Knightscope, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Financial amounts below are in millions unless stated otherwise. Knightscope develops autonomous security robots, related software and services, and emergency communications products. Results include the CASE Emergency Systems business acquired in October 2022.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $3.324 | $1.296 | $9.784 | $3.281 |
| Gross profit (loss) | $0.050 | $(0.899) | $(0.154) | $(2.139) |
| Operating expenses | $6.533 | $6.876 | $18.795 | $21.073 |
| Operating loss | $(6.483) | $(7.775) | $(18.949) | $(23.212) |
| Net loss | $(8.342) | $(5.238) | $(15.584) | $(13.967) |
| Net loss per share | $(0.11) | $(0.14) | $(0.26) | $(0.40) |
Q3 gross margin was approximately 1.5%, compared with negative 69% a year earlier; nine-month gross margin was negative 1.6%, compared with negative 65% in 2022. Revenue growth reflected CASE-related Blue Light Tower, E-Phone and Call Box product sales and associated services. Product revenue was $1.409 million in Q3 and $4.296 million for the nine months; the comparable 2022 periods had no product revenue reported.
- Cash flow: For the first nine months, operating cash use was $18.158 million, investing cash use was $3.583 million, and financing provided $21.642 million. Cash, cash equivalents and restricted cash ended at $4.711 million, including $4.611 million of cash and cash equivalents.
- Balance sheet and liquidity: At September 30, cash and cash equivalents were $4.611 million; current assets were $11.182 million and current liabilities $7.696 million. Total liabilities were $15.905 million. Accumulated deficit was $154.924 million and stockholders’ deficit $25.171 million.
- Debt: Reported debt obligations were $0.273 million, all current, at September 30. The $6.075 million principal balance of convertible notes had been converted into shares by June 26, 2023. The remaining seller’s note was paid in full on October 5, 2023.
Changes and notable items
- Nine-month revenue nearly tripled year over year, while operating loss narrowed by $4.263 million. The gross loss also narrowed substantially as product sales contributed gross profit.
- Despite improved operating results, nine-month net loss increased by $1.617 million. Other income was lower than in 2022, largely reflecting smaller gains from fair-value changes in warrant liabilities; Q3 recorded a $1.800 million warrant-liability expense versus $2.543 million of income a year earlier. These fair-value movements are non-cash and can make reported earnings volatile.
- Operating expenses decreased overall for the nine-month period, with lower research and development and sales and marketing costs partly offset by higher general and administrative costs. The company recorded $0.149 million of restructuring charges related to a January 2023 workforce reduction.
- The company raised $20.3 million net through its at-the-market (ATM) equity program during the first nine months, issuing 30.8 million shares. Class A shares outstanding rose from 28.0 million at December 31, 2022 to 73.4 million at September 30, 2023. After quarter-end, it sold a further 2.05 million shares for approximately $1.4 million net through November 10.
- After quarter-end, the company began offering up to $10 million of unsecured bonds bearing 10% annual interest and maturing five years after issuance. Through October 31, it issued $0.421 million principal and received approximately $0.394 million net.
Outlook, risks and contingencies
- Going concern: Management states the company needs additional financing to sustain operations and that substantial doubt exists about its ability to continue as a going concern for the next 12 months. It projected operating losses and negative operating cash flows averaging approximately $1.0 million per month for the next several months; cash was approximately $3.4 million as of November 7, 2023. The company warns that insufficient financing could require it to reduce or discontinue operations or development.
- Business outlook: Management described demand and the sales pipeline as growing, but noted lengthy enterprise and municipal sales cycles. Backlog was approximately $4.1 million as of October 29, comprising $2.4 million of ASR orders and $1.7 million of emergency communications and Call Box orders. Management aims to improve production, deployment efficiency and margins; the filing provides no quantified revenue or earnings guidance.
- Execution risks: Supply chain constraints and component availability may delay deployments and revenue recognition. Other cited risks include inflation and operating costs, competition, customer readiness, and the company’s ability to scale production and reduce costs.
- Nasdaq: The company received notice on October 26 that its share price had been below $1.00 for 31 consecutive business days. It has until April 23, 2024 to regain compliance by meeting the minimum bid price for at least 10 consecutive business days; failure could lead to delisting.
- Contingencies and unusual items: The company recorded a $0.4 million use-tax liability and said potential sales-tax exposure could be material, though it does not currently expect claims to materially affect results. It also corrected an acquisition-related deferred revenue and goodwill error by $0.578 million, which it determined was immaterial to prior periods.
Important facts for investors to verify
- Current financing capacity, actual cash burn and whether ATM sales or bond proceeds can meet near-term funding needs.
- Whether backlog converts into deployments and recognized revenue, and whether supply constraints or lengthy sales cycles cause delays.
- Gross margins and service economics as CASE products and the ASR installed base scale.
- Further share issuance, dilution, bond uptake and the terms or availability of additional financing.
- Progress toward Nasdaq’s minimum-bid-price requirement and any related listing consequences.
- Potential sales-tax exposure and the assumptions behind reported warrant fair values and other non-cash earnings effects.