capital, but there's all kinds of capital. It's a commodity and can be helpful for some companies. That's not 100% true. There are situations where the company may not be able to raise more capital to keep investing and growing the company.

Operator

But I think the one regret, whoever asked the question, the one thing that absolutely drives me crazy is I can't have a sane, normal conversation with friends, family, investors, clients, the media who ask me seemingly benign, normal, everyday questions. And it's really frustrating because I can't have a normal conversation with anyone. So I think that's one of the reasons I'm sitting here because I can try to be careful here and not get in trouble with the authorities. But that's probably the one massive regret.

Speaker 2

All right. You're going to love this one. Why not act to put K5s and kids on TikTok? Kids play with and being protected humorously could be a cheap way to get better known. Kids on early TV got their parents to buy things.

Speaker 2

I'm thinking something like an SNL type episode, etcetera, etcetera.

Operator

Because Stacy won't download TikTok to post them.

Speaker 2

I will not.

Operator

I think that could be there's a lot of fun things that can be done. But remember, the audience of who we're trying to sell to, in some cases, have a great sense of humor, in some cases, not so much. So we Stacy is working on with the team on improved messaging to focus on the end user decision maker, who likely is not necessarily on TikTok and would enjoy that that kind of video. But you never know.

Speaker 2

Regarding distribution centers, have you looked into the Defense Logistics Agency? They have 17 distribution centers across the U. S, including Barstow and San Joaquin.

Operator

On the very long list, have not spoken to them directly.

Speaker 2

How many VA medical facilities is NightScope deployed at? Are you aware of any new hospital sized clinic under construction at the Fredericksburg, Virginia area? No,

Operator

we've been the plan was and I think maybe it's worthy of some clarification here. I think people are expecting that we would get the authority to operate and then there's be a massive flood of contracts. We've successfully deployed the first machine, the K5 gov machine. On the outside, it looks exactly the same as the other V5 machines, but inside, it's completely different. It's kind of at the federal requirement level.

Operator

So the software, hardware, everything inside is significantly different. And there are some operational things that we need to kind of manage for that. So that one has been successfully deployed in Texas. And now we're with ongoing discussions on the, help me out here, 143, 147 other VA hospitals, to see if there might be some opportunities there and then as well as, you know, obviously other federal agencies. But we needed to get the first one working, which was a massive undertaking, despite it looking like every other robot out there that we have.

Speaker 2

Has your team looked into powering devices with Hydrogen, in particular the drone part of the business?

Operator

No.

Speaker 2

What products of NightScope could be could not be deployed to be used in securing the border?

Operator

Could not be what?

Speaker 2

Maybe we should just ask what could be used and that's pretty easy K-five in the hemisphere and the emergency phones, gunshot detection, the lasers, so yes, pretty much everything.

Operator

Yes. And maybe a few other things we might have our press release.

Speaker 2

Everything about a package deal with the government, meaning we sell a K-seven with a blue light, we could identify the situation and then provide us a provide that situation a way to get help if they need it.

Operator

One thing I am in the search for that I think it's okay to say is a single military base in the continental U. S. That would want that has a decision maker that would want to reimagine a military base physical security profile and take a look at what technologies and learnings that we have from the private sector that can be put into the public sector and then what gaps might be missing that we could develop something new for them. So we're on that search for that one leader that could be the laboratory for lack of a better way of saying it.

Speaker 2

We saw your product in motion at Pechanga for many years ago and gave it a hug.

Speaker 1

We saw you too.

Speaker 2

Do the robots ever get vandalized?

Operator

As I mentioned before, a lot less than I expected, but it does happen.

Speaker 2

Is the K7 deployed yet?

Operator

No, the K7 is at alpha prototype stage. We've got it running. Cross fingers, if everything goes well, we're running a little bit behind. We're hopeful the next year we can start taking preorders for it. But it's a complicated product.

Operator

And well, I'm personally and professionally super excited about it.

Speaker 2

Sorry, still standing for questions in between the comments. If the company is delisted from the NYSE, NASDAQ will say, are there clear guidelines on how to get listed again?

Operator

We have it's almost zero risk of us getting delisted. We are NASDAQ, not the NYSE. And you still own your shares if that were to ever happen, but we have an agreement and plan with NASDAQ as to how to stay listed. So that's not really any time. And we're not spending any time on that because that's not a thing.

Speaker 2

I'm not sure if this must be a sideways comment. There's another one that says, who do you consider your competitors with the others that have exited?

Operator

Sorry, all the competitors have gone under? What's the question?

Speaker 2

They're asking if there are any other competitors and then somebody else at AITX would like a word.

Operator

Yes. I think on the if we're talking about autonomy, I think that would probably be an interesting discussion.

Speaker 2

Same thing with Boston Dynamics and then Singapore based Kabam seems to be doing well. Just other comments coming in on the same subject. And actually, I can tell you Boston Dynamics is not focused on security. They're focused on

Operator

Or autonomy.

Speaker 2

Yes, they're focused on business checks or specific checks, systems checks. Inspections. Some of these, I'm sorry, I don't understand. There must have been commenting or asking a question about something that was being said, so I'm not sure what they're asking. How can you expect people to buy more shares if we can't get info about how many K-5s are operating and how many you need operating to achieve profitability?

Speaker 2

There's very little clarity on the operations of the business.

Operator

I think we would take issue with that. We do massive regulatory filings every 90 days. They're all readily available for you at ir.nightscope.com. 2nd, you with twothree of the business being K1B, onethree being ASRs, your question presupposes that you're going to get the math, it doesn't work. You're trying to take one product to see if we can get the entire company to be profitable.

Operator

And you want me to give you a fictional number on the number of K5s needed when we have, I don't know, 8 different products. So that's like, I don't know, back and Ford Motor Company, like how many Lincoln Navigators do you need to sell to make the whole company profitable and exclude the millions of other vehicles? Like the question doesn't make a lot of sense. We do break down the K1B sales and the product sales and everything's in there. I think the other notional problem with the question is, well, how many ASRs versus K1B?

Operator

Well, look at the price point of a K1 hemisphere versus the price point of an ASR and you're going to combine those and commingle those into the amount of units needed. Like it's a non it doesn't make sense. The question doesn't make any sense. Probably the better way to think about it would be what is the and we're working on this. What is the top line revenue needed to get to profitability?

Operator

And the big inherent problem with that is product mix. There's at least, I don't know, 17 different ways you can cut it. So then to give forward guidance with one exact particular number when there's 17 different ways to get there is also problematic. So that's one of the reasons we don't we're not hiding and obviously, hopefully, having spent a few hours here with you, we're not hiding away from any questions. But sometimes, the questions that are asked don't make logical sense.

Operator

And we're not looking to hide anything. We're publicly traded. We have to disclose everything. And again, everything is readily available for you at ir.netscope.com.

Speaker 2

Have you considered implementing crypto solutions like a security DAO to tap into the social and financial capital of the large and impactful crypto community?

Operator

I'm going to get in trouble with this answer, but maybe I'm a little old school. If the SEC is investigating, we're not involved. So we I think on just encryption overall, our cryptography, I think what could be helpful for us in the future is chain of custody on evidence and would be a super interesting use case, but that's not kind of critical on the immediate roadmap.

Speaker 2

Can we reintroduce another referral sales program of some kind or can you speak to the one that exists if applicable? I know you have resellers, but maybe we should make everyone a potential seller.

Operator

Do you want to answer that one?

Speaker 2

Sure. The Scout program is still in place. The Scout program is a referral program. It's intended to be not a sales position. It is you know somebody in your Rolodex on your list of contacts that you know has influence over the purchase of security related technologies.

Speaker 2

And you can over dinner or a beer go and tell them, hey, you should look at NightScope and then you get paid for that. Resellers are completely different. These are industry experts, whether they are security companies, integrators or other technology providers that already have an existing client base or customer base in their case. And they can implement the technology as well into the current offering of technologies that they have. We'd love to have more, but as Bill led to earlier when we were talking about the sales side of things, these are incredibly complicated, complex sales to go through when talking about specifically the security robots.

Speaker 2

On the blue light towers, we have a bunch of resellers and they are phenomenal. They do an outstanding job and we are still very proud of those relationships. So all

Operator

of the You know, Stacy, you got to stop saying Rolodex because I know there's a 20 something in this crowd in here and they're on Google going, what is a Rolodex?

Speaker 2

But yes, it's both programs are already in place. The Scott program is there. The reseller program is there. It just depends on who you are and what you have access to. But referrals are always, always, always appreciated.

Operator

Okay.

Speaker 2

Please explain the rationale for the huge stock option award that the CEO was granted in June 24. Given the massive dilution experienced by long term shareholders, this is absolutely inconsistent with the oft repeated claim that the CEO is in the same boat as investors. Investors did not get the dilution mitigation benefit of a massive new option grant.

Operator

That is the decision of the compensation committee to incentivize management to turn this around and keep growing the company. And that goes for the other stock option grants as well. Some of these folks have been around for a very long time and don't have either all fully vested or have no big upside in its decision of the comp committee, not my decision.

Speaker 2

Q2 gross loss is $558,000 or 117 percent of revenue. Please explain how this is sustainable.

Operator

I already answered that question earlier. It requires some additional scale in order to cover the critical mass required to run the company.

Speaker 2

Regarding the toxic financing deal, who put the deal in place? You keep referring to it. Who approved it?

Operator

I relied on prior management, prior outside legal counsel and prior board, but I was involved as well. And that was one thing I wish we had not done in order to finance the acquisition.

Speaker 2

Much discussion has been had over the closing of the multiple different locations, your current manufacturing is still in California. Have you considered leaving California to get away from a non business friendly state?

Operator

Two answers to that. I have lived in a lot of places in my life. The one thing I learned, especially with startups, like if you want to be an actor, be in Hollywood, you want to be a politician, be in DC, you want to build cars, be in Detroit. You want to work on Wall Street, be in New York. You want to trade commodities, be in Chicago.

Operator

Like, if you want to build cutting edge, brand new technology, you need to be in the heart of Silicon Valley. Like, this is like the equivalent of being in the Renaissance in Italy at that time and decided to go somewhere else. So we're in the right location. I think the other thing to think about is if we were building 10,000,000 machines a year and we're kind of rinse and repeat on more of a commodity product? Sure.

Operator

Maybe there's multiple facilities across the U. S. At that point, but we're not at that stage right now. As if it hasn't come across over the last couple of hours, this technology is extremely difficult. You just don't stick a plant somewhere and have them continue to rinse and

Speaker 2

repeat. Well, Bill, regrettably, I do have a commitment that I cannot get out of right now. You're going to bail?

Operator

There's like 107 people on here.

Speaker 2

I'm aware. I am

Operator

so All right. So let's do this. For the if I didn't answer your question, please go to nightscope.com/ rise. The little button at the bottom is that instant messaging thing. If you leave your e mail in there, I'll be sure to reply.

Operator

If it's a really long question, you can send it to me directly at invest atnightscope.com. That only comes to me. Nobody else is going to see that. And I try to answer as best I can. I do get thousands of messages, so just be a little bit patient.

Operator

If my answer is a little shorter than you might like or take a little longer than you might like. But I appreciate everyone taking so much time out of your day. I really hope to continue to have your trust and support and continue to build the company. We will get through this, and it's a difficult time, but we've been through much, much, much, much worse, and we always make it through. And the future is bright.

Operator

There's a lot of fun, good stuff that's going to happen, and we just need to keep at it and appreciate everyone tuning in. The videos and everything else will be on the if not already on the YouTube channel if you need them. And thanks, everybody. Cheers.

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Key Takeaways

  • In Q2 2024, Knightscope reported net revenues of $3.2 M (down 10% YoY), a gross loss of $0.6 M and a net loss of $6.3 M, which management attributes to one‐time transition costs and views as part of a planned 2024 transition year.
  • The company is targeting a multibillion‐dollar recurring public safety market for robotics, AI and automation, having already generated $1 M in “Machine as a Service” subscriptions and demonstrated > 60% gross margins with long‐term client renewals.
  • Knightscope is executing sweeping operational reforms—consolidating manufacturing in Mountain View, cutting management headcount, reducing bill of materials and service costs, and enhancing QA and throughput—to drive efficiency and set the stage for profitability.
  • With a genuine first‐mover advantage after several competitors failed, the firm holds FedRAMP authorization for federal deployments, has delivered its first K-5 unit to a VA hospital, and is expanding its technology suite (ASRs, blue-light towers, gunshot detection and more).
  • CEO Bill Faith, Knightscope’s largest shareholder, emphasizes unwavering team commitment and long‐term value creation through the upcoming ICM platform commonality project and selective strategic partnerships to scale proven technology.
A.I. generated. May contain errors.
Earnings Conference Call
Knightscope Q2 2024
00:00 / 00:00