Knightscope, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; compared with Q1 2021. Financial statement amounts are in thousands of dollars unless stated otherwise. Knightscope develops and provides autonomous security robots and related software through a Machine-as-a-Service subscription model.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $944 | $866 |
| Gross loss (margin) | $(549) (-58%) | $(317) (-37%) |
| Operating expenses | $7,654 | $4,740 |
| Operating loss | $(8,203) | $(5,057) |
| Net loss | $(9,597) | $(5,577) |
| Net loss per common share | $(0.30) | $(0.56) |
| Cash used in operating activities | $(8,352) | $(5,758) |
| Cash used in investing activities | $(805) | $(387) |
At March 31, 2022, cash and cash equivalents were $21.1 million, working capital was $19.7 million, and accumulated deficit was $123.3 million. Total liabilities were $27.6 million, including $22.7 million of preferred-stock warrant liabilities; stockholders’ deficit was $38.7 million. Debt obligations were zero after convertible notes and accrued interest of approximately $16.0 million converted into Class A common stock in January. Operating lease liabilities totaled $979,000.
Changes and notable items
- Revenue increased about 9% year over year, but cost of revenue rose faster, widening gross loss to $549,000 from $317,000.
- Operating expenses increased 61%. R&D rose 63% to $1.8 million, sales and marketing rose 14% to $3.5 million, and general and administrative expense rose 328% to $2.3 million. The company attributed increases to hiring, product development, marketing, and public-listing-related professional costs.
- Net loss included $8.9 million of interest expense, primarily an $8.8 million noncash write-off of remaining debt discount when the notes converted. A $7.5 million gain from warrant-liability remeasurement partly offset that expense.
- Financing provided $19.5 million, primarily from the Class A Regulation A offering, which concluded in January. Cash rose by $10.3 million during the quarter.
- Common shares issued increased materially through the offering, note conversion, and preferred-stock conversion. At March 31, the company also reported 13.6 million preferred shares outstanding, 8.5 million options, and warrants and other securities that may result in further dilution.
Outlook, risks and contingencies
Management reported a backlog, as of May 2, 2022, of orders to deploy 29 robots with approximately $1.6 million in aggregate annual subscription value. It cited a growing sales pipeline but noted lengthy enterprise sales cycles. No formal revenue or earnings guidance was provided. Management expected operating losses and negative cash flows of approximately $1.5 million per month for the next several months, and said working capital was sufficient for at least twelve months of operations as of the report date.
- Supply-chain delays, higher component minimum orders, COVID-19-related customer budget and site-access constraints, and the conflict in Ukraine affected deployments and costs; management expected supply constraints to continue through 2022 and into 2023.
- On April 4, 2022, as amended April 11, Knightscope entered a committed equity facility allowing it, at its discretion and subject to conditions, to sell up to $100 million of Class A stock to B. Riley over 24 months. This is a potential funding source, not guaranteed proceeds, and could dilute shareholders.
- The company disclosed a material weakness in internal control over financial reporting related to technical accounting and SEC-reporting expertise and insufficient finance resources. Disclosure controls were deemed ineffective as of March 31; management planned to add technical accounting capacity.
- The company recorded a $400,000 use-tax liability and warned that uncollected sales taxes could create additional material liabilities. It reported no legal proceedings believed likely to have a material adverse effect.
- Management identified limited operating history, market acceptance, financing needs, competition, privacy requirements, and its ability to scale operations and manage expenses as risks. The company has incurred recurring operating losses and negative operating cash flow.
Key facts for investors to verify
- Whether the 29-robot backlog converts into deployments and recurring revenue, and the timing and collectability of the stated $1.6 million annual subscription value.
- Actual cash burn and runway relative to management’s estimate, and whether the B. Riley facility can provide usable capital on acceptable terms.
- Deployment growth, unit economics, and progress toward reducing the negative gross margin.
- Potential dilution from preferred stock, warrants, options, note conversion shares, and any equity-facility sales.
- Remediation of the disclosed material weakness and any subsequent changes in financial reporting controls.