Knightscope, Inc. — Q3 2022 Form 10-Q
Business context and period. Knightscope designs, builds, deploys and supports autonomous security robots (ASRs) and related software. Its Machine-as-a-Service subscriptions generally lease ASRs and provide access to its Knightscope Security Operations Center software. This unaudited report covers the three and nine months ended September 30, 2022; financial statement amounts below are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1.296 | $0.784 | $3.281 | $2.561 |
| Gross loss | $(0.899) | $(0.525) | $(2.139) | $(1.265) |
| Gross margin | (69%) | (67%) | (65%) | (49%) |
| Operating expenses | $6.876 | $3.469 | $21.073 | $14.420 |
| Loss from operations | $(7.775) | $(3.994) | $(23.212) | $(15.685) |
| Net loss | $(5.238) | $(4.895) | $(13.967) | $(27.636) |
| Net loss per common share | $(0.14) | $(0.50) | $(0.40) | $(2.77) |
- Q3 revenue grew 65% year over year; nine-month revenue grew 28%. Revenue was primarily subscription revenue recognized over time.
- Gross losses widened as cost of revenue rose faster than revenue, reflecting increased personnel, ASR production, service and maintenance costs, including inflation-related costs.
- Nine-month operating cash use was $18.391 million, investing cash use $2.832 million, and financing cash inflow $21.443 million. Cash increased by $0.220 million to $11.069 million, including restricted cash in the cash-flow comparison.
- At September 30, cash and cash equivalents were $11.069 million, working capital was $7.9 million, and accumulated deficit was $127.7 million. Debt obligations were zero at quarter-end after the convertible notes converted to common stock; the company recorded $8.9 million of debt-discount amortization as interest expense during the nine-month period.
- Preferred-stock warrant liabilities were $12.006 million at quarter-end. A $18.190 million favorable change in their fair value contributed materially to the lower nine-month net loss; this is a valuation-driven, non-operating item.
Changes, outlook and material developments
- Operating expenses increased 46% year over year for the first nine months. R&D rose 54%, G&A rose 156%, and sales and marketing declined 6%. G&A increases included public-company, professional-services, personnel and stock-compensation costs.
- Management cited new client activity and a growing sales pipeline, but noted lengthy enterprise sales cycles. As of November 2, 2022, reported backlog was 289 units and approximately $3.9 million: 240 Case Emergency Systems units ($1.4 million) and 49 ASRs (approximately $2.5 million in aggregate annual subscription value). Management cautioned that delays or cost increases could lead clients to postpone or terminate agreements.
- Management expects supply-chain constraints, higher component costs and extended lead times to continue through the remainder of 2022 and into 2023, potentially delaying deployments and revenue recognition. COVID-related client budget and site-access issues were also cited. The company is investing in product development, including the K1 Hemisphere and an upgraded K5, while aiming to scale production and reduce unit and service costs. No quantified earnings or revenue guidance was provided.
- The filing disclosed substantial doubt about the company’s ability to continue as a going concern, citing recurring operating losses and negative operating cash flows. Management said the January 2022 offering proceeds and access to the B. Riley equity facility alleviated that doubt and stated that available working capital and facility access were sufficient for at least twelve months as of the report date. The facility permits, but does not require, up to $100 million of stock sales, subject to limits and conditions.
- After quarter-end, the company completed its acquisition of Case Emergency Systems. Consideration included $6.16 million cash, subject to adjustments and a holdback, plus a $0.56 million promissory note. It also raised $5.0 million gross proceeds through senior secured convertible notes with $6.075 million principal, an approximately 17.65% original issue discount, and warrants. The notes are secured by substantially all company assets, have monthly principal installments beginning April 2023, and mature September 15, 2024 unless earlier converted.
- Disclosure controls were reported ineffective at September 30, 2022 because of a material weakness involving technical accounting and SEC reporting expertise and accounting oversight. Management said it had hired additional accounting staff and continued remediation efforts.
Key investor verification points
- Track cash burn, available financing, and whether the B. Riley equity facility can provide sufficient capital without substantial dilution.
- Review the post-quarter secured notes’ repayment, conversion, redemption and covenant terms, including the $3.0 million minimum available-cash covenant.
- Verify that reported backlog converts into completed deployments and recurring revenue, and monitor supply availability, deployment timing and gross-margin progress.
- Assess acquisition integration, results and costs for Case Emergency Systems, including the cash funding used and the effects of the acquired business on reported backlog.
- Monitor warrant remeasurement effects separately from operating performance, and evaluate potential dilution: 30.9 million shares were reserved for outstanding securities and future grants at quarter-end.
- Follow remediation of the material weakness and the company’s disclosure-control effectiveness in subsequent filings.