Knightscope, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Knightscope develops and deploys Autonomous Security Robots (ASRs) and related software through a Machine-as-a-Service subscription model. Amounts below are in millions of dollars unless otherwise stated.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $1.042 | $0.912 | $1.985 | $1.778 |
| Gross loss | $(0.690) | $(0.423) | $(1.240) | $(0.740) |
| Operating expenses | $6.544 | $6.210 | $14.197 | $10.951 |
| Operating loss | $(7.234) | $(6.633) | $(15.437) | $(11.691) |
| Net income (loss) | $0.868 | $(17.163) | $(8.729) | $(22.740) |
| Net cash used in operating activities | Not provided for quarter | Not provided for quarter | $(13.638) | $(10.517) |
- Revenue increased 14% in Q2 and 12% in the first half year over year. Gross margin remained negative and worsened to approximately negative 66% in Q2 and negative 62% for the first half, compared with negative 46% and negative 42%, respectively.
- Q2 reported net income was driven by a $8.125 million noncash gain from the change in fair value of warrant liabilities; the company still recorded a $7.234 million operating loss. The first-half net loss included $8.910 million of net interest expense, principally the $8.878 million amortization of debt discount upon conversion of the notes.
- At June 30, cash and cash equivalents were $15.639 million, versus $10.749 million at December 31, 2021; working capital was $13.2 million. Total liabilities were $19.973 million, including $14.549 million of preferred-stock warrant liabilities. Debt obligations were zero after conversion of the notes. Stockholders’ deficit was $33.076 million.
- First-half investing cash outflow was $1.727 million; financing cash inflow was $20.155 million. Cash increased by $4.790 million over the period.
- Revenue is mainly ASR subscription revenue recognized over contract terms. Deferred revenue was $1.544 million, up from $0.889 million at year-end.
Material changes versus comparable periods
- Operating costs rose: first-half cost of revenue increased 28%, research and development increased 47%, and general and administrative expense increased $3.621 million. G&A growth reflected personnel and public-company, legal, financial and regulatory costs.
- Sales and marketing expense declined 25% for the first half, primarily because 2021 included higher advertising and virtual-tradeshow spending.
- Warrant fair-value changes swung from expense of $10.737 million in the first half of 2021 to income of $15.647 million in 2022, materially affecting reported net loss. These are noncash remeasurements.
- On January 5, 2022, approximately $16 million of convertible notes and accrued interest converted into 6,513,385 Class A shares. The company also completed its Regulation A offering in January, generating $19.6 million net proceeds.
Outlook, risks and unusual items
- Management reported a backlog as of August 10, 2022 of 35 ASRs to deploy, with approximately $1.9 million in aggregate annual subscription value. This is not recognized revenue; deployment timing and supply constraints may affect conversion.
- Management said cash and access to the committed equity facility were sufficient to fund at least 12 months of operations. The April 2022 B. Riley facility allows, subject to conditions and an exchange cap, up to $100 million of Class A stock sales at the company’s option; $0.4 million net proceeds had been raised by June 30. Additional equity financing could dilute existing holders.
- No specific revenue, earnings or margin guidance was provided. Management’s stated priorities include meeting demand, scaling deployments, improving sales processes and reducing costs. It expects supply-chain delays and higher minimum component orders to persist through 2022 and 2023.
- Management cited COVID-19-related client delays or service pauses, supply-chain constraints, and the conflict in Ukraine as factors that have disrupted production and deployments. Lengthy enterprise sales cycles, competition, limited market acceptance and continued financing needs are additional risks.
- Disclosure controls and procedures were assessed as ineffective at June 30, 2022 because of a material weakness in financial reporting controls, including insufficient technical accounting and SEC-reporting expertise. The company said it was adding accounting staff and implementing process improvements.
- The company recorded a $0.5 million use-tax liability and noted potential sales-tax exposure. It said it did not then expect claims to have a material effect, but an adverse tax determination could create material liabilities. No material legal proceedings were identified.
- In June, Knightscope announced the K1 Hemisphere and began accepting pre-orders. The filing also describes 2022 equity-plan authorization of up to 5 million shares, in addition to outstanding options and other potentially dilutive securities.
Important facts for investors to verify
- Whether the 35-ASR backlog is deployed on schedule and converts into recurring revenue, given supply constraints and the timing of client access.
- Cash burn and financing runway against the company’s stated 12-month funding assessment, including the actual availability and terms of remaining B. Riley facility capacity.
- Potential dilution from the equity facility, preferred shares, warrants, options and equity incentive plans; the filing reports 26.4 million shares reserved for future issuance.
- Progress in remediating the material weakness and whether disclosure controls become effective.
- Underlying operating performance excluding noncash warrant revaluations and debt-discount amortization, particularly gross margin and deployment/service costs.