Earnings Call Transcript - KSCP Q1 2025

William Li, CEO

Today recording in progress. Nightscope in all things robots. So appreciate everyone taking time out of your busy schedules for us. As we let people in, a few things to cover. One, if you have a question, please use the Q&A button at the bottom of the screen there for you, and we will try to answer your questions. If we can't legally answer what you're asking, we might reword your question. Another thing to note, we will not be sharing any MMPI or material non-public information. We can certainly provide clarifications or stuff that's not material, but no material items. We want to be in strict compliance with our friends over at the SEC and NASDAQ. Still have some people coming in. And then, again, please make sure to ask your questions in the Q&A section at the bottom there. And we will spend a few moments first to have Apoorv walk you through the results from the first quarter. We've had a lot of folks have a little bit of confusion as to when these occur. So, normally, for a 10-Q filing, it's six weeks after the quarter has ended. I get all sorts of love messages and texts like, 'Hey, where's the filing?' It's like, well, I kind of need time to prepare and get all the filings pulled together and all the numbers reviewed by the auditors, etc. So it's six weeks after the quarter has ended. And then a little difference for the year-end, that's usually after the first quarter, is actually fully ended. And then we do the review thereafter, which we just did with all of you last month. So now that we, I think we have more than a quorum, I'm going to turn it over to Apoorv, who's our CFO. He's going to walk you through a pretty exciting first quarter. So, Apoorv, you want to take it away?

Apoorv Dwivedi, CFO

Absolutely. Thanks, Bill. Good afternoon, everyone, and thank you for joining us today. I'm excited and pleased to walk you through our financial results for the quarter ended March 31, 2025, and provide some commentary on our progress. Let's dive right in. Our total revenue for the first quarter was $2.9 million, this is a 29% increase compared to the $2.3 million in the first quarter of 2024. Now this is driven by both growth in service revenue and our product revenue. Our service revenues grew to about $2.1 million, which is up 25% from $1.7 million prior year, primarily due to the strength in both the ASR subscriptions and the full-service maintenance agreements on ECD clients. On the product side, revenues increased by 44% to about $809,000, actually, as compared to the $563,000 in the prior year, primarily because of some of the distribution partnerships that we've created in the past years; they're starting to take off. So this year-over-year growth reflects the expanding deployments across our platform, our product lines, and client retention, as well as expansion in the machine-as-a-service model. Sorry. There you go. On the cost structure, piece or gross loss; let me walk you guys through there. So, our gross loss came in approximately $700,000, which is a meaningful improvement compared to the loss of $1.4 million a year ago. Now, this is driven primarily due to some savings in the total cost of revenue. Our cost of revenue came in slightly lower at $3.6 million this year compared to $3.7 million in Q1. So, not largely flat, but primarily due to the savings from one-time scrap fees that last year, if you recall, we were going through changes in our robots that we were swapping out for the higher version, the version threes versus version fives. And those one-time scrap fees were then offset by higher cost in product to support the increase in sales volume this year. So, importantly, as you can see, we are making tangible progress towards achieving the goal of positive gross margins, primarily driven by price optimization, better asset utilization, and disciplined cost control. Moving on to our operating expenses. Operating expenses for the quarter came in at $6.2 million, as compared to the $6.8 million in 2024. This is about a 9% reduction year-over-year. If I break that down, you can see that research and development expenses were about $2.1 million, which is about 35% higher than Q1 2024. This reflects our continued investment in product innovation and features that expand as we continue to invest in innovation and drive product growth. On the sales and marketing expense side, we actually came in 15% lower at $1.3 million versus the prior year, and this is primarily due to the fact that we continue to make strategic changes in our go-to-market strategy. Finally, G&A expenses came in at $2.8 million. This is almost $800,000 lower than prior year's expenses of $3.6 million last year, primarily due to cost discipline and savings in prior year IR spend, that we had related to the promotion of our public infrastructure bonds in Q1 2024, if you recall, and we also had no restructuring charges this quarter compared to about $100,000 we had in Q1 2024. So, with that, our net operating income or loss actually, loss from operations for the quarter was about $6.8 million. This marked a huge improvement from the $8.3 million in the first quarter of last year. And going one line further, net loss after taking into account other income and expenses came in about 11% lower than prior year's loss of $7.6 million, notably because we did not have to recognize any change in fair value of warrants. So, last year, if you recall, we had these warrant liabilities on our books that were extinguished mid-year, but there was a fair value exercise that we had to run when we have these type of warrants, and there was a $700,000 gain prior year that did not show up this year, but overall, it's a good thing because we no longer have those warrants on our balance sheet. Other income and expenses came in largely flat. Our earnings loss per share improved also to about $1.29 as compared to a loss of almost $4 per share last year. And I want to highlight also that, our cash balance came in stronger this year in Q1 than both Q1 last year and even at the end of 2024, where we had about $11.2 million. So, with that in summary, Q1 2025 reflects continued revenue growth, narrowing gross loss, lower operating expenses, and progress on key operational initiatives that the company is focused on this year. We are focused on basically three main things: One is driving towards a positive gross margin. We're focused on scaling our services and product footprint, and operating the business with increased efficiency and discipline. With that, thank you for your support, and I'll pass it back to Bill.

William Li, CEO

Thanks, Apoorv. And that's exciting that you’ve been with us just a bit over a year and to have a good quarter, as you and I have made with the team, a massive amount of changes the last 15 months, dozens and dozens and dozens of changes all across the business, up and down the income statement, all around the balance sheet, cleaning things up. And finally, it's starting to show up in the numbers, and we're hopeful that trend will continue. So, folks have questions, for Apoorv or myself, please make sure to put them in the Q&A section at the bottom of your screen. But how do you feel overall, Apoorv? I know we just went over the numbers, but like, how are you feeling about the company and the progress just kind of more subjectively?

Apoorv Dwivedi, CFO

Yeah. Look. It's an interesting place to be. We are a company of our size. A lot of times, the performance of the things that we do is largely driven by external events just as much as it is driven by internal events. What I am excited about and have a positive outlook on is that we've talked about this. All of the things that we did last year that we thought were somewhat risky in that sense that we didn't know how they're going to turn out, but we're geared towards driving high growth, driving better margins, more efficiency. They're starting to kind of take hold, and what this tells me is that we just have to continue to execute, and as long as the team is focused on execution, things are positive, and we just got to keep that focus on and continue to make progress towards some of the goals that we have laid out in the long term.

William Li, CEO

Yeah. We made some controversial and difficult decisions. But, I think we would do it all over again. We're heading in the right direction and actually feeling pretty good about things. Okay. Now the questions are starting to pile in.

Apoorv Dwivedi, CFO

So, that's right.

William Li, CEO

So the rule here is the easy ones, I'll do. All the hard ones, you have to do.

Apoorv Dwivedi, CFO

Right.

William Li, CEO

Alright. Scott Buck is in the house. Let's see. Scott, can you provide a little color on how the current level of macro uncertainty may be impacting the conversations you're having with potential customers? You want to try that and I can.

Apoorv Dwivedi, CFO

Sure. Helen? Sure. So, on one hand, I think where the uncertainty is having an impact or will have an impact in my mind is really on the financials. Primarily, if you think about tariffs, right? So, on one hand, you have political uncertainty that likely has less impact on us directly. Although some of the focus on security and national safety is actually, I would say, positive in our favor. On the other side, you have the financial impact of things like tariffs that is, frankly, unknown. We do know that there are some impacts on our suppliers, who have to worry about the components they outsource from foreign-based companies, and those they have to pass on to us. So, we have to figure out how to manage that, and some of that is still being determined, right? Things are changing almost on a daily basis. So, yet to remain. Although, if track, if tariffs do stay and they stay high, we anticipate some impact from that, primarily on, obviously, pricing, to component pricing, to really the lead time for some of the items that we need. Component lead time, we see become elongated when everybody wants the same components, and wants to hold them before the tariffs take effect. So, those are two areas. Obviously, we'll continue to work through them. But on the other side, like I talked about, from a safety and security perspective, I think we're going to see some tailwinds there. Bill?

William Li, CEO

Yes. I think one in the way I view things in chaos is always opportunity. So, I'm actually kind of bullish about the set of circumstances. Second, we are American-made. Yes, we do have some components and the like that may come with a tariff penalty. I think on the subscription side of things, it becomes a lot less of a material item because, if you got a $1,000 widget and now it's $1,500, okay, or how many of those widgets does it really apply to? And then remember, if it's a subscription service, you're not paying that tariff the second, third, fourth, fifth year in the subscription. All our operating costs and everything is dollar-denominated U.S.-based. And then, there's certainly the tailwinds on Buy American and American jobs, for which we're right in the thick of things. And then, not to be funny about it, but like, Chief Security Officers aren't sitting around going or criminals like, 'Hey, what's the tariff amount this month for this country, or what's on my Bloomberg terminal, or what are the markets doing?' Criminal activity is kind of divorced from that. From a very, very macro perspective. Sure, sometimes in more desperate times, things get a little bit worse, but it's kind of on the margins. So, I think we're just kind of, there's always going to be noise, ignore the noise, focus on the signal, and kind of move forward. So, we're not in the market exposure kind of issue where everyone's like, 'Freeze everything,' and it relied solely on imported items, and we've got a, like, literally a business concern that's not what we're frankly focused on. Dane Jones, is the per-share loss improvement partially or mostly due to the reverse split? I forget the timing of it. Apoorv?