Knightscope, Inc. (KSCP) Earnings Call Transcript & Summary

[Presentation] All right. Welcome, everybody. We have a very large gathering. So let me do some ground rules first. But first and foremost, thanks, everybody, for taking time out of your busy day to talk about all things Knightscope. For those of you who've gone through this with me a few times, just bear with me, I need to put the forward-looking statements disclaimer, and it looks like it might be too long, so I might need to do it in a couple of shots here. But we need to put that in there, just for safekeeping. And then the video that you just saw will be on our YouTube channel here shortly, and you'll be able to grab that, and we can go over today again to answer any questions. And I need to talk to counsel to stop making these disclaimers so long, anyway. So a few ground rules before we get going, as I let people in here. This is intended to be questions from almost every angle. But in some cases, obviously, I'm an officer of a publicly traded company. I may not be able to answer your question exactly the way you asked it. So I might rephrase it or I'll tell you I can't answer it. But I try to be as responsive as possible as long as we can answer it most likely, I will. Obviously, we won't be sharing any MNPI or material nonpublic information. So we want to be mindful of that. And then Henry has already got his polite hand raised, beat me to the punch here. But because we have such a large group, the easiest way to do this -- the check gets a little bit too much. It's just me on this side. [Operator Instructions] I will stay here as long as you need me. I want to make sure everyone's questions are answered. So we'll just keep going through the easy softball questions, and I'm sure somebody's got a zinger in there or 2, which is fine, which is why we're doing this. So with that, I'm going to prioritize the people with the hands up. And then if we have a lapse there, I'll go through the chat. But why don't we start with Henry since he was first in line there. So go for it.

Thank you so much for what you're doing. Really appreciate the work you're doing. I think it's so important for our communities. I was a little late tunning in, so sorry if I missed any of the initial information, my family stuff happening. So apologies for that. But thank you so much for the work you're doing. I think that's really -- at this point, I wanted to lead off with. My question is -- let me introduce myself. I'm Henry Schuller. I'm an investor -- early investor, and I'm also a founder and CEO of myself. I'm curious if you're interested in working with local communities that you're already working with towns and governments. I'm sure that's part of your order backlog. And how would -- I sit on as a trustee on the City Council in my city. So how would a trustee go about engaging with Knightscope and helping to make our communities safer in the places we live and to care of our families?

So appreciate the support and the question. The easy-peasy is for me to share my screen if you go to knightscope.com. For that particular question, we do have something a little controversial that we started, and I'm turning to find it here. If you go to innovate public safety at the bottom, there's literally a mayoral challenge, if you want to read about that. The concern I've got is a lot of the safest places in the country are really low population, are kind of higher income, medium income, 6 figures. And for whatever reason, maybe it's the weather likely in the Northeast. If you want to read through that, that's probably the best and easy way to engage. And every city municipality is very different. In some cases -- sorry, let me let some people in here. In some cases, it's the mayor that really wants to drive something home. It might be the City Council member, a single member who decides, okay, we need to do this, and that's literally has happened. It might be the chief of police. It might be the sheriff. It might be a hospital administrator. Again, every town and city is so different. It's really difficult, Henry, to just say, do X, Y, Z and then everything happens exactly right. But getting the dialogue going is probably the best thing and getting a decision-maker or 2 to sit with our team. And now that we've done this a lot, more than 2 million hours across the country, I don't know, 6, 7 winters and summers like we've learned a thing or 2. So usually, it's best to have a dialogue and be able to assess the situation and go. I don't think we can help you because you asked for this, this and this and we don't do that and just be super frank. In some cases, it might be a perfect fit, and then we can have an initial use. Like what are you trying -- what is the problem that we can potentially solve and then we can get the decision makers in the process going. Honestly, some cities and municipalities have shocked us, how fast they can move and some a complete opposite and it doesn't necessarily correlate to small, medium or large, like what you would think hasn't been our experience thus far, but I appreciate that, Henry.

Thank you so much, William. Thank you so much for all you do. I appreciate the answer. And I'll start digging deeper and bring it to the right people.

Awesome. Very much appreciated. [ Yvon ]?

Bill, first of all, thank you so much for being such a hands-on guy. We love that.

I'm trying. I'm trying.

I hope you never outgrow being hands-on. Maybe I missed it. I'm a little concerned about this backlog. Is there a time line for catching up or being further along?

So this is good and bad and a little bit of humor. If you remember the old I Love Lucy episode where they're making chocolates...

Bananas?

And then they stopped to start eating them because there's too many coming at the same time. It's been good news and bad news. So years ago, we would be sitting there going, will we get a sale, do -- will anything happen. And now we're getting closer to rinse and repeats. So on the positive side, we have a backlog, right? To have multimillion dollars worth of pending or potential revenue is wonderful. The team has started shipping stuff, but the sales team keeps putting more stuff in, right? So there's this tension. The primary root cause of the problem, I would say, the primary one is the supply chain issues, and it's -- I've covered a nauseam either it's a wiring issue problem, it's a chip problem, it's a resin problem, it's a resistor problem or something that holds things up. So it's very lumpy. We are shipping. It's just not as kind of consistent that we want. And frankly, you want the backlog growing, but you want to make sure you're utilizing the revenue. So 1 big thing that we mentioned in the video that we're doing is to change the production process itself, how we manufacture the robots at Knightscope headquarters here in Silicon Valley is -- I've said this before, our current machines take 100 to 120 hours to build one or crudely speaking, 1 a week, which is not good. The new machine that we've now started building with big asterisks on the supply chain issues, targeting to build 1 or 2 a day and that's going to make a big difference. Staffing also makes a big difference needing to hire some additional folks once we make those big changes. The Board, myself, the team, everyone's scrambling to try to get these out as fast as possible. I share your concern Yvon, because that's revenue that we want to recognize. I think the last point, if you didn't catch it in the video, we did $5.6 million of revenue last year. We hold more of from the figures that we shared about $5.2 million in the backlog. So it's a little crazy to be ending the first quarter with almost the same amount of revenue that we had the entirety of all last year. So that's another more positive way to look at it. But it's a top of mind for all of us. We're working through it. We've hired a senior supply chain manager. We're out recruiting a plant manager, and we're working on it, but it's certainly a concern. John Patrick?

I wanted to ask you about social media. Well, it's top of mind for you to get the buzz going and you've done a great job in communicating with investors and a lot of the graphic and art and communications work looks really good to me. I thought...

Folks, if you're not -- if you're not on speaking, kindly please mute, would be great. All right. Sorry, John Patrick?

Yes. I'm back. So with the social media, a lot of it might be fun, but not necessarily helpful to Knightscope. But LinkedIn, as you know, is more of a professional kind of a social media network.

You are saying the others are unprofessional, John?

Well, there are some signs of it. We'll see what's going to happen at Twitter. But LinkedIn is pretty serious stuff. I took a look there today, and I did find Knightscope, but the latest post there from yourself was, I think, 7 months ago. And so it looked like it was dormant, and also...

But if we can connect offline, you can show me. Like I post probably personally once a week, if not more, the company post literally every day. So I'm not sure where you were looking.

Okay. Well, the intersection then must be the company and you at the same place. So if you're posting to your own page as opposed to the Knightscope page, I'm speculating on that, but it definitely did say it was 7 months since there was a post. So I have somebody take a look to see why it's saying that. But actually, I suggestion, my point is if you do a search on public safety on LinkedIn, there's a lot of stuff there, companies and people. And there's a section I found that says people that are talking about public safety. And there's about a dozen of them, and they're very senior people, some in local government, some in industry, connecting with some of them might be helpful to try to spread the word because those people, in turn, are connected to people who are reporters.

Yes. We -- so if we go here to the -- this is the admin view for LinkedIn, you can see that we're posting literally every day. So I'm not sure where the issue might be. If you look at mine, I've got 11,000 almost followers.

I did see that.

It was in there all the time. So must have been some disconnect, but our lead generation team certainly focuses on getting as many people engaged as possible both offline and online. Some of our team is pretty astute on the LinkedIn side of things. But take your point. And from what we found, it's never one thing. I always get challenged internally from my teams like what's the one thing we should be doing to like it all work. And I often go back to my days in Detroit, where if you're trying to sell a car, you probably marketed at 17x before you literally sold it. Like you got to think about the regional dealer, the local dealer, the automaker, the leasing finance company, the brand, the nameplate and then they have offline, online and the number of permutations. So to me, it's -- in order to be effective, it's got to be "all the above. " And we've got to be as within reason, everywhere as much as possible to get the word out. And part of that today is just engaging with our supporters and our investors to help get the word out.

I was thinking the announcement about Rutgers. That's a very positive announcement. So on LinkedIn, every university is on LinkedIn, a blurred a short article, kind of like that mayoral challenge you showed a little bit ago, if you could start posting that on university pages, public -- people that can get that intersection of public safety universities, there's going to be a lot of opportunity there.

Yes. And I think that goes the same with -- if you go under like what we do here. This is all new as well. And you can see the different verticals that we've got. And for example, having a major airport involved and then being able to have that blog there to be able to showcase kind of what we think should happen with a requisite client can also be helpful. But one of the key things I would like to convey is us making that announcement than our sales team and our marketing team for all the leads that they're working on, they can use that content. It doesn't have to be online. It's like I've been talking to some and so university, look what probably a different way to say it is lending our first hospital, our first casino was really hard. Getting the second one was a little bit easier, the third one a little bit easier on and on and on. And then it becomes a little bit rinse and repeat. But yes, Rutgers is a huge deal for us through the acquisition of CASE Emergency Systems. I think that thesis of having some cross-selling over time because we're literally talking to the same folks is going to be a benefit, but it takes some time to get through the whole process.

Okay. You're on the case?

We're on it. We're on it. Not perfect, but we're doing the best what we can with the resources we have.

Right. Keep up the good job.

Thank you, sir. Mark?

Hello, William. Thank you for doing these calls for us. Really appreciate it. My question is about the ATM. How many shares have we issued under it and at what price? And what's the current total outstanding versus when we came public.

You're going to test my memory here. Hopefully, I get these roughly right. If I get them wrong, I have to refer you back to the regulatory filings at ir.knightscope.com, where you will get the actual correct numbers, but just from memory here, from recent filings. So the ATM for the rest of the benefit of the group is an aftermarket facility, and it's a draw down capital as efficiently as possible to kind of avoid a large, huge financing that's highly dilutive. Remember, my entire net worth is in the company. I've got 7 million shares. I don't want to see dilution as much as anyone on this call. But the company does need capital to continue to grow. So we need to do it as efficiently as possible. If I'm correct, I believe the recent 10-Q filing we did on Friday for the first quarter of 2023, I think we drew down during the first quarter about $3 million-ish or maybe $1 million a month or so. And then in terms of outstanding shares, again from memory, I think we've got maybe 44 million shares common outstanding. There's probably 10 million shares of Class B stock that doesn't trade. That's kind of the founder shares and then there's probably another 10 million of preferred stock that never converted as part of the public listing. Just a refresher because we didn't do an underwritten S1 IPO, like a normal company would have. We didn't have an automatic conversion for all those preferred shares to convert to common. So some people decided to keep their preferred shares, which basically hold a 1x liquidation preference. But there's no other dividend or any other kind of financial benefit and some people just decided not to put the shares at their broker or what have you. So that's sort of 44 million plus 20 million, 64 million. I don't know the answer off the top of my head on the -- where were we 15 months ago. But hopefully, that's enough to get you started.

Yes, I appreciate that. So $1 million a month, are we actually getting at the money. So today, we would get $0.57 whatever it was, or...

If we drew down on it. It's at our discretion when we do it, how much we do it. And we try to obviously minimize the amount versus doing the opposite, which would be like, let's go raise $10 million or $20 million at these share prices is not something I get all too excited about. So we're trying to be careful with it. But back to some of the earlier questions on backlog. Do you think it would be smart for us to draw down a little bit of capital, so we could hire 2 more production technicians, so we can get the backlog out faster. I think if everyone knew what I knew, you'd be kind of like, why are you even asking me this question, just go do it. And so we're trying to be very careful on how we go about doing it. And remember that the last part of the video, there were kind of 7 key aspects to be able to improve the cash position and it's not just the ATM. So a bunch of people joined before -- after the video. So let me just go through this, if that's okay, Mark.

Of course, sir.

So there's -- the cash position needs to get improved, right? So there are 7 things that we're working on. One is just the sales growth. Obviously, you've seen that we've been putting out good positive news almost like clockwork on a weekly basis. So just continue [ with the ] the momentum. Remember that we have financing partnerships with both Balboa and Dimension Funding. And how this works is for some of the orders that's appropriate, we would get that finance, so we actually have the cash in hand for obviously a fee, but it helps the cash flow side of things. Obviously, we need to buy materials to get through the backlog. There's deployment times and everything else. So that can help the cash position. We need to deliver on the backlog itself, right? Wherever we're at $4 million, $5 million or more dollars, that's cash coming into the company, the ATM we just spoke of, Mark. Cost reductions. Remember, we announced a 20% reduction in force at the beginning of the year. And some of those cost reductions and actions that we took there will continue to help us in reducing the amount of cash that we utilize. We also announced that we're targeting to get to profitability here in the next 24 months. And part of that is improving all our margins and getting our costs down. So the good news here on the telecom side is our clients are using the service and using it a lot, which means they're eating a lot of data. And we've been taking a lot of actions to reduce the -- whatever we can control from a software standpoint to reduce those expenditures. And then we're also very hard pushing on getting the private LTE and lower types of costs for us to reduce that expenditure outright. The service costs need a good amount of work in terms of parts and logistics and the amount of maintenance and service. But remember, if you drove your car 24/7 for 30 days in a row and never stopped, and we took care of your fuel, you probably would need some service at the end of the month. And if you did that for 6 or 12 months, you definitely would avoid the automakers warranty. So that's the level of duress that these machines are going through. So you've got to have some maintenance and service and support. And then there's obviously cloud cost. And then we're looking at a non-dilutive debt offering. So the ATMs -- the point here, Mark, is that the ATM is not the sole source to fix everything. We want to look at this kind of systemically.

I appreciate all the conscious stuff that you're giving to it. And a related question, a lot of chatter in the chat about delisting, are we going to be able to avoid that, do you think?

So delisting. So we actually -- 2 things for NASDAQ were Knightscope is required to meet 2 financial metrics. One is you had to have a $50 million market cap, which we did get a notice for. And then we also have to have a share price that's over $1 that is also an important point. If we're able to -- so a few points here. If we're able to get above $1 or above $50 million market cap for 10 trading days in a row, then that gets cured. So NASDAQ gave us a notice of them us and several hundred companies because, obviously, the economy is not doing all that great in some aspects of the markets. So we have 180 days from the day we got the notice to cure the problem. Typically -- not always, but typically if you're unable to secure the problem within those 180 days, you can ask NASDAQ in petition as to why you should get another 180-day extension. So every way you want to look at it, we have plus or minus 6 to 12 months to fix the problem. We don't control -- I get tons of e-mails and text messages like Bill, you need to fix the share price. I don't control the market. That's frankly not to be funny, but it's everyone on this call and not me. And supply and demand. What I can do and what my team and I can do together is improve the financial performance of the company, keep it growing, keep telling the story to whoever will listen. But the rest of it is kind of up to the market. We don't control pandemics or bank failures or interest rates or inflation or the like. But I think we have more than a reasonable chance that over the next 6 to 12 months that continued performance, cold financial performance and getting to profitability and the company growing. It's kind of, I don't know, from a personal standpoint, it's really hard for me to understand the company is growing double digits at the intersection of 4 important technologies AI, autonomy, robotics and artificial and electric vehicle technology that we wouldn't have the eyes and ears of a good amount of investors. So we just need to kind of continue to prove ourselves. But we've got a shot to fix it, but this is a 2-way street, and we don't control everything. Part of it's the market, which, frankly, Mark, you and the rest of the investors on here represent

Thanks very much for taking the tough questions Bill, really appreciate you straightforwardness.

Of course, what we're doing is technically extremely difficult. And if we're not willing to engage with people and have a frank discussion like this is not going to -- it's not going to happen by itself. So I appreciate you taking this time, Mark. So let's go on to [ Mathew Delour ].

Yes. So if I look at the rounds we raised when before your public, I think the cost basis on that was around $8 or so. Just -- and the current price is around $57. I just want to figure out, was there any like split or something that changes the cost basis? Or am I misreading how the previous investments were? And I have a follow-up question after that.

Of course. So the number $8 is one-off. We had numerous rounds. So again, don't quote me here, make sure you go back to the regulatory filings. But notionally speaking, the seed round was done at, I don't know, I want to say $0.33 a share. We did something at $0.80 something a share. There was $1 something and then there's $3, there's $8 and there's $10. So you've got 35 -- just before the public listing, we had about 35,000 investors all the way down from $0.33 up to $10. So I wouldn't say that $8 is the number one. Two, there has not been any stock splits or the like. I guess, for the benefit of the group, I'm going to give you a slight little longer answer because I think a lot of people might have a similar question. So first and foremost, I just want to reiterate what I said earlier. We or Bill does not -- we don't control the stock price. It's literally supply and demand, what's out in the marketplace. So if a bunch of investors that bought in at $0.33 a share, decided to dump 0.5 million, 1 million, 2 million shares into the market, and there isn't counter party on the other side to buy a bunch of shares, well, what's going to happen? The share price is going to go down, right? So that's one thing to consider. Another thing to consider is the overall market is -- especially from micro caps or small cap companies, anything under $1 billion has been hurt pretty hard from the tech downturn. Frankly, the -- you can almost watch it, the interest rates go up and share prices go down. It's kind of almost, almost tied directly together, feels that way. You've got inflation, you've got a bunch of issues. And then you've got a bunch of short sellers that are putting pressure on the stock. We don't control any of that. And I haven't sold -- I took -- we took the company public. I didn't sell a single share. I haven't sold a single share. I don't plan on selling a single share. So all the pain and suffering that a lot of people are feeling, I'm literally on your side, financially aligned. So I don't want anyone ever thinking that we're doing something odd that would be not in the best interest of the shareholders in the long term. It's really frustrating. I mean we're trying to do something positive for the country and for someone to be out there shorting the stock, like I mean -- okay. You legally have the right to do that, but you're probably going to end up on the wrong side of history for doing it. So all we could do is keep telling the story, get the financial performance. And the way to cure it is you got to have more buyers for the stock than sellers. I mean that's -- it sounds almost too simple. But that at the end of the day is what ends up happening. So hopefully, I answered your question, probably not exactly what you want to hear, but it's that.

That's fine. So a follow-up question is if the valuation pre-IPO was pretty high rather than trying to go through this listing and delisting process or whatever, it looks like the public markets are not valuing the stock is as high as it was in the private market, can you just take this back private?

So I guess there's 2 answers. One, as an officer of the company, I legally have a fiduciary responsibility to look at everything, regardless if I personally like it or not. I don't know how to do that, basically. You would have in order to take it private, like if -- I'll put myself -- so not to use you as an example, let's say, I invested at $10 a share. And then we took the company private at $1 a share, $2 a share, $0.50 a share, like I'd be pretty cranky. I don't know how to physically do that transaction and then you'd have to go raise some capital to go along with it. Like everything has to be on the table. I don't think I'm speaking at a turn here. I don't know how that cures the problem unless you had a large financing source that would be willing to give the shareholders an appropriate price, right? And then have enough capital when you're private to grow the company. So as I said, everything needs to be on the table. I don't know exactly physically how to do what you're suggesting. And that would be in the best -- sorry, I need to caveat that, that would be in the best interest of the existing shareholders that, that footnote is kind of really important, right?

Got it. Yes.

Of course. [ Kerry Dine ]?

Yes, Bill. I want to echo the sentiments of everyone else. Thank you for your availability. It's refreshing to invest with the company where the CEO is so available to the shareholders. I did purchase in 2019, I believe it was Series S preferred and consider a long-term investment. Had it been up to me I -- I'm making a statement and then I do have a question. I would have loved to have seen the company stay private if it's perfect world, right, grow and grow and grow like you're doing as fast as you're able you're pulling on the supply chain, you're doing as much as you can. I appreciate that and the whole team, grow under the radar and to Wall Street bags for you to go public. Perfectly -- perfect world, that's what I would have loved to have seen. So my question is, I kept the preferred. I have not converted. I don't know what that exchange rates are, even what that process would look like. I had never seen the type of public raise that you had where common shares were sold to the public. Could you maybe inform us how was that beneficial initially and long term to both the company and to us to shareholders for having that last raise or common shares were issued?

There was few words that we got cut off, and then I missed the sentiment of the question. Can you ask the question one more time?

Sure. What is -- okay, what is the benefit initially and long term to the company and the shareholders for having the common share public fund raise if we listed?

So a different way to ask the question is like why the hell did you take the company public?

Yes, I'm not -- without saying that because I figured...

That's fine. That's fine. That's why we're here. So at the time, we had a few things to consider. One is the -- we had been private for 9-plus years and had raised I don't know how much money through -- I do know, right before the public listening a total probably north of $120 million. I didn't think it was possible or viable for us to do another Reg A offering. And what we really needed was to raise the $40 million while we were private on our -- don't quote me here. I think part -- would have been our fourth or fifth Reg A. And I just -- running a Reg A is really expensive. It may or may not have gotten done. It was one thing to consider. The second thing to consider is because we had been doing Reg A since 2016, we had all the costs of being publicly traded without any of the benefits. Like we couldn't -- there are some kinds of debt and debt offerings that we weren't able to do and have access to the wider capital markets. And you got to think through the whole aspect. So at the time, not knowing you can over time in the market as much as people think you can. That path was viable for us to raise some additional capital and listing it was kind of one way to do it. We do have access to monies that probably we wouldn't have before. But now you're under the scrutiny of the public markets every day, which is -- I guess, on a personal it's a little weaker like you're selling a house and everyone -- every day is in your face going, "This is how much your house is worth. This is how much your house is worth. "Does it buy the second. It's like kind of a weird situation to be in. It is what it needs to be. There are some brand aspects. There are some companies that rather client -- prospective clients that could prefer to work with a publicly traded company. Yes, rewriting history, I don't know. Would we have done it again probably. But because at the time, I didn't have confidence of doing another Reg A would get done, it's probably the crux of the question. But we're here now.

Okay. Good. And one quick statement. I appreciate the time. I'm going to channel a precious middle investor called Rick Rule and kind of speak to the rest of the investors. The delta between a stupid low stock price and the reality of a high-growth company is where fortunes are made. Thank you so much for the time.

Thanks for that. I don't think I could say that, but you can. [ Sam ], been a long time. [ Sam ], are you there?

I'm here. How are you, Bill?

I'm hanging in there, [ Sam ].

Yes. So am I. Original investor at less than the dollar, see it go all the way up and come back down, but that's not my question.

Yes.

That is as it is. My question, which I've asked you every year is why are we not selling more of the K3 K5 robots, which are revised, working very well, problems all sorted out. It seems like the sales force are not just telling the story to the right people or there is no demand for it for some other reason.

[ Sam ], I appreciate you being on the call, and thank you for being a long, long, long time investor. And yes, [ Sam ] asks me this question religiously almost every year, like why aren't the sales going up faster and higher. If I just step back just objectively, [ Sam ], I think it is probably a few different factors. There isn't one thing. So the first one, I would say that the premise is a little bit off because we're sitting on, I don't know, somewhere near $3 million of backlog of orders. So that's to say that we're not telling anything is not good. Are we delivering? That's a separate problem. But we are selling. I think the second issue is -- how do I -- I got taught this by my cofounder, sometime ago. He was an ex-law enforcement officer, as you know, [ Sam ]. And he warned me, and I think he's been right for all this time was law enforcement and security market is not, and I'm going to try to do this as politely as possible, not the most technologically progressive sector in the world. And it takes a really long time to convince people that changing is the kind of the right way. So I think we've got a little selling against the grain, [ Sam ], which investors and people don't want to hear that, but you're having to educate a market which is, in a lot of cases, not good. And then the third, [ Sam ], just to be fair to the team, we've been strapped for resources. Up until recently, we never had a proper full sales marketing team, not that we're fully completely staffed right now, but we have enough people that are generating enough leads and enough demand that we've got the qualification process sorted out. We kind of know how to do this, and we've got the right contract and we've done enough legal and cyber and everything else. So I think it's 3 things that have not helped us. But that is to say this is not -- should not be viewed as the same conversation, [ Sam ], that we've had for a few years back when like are we going to sell anything this month? Is anything going to come in? That's not the case now. Now the problem is the shipping and delivering side of things. Should it go faster and higher? Yes. That's a little bit of frustration, [ Sam ], because we've got clients that have renewed 4 years, 5 years, 6 years, 7 years. You don't get a client to pay you full price for 7 years or more than half a decade and you're not creating value for them. So I think it's a combination of all those, [ Sam ], and we're working the issue. But that's kind of my viewpoint, [ Sam ].

Okay. I hope the government steps in and fills the coffers.

Well, I think another way to look at it, [ Sam ], if we want to look forward without me getting out of step here. I think the federal government is a very large opportunity that will take some time. I think us landing New York City and NYPD, 10 years in the making, and we're really excited to be deploying that machine hopefully here during the second quarter. That opens up another large avenue. And I don't want to say it's cheap because it's not, but having the federal government and New York City as a client will help us with other clients. That's no doubt. And I think if you look at having several publicly traded companies as clients is a big deal. Lowe's is a client of ours. PG&E is a client of ours. PENN Entertainment is a client of ours. ABM's a client. These are all multibillion-dollar companies and some may be able to scale as they have more and more time. But [ Sam ], I'm frustrated as well, but we're working as hard as we can to try to pick up the pace here. [ Barry Hanes ].

Yes. Bill, thanks so much for doing this. So I had a couple of questions relating to the gross margin because solving the stock price problem requires kind of getting to free cash flow neutral and it kind of starts with the gross margin. If you have a negative gross margin, you can never get there. So I'd like to just drill down on that a little bit. And maybe you could talk, first of all, about -- you mentioned the production movement from cells to assembly line, how much could that add to the gross margin? What are the other key steps do you see to get the gross margin up? And what's sort of the goal? If you go out 2, 3, 4 years, whatever, where do you think you can get to on the gross margin?

Okay. So the gross margin for us as a company is a little convoluted. So the gross margin, as you can see in our regulatory filings, for product-related sales like through the acquisition for all our stationary stuff, it's more like a product sale, like you sell the product. You may sell a service contract or something that go along with it. But there's a margin on that product, kind of like when I was back in Detroit, you sell a car to the dealer you have a margin, there's variable cost, there's fixed cost and it's abundantly clear. In our case, with the machine as a service, it's a little odd, right? We don't sell the machine outright. We don't sell the software outright. We don't sell the data transfer outright and everything else. You have a bill of material for the machine, I guess, depreciated over 3, 4, possibly 5 years at some point, and you're using that to calculate the gross margin of which the revenue is obviously a part of that. The telecom cost, the service cost, the labor associated with the assembly of the machine and then the cloud costs, right? And so it's a little weird because you need some scale for this to work. A good example might be the KNOC, the Knightscope Network Operations Center. You need to run -- let's say, you have a staff of 4 people that can run 168 hours a week, right? They need to run 24/7. Just because you added the third, fourth, fifth or 60th or 70th machine, it's not like we're adding additional people to monitor those machines. So you need a little bit of scale, [ Barry ]. And that's the thing that doesn't always come across. And then the assembly portion also makes a huge difference. If us -- taking 120 hours and you can pick your hourly rate, and we can build something with less than 20 hours, you can do the math real quick and go, okay, that's going to be material. But it's not going to be one thing. You're going to have to keep the revenue going up. You need to get the telecommunications costs down, which are material. You need to get the service cost down. You need to get the cloud cost down and you need throughput. You need to get these things out the door faster. And because we kind of see how we could -- there's a possibility to get there is why we have the nerve, I guess, to say that we can get it to profitability in the next 24 months. And obviously, at the end of the day, it's also the fixed cost, right? You need to keep the team as small as possible, as efficient as possible, so that we're generating a good amount of revenue. And you start getting there, like if you go -- if you multiply by 4 our first quarter annual run rate and you annualize it, you're about $11 million, and we've got maybe 90 employees on staff. You can start seeing that if we can keep the team efficient and lean and get our cost down, we can get there. And then in terms of what it could look like longer term -- in the interest of time, I want to make sure that everyone has a chance here. If you go to knightscope.com/rise, R-I-S-E, the investor deck -- the updated investor deck is there, and there's literally a slide there that shows our target of what we're trying to get at. Mr. Matthew Miller.

Hey, Bill. Do you hear me?

I can hear you.

All right. Sounds good. Before I get into my question, I just want to make a comment on like the whole. I see a lot of chat going on about reverse splits and delisting. The first thing I want to say is I'm -- unequivocally, I'm sure NASDAQ will give you more time, the 180-day extension, if needed. I've been trading for a long time and I've never -- I've seen companies do reverse split after reverse split. And I just want to make the point that Knightscope has never needed an extension or asked for an extension beyond what they already had. So if it came down to the point where you did an extension, I don't ever see them giving you a problem doing that. So I just wanted to kind of point that out, just so there's not going to be that fear that 2 or 3 months down the line that we're going to be looking at a reverse split or a delisting. So I just kind of wanted to get that out of the way first. Hold on 1 second. Okay. So I'm going to start off my question just with a statement. So prior to myself becoming a full-time investor, I was actually in operations and management for one of the largest security companies in the world, which is kind of why I have an authentic alacrity for Knightscope. So while there are plenty of hard-working qualified human security guards, I firsthand know the challenges, costs and inefficiencies in the security guard industry with constant callouts, turnover perfunctory training for new hires, which then translates over to level of service. The average cost for a human security guard for a company outsourcing security measures is anywhere from $35 to $100 per hour depending on whether the guard is old or not. Knightscope is a cost-saving efficient alternative to existing security measures and any company looking to cut down our costs without degradation of security efforts should look to Knightscope as a solution. So any narrative contributing to a nonfavorable economic climate, kind of like we are now, should actually be beneficial to Knightscope as an investment. So my question is, what can Knightscope leadership do to communicate this message to existing and potential shareholders? So basically, Knightscope is something you want to invest in as companies can save money on their existing security measures and crime obviously isn't something going away, no matter what the economic climate we're in.

Hear, hear. Was there a question in there, Matthew?

That was basically my question. I apologize. So let me -- I know that was kind of a long-winded statement, but there was a question in there. So what can Knightscope leadership do to communicate this message that basically, you're investing into something that is going to be saving company. Because just there -- crime is going to go on no matter what and companies are going to be looking to be saving money. And currently, their existing security measures are probably outsourcing a company for anywhere from $50 to $100 per hour. But investing in Knightscope, you're getting a superior service for a fraction of a fraction of the cost. And this is why it's a better efficient -- this is why it's an investment or this is what's -- why you want to invest in Knightscope.

So I think I'm the do-all-the-above kind of guy. If you want something done, the -- Colin Powell's doctrine of overwhelming force usually is the one I want to go towards, which is you need to spend time on everything. You need to spend time on calls here with our investors and supporters. You need to take every podcast opportunity that you have. You need to post on social media. You need to be on the robot roadshow. You need to have some of our existing clients be able to speak to a prospective client. You need to write white papers. You need to get a Board member to write a blog. You can issue press releases. Basically, you got to do everything. And one of the reasons why we did the financings the way we did is I think it would be very foolish to think that a company by itself with a handful of large institutional investors is going to make this massive change for the country. We've gotten so lucky with so many of our investors who've introduced us to a possible recruit, who've made a phone call to a mayor, who called a sitting Congressman, who've been able to get a Mayor engaged, who got a school administrator to take a call, to get a health -- hospital administrator to engage us as a client. And we can't do this by ourselves. And I think it's not just what management can do. It's what can our supporters do to get the word out. There are some things that I would love to say that you should do, but I can't. And all I can do is continue to improve the financial performance of the company and communicate and communicate and communicate and communicate. And that's why I'm willing to put the inordinate amount of effort in answering questions online, offline, text, voice mail, whatever it is, and our CFO, our Co-Founder, everyone has -- they've been trying to be as responsive as possible. And we can try to just continue to get the message out. But part of it is delivering on results. And we said we're going to continue to grow the company, and I hope the graphs we put up this afternoon show that we are. Do we want to accelerate that? Yes, absolutely. But at this point, it's -- we need to put numbers on the board and we need everyone's help to do it. Is that, [ Brian ]? He's back?

Bill, I'm back. How are you doing?

How are you? I'm good. I'm good.

Okay. Well, I'm going to hit you with some questions here.

All right. Well -- all right. So full disclosure, I kind of threw out my back over the weekend, so don't freak out, but I got to stand up here for whatever jaw-dropping nightmare questions you're going to ask me. So go for it.

Well, you're ruining my image. So the inquiring minds want to know, are you -- do you identify yourself with the Millennium Falcon in the background or the Empire fighters?

You're going to ask me that, [ Brian ]? It's kind of -- it's evil -- good against evil. I mean technologically, the TIE fighters are really cool, but you got to be the Han Solo Millennium Falcon guy.

Okay. Well, I know that you can't control the stock price and...

What?

I'm being an advocate for you here, and I'm not a financial adviser, but Knightscope went public right at the tail end of what I would call the great bull market and the qualitative easing, and then the market turned. Then if you looked at a lot of high-tech companies, like you mentioned, their valuations have been crushed over the past 6 months. I mean it's never good to see, for example, bank stocks go under. It's never good to see bank stocks swing 50% in a day, 20% in a day. Were you guys caught up in the Silicon Valley Bank failure at all?

Yes, we've disclosed this. That was a horrifying weekend. We had all our money tied up there. Fortunately, they got resolved after the weekend. We have since pulled our -- the funds over to a different bank. But yes, and it sets up -- investors want confidence, right? That does -- that kind of stuff going on does not instill confidence, instilled a lot of stress on us. But fortunately, we came away unscathed. And stuff like that, we don't control. But we can't sit here and whine and complain either, like it's a problem? All right. How do we fix the problem? And you just got to move on to the next issue. We can't woe is me, the market, woe is me, the short sellers, woe is me. And it's like, listen, nobody cares. Put the numbers up. Get the work done. Get the revenue up. Get the cost down. The rest of the stuff, like it's entertaining, it's interesting, it's what have you, but the markets can be pretty rough and what they want to see is results and growth, and that's what we're working on.

I think I mentioned previously, I think your case acquisition was very timely and a very long-term strategically well-planned acquisition based on the synergies that you have with the customer base -- existing customer base, the potential for upsells, obviously acquiring a new customer in the public [ study throne ] is the hardest thing case, had a set of customers where you could go back to and refurbish or do new installs like Rutgers announcement today. A question I always get from people is, well, don't you have a cellphone? And I'm like, well, if, unfortunately, you're in a situation where you're in -- you get attacked or someone steals your cellphone from you or you're disoriented, the first thing you're looking for is that call. And I think the case offers that solution. And then it also offers Knightscope the opportunity to offer the K5 or the Hemisphere or other product lines. Are you seeing that opportunity starting to grow?

I think there's a lot of cross synergies because we're basically going after the same clientele in a lot of cases. I guess, pun intended. I think, first and foremost, the folks working on Blue Light Towers will tell you part of the solution is literally the physical presence of having that light there in the first place can stop some negative behavior. Second, your phone isn't always charged. Your phone isn't always -- have connectivity. And just having the GPS location, we know exactly where that call came from, I think it's over here, can be really helpful. And I think selfishly for Knightscope and our -- and through the acquisition, there's a lot of synergies for us to grow together and likely some product pipeline, new things for us to do in the future. But if you look at it, the 7,000 devices that are out there in the field, what happens when you're able to do a massive nationwide upgrade and add all the AI capabilities that we have and in the long term, be able to have all these machines moving or not moving, see, feel, hear, smell and speak, like there's inherent value creation, and it's a little bit of a land grab. It's not like in some of these places where these devices that a case had installed over the years, it's not like it's easy to just show up and I'm going to go stick this on the highway somewhere, like it's a pretty intense process. And yes, it's a long-term play. It's also, I think, if you reflect on the financials that we just put up, we asserted that it was an accretive transaction. And you can see the positive impact it's had and the team there has been doing -- rather, well growing, and there's a lot more growth to be had.

And then, I'll just finish up here. I mean I think having a backlog is fantastic as long as you're able to get the products out the door and then recognize that revenue, because you really have 2 parts of the business, the subscription model as a service and then like the case model looks more of a point-of-sale type of service. Any update on the government security review? And also the Hemisphere product launch?

The ATO with the U.S. federal government, we're a little in the dark here. So we're -- we don't know anything more than what you already know, and -- I'm going to need to put somebody on mute here. And in terms of the Hemisphere, we're working through some last minute supply chain and technical stuff, but we've got orders come in, and hopefully, we'll start shipping that one soon.

All right, Bill. Well, again, I know everyone asked you about the stock price. And if you're successful in growing the company, growing the top line as well as getting cash flow positive, and it's all about getting the number of installs and if this economy can kind of just kind of trend along, I think you'll be in a good position. You've been very transparent. Finally, on that nondilutive offering that you kind of had on your slide there, can you give any details of what that might entail? Because typically, companies, when they want to raise money, they issue more stock, it becomes dilutive to existing shareholders. Or they'll do a convertible type of offering of preferred shares that get converted to common. So anything that you can elaborate on that?

I think I can -- folks, if you're -- if you're not speaking, if you can go on mute, kindly, would be great. I think one thing that I've learned without commenting directly on a possible offering or anything like that, on the private market side of things, prior to the Jobs Act from 1930 whatever, until 2015-ish, it was illegal for the general population to invest in a startup, like you can go to Vegas and do whatever the heck you wanted, but it was literally illegal for you to participate in our Reg A offering or Reg CF or anything like that because none of it existed. And it was kind of an injustice where the general population couldn't invest in promising startups, some cause that they were behind, some entrepreneur they wanted to back or what have you. And as I reflect generally on the markets -- on the public markets, you look at a lot of micro cap, small cap companies that are dealing with larger institutional investors with some, whichever way you want to look at it, highly lucrative for them or obnoxiously expensive for the issuer. And the general public typically doesn't have access to that. So to me, that feels like a little bit of an injustice. So we're exploring to see if there is an opportunity for our supporters and for the company. Obviously, we're growing. Obviously, we need the additional capital to see if there's an interesting way for us to do something non-dilutive, which remember, again, I don't want any dilution either. So let's just be abundantly clear here. So we'll see. We'll see. We're still in exploratory phase.

Well, obviously, you have the route of accredited investors. You have those preferred shares sitting over in the sidelines. There's different things you can do, but unfortunately, crime is not going anywhere. So you're a public safety company. Your mission is to make America the safest country. It breaks my heart every time I see something happening at schools, impacting families and children in our communities. So you're right on mission long Knightscope, short the criminals. And may the force be with you.

Thanks, Brian. I appreciate that. [ Kevin Heinz ].

Bill, can you hear me?

Yes, go for it.

First off, yes, thank you for your time. I'll try to be short and to the point here, so some of the other people can get their questions in. So as far as Blue Towers versus K5s, it seems to me as if the sales on the Blue Light Towers have sort of been ramping up a little quicker than those of the K5s. I was just wondering if maybe you could touch on sort of that trend? And do you think that, that trend may reverse on the side of K5s anytime soon? Or if that makes any sense?

Yes, I understand the question, [ Kevin ]. I think because CASE was a private company and no one heard when they got their sales, now all of a sudden because we give it some due publicity, then it looks like it's a big trend. I mean I think the easier way to look at it, and this is roughly speaking, so don't quote me here, if you look at the backlog, it's -- I don't want to say it's 50-50, but it's pretty close to split. So if it was like 90% backlog on Blue Light Towers and the rest were autonomous security robots, then it'd be different, but that's not the case. So I -- long term, that's a great question. How does this play out over time in terms of either quantity, which is very different. That's the other thing to think about, [ Kevin ]. Quantity per unit revenue for an autonomous security robot is materially different than a call box or an e-phone. So we're in uncharted territory. No one in the history of mankind has done this before. So for me to sit here, [ Kevin ], and tell you, oh, yes, we know exactly what's going to happen, it's like there's no credibility there. I think we just need to keep pushing forward. I think the positive thing I can share is, it's green lights on both sides. And a lot of cases, I'm looking for synergies across the portfolio, and we want to be able to tell a client, yes, as much as we can as opposed to, no, we don't do that. So I think things are looking up and the numbers reflect it.

Okay. And just a couple of more quick things. I think you already mentioned maybe and I just want to make sure that the -- there's no new update on the FedRAMP process yet or the federal government status?

Yes. I wish. Unfortunately, [ Kevin ], I don't have anything to share. It's not the most -- going to be polite here...

I know the government's slow...

It's not the most transparent process, how about that?

Yes. Yes, the government moves slow. I don't know. It irritates me. I've been with them all the time, too. And then my last little piece of my question was just, are we seeing any relief in terms of parts, supply and manufacturing on producing additional units to get out in the field?

Yes, no and maybe. Like, I mean, [ Kevin ], I'm not trying to be funny, but every day is like a new drama. We thought we were good over here and then all of a sudden, it's a problem. Or we have an intermittent problem. It's -- for 2 weeks we're going to be stuck here. I'm hoping it starts leveling out. We did hire, I think I mentioned earlier, a full-time supply -- senior supply chain manager who can keep a closer eye on it and try to plan ahead better. Stuff that we never thought we'd have a supply chain issue ends up being a massive problem. It could be a wiring harness. It could be a connector. It could be a resistor. I mean it's all over the map. We're working through it. And obviously, you can see that we've been shipping and reflecting it on the revenue side of things. But I don't -- I wouldn't want to say that, yes, it's all green lights going ahead. It's -- I think the best thing we can say is it's going to be choppy. And it's -- that's not necessarily healthy for us or the clients to have a mad rush of stuff come in. It doesn't help on the production, quality, deployment, client experience type of things, but we've kind of just need to work through it.

Okay. So we don't necessarily expect any drastic improvement to that, like within the next, I don't know, 12, 24 months or anything like that? I mean do we expect it to be an ongoing issue for a while?

I hope it's not, [ Kevin ]. I can't forecast that. And the problem, [ Kevin ], it's that we get caught by surprise. It's not that it's something we internally did. It's -- sometimes it's a Tier 3 supplier. The guy who gave another part to another part and then ends up affecting us. And we don't have visibility and it's happening across -- it's not just us across a number of sectors. And I don't know if the next 12 or 24 -- I'm hoping the next 12 to 24 months are going to be a lot better than what the hell we just went through. But I can't promise that, [ Kevin ]. [ Alan Stone ].