Knightscope, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed March 31, 2022. This is an annual report, not a standalone fourth-quarter results report. Knightscope develops and operates autonomous security robots (ASRs) and its Knightscope Security Operations Center (KSOC), primarily under annual Machine-as-a-Service subscriptions.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $3.407 million | $3.335 million |
| Cost of revenue | $5.464 million | $4.634 million |
| Gross loss / gross margin | $2.057 million / (60%) | $1.299 million / (39%) |
| Operating expenses | $22.498 million | $13.343 million |
| Operating loss | $24.555 million | $14.642 million |
| Net loss | $43.843 million | $19.341 million |
| Net loss attributable to common stockholders | $44.451 million | $19.999 million |
| Basic and diluted loss per share | $4.18 | $1.96 |
| Cash used in operating activities | $20.106 million | $15.169 million |
| Cash used in investing activities | $2.333 million | $0.632 million |
| Cash provided by financing activities | $26.131 million | $22.249 million |
- Revenue was nearly flat, up about 2%, as new deployments were offset by supply-chain delays, growing backlog and subscription terminations. Cost of revenue rose about 18%, worsening the gross loss.
- Operating expenses increased about 69%, led by sales and marketing ($12.017 million), R&D ($5.601 million) and general and administrative ($4.880 million). Advertising expense alone was $9.7 million.
- Other expenses included $15.718 million from remeasurement of preferred-stock warrant liabilities and $4.333 million of net interest expense. The warrant remeasurement is a significant non-cash item; it substantially contributed to the reported net loss.
- At year-end, cash and cash equivalents were $10.749 million; working capital was $1.1 million; accumulated deficit was $113.7 million; and stockholders’ deficit was $82.9 million. Current liabilities included $7.109 million of debt obligations. The $30.566 million preferred-stock warrant liability was also reported.
- Management estimated average operating losses and negative cash flows of about $1.5 million per month for the following several months. It stated that available resources supported at least 12 months of operations, while also warning that further financing would be needed and was not assured.
Material developments and outlook
- After year-end, the company reported approximately $20.2 million of net proceeds from its Regulation A offering, converted outstanding notes and accrued interest into 6,513,385 Class A shares on January 5, 2022, and listed its Class A stock on Nasdaq on January 27, 2022. Cash was approximately $22.3 million as of March 16, 2022, according to the filing.
- In November 2021, convertible-note maturity was extended to January 1, 2024 and the interest rate was reduced from 12% to 3% beginning January 1, 2022. The notes automatically converted upon the company’s exchange listing; the stated conversion price was $2.50 per share.
- Year-end orders outstanding were approximately $1.1 million, compared with $0.7 million a year earlier; orders outstanding were approximately $1.7 million on March 18, 2022. The filing gives no formal revenue or earnings guidance.
- Management planned a fifth-generation K5 release later in 2022, a second-generation K1, development of the K7 multi-terrain robot and KSOC version 7.0. FedRAMP authorization was targeted for around year-end 2022, but timing and resulting federal sales were uncertain.
- Management cited COVID-19 and global supply-chain constraints, including component shortages and higher freight costs, as risks to production, deployment timing, revenue recognition and margins; it expected some delays to continue in 2022. The filing also cites the continuing Ukraine conflict as a source of supply-chain risk.
- The company reported concentration in a small number of clients: two clients each accounted for at least 10% of FY2021 revenue (15% and 10%). It had 55 full-time employees at year-end and assembled robots using components from more than 75 suppliers.
Risks, controls and unusual items
- The company has a history of substantial losses, negative operating cash flow and dependence on additional fundraising. Failure to secure adequate capital could require reductions, delays or discontinuation of operations or product development.
- Management concluded disclosure controls were ineffective at December 31, 2021 and disclosed a material weakness in financial-reporting controls, associated with insufficient technical accounting and SEC-reporting expertise and resources. The company planned to add technical accounting professionals. The auditor issued an unmodified opinion on the financial statements but did not opine on internal-control effectiveness.
- The filing identifies customer concentration, limited deployments and market acceptance, lengthy sales cycles, privacy and data-security regulation, robot safety and liability, competition, supply-chain and inflation exposure, and reliance on key personnel as business risks.
- Preferred-stock warrant valuation is based on Level 3 inputs and changes can materially affect reported earnings. Preferred securities also have substantial liquidation preferences; Series m-4 has senior priority and a 12% in-kind dividend.
- Super-voting securities represented approximately 86.8% of total voting rights as of February 28, 2022. The filing also describes potential dilution from convertible securities, preferred-stock conversions, warrants and employee equity awards.
- No material legal proceeding was identified as expected to materially affect the company. The company recorded a sales and use tax liability of approximately $0.5 million at year-end and noted possible additional exposure depending on tax authorities’ treatment of its MaaS offering.
Important facts for investors to verify
- Whether post-listing proceeds and cash levels, after the stated burn rate and other commitments, provide adequate runway; and whether additional capital will be required.
- Whether deployments, revenue and backlog are converting to recurring subscription revenue, and whether gross margins can improve from the FY2021 negative margin.
- Current status of supply constraints, client terminations or delayed deployments, and the extent of customer and supplier concentration.
- Progress in remediating the material weakness and improving disclosure controls, including subsequent-period reporting.
- Actual timing and costs of K5/K1/K7 development and FedRAMP authorization, and whether these initiatives produce commercial contracts.
- The post-conversion share count, remaining preferred-stock and warrant overhang, voting control and potential dilution. The filing states that certain holders converted approximately 11.4 million shares to Class A common stock between January 1 and March 30, 2022.
- The cover page marks “No” for having filed all required Exchange Act reports during the preceding 12 months; investors should confirm the meaning and any filing-compliance implications.