Knightscope, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2021. The filing was signed March 14, 2022. Unless stated otherwise, financial amounts below are in U.S. dollars and millions; the financial statements are unaudited.
Business context
Knightscope develops, builds, deploys, and supports autonomous security robots (ASRs) and its Knightscope Security Operations Center software. Its Machine-as-a-Service model generally leases ASRs with software access and support. The company reported 30 clients and 52 machines in its network at September 30, 2021; it cited a backlog of 28 ASRs with approximately $1.6 million in aggregate annual subscription value.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $0.784 | $0.720 | $2.561 | $2.358 |
| Gross loss | $(0.525) | $(0.579) | $(1.265) | $(1.127) |
| Operating expenses | $3.469 | $3.332 | $14.420 | $8.449 |
| Operating loss | $(3.994) | $(3.911) | $(15.685) | $(9.576) |
| Net loss | $(4.895) | $(4.598) | $(27.636) | $(13.739) |
| Net loss attributable to common stockholders | $(5.081) | $(4.763) | $(28.181) | $(14.224) |
- Margins: Gross margin remained negative: approximately -67% in Q3 2021 versus -80% in Q3 2020, and -49% for the first nine months of 2021 versus -48% in 2020.
- Cash flow: Nine-month operating cash use was $13.619 million and investing cash use was $1.819 million; financing provided $18.051 million. Cash and cash equivalents were $9.670 million at September 30, 2021, plus $0.100 million restricted cash.
- Liquidity and balance sheet: Working capital was $1.8 million. Total liabilities were $27.364 million, including $5.598 million of current debt obligations, principally convertible notes. Preferred-stock warrant liabilities totaled $17.994 million. Accumulated deficit was $97.427 million and stockholders’ deficit was $93.489 million. Preferred stock had a stated aggregate liquidation preference of $93.261 million.
- Subsequent liquidity update: Management reported cash of approximately $22 million as of March 14, 2022, including proceeds from a later Regulation A offering. It projected operating losses and negative cash flow of approximately $1.5 million per month for the following several months and stated working capital was sufficient for at least 12 months of operations.
Changes versus the prior comparable period
- Nine-month revenue increased 9%, but cost of revenue rose 10%, leaving the gross loss wider by $0.138 million.
- Nine-month operating expenses rose $5.971 million, led by sales and marketing (+$2.770 million), research and development (+$1.610 million), and general and administrative (+$1.592 million).
- Nine-month net loss approximately doubled. A $10.737 million noncash loss from remeasuring warrant liabilities was a major contributor; the comparable 2020 charge was $2.424 million.
- Operating cash use increased from $10.066 million to $13.619 million. Financing cash inflow declined from $20.244 million to $18.051 million.
Outlook, risks, contingencies, and unusual items
- Management said demand and its sales pipeline were growing, but enterprise sales cycles can be lengthy. It cited limited cash and resources, supply-chain delays, higher component minimum orders, and COVID-19-related client cancellations or deployment delays as constraints on performance.
- Management expected supply-chain constraints and elevated costs to continue through 2021 and 2022; the filing also warns that delays and cost pressures could affect deployments, revenue timing, and profitability into 2023. It expects gross-loss improvement with scale but provided no quantified profitability guidance.
- The company stated it depends on additional fundraising and disclosed substantial doubt about its ability to continue as a going concern in connection with its history of losses and negative operating cash flows. It warned that insufficient financing could force it to reduce, delay, or discontinue operations.
- After quarter-end, Knightscope received $8.1 million in convertible notes through November 18, 2021. Note terms were amended to extend maturity to January 1, 2024 and reduce interest to 3% starting January 1, 2022. The notes and accrued interest converted into Class A common stock on January 5, 2022. The company’s Class A stock began trading on Nasdaq on January 27, 2022; its Regulation A offering generated approximately $20.2 million in net proceeds.
- The company recorded a $0.435 million sales and use tax liability at September 30, 2021. It said possible tax assessments could be material, although it did not then expect claims to materially affect its financial statements. It reported no identified legal claims expected to have a material adverse effect.
- A previously identified material weakness in internal financial-reporting controls related to accounting resources, oversight, records, and timely reporting. The company had hired an in-house accounting team and said remediation efforts were continuing.
- The filing’s cover indicates “No” in response to whether all required Exchange Act reports had been filed during the preceding 12 months. The filing text does not explain this checkbox; the filing date was more than five months after quarter-end.
Important facts for investors to verify
- Whether the stated $22 million cash balance and at-least-12-month runway adequately account for ongoing monthly cash burn, deployment spending, and future financing needs.
- Whether the 28-ASR backlog converts to deployments and recurring revenue, and whether the company can improve gross margins as it scales.
- The terms, dilution, and priority effects of preferred stock, convertible notes, warrants, and the preferred-stock liquidation preferences.
- Progress on remediating the material weakness in internal controls and the reason the cover page marks “No” for timely filing compliance.
- Potential exposure from sales and use taxes, supply constraints, COVID-19-related client disruption, and the company’s continuing dependence on external capital.
- Check a reported-value inconsistency: The statement of operations reports Q3 2021 loss before income taxes of $(4.895) million, while the MD&A comparison table reports $(4.741) million. Investors should consult the filed financial statements and any subsequent clarification.