Knightscope, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; balance-sheet comparisons are to December 31, 2022. Financial statement amounts below are in millions unless otherwise noted. Knightscope develops and deploys autonomous security robots (ASRs), related software and services, and Blue Light emergency communications products, including products acquired with CASE Emergency Systems in October 2022.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $3.563 | $1.042 | $6.460 | $1.985 |
| Gross profit (loss) | $0.009 | $(0.690) | $(0.204) | $(1.240) |
| Operating expenses | $5.954 | $6.544 | $12.262 | $14.197 |
| Operating loss | $(5.945) | $(7.234) | $(12.466) | $(15.437) |
| Net income (loss) | $(4.798) | $0.868 | $(7.242) | $(8.729) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(11.215) | $(13.638) |
- Q2 revenue increased about 242% year over year; six-month revenue increased about 225%. Product revenue was $1.738 million in Q2 and $2.887 million for the first half, primarily from Blue Light Towers, E-Phones, and Call Boxes acquired with CASE. Service revenue was $1.825 million and $3.573 million, respectively.
- Q2 gross margin was approximately 0.3%; first-half gross margin was approximately negative 3.2%. In Q2, service operations generated a gross loss of about $0.817 million, partly offset by approximately $0.826 million gross profit on product sales.
- Q2 net income in 2022 was mainly supported by a substantially larger noncash gain from the revaluation of warrant liabilities. In Q2 2023, the warrant fair-value gain was $1.193 million versus $8.125 million a year earlier. First-half net loss improved year over year, but operating losses remained substantial.
- Operating expenses declined year over year in the first half, particularly sales and marketing and research and development; general and administrative expense rose 31% to $6.913 million, including higher corporate, legal, financial, accounting, and investor-relations costs.
- At June 30, cash and cash equivalents were $5.842 million, with $0.100 million restricted cash; current assets were $11.958 million and current liabilities $9.341 million. Total liabilities were $15.949 million. Debt obligations were $0.546 million, all current; the 2022 convertible notes had been fully retired through conversion to Class A shares.
- First-half investing cash use was $2.147 million, principally ASR investment and equipment purchases. Financing provided $14.494 million, including equity-sale proceeds. Cash, cash equivalents, and restricted cash ended the period at $5.942 million.
- Stockholders’ deficit was $25.318 million and accumulated deficit was $146.582 million at June 30. Class A shares outstanding rose to 63.5 million from 28.0 million at year-end; the filing reports 67.3 million Class A shares outstanding as of August 2, 2023.
Material changes and operating developments
- The CASE acquisition expanded revenue through emergency communications product sales and associated service and maintenance. The company attributed higher service costs partly to acquired personnel, service vehicles, warranty costs, depreciation and amortization, and cellular fees.
- Knightscope issued 21.97 million Class A shares under its at-the-market program during the first half, reporting approximately $12.9 million net proceeds under the program. It reported approximately $6.6 million remaining ATM capacity at June 30. Separately, the cash-flow statement reports $14.236 million of proceeds from equity sales; the filing does not clearly reconcile this total to the program-specific amount.
- During the first half, 10.43 million Class A shares were issued in conversions of the 2022 convertible notes, representing $6.075 million of principal. The associated common-stock warrants remain outstanding.
- Backlog was approximately $4.9 million as of July 30, 2023: $2.1 million for ASRs and $2.8 million for emergency communications devices and Call Boxes. Backlog is not equivalent to recognized revenue and may be affected by delivery and deployment timing.
- Nasdaq notified the company in July 2023 that it had regained compliance with both the minimum market-value and minimum-bid-price listing requirements.
Outlook, risks, contingencies, and unusual items
- Going concern and funding: Management stated that the company expects average operating losses and negative cash flows of approximately $1.0 million per month for the next several months and will need additional funding within the next 12 months. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern. Management reported cash of approximately $6.4 million as of July 31, after ATM proceeds and collections, and no assurance that sufficient financing will be available.
- Business outlook: Management cited growing sales inquiries and a strong pipeline, but noted long enterprise and municipal sales cycles, continuing potential supply-chain constraints, and the risk that deployment delays may defer revenue. It is pursuing operational efficiencies, lower fixed and support costs, and assembly-line production. No specific revenue or earnings guidance was provided.
- Operational and market risks: Management identified competition, production cost, quality and product-feature pressures; unpredictable component availability; inflation and higher operating costs; and dependence on successful scaling and customer adoption. The company plans to focus on U.S. sales and deployments for the foreseeable future.
- Sales-tax exposure: The company recorded a use-tax liability of $0.6 million at June 30, up from $0.4 million at year-end. It noted potential additional exposure if authorities determine that sales taxes should have been collected on MaaS subscriptions, while stating it did not currently expect claims to have a material effect.
- Accounting adjustments: The company corrected an acquisition-related error by increasing goodwill and deferred revenue by $0.578 million, and recorded an additional $0.062 million interest expense in Q2. Management determined the errors were immaterial to previously issued periods.
- Other items: A CASE seller note with a $0.560 million original amount was extended to October 6, 2023, with installments due after quarter-end. No material litigation was reported. Management stated disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Available cash, monthly cash burn, and the timing, amount, and terms of any additional financing; assess the going-concern warning and potential dilution.
- ATM proceeds and remaining capacity, including the difference between the reported program-specific net proceeds and total equity-sale proceeds in the cash-flow statement.
- Whether backlog converts into delivered deployments and recognized revenue, and whether product growth can offset continuing service losses and operating expenses.
- Potential further sales-tax liabilities, the CASE seller-note repayment, and any changes in supply-chain conditions or deployment schedules.
- Share-count changes and potential dilution from preferred stock, warrants, and stock options, as well as ongoing Nasdaq listing compliance.