UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
EXCHANGE ACT OF 1934
For the quarterly period ended
or
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
(Address of Principal Executive Offices)
(
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | ||
☒ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
| Trading symbol |
| Name of Exchange on which registered |
As of November 8, 2023, there were
TABLE OF CONTENTS
2
Cautionary Note on Forward-Looking Statements
This Quarterly Report on Form 10-Q “this Quarterly Report” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements contained in this Quarterly Report other than statements of historical fact, including but not limited to, statements regarding our future operating results and financial position, including projections of our future financial performance, our business strategy and plans, market growth, our objectives for future operations, industry trends, anticipated trends in our business and other characterizations of future events or circumstances are forward-looking statements. Words such as “believe,” “may,” “will,” “estimate,” “potential,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “target,” and similar expressions are intended to identify forward-looking statements.
Forward-looking statements contained in this Quarterly Report include, but are not limited to, statements about:
● | our expectations regarding future trends, expectations, and performance of our business; |
● | the success and acceptance of our products and product candidates; |
● | our ability to raise capital and the availability of future financing; and |
● | Unpredictable events, such as the COVID-19 pandemic, banking failures, and a rise in the inflation rate resulting in supply chain constraints, increased operating costs, and associated business disruptions could seriously harm our future revenues and financial condition, delay our operations, increase our costs and expenses, and impact our ability to raise capital. |
We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward- looking statements are subject to a number of risks, uncertainties, and assumptions and other factors that could cause actual results to differ materially from those stated, including those described in “Risk Factors” in Part I, Item 1A of our most recent Annual Report on Form 10-K, in Part II, Item 1A of this Quarterly Report, as such factors may be updated in our filings with the Securities and Exchange Commission, (“the SEC”). Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. In particular, disruptions and delays with certain vendors in our supply chain as well as increased operating costs resulting from a rise in the inflation rate, may adversely impact component manufacturers’ ability to meet our client demand timely. Additionally, the prioritization of shipments of certain products, as a result of component availability and client readiness, could cause delays in our ability to deploy our ASRs. Such disruptions could result in a delay in our ability to recognize revenue on sales. The physical security industry in general and our financial position and operating results, in particular, are changing rapidly, and cannot be predicted.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. Our forward-looking statements speak only as of the date of this Quarterly Report, and we undertake no obligation to update any of these forward-looking statements for any reason after the date of this Quarterly Report or to conform these statements to actual results or revised expectations, except as required by applicable law.
In this Quarterly Report, the words “we,” “us,” “our,” the “Company” and “Knightscope” refer to Knightscope, Inc., unless the context requires otherwise.
3
PART I —FINANCIAL INFORMATION
Item 1. Financial Statements
KNIGHTSCOPE, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
| September 30, |
| December 31, | |||
2023 | 2022 | |||||
(unaudited) | (1) | |||||
ASSETS | ||||||
Current assets: |
|
| ||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash |
| |
| — | ||
Accounts receivable (net of allowance for credit losses of $ |
| |
| | ||
Inventory | | | ||||
Prepaid expenses and other current assets |
| |
| | ||
Total current assets |
| |
| | ||
Autonomous Security Robots, net |
| |
| | ||
Property, equipment and software, net |
| |
| | ||
Operating lease right-of-use-assets |
| |
| | ||
Goodwill |
| | | |||
Intangible assets, net |
| | | |||
Other assets | |
| | |||
Total assets | $ | | $ | | ||
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT |
|
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| ||
Current liabilities: |
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| ||
Accounts payable | $ | | $ | | ||
Accrued expenses |
| |
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Deferred revenue |
| |
| | ||
Debt obligations |
| |
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Operating lease liabilities, current |
| |
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Other current liabilities |
| |
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Total current liabilities |
| |
| | ||
Debt obligations | — |
| | |||
Preferred stock warrant liability | |
| | |||
Derivative liability | | | ||||
Other noncurrent liabilities | | | ||||
Operating lease liabilities, noncurrent | |
| | |||
Total liabilities |
| |
| | ||
Commitments and contingencies (Note 8) |
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Preferred Stock, $ |
| |
| | ||
Stockholders’ deficit: |
|
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|
| ||
Class A Common Stock, $ |
| |
| | ||
Class B Common Stock, $ |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Accumulated deficit |
| ( |
| ( | ||
Total stockholders’ deficit |
| ( |
| ( | ||
Total liabilities, preferred stock and stockholders’ deficit | $ | | $ | |
(1) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
KNIGHTSCOPE, INC.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share data)
(Unaudited)
Three-Months Ended September 30, | Nine-months ended September 30, | |||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | |||||
Revenue, net | ||||||||||||
Service | $ | | $ | | $ | | $ | | ||||
Product | | — | | — | ||||||||
Total revenues | | | | | ||||||||
Cost of revenue, net |
|
| ||||||||||
Service | | | | | ||||||||
Product | | — | | — | ||||||||
Total cost of revenues, net | | | | | ||||||||
Gross profit (loss) | | ( |
| ( |
| ( | ||||||
Operating expenses: |
|
|
|
| ||||||||
Research and development | | |
| |
| | ||||||
Sales and marketing | | |
| |
| | ||||||
General and administrative | | |
| |
| | ||||||
Restructuring charges | — | — | | — | ||||||||
Total operating expenses | | |
| |
| | ||||||
Loss from operations | ( | ( |
| ( |
| ( | ||||||
Other income (expense): |
|
|
|
| ||||||||
Change in fair value of warrant liabilities | ( | |
| |
| | ||||||
Interest income (expense), net | ( | — |
| ( |
| ( | ||||||
Other income (expense), net | ( | ( |
| ( |
| ( | ||||||
Total other income (expense) | ( | |
| |
| | ||||||
Loss before income tax expense | ( | ( |
| ( |
| ( | ||||||
Income tax expense | — | — |
| — |
| — | ||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Basic and diluted net loss per common share | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Weighted average shares used to compute basic and diluted net loss per share | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
KNIGHTSCOPE, INC.
Condensed Consolidated Statements of Stockholders’ Deficit
(In thousands, except share and per share data)
(Unaudited)
Series m | Series m‑1 | Series m‑2 | Series m‑3 | Series S | Series A | Series B | Class A | Class B | ||||||||||||||||||||||||||||||||||||||||||||||
Preferred | Preferred | Preferred | Preferred | Preferred | Preferred | Preferred | Common | Common | Additional | Total | ||||||||||||||||||||||||||||||||||||||||||||
Stock | Stock | Stock | Stock | Stock | Stock | Stock | Stock | Stock | Paid-in- | Accumulative | Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount | Shares | Amount |
| capital |
| Deficit |
| Deficit | |||||||||||||||
June 30, 2022 |
| | $ | | | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | | | $ | |
| $ | | $ | ( |
| $ | ( | ||||||||||||
Stock based compensation | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — |
| — |
| |
| — |
| | |||||||||||||||||||||||||||||
Stock options exercised | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | — | — |
| — |
| |
| — |
| | |||||||||||||||||||||||||||||
Shares issued for consulting services | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | — | — | — | | — | | |||||||||||||||||||||||||||||||||
Share conversion to common stock | ( | ( | — | — | — | — | — | — | ( | ( | ( | ( | ( | ( | | — | ( | — | | — | | |||||||||||||||||||||||||||||||||
Proceeds from equity sale, net of issuance costs | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | | — | — | | — | | |||||||||||||||||||||||||||||||||
Share conversion costs | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||
Balance as of September 30, 2022 | | $ | | | $ | | | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | | | $ | |
| $ | | $ | ( |
| $ | ( |
6
Series m | Series m‑1 | Series m‑2 | Series m‑3 | Series S | Series A | Series B | Class A | Class B | ||||||||||||||||||||||||||||||||||||||||||||||
Preferred | Preferred | Preferred | Preferred | Preferred | Preferred | Preferred | Common | Common | Additional | Total | ||||||||||||||||||||||||||||||||||||||||||||
Stock | Stock | Stock | Stock | Stock | Stock | Stock | Stock | Stock | Paid-in- | Accumulative | Stockholders’ | |||||||||||||||||||||||||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| capital |
| Deficit |
| Deficit | |||||||||||||
Balance as of December 31, 2021 |
| | $ | | | $ | | | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| $ | | $ | ( |
| $ | ( | ||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock based compensation | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | — | | |||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Warrants exercised | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | — | — | — | | — | | |||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of debt obligations to Class A Common Stock | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | | — | — | | — | | |||||||||||||||||||||||||||||||||
Stock options exercised | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | — | | — | | — | | |||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Offering proceeds, net of issuance costs | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | | — | — | | — | | |||||||||||||||||||||||||||||||||
Share conversion to common stock | ( | ( | ( | ( | ( | ( | ( | ( | ( | ( | ( | ( | ( | ( | | | ( | ( | | — | | |||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares issued for consulting service | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | — | — | — | | — | | |||||||||||||||||||||||||||||||||
Proceeds from equity sale, net of issuance costs | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | | — | — | | — | | |||||||||||||||||||||||||||||||||
Share conversion costs | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||
Balance as of September 30, 2022 | | $ | | | $ | | | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| $ | | $ | ( |
| $ | ( |
7
Series m | Series m‑1 |
| Series m‑2 |
| Series m‑3 |
| Series S |
| Series A |
| Series B |
| Class A |
| Class B |
| ||||||||||||||||||||||||||||||||||||||
Preferred | Preferred | Preferred | Preferred | Preferred | Preferred | Preferred | Common | Common | Additional | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Stock | Stock | Stock | Stock | Stock | Stock | Stock | Stock | Stock | Paid-in- | Accumulative | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| capital |
| Deficit |
| Deficit | |||||||||||||
Balance as of June 30, 2023 |
| | $ | | — | $ | — | | $ | |
| — | $ | — |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| $ | | $ | ( |
| $ | ( | ||||||||||||
Stock based compensation | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | — | | |||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from equity sale, net of issuance costs | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | | — | — | | — | ||||||||||||||||||||||||||||||||||
Share conversion to common stock | ( | ( | — | — | — | — | — | — | ( | ( | — | — | — | — | | | ( | ( | | — | ||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share conversion costs | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — |
| — |
| — |
| — |
|
| ( | — | ( | ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — |
| — |
| — |
| — |
|
| — | ( | ( | ||||||||||||||||||||||||||||
Balance as of September 30, 2023 | | $ | | — | $ | — | | $ | |
| — | $ | — |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| $ | | $ | ( |
| $ | ( |
Series m | Series m‑1 |
| Series m‑2 |
| Series m‑3 |
| Series S |
| Series A |
| Series B |
| Class A |
| Class B |
|
| |||||||||||||||||||||||||||||||||||||
Preferred | Preferred | Preferred | Preferred | Preferred | Preferred | Preferred | Common | Common | Additional | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Stock | Stock | Stock | Stock | Stock | Stock | Stock | Stock | Stock | Paid-in- | Accumulative | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| capital |
| Deficit |
| Deficit | |||||||||||||
Balance as of December 31, 2022 |
| | $ | | — | $ | — | | $ | |
| — | $ | — |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| $ | | $ | ( |
| $ | ( | ||||||||||||
Stock based compensation | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — |
| — |
| — |
| — |
| |
| — |
| | |||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of debt obligations to Class A Common Stock | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | |
| — | — |
| |
| — |
| | |||||||||||||||||||||||||||||
Stock options exercised | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | — | | — | | — | | |||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from equity sale, net of issuance costs | — | — | — | — | — | — | — | — | — | — | — | — | — | — | | | — | — | | — | | |||||||||||||||||||||||||||||||||
Share conversion to common stock | ( | ( | — | — | — | — | — | — | ( | ( | ( | ( | ( | ( | | | ( | ( | | — | | |||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share conversion costs | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — |
| — |
| — |
| — |
|
| — | ( |
| ( | |||||||||||||||||||||||||||
Balance as of September 30, 2023 | | $ | | — | $ | — | | $ | |
| — | $ | — |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| | $ | |
| $ | | $ | ( |
| $ | ( |
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
KNIGHTSCOPE, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine-months ended September 30, | ||||||
| 2023 |
| 2022 | |||
Cash Flows From Operating Activities |
|
|
|
| ||
Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
| |||
Depreciation and amortization |
| |
| | ||
Stock compensation expense |
| |
| | ||
Change in fair value of warrant liabilities |
| ( |
| ( | ||
Accrued interest |
| |
| | ||
Common stock issued in exchange for consulting services | | | ||||
Amortization of debt discount |
| — |
| | ||
Changes in operating assets and liabilities: |
|
|
| |||
Accounts receivable, net |
| ( |
| | ||
Prepaid expenses and other current assets |
| ( |
| ( | ||
Inventory | ( | — | ||||
Other assets |
| |
| — | ||
Accounts payable |
| ( |
| | ||
Accrued expenses |
| ( |
| ( | ||
Deferred revenue |
| ( |
| | ||
Other current and noncurrent liabilities |
| |
| ( | ||
Net cash used in operating activities |
| ( |
| ( | ||
Cash Flows From Investing Activities |
|
| ||||
Purchases and related costs incurred for Autonomous Security Robots |
| ( |
| ( | ||
Purchase of property and equipment |
| ( |
| ( | ||
Net cash used in investing activities |
| ( |
| ( | ||
Cash Flows From Financing Activities |
|
| ||||
Proceeds from stock options exercised |
| |
| | ||
Offering proceeds, net of issuance costs |
| — |
| | ||
Repayment of sellers note | ( | — | ||||
Proceeds from equity sale, net of issuance costs |
| |
| | ||
Share conversion costs | ( | ( | ||||
Net cash provided by financing activities |
| |
| | ||
Net change in cash and cash equivalents and restricted cash |
| ( |
| | ||
Cash, cash equivalents and restricted cash at beginning of the period | | | ||||
Cash, cash equivalents and restricted cash at end of the period | $ | | $ | | ||
Supplemental Disclosure of Non-Cash Financing Activities |
|
|
| |||
Conversion of preferred stock to Class A Common Stock | $ | | $ | | ||
Conversion of debt obligations to Class A Common Stock | $ | | $ | | ||
Goodwill adjustment | $ | | $ | — | ||
Cashless exercise of warrants | $ | — | $ | | ||
Common stock issued for consulting services | $ | — | $ | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
KNIGHTSCOPE, INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)
NOTE 1: The Company and Summary of Significant Accounting Policies
Description of Business
Knightscope, Inc., was incorporated on April 4, 2013 under the laws of the State of Delaware.
Knightscope, Inc. (the “Company”) is an advanced public safety technology company that builds fully autonomous security robots and Blue Light emergency communications systems. The Company’s mission is to make the United States of America the safest country in the world by helping to protect the people, places, and assets where we live, work, study, and visit.
To support this mission, the Company designs, develops, manufactures, markets, deploys, and supports Autonomous Security Robots (“ASRs”), autonomous charging stations, the proprietary Knightscope Security Operations Center (“KSOC”) software user interface, Blue Light emergency communication devices, and its newly released Knightscope Emergency Management System (“KEMS”) platform.
Basis of Presentation and Liquidity
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures have been condensed or omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair presentation of the period presented. The results of operations for the three and nine months ended September 30, 2023, are not necessarily indicative of the results to be expected for the year ending December 31, 2023 or for other future periods. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 31, 2023. The Company’s significant accounting policies are described in Note 1 to those audited consolidated financial statements.
Since its inception, the Company has incurred significant operating losses and negative cash flows from operations which is principally the result of significant research and development activities related to the development, maintenance, and continued improvement of the Company’s ASRs and KSOC (hardware and software).
Cash and cash equivalents on hand were $
Segments
The Company has
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Basic and Diluted Net Loss Per Share
Net loss per share of common stock is computed using the two-class method required for participating securities based on their participation rights. All series of convertible preferred stock are participating securities as the holders are entitled to participate in common stock dividends with common stock on an as converted basis. Holders of Series m-4 Preferred Stock were entitled to receive cumulative dividends payable semi-annually in arrears at the rate per share of Series m-4 Preferred Stock equal to the dividend rate for the Series m-4 Preferred Stock, in each case subject to compliance with applicable law. Dividends to holders of Series m-4 Preferred Stock are paid in kind as a dividend of additional shares of Series m-4 Preferred Stock for each dividend period on the applicable dividend payment date using a price per share equal to the original issue price, provided that the Company shall not issue any fractional shares of Series m-4 Preferred Stock. The holders of the Company’s preferred stock, other than m-4 preferred stock, are also entitled to noncumulative dividends prior and in preference, to the Company’s common stock and do not have a contractual obligation to share in the losses of the Company. All shares of Series m-4 Preferred Stock have converted to Class A Common Stock, leaving
Basic net loss per share is computed by dividing net loss attributable to common stockholders (net adjusted for preferred stock dividends declared or accumulated) by the weighted average number of common shares outstanding during the period. All participating securities are excluded from basic weighted average shares outstanding. In computing diluted net loss attributable to common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities. Diluted net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by diluted weighted average shares outstanding, including potentially dilutive securities, unless anti-dilutive. Potentially dilutive securities that were excluded from the computation of diluted net loss per share consist of the following:
| September 30, |
| September 30, | |||
2023 | 2022 | |||||
Series A Preferred Stock (convertible to Class B Common Stock) |
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Series B Preferred Stock (convertible to Class B Common Stock) |
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Series m Preferred Stock (convertible to Class A Common Stock) |
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Series m-2 Preferred Stock (convertible to Class B Common Stock) |
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Series S Preferred Stock (convertible to Class A Common Stock) |
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Warrants to purchase Class A Common Stock |
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| — | ||
Warrants to purchase Series m-3 Preferred Stock |
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Warrants to purchase Series s Preferred Stock |
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Stock options |
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Total potentially dilutive shares |
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As all potentially dilutive securities are anti-dilutive for the nine months ended September 30, 2023 and 2022, diluted net loss per share is the same as basic net loss per share for each period.
Comprehensive Loss
Comprehensive loss represents the changes in equity of an enterprise, other than those resulting from stockholder transactions. Net loss was equal to comprehensive loss for the three and nine-month periods ended September 30, 2023 and 2022.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Specific accounts that require management estimates include, but are not limited to, estimating the useful lives of the Company’s ASRs and property, equipment and software, certain estimates required within revenue recognition, estimating fair values of Company’s common stock, share-based awards and warrant liabilities, inclusive of any contingent assets and liabilities. Actual results could differ from those estimates and such differences may be material to the condensed consolidated financial statements.
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Accounting Pronouncements Adopted in 2023
In June 2016, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update No. 2016-13, “Financial Instruments – Credit Losses.” The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including but not limited to available-for-sale debt securities and accounts receivable. The Company’s implementation of this pronouncement did not have a material impact on the Company’s condensed consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
Management has reviewed other recently issued accounting pronouncements issued or proposed by the FASB, and does not believe any of these accounting pronouncements has had or will have a material impact on the condensed consolidated financial statements.
Out of Period Adjustments
During the quarter ended June 30, 2023, the Company became aware of an error in the calculation of deferred revenue and goodwill associated with the CASE Emergency Systems acquisition in October of 2022. The error resulted in an understatement of acquired deferred revenue and goodwill in the amount of $
Inventory
Inventory, principally purchased components, is stated at the lower of cost or net realizable value. Cost is determined using an average cost, which approximates actual cost on a first-in, first-out basis. Inventory in excess of salable amounts and inventory which is considered obsolete based upon changes in existing technology is written off. At the point of loss recognition, a new lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in the new cost basis.
| September 30, | December 31, | ||||
2023 |
| 2022 | ||||
Raw materials | $ | | $ | | ||
Work in process | | — | ||||
Finished goods |
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$ | | $ | |
Autonomous Security Robots, net
ASRs consist of materials, ASRs in progress and finished ASRs. ASRs in progress and finished ASRs include materials, labor and other direct and indirect costs used in their production. Finished ASRs are valued using a discrete bill of materials, which includes an allocation of labor and direct overhead based on assembly hours. Depreciation expense on ASRs is recorded using the straight-line method over their estimated expected lives, which currently ranges from
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ASRs, net, consisted of the following:
| September 30, |
| December 31, | |||
2023 | 2022 | |||||
Raw materials | $ | | $ | | ||
ASRs in progress |
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Finished ASRs |
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Accumulated depreciation on Finished ASRs |
| ( |
| ( | ||
ASRs, net | $ | | $ | |
The components of the Finished ASRs, net are as follows:
September 30, | December 31, | |||||
2023 | 2022 | |||||
ASRs on lease or available for lease |
| $ | |
| $ | |
Demonstration ASRs |
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Research and development ASRs |
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Docking stations |
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Less: accumulated depreciation |
| ( |
| ( | ||
Finished ASRs, net | $ | | $ | |
Intangible Assets
The gross carrying amounts and accumulated amortization of the intangible assets with determinable lives are as follows:
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| September 30, 2023 | |||||||||
Amortization | Gross |
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Period | carrying | Accumulated | Carrying | ||||||||
Intangible assets with determinable lives |
| (years) |
| amount |
| amortization |
| amount, net | |||
Developed technology | $ | | $ | ( | $ | | |||||
Customer relationships | |
| ( |
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Trademark | |
| ( |
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Total | $ | | $ | ( | $ | |
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| December 31, 2022 | |||||||||
Amortization | Gross | ||||||||||
Period | carrying | Accumulated | Carrying | ||||||||
Intangible assets with determinable lives | (years) | amount |
| amortization |
| amount, net | |||||
Developed technology |
| $ | | $ | ( | $ | | ||||
Customer relationships |
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| ( |
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Trademark |
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| ( |
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Total | $ | | $ | ( | $ | |
Intangible assets amortization expense totaling $
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As of September 30, 2023, future intangible assets amortization expense for each of the next five years and thereafter is as follows:
Year ending December 31, |
| Amount | |
2023 (remaining) | $ | | |
2024 | | ||
2025 | | ||
2026 | | ||
2027 | | ||
Thereafter | | ||
Total | $ | |
Other Current Liabilities
Other current liabilities consisted of the following:
| September 30, |
| December 31, | |||
2023 | 2022 | |||||
Sales tax | $ | | $ | | ||
Customer and vendor deposits |
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Warranty liability |
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Lease liability – short term |
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Other | | | ||||
$ | | $ | |
Accrued Warranty
The liability for estimated warranty claims is accrued at the time of sale and the expense is recorded in the condensed consolidated statements of operations in cost of revenue, net - product. The liability is established using historical warranty claim experience. The current provision may be adjusted to take into account unusual or non-recurring events in the past or anticipated changes in future warranty claims. Adjustments to the warranty accrual are recorded if actual claim experience indicates that adjustments are necessary. Warranty reserves are reviewed to ensure critical assumptions are updated for known events that may impact the potential warranty liability.
Change in the warranty liability for the nine-months ended consisted of the following:
| September 30, | |||||
| 2023 |
| 2022 | |||
Balance January 1, | $ | | $ | — | ||
Provision for warranties issued during nine months |
| |
| — | ||
Warranty services provided | ( | — | ||||
$ | | $ | — |
Accrued Expenses
Accrued expenses consisted of the following:
| September 30, |
| December 31, | |||
2023 | 2022 | |||||
Accrued bonuses | $ | | $ | | ||
Payroll and payroll taxes |
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Legal, consulting, and financial services |
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Other |
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$ | | $ | |
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Convertible Preferred Warrant Liabilities and Common Stock Warrants
Freestanding warrants to purchase shares of the Company’s preferred stock are classified as liabilities on the balance sheets at their estimated fair value because the underlying shares of preferred stock are contingently redeemable and, therefore, may obligate the Company to transfer assets at some point in the future. The preferred stock warrants are recorded at fair value upon issuance and are subject to remeasurement to their respective estimated fair values. At the end of each reporting period, changes in the estimated fair value of the preferred stock warrants are recorded in the condensed consolidated statements of operations. The Company will continue to adjust the liability associated with the preferred stock warrants for changes in the estimated fair value until the earlier of the exercise or expiration of the preferred stock warrants or the completion of a sale of the Company. Upon an initial public offering, the preferred stock warrants will convert into warrants to purchase common stock and any liabilities recorded for the preferred stock warrants will be reclassified to additional paid-in capital and will no longer be subject to remeasurement.
Common stock warrants that are not considered derivative liabilities are accounted for at fair value at the date of issuance in additional paid-in capital. The fair value of these common stock warrants is determined using the Black-Scholes option-pricing model.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with Accounting Standards Codification (“ASC”) 718, Compensation - Stock Compensation, which requires that the estimated fair value on the date of grant be determined using the Black-Scholes option pricing model with the fair value recognized over the requisite service period of the awards, which is generally the option vesting period. The Company’s determination of the fair value of the stock-based awards on the date of grant, using the Black-Scholes option pricing model, is affected by the fair value of the Company’s common stock as well as other assumptions regarding a number of highly complex and subjective variables. These variables include but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected employee option exercise behaviors. Because there is insufficient historical information available to estimate the expected term of the stock-based awards, the Company adopted the simplified method of estimating the expected term of options granted by taking the average of the vesting term and the contractual term of the option. The Company recognizes forfeitures as they occur when calculating stock-based compensation for its equity awards.
NOTE 2: Revenue and Deferred Revenue
Revenue Recognition
ASR related revenue
The Company derives its revenues from lease of proprietary ASRs along with access to the browser-based interface KSOC through contracts under the lease accounting that typically have a twelve (12) month term. In addition, the Company derives non-lease revenue items such as professional services related to ASRs’ deployments, special decals, shipping costs and training if any, recognized when control of these services is transferred to the clients, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.
Blue Light Towers, E-Phones and Call Boxes revenue
The Company also derives revenues from fees from Blue Light Tower, E-Phone and Call Box sales and related services, such as installation, maintenance, and upgrades. The maintenance revenue is recognized in the period the service is performed and the Company has determined that term of the contracts has been fulfilled. Installation or upgrades revenue are recognized upon completion of the project/contracts. In certain cases, deferred revenue is recognized to account for unfinished contracts.
The Company determines revenue recognition through the following steps:
● | identification of the contract, or contracts, with a client; |
● | identification of the performance obligations in the contract; |
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● | determination of the transaction price; |
● | allocation of the transaction price to the performance obligations in the contract; and |
● | recognition of revenue when, or as, the Company satisfies a performance obligation. |
The Company recognizes ASR subscription revenue as follows:
ASR subscription revenue
ASR subscription revenue is generated from lease of proprietary ASRs along with access to the browser-based interface KSOC through contracts that typically have twelve (12) month terms. These revenue arrangements adhere to lease accounting guidance and are classified as leases for revenue recognition purposes. Currently, all revenue arrangements qualify as operating leases where consideration allocated to the lease deliverables is recognized ratably over the lease term.
Deferred revenue
In connection with the Company’s Machine-as-a-Service (“MaaS”) subscription for the Company’s ASRs, the Company’s standard billing terms are annual in advance. In these situations, the Company records the invoices as deferred revenue and amortizes the subscription amount when the services are delivered, which generally is a 12-month period. In addition, the Company refers certain transactions to Dimension and Balboa Capital, whereby Dimension or Balboa Capital advances the full value of the MaaS subscription to the Company, less a processing fee. The advanced payment is recorded in deferred revenue and amortized over the term of the subscription once the ASR is delivered to the deployment site.
The Company derives revenue from the lease subscription of its proprietary ASRs along with access to its KSOC browser-based software interface. MaaS subscription agreements typically have a twelve (12)-month term.
The Company also records deferred revenue from unfinished contracts for certain Call Box services.
Deferred revenue includes billings in excess of revenue recognized. Revenue recognized at a point in time generally does not result in significant increases in deferred revenue. Revenue recognized over a period generally results in a majority of the increases in deferred revenue as the performance obligations are fulfilled after the billing event. Deferred revenue was as follows:
| September 30, 2023 | ||
Deferred revenue - short term | $ | | |
Revenue recognized in the nine-months ended related to amounts included in deferred revenue as of January 1, 2023 | $ | |
Deferred revenue represents amounts invoiced to customers for contracts for which revenue has yet to be recognized based on subscription services to be delivered to the Company’s clients. Typically, the timing of invoicing is based on the terms of the contract.
Customer Deposits
Customer deposits primarily relate to sales of Blue Light Towers, E-Phones and Call Boxes to certain customers dependent upon credit worthiness. The customer deposits are recorded as current liabilities and reclassed to a contra accounts receivable account at the time that the final invoice for the sale is generated following the completion of the revenue recognition criteria.
Disaggregation of revenue
The Company disaggregates revenue from contracts with customers into the timing of the transfers of goods and services by product line.
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The following table summarizes revenue by product line and timing of recognition:
Three-Months Ended September 30, | ||||||||||||||||||
2023 | 2022 | |||||||||||||||||
| Point in time |
| Over time |
| Total |
| Point in time |
| Over time |
| Total | |||||||
ASRs | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Blue Light Towers, E-Phones and Call Boxes | | |
| | — | — |
| — | ||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | |
Nine-Months Ended September 30, | ||||||||||||||||||
2023 | 2022 | |||||||||||||||||
| Point in time |
| Over time |
| Total |
| Point in time |
| Over time |
| Total | |||||||
ASRs | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Blue Light Towers, E-Phones and Call Boxes | | |
| | — | — |
| — | ||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | |
Other revenue
Other non-ASR related revenue such as deployment services, decals, shipping, and training revenue is recognized when services are delivered.
NOTE 3: Fair Value Measurement
The Company determines the fair market values of its financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following are three levels of inputs that may be used to measure fair value:
● | Level 1 – Quoted prices in active markets for identical assets or liabilities. The Company considers a market to be active when transactions for the asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
● | Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
● | Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The valuation of Level 3 investments requires the use of significant management judgments or estimation. |
In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3. Level 3 liabilities that are measured at fair value on a recurring basis consist of the convertible preferred stock warrant liabilities. The inputs used in estimating the fair value of the warrant liabilities are described in Note 6 -- Capital Stock and Warrants.
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The following tables summarize, for each category of assets or liabilities carried at fair value, the respective fair value as of September 30, 2023, and December 31, 2022, and the classification by level of input within the fair value hierarchy:
| Total |
| Level 1 |
| Level 2 |
| Level 3 | |||||
September 30, 2023 |
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Assets |
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Cash equivalents: |
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Money market funds | $ | | $ | | $ | — | $ | — | ||||
Liabilities |
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Warrant liability – Series m-3 Preferred Stock | $ | | $ | — | $ | — | $ | | ||||
Warrant liability – Series S Preferred Stock | $ | | $ | — | $ | — | $ | | ||||
Derivative liability – Class A Common Stock warrants | $ | | $ | — | $ | — | $ | |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | |||||
December 31, 2022 |
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Assets |
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Cash equivalents: |
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Money market funds | $ | | $ | | $ | — | $ | — | ||||
Liabilities |
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Warrant liability – Series m-3 Preferred Stock | $ | | $ | — | $ | — | $ | | ||||
Warrant liability – Series S Preferred Stock | $ | | $ | — | $ | — | $ | | ||||
Derivative liability – Class A Common Stock warrants | $ | | $ | — | $ | — | $ | | ||||
2022 Convertible Notes | $ | | $ | — | $ | — | $ | |
During the three-month periods ended September 30, 2023 and 2022, there were
The following table sets forth a summary of the changes in the fair value of Company’s Level 3 warrant liabilities during the nine-month periods ended September 30, 2023 and 2022, which were measured at fair value on a recurring basis:
September 30, | September 30, | |||||
| 2023 |
| 2022 | |||
Beginning Balance | $ | | $ | | ||
Warrants exercised |
| | ( | |||
Warrants cancelled | ( | | ||||
Revaluation of Series m-3 and S Preferred Stock warrants | ( | ( | ||||
Revaluation of Common Stock warrants (derivative liability) | ( | | ||||
Ending Balance | $ | | $ | |
The following table sets forth a summary of the changes in the fair value of Company’s Level 3 convertible note liabilities during the nine-month periods ended September 30, 2023 and 2022, which were measured at fair value on a recurring basis:
| September 30, |
| September 30, | |||
2023 | 2022 | |||||
Beginning Balance | $ | | $ | — | ||
Notes converted |
| ( |
| — | ||
Interest accretion |
| |
| — | ||
Ending Balance | $ | — | $ | — |
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NOTE 4: Debt Obligations
The amortized carrying amount of the Company’s debt obligations consists of the following:
September 30, | December 31, | |||||
| 2023 |
| 2022 | |||
Convertible notes, net of fees and discount | $ | — | $ | | ||
Promissory notes | | | ||||
Total debt |
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Less: current portion of debt obligations |
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Non-current portion of debt obligations | $ | — | $ | |
During the nine months ended September 30, 2023, the Company issued
On June 30, 2023, Knightscope and CASE Emergency Systems (“CASE”) executed a Promissory Note Partial Payment and Extension Agreement, whereby the maturity date of the Seller’s Note (“Note”) issued on October 14, 2022 in the amount of $
The Company filed an Offering Circular for up to $
NOTE 5: Stock-Based Compensation
Equity Incentive Plans
In April 2014, the Company adopted the Knightscope, Inc. 2014 Equity Incentive Plan (the “2014 Plan”) allowing for the issuance of up to
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The Board may grant stock options under the 2016 Plan at a price of not less than
On June 23, 2022, following approval by the Board of Directors, the Company’s stockholders adopted the Knightscope, Inc. 2022 Equity Incentive Plan (the “2022 Plan”) allowing for the issuance of up to
The Board of Directors also determines the terms and conditions of awards, including the vesting schedule and any forfeiture provisions. Options granted under the 2022 Plan may vest upon the passage of time, generally
Stock option activity under all of the Company’s equity incentive plans for the nine-month period ended of September 30, 2023, is as follows:
Weighted | ||||||||||||
Weighted | Average | |||||||||||
Shares | Number of | Average | Remaining | Aggregate | ||||||||
Available for | Shares | Exercise | Contractual | Intrinsic | ||||||||
| Grant |
| Outstanding |
| Price |
| Life (Years) |
| Value (000’s) | |||
Available and outstanding as of December 31, 2022 |
| |
| | $ | |
| $ | | |||
2022 Plan annual increase | | — | — | — | — | |||||||
Granted |
| ( |
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| — |
| — | ||
Exercised |
| — |
| ( |
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| — |
| — | ||
Forfeited |
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| ( |
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| — |
| — | ||
Available and outstanding as of September 30, 2023 |
| |
| | $ | |
| $ | | |||
Vested and exercisable as of September 30, 2023 |
| | $ | |
| $ | |
The weighted average grant date fair value of options granted during the nine-month period ended September 30, 2023, was $
As of September 30, 2023, the Company had unamortized stock-based compensation expense of $
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The assumptions utilized for option grants during the three and nine-months ended September 30, 2023 and 2022, are as follows:
| Three-months ended |
| Nine-months ended |
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September 30, | September 30, | ||||||||
2023 |
| 2022 | 2023 | 2022 |
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Risk-free interest rate |
| | % | | % | | % | | % |
Expected dividend yield |
| — | % | — | % | — | % | — | % |
Expected volatility |
| | % | | % | | % | | % |
Expected term (in years) |
|
|
A summary of stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations is as follows:
| Three-months ended |
| Nine-months ended | |||||||||
September 30, | September 30, | |||||||||||
2023 |
| 2022 | 2023 |
| 2022 | |||||||
Cost of revenue, net | $ | | $ | | $ | | $ | | ||||
Research and development | | |
| |
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Sales and marketing | | |
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General and administrative | | |
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Total | $ | | $ | | $ | | $ | |
NOTE 6: Capital Stock and Warrants
The following tables summarize convertible preferred stock issued and outstanding as of September 30, 2023:
| Shares |
| Proceeds Net |
| Aggregate | |||
Issued and | of Issuance | Liquidation | ||||||
Outstanding | Costs | Preference | ||||||
Series A Preferred Stock |
| | $ | | $ | | ||
Series B Preferred Stock |
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Series m Preferred Stock |
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Series m-2 Preferred Stock |
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Series S Preferred Stock |
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Total Preferred Stock |
| | $ | | $ | |
A summary of the Company’s outstanding warrants as of September 30, 2023, is as follows:
Class of shares |
| Number of Warrants | Exercise Price |
| Expiration Date | ||
Series m-3 Preferred Stock |
| | $ | | December 31, 2027 | ||
Series S Preferred Stock |
| | $ | | December 31, 2027 | ||
Class A Common Stock | | $ | | October 13, 2027 |
On April 7, 2023, the Company entered into an Amendment and Cancellation Agreement with certain holders of warrants to purchase Series m-3 and Series S Preferred Stock. Under the terms of the agreement, the expiration date for warrants to purchase
21
Common Stock Reserved for Future Issuance
Shares of common stock reserved for future issuance relate to outstanding preferred stock, warrants and stock options as follows:
| September 30, | |
2023 | ||
Series A Preferred Stock |
| |
Series B Preferred Stock |
| |
Series m Preferred Stock |
| |
Series m-2 Preferred Stock |
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Series S Preferred Stock |
| |
Stock options to purchase common stock |
| |
Warrants outstanding for future issuance of convertible preferred stock and common stock | | |
Stock options available for future issuance |
| |
Total shares of Class A Common Stock reserved |
| |
At-the-Market Offering Program
In February 2023, the Company commenced an at-the-market offering program with H.C. Wainwright & Co., LLC, as sales agent, which allows the Company to sell and issue shares of Class A Common Stock from time-to-time of up to approximately $
During the three months ended September 30, 2023, the Company issued
NOTE 7: Related parties and related-party transactions
One of the Company’s vendors, Konica Minolta, Inc. (“Konica Minolta”), is a stockholder of the Company. Konica Minolta provides the Company with repair services to its ASRs. The Company paid Konica Minolta $
The Company paid $
NOTE 8: Commitments and contingencies
Leases
The Company leases facilities for office space under non-cancelable operating lease agreements. The Company leases space for its corporate headquarters in Mountain View, California through August 2025.
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As of September 30, 2023 and December 31, 2022, the components of leases and lease costs are as follows:
| September 30, 2023 |
| December 31, 2022 | |||
Operating leases |
|
| ||||
Operating lease right-of-use assets | $ | | $ | | ||
Operating lease liabilities, current portion | $ | | $ | | ||
Operating lease liabilities, non-current portion | | | ||||
Total operating lease liabilities | $ | | $ | |
Lease costs for the three and nine-month periods ended September 30, 2023 are as follows:
Three-months ended | Nine-months ended | |||||
| September 30, 2023 |
| September 30, 2023 | |||
Operating lease costs |
|
| ||||
Operating lease right-of-use assets | $ | | $ | |
As of September 30, 2023, future minimum operating lease payments for each year until the end of the operating leases is as follows:
Years ending December 31, |
| Amount | |
2023 (remaining) | $ | | |
2024 |
| | |
2025 | | ||
2026 |
| | |
Total future minimum lease payments |
| | |
Less - Interest |
| ( | |
Present value of lease liabilities | $ | |
Weighted average remaining lease term is
Legal Matters
The Company may be subject to legal proceedings and regulatory actions in the ordinary course of business. The Company is not currently party to any legal proceedings or regulatory actions that would have a material adverse effect on the Company’s financial position, results of operations or cash flows.
The Company from time to time enters into contracts that contingently require the Company to indemnify parties against third party claims. These contracts primarily relate to: (i) arrangements with clients which generally include certain provisions for indemnifying clients against liabilities if the services infringe a third party’s intellectual property rights, (ii) the Regulation A Issuer Agreement where the Company may be required to indemnify the placement agent for any loss, damage, expense or liability incurred by the other party in any claim arising out of a material breach (or alleged breach) as a result of any potential violation of any law or regulation, or any third party claim arising out of any investment or potential investment in the offering, and (iii) agreements with the Company’s officers and directors, under which the Company may be required to indemnify such persons from certain liabilities arising out of such persons’ relationships with the Company. The Company has not incurred any material costs as a result of such obligations and has not accrued any liabilities related to such obligations in the condensed consolidated financial statements as of September 30, 2023, and December 31, 2022.
23
Sales Tax Contingencies
The Company has historically not collected state sales tax on the sale of its “MaaS” product offering but has paid sales tax and use tax on all purchases of raw materials and in conjunction with the financing arrangement of the Company’s ASRs with Farnam Street Financial. The Company’s MaaS product offering may be subject to sales tax in certain jurisdictions. If a taxing authority were to successfully assert that the Company has not properly collected sales or other transaction taxes, or if sales or other transaction tax laws or the interpretation thereof were to change, and the Company was unable to enforce the terms of their contracts with customers that give the right to reimbursement for the assessed sales taxes, tax liabilities in amounts that could be material may be incurred. Based on the Company’s assessment, the Company has recorded a use tax liability of $
NOTE 9: Subsequent Events
From October 1, 2023 to November 10, 2023, the Company sold
We filed an Offering Circular dated September 29, 2023 (the “Offering Circular”) for the issuance of up to $
On October 26, 2023, the Company received notice from The Nasdaq Stock Market (“Nasdaq”) that the Company is not in compliance with Nasdaq Listing Rule 5450(a)(1), as the minimum bid price of the Company’s Class A Common Stock has been below $
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited condensed financial statements and the related notes thereto included elsewhere in of this Quarterly Report, and the audited financial statements and the related notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2022 included in the Annual Report.
The historical results presented below are not necessarily indicative of the results that may be expected for any future period.
Overview
Knightscope is an advanced public safety technology company that builds fully autonomous security robots and Blue Light emergency communications systems. Our technologies are Made in the USA and allow public safety professionals to more effectively deter, intervene, capture, and prosecute criminals. Our mission is to make the United States of America the safest country in the world by helping to protect the people, places, and things where we live, work, study and visit.
To support this mission, we design, develop, manufacture, market, deploy and support Autonomous Security Robots (“ASRs”), autonomous charging stations, the proprietary Knightscope Security Operations Center (“KSOC”) software user interface, Blue Light emergency communication devices, and our newly released Knightscope Emergency Management System (“KEMS”) platform.
Our core technologies are suitable for most environments that require security patrol coverage and designed to be force multipliers that offer security teams improved situational awareness. ASRs conduct real-time on-site data collection and analysis in both indoor and outdoor spaces delivering alerts to security professionals through the KSOC. The KSOC enables clients with appropriate credentials and user permissions to access the data for investigative and evidence collection purposes.
Our Blue Light emergency communication devices consist of emergency Blue Light towers, Blue Light emergency phones (“E-Phone”), fully integrated, solar-powered cellular emergency phone towers, and emergency call box systems (“Call Box”). Tower devices are tall, highly visible and recognizable apparatuses that provide emergency communications using cellular and satellite communications with solar power for additional safety in remote locations. E-Phones and Call Boxes offering a smaller, yet still highly visible, footprint than the stationary security towers, but with the same reliable communication capabilities. In October 2022, we completed the acquisition of substantially all of the assets of Case Emergency Systems (the “CASE Acquisition”), which consisted of their emergency call box and communications business.
We sell our ASR and stationary multi-purpose security solutions under an annual subscription, Machine-as-a-Service business model, which includes the ASR rental as well as maintenance, service, support, data transfer, KSOC access, charging stations, and unlimited software, firmware and select hardware upgrades.
Our stationary Blue Light Towers, E-Phones, and Call Boxes are sold as point-of-sale modular systems, including Knightscope’s exclusive, self-diagnostic, alarm monitoring system firmware that provides system owners daily email reports on the operational status of their system, a one-year parts warranty, and optional installation services. In 2023, the Company announced the release of the KEMS platform. The cloud-based application monitors the system wide state-of-health, alerts users concerning operational issues, provides technicians real-time error detection/diagnostics, and collects/reports system performance statistics. Modular upgrades are available for the Blue Light Towers, such as public announcement speaker systems. Knightscope also offers an extended warranty on this series of stationary security towers.
Our current strategy for all products and services is to focus solely on United States sales and deployments for the foreseeable future before considering global expansion.
25
Nasdaq Listing Rules Compliance
On October 26, 2023, we received notice from The Nasdaq Stock Market (“Nasdaq”) that we were not in compliance with Nasdaq Listing Rule 5450(a)(1), as the minimum bid price of our Class A Common Stock has been below $1.00 per share for 31 consecutive business days. We have 180 calendar days, or until April 23, 2024, to regain compliance with the minimum bid price requirement. To regain compliance, the minimum bid price of our Class A Common Stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days during this 180-calendar day grace period. In the event we do not regain compliance with the minimum bid price requirement by April 23, 2024, we may be eligible for an additional 180-calendar day compliance period if we elect to transfer to The Nasdaq Capital Market to take advantage of the additional compliance period offered on that market. Our failure to regain compliance during the compliance period could result in delisting.
Known or Anticipated Trends
Our primary goal remains meeting client demand for additional orders of our technology, attracting new client orders, and ensuring consistent performance in the field. The Company is focused on scaling its business to meet incoming orders. Increasing demand through various marketing efforts, including our nationwide Robot Roadshow and media coverage, has driven and continues to drive an increase in orders and client inquiries.
Sales trends for the nine months ended September 30, 2023, showed demand across all of Knightscope’s product and service lines. The sales pipeline continues to grow and is strong, though similar to many business-to-business transactions, the enterprise and government municipality sales cycle is lengthy. Although we have executed contracts in less than 30 days, notionally these negotiations can range up to several months and years, taking into account the client’s budget, finance, legal, cyber security, human resources, facilities and other reviews. The sales process for brand-new technology as well as mature, trusted technology requires significant streamlining and improvements, and we are taking steps to ensure our sales processes are robust, repeatable, and can enable our products to move through the sales pipeline quicker.
Delays due to supply chain issues and the COVID-19 pandemic that negatively impacted the Company’s performance during the first half of 2022 had largely subsided by the end of the third quarter of 2023, although supply chain constraints can still be unpredictable and problematic. The acquisition of CASE Emergency Systems (“CASE”) also contributed to a significant increase in the Company’s business and results of operations for the period covered by this Quarterly Report.
Due to numerous geopolitical events and new safety requirements as well as various high-profile incidents of violence across the United States, we believe that the market for our technologies will continue to grow. We also expect that competing products may be introduced in the near future, creating pressure on us to improve on our production methods, cost, quality and product features.
As our business scales and becomes more streamlined, management expects the Company’s historical gross loss to decrease, once a critical mass has been achieved. We are focusing our resources on growing the business to be able to generate both a gross profit and overall net income. We are continually evaluating and taking a number of near-term actions to facilitate this result, and expect that as the Company matures, we expect to obtain economies of scale and efficiency that would continue to increase revenue and reduce costs over the medium to long-term. We are also focused on controlling general overhead costs, such as expenditures for real estate leases and optimizing team composition and size. We believe that with the building of new internal tools, the Company will be able to streamline procedures and manage deployments more efficiently through the deployment of automation, alleviating the need for a dramatic increase in headcount. Additionally, new telecommunication service and cloud cost reduction initiatives are underway to further reduce our ongoing support, repair and maintenance costs. Additionally, we are transitioning our ASR, Blue Light Tower, E-Phone, and Call Box production processes from a work cell environment to a more traditional assembly line process, for improved quality, efficiency and throughput. Our overall strategy is to try to keep fixed costs as low as possible and minimize variable costs while achieving our overall growth objectives.
As of October 29, 2023, the Company had a total backlog of approximately $4.1 million, comprised of $2.4 million related to ASR orders and $1.7 million related to orders for Blue Light emergency communication devices and Call Boxes. The Company’s continued focus on addressing supply chain constraints and implementing operational efficiencies has contributed to a reduction in the backlog, which directly contributes to increased revenue, net.
26
Results of Operations
Comparison of the Three-Months Ended September 30, 2023 and 2022
The following table sets forth selected Condensed Consolidated Statements of Operations data (in thousands, other than share data) and such data as a percentage of total revenues.
Three-Months ended September 30, |
| ||||||||||
| 2023 |
|
| 2022 |
|
| |||||
Revenue, net | |||||||||||
Service | $ | 1,915 | 58 | % | $ | 1,296 | 100 | % | |||
Product | 1,409 | 42 | % | — | — | % | |||||
Total revenue, net | 3,324 | 100 | % | 1,296 | 100 | % | |||||
Cost of revenue, net | |||||||||||
Service | 2,581 | 78 | % | 2,195 | 169 | % | |||||
Product | 693 | 21 | % | — | — | % | |||||
Total cost of revenues | 3,274 | 98 | % | 2,195 | 169 | % | |||||
Gross profit (loss) |
| 50 |
| 2 | % |
| (899) |
| (69) | % | |
Operating Expenses: | |||||||||||
Research and development |
| 1,903 |
| 57 | % |
| 2,070 |
| 160 | % | |
Sales and marketing |
| 1,395 |
| 42 | % |
| 1,907 |
| 147 | % | |
General and administrative |
| 3,235 |
| 97 | % |
| 2,899 |
| 224 | % | |
Total operating expenses |
| 6,533 |
| 197 | % |
| 6,876 |
| 531 | % | |
Loss from operations |
| (6,483) |
| (195) | % |
| (7,775) |
| (600) | % | |
Change in fair value of warrant and derivative liability |
| (1,800) |
| (54) | % |
| 2,543 |
| 196 | % | |
Interest income (expense), net |
| (8) |
| — | % |
| — |
| — | % | |
Other income (expense), net | (51) | (2) | % | (6) | — | % | |||||
Total other expense, net |
| (1,859) |
| (56) | % |
| 2,537 |
| 196 | % | |
Loss before income tax expense |
| (8,342) |
| (251) | % |
| (5,238) |
| 404 | % | |
Income tax expense | — |
| — | % | — |
| — | % | |||
Net loss | $ | (8,342) |
| (251) | % | $ | (5,238) |
| 404 | % |
Revenue, net
Service revenue, net for the three-months ended September 30, 2023, increased approximately $0.6 million versus the same period in 2022. The increase is primarily attributed to maintenance and service revenue of approximately $0.8 million associated with installed Blue Light Towers, E-Phones and Call Box products partially offset by a decrease in revenue for deployed ASRs of approximately $0.1 million. Product revenue of approximately $1.4 million is attributable to sales of Blue Light Towers, E-Phones and Call Box products from the CASE Acquisition in October 2022.
Cost of revenue, net
Cost of revenue, net - service for the three-months ended September 30, 2023, increased by approximately $0.4 million to $2.6 million, compared the same period in 2022, primarily due to an increase in personnel costs related to increased headcount resulting from the CASE Acquisition in October 2022 of approximately $0.2 million. Also contributing to the increase were service vehicle related costs, warranty and material related expenses, depreciation and amortization expense related to the CASE Acquisition of approximately $0.4 million, partially offset by lower cellular and communication fees of approximately $0.2 million attributed to the ongoing operation of deployed ASRs and Blue Light communication devices and Call Boxes. The cost of revenue, net - service is primarily related to the average service cost per unit, depreciation of the ASRs, and personnel related compensation. Additional costs relate to the ongoing maintenance and support of our install base of Blue Light communication devices and Call Boxes, which consists primarily of service personnel, vehicle expense, and warranty repair costs.
Cost of revenue, net - product was approximately $0.7 million and is attributable to sales of Blue Light emergency communications devices and Call Boxes.
27
Gross Profit (Loss)
Revenue, net and cost of revenue, net described above resulted in a gross loss attributed to services offset by a gross profit attributed to product sales resulted in a gross profit of approximately $50 thousand for the three-months ended September 30, 2023, compared to a gross loss of approximately $0.9 million for the same period in 2022.
Research and Development
Three-Months Ended |
|
|
| |||||||||
September 30, |
| |||||||||||
| 2023 |
| 2022 |
| $ Change |
| % Change |
| ||||
Research and development | $ | 1,903 | $ | 2,070 | $ | (167) |
| (8) | % | |||
Percentage of total revenue |
| 57 | % |
| 160 | % |
|
|
|
|
Research and development expenses decreased by approximately $0.2 million, or 8%, for the three-months ended September 30, 2023, as compared to the same period in 2022. The decrease is primarily due to decreased personnel related costs from the reduction in workforce announced in January 2023, partially offset by an increase in network hosting fees, including increases from product lines acquired in the CASE Acquisition, as well as material costs related to testing and development.
Sales and Marketing
Three-Months Ended |
|
|
| |||||||||
September 30, |
| |||||||||||
| 2023 |
| 2022 |
| $ Change |
| % Change |
| ||||
Sales and marketing | $ | 1,395 | $ | 1,907 | $ | (512) |
| (27) | % | |||
Percentage of total revenue |
| 42 | % |
| 147 | % |
|
|
|
|
Sales and marketing expenses decreased by approximately $0.5 million, or 27%, for the three-months ended September 30, 2023, as compared to the same period in 2022. The decrease was primarily due to decreased advertising costs, partially offset by amortization and personnel expenses related to the CASE Acquisition.
General and Administrative
Three-Months Ended |
|
|
| |||||||||
September 30, |
| |||||||||||
| 2023 |
| 2022 |
| $ Change |
| % Change |
| ||||
General and administrative | $ | 3,235 | $ | 2,899 | $ | 336 |
| 12 | % | |||
Percentage of total revenue |
| 97 | % |
| 224 | % |
|
|
|
|
General and administrative expenses increased by approximately $0.3 million, or approximately 12%, for the three-months ended September 30, 2023, as compared the same period in 2022. The increase was primarily driven by increased investor relations, corporate, state taxes, and personnel related expenses, partially offset by savings on rent expense, insurance premiums, legal fees, and a reduction in bad debt expense.
Other Income/(Expense), Net
Three-Months Ended |
| |||||||||||
September 30, | ||||||||||||
| 2023 |
| 2022 |
| $ Change |
| % Change |
| ||||
Change in fair value of warrant liability | $ | (1,800) | $ | 2,543 | $ | (4,343) |
| (171) | % | |||
Change in fair value of convertible notes | — | — | — | — | % | |||||||
Interest income (expense), net | (8) | — | (8) |
| (100) | % | ||||||
Other income (expense), net |
| (51) |
| (6) |
| (45) |
| 750 | % | |||
Total other income (expense) | $ | (1,859) | $ | 2,537 | $ | (4,396) |
| (173) | % |
28
Total other income (expense) decreased by approximately $4.4 million, or 173%, for the three-months ended September 30, 2023, as compared to the same period in 2022, resulting in other expense of approximately $1.9 million for the three-months ended September 30, 2023, compared to other income of approximately $2.5 million for the same period in 2022. The decrease was primarily due to a decrease in the change in fair value of warrant liability of approximately $4.3 million for the three-months ended September 30, 2023.
Comparison of the Nine Months Ended September 30, 2023 and 2022
The following table sets forth selected Condensed Consolidated Statements of Operations data (in thousands, other than share data) and such data as a percentage of total revenues.
Nine-Months ended September 30, |
| ||||||||||
| 2023 |
|
| 2022 |
|
| |||||
Revenue, net | |||||||||||
Service | $ | 5,488 | 56 | % | $ | 3,281 | 100 | % | |||
Product | 4,296 | 44 | % | — | — | % | |||||
Total revenue, net | 9,784 | 100 | % | 3,281 | 100 | % | |||||
Cost of revenue, net | |||||||||||
Service | 7,465 | 76 | % | 5,420 | 165 | % | |||||
Product | 2,473 | 25 | % | — | — | % | |||||
Total cost of revenues | 9,938 | 102 | % | 5,420 | 165 | % | |||||
Gross loss |
| (154) |
| (2) | % |
| (2,139) |
| (65) | % | |
Operating Expenses: | |||||||||||
Research and development |
| 4,782 |
| 49 | % |
| 5,983 |
| 182 | % | |
Sales and marketing |
| 3,716 |
| 38 | % |
| 6,905 |
| 210 | % | |
General and administrative |
| 10,148 |
| 104 | % |
| 8,185 |
| 249 | % | |
Restructuring charges | 149 | 2 | % | — | — | ||||||
Total operating expenses |
| 18,795 |
| 192 | % |
| 21,073 |
| 642 | % | |
Loss from operations |
| (18,949) |
| (194) | % |
| (23,212) |
| (707) | % | |
Change in fair value of warrant and derivative liability |
| 4,015 |
| 41 | % |
| 18,190 |
| 554 | % | |
Interest expense, net |
| (462) |
| (5) | % |
| (8,910) |
| (272) | % | |
Other income (expense), net |
| (188) |
| (2) | % |
| (35) |
| (1) | % | |
Total other income (expense), net |
| 3,365 |
| 34 | % |
| 9,245 |
| 282 | % | |
Loss before income tax expense |
| (15,584) |
| (159) | % |
| (13,967) |
| (426) | % | |
Income tax expense |
| — |
| — | % |
| — |
| — | % | |
Net loss | $ | (15,584) |
| (159) | % | $ | (13,967) |
| (426) | % |
Revenue, net
Service revenue, net for the nine-months ended September 30, 2023, increased approximately $2.2 million, or 67%, versus service revenue, net for the same period in 2022. The increase is primarily attributed to maintenance and service revenue of approximately $2.2 million associated with installed Blue Light Towers, E-Phones and Call Box products.
Product revenue of approximately $4.3 million is attributable to sales of Blue Light Towers, E-Phones and Call Box products from the CASE Acquisition in October 2022.
Cost of revenue, net
Cost of revenue, net - service for the nine-months ended September 30, 2023, increased by approximately $2.0 million to $7.5 million, compared to the same period in 2022, primarily due to an increase in personnel costs related to increased headcount resulting from the CASE Acquisition in October 2022 of approximately $0.9 million, as well as increased costs of approximately $1.1 million related to service vehicles, depreciation, warranty expenses, and amortization expense related to the CASE acquisition, and increased third party service costs of approximately $0.3 million. The increase in costs was partially offset by savings in overhead related expenses of
29
approximately $0.2 million. The cost of revenue, net - service is primarily related to the average service cost per unit, depreciation of the ASRs, and personnel related costs.
Cost of revenue, net - product was approximately $2.5 million and is attributable to sales of Blue Light emergency communications devices.
Gross Loss
Revenue, net and cost of revenue, net described above resulted in a gross loss attributed to services offset by a gross profit attributed to product sales for the nine-months ended September 30, 2023, resulting in a gross loss of approximately $0.2 million, net, compared to a gross loss of approximately $2.1 million, net, for the same period in 2022.
Research and Development
Nine-Months Ended |
|
|
| |||||||||
September 30, |
| |||||||||||
| 2023 |
| 2022 |
| $ Change |
| % Change |
| ||||
Research and development | $ | 4,782 | $ | 5,983 | $ | (1,201) |
| (20) | % | |||
Percentage of total revenue |
| 49 | % |
| 182 | % |
|
|
|
|
Research and development expenses decreased by approximately $1.2 million, or 20%, for the nine-months ended September 30, 2023, as compared to the same period in 2022. The decrease is primarily due to decreased personnel related costs and a reduction in consulting fees partially offset by an increase in network hosting fees related to the CASE Acquisition and the ASRs.
Sales and Marketing
Nine-Months Ended |
|
|
| |||||||||
September 30, |
| |||||||||||
| 2023 |
| 2022 |
| $ Change |
| % Change |
| ||||
Sales and marketing | $ | 3,716 | $ | 6,905 | $ | (3,189) |
| (46) | % | |||
Percentage of total revenue |
| 38 | % |
| 210 | % |
|
|
|
|
Sales and marketing expenses decreased by approximately $3.2 million, or 46%, for the nine-months ended September 30, 2023, as compared to the same period in 2022. The decrease was primarily due to decreased advertising costs partially offset by personnel related costs and amortization expense related to the CASE Acquisition.
General and Administrative
Nine-Months Ended |
|
|
| |||||||||
September 30, |
| |||||||||||
| 2023 |
| 2022 |
| $ Change |
| % Change |
| ||||
General and administrative | $ | 10,148 | $ | 8,185 | $ | 1,963 |
| 24 | % | |||
Percentage of total revenue |
| 104 | % |
| 249 | % |
|
|
|
|
General and administrative expenses increased by approximately $2.0 million, or approximately 24%, for the nine-months ended September 30, 2023, as compared to the same period in 2022. The increase was primarily driven by increased corporate, financial services, and investor relations expenses, partially offset by savings in legal fees, rent expense relating to the renegotiation of the Mountain View, California lease at the end of 2022, reduced insurance premiums, and lower bad debt expense.
Restructuring Charges
Nine-Months Ended |
|
|
| |||||||||
September 30, |
| |||||||||||
| 2023 |
| 2022 |
| $ Change |
| % Change |
| ||||
Restructuring Charges | $ | 149 | $ | — | $ | 149 |
| 100 | % | |||
Percentage of total revenue |
| 2 | % |
| — | % |
|
|
|
|
30
We incurred restructuring charges for the nine-month period ended September 30, 2023, of $149 thousand as a result of a work force reduction initiated in January 2023.
Other Income/(Expense), Net
Nine-Months Ended |
|
|
| |||||||||
September 30 |
| |||||||||||
| 2023 |
| 2022 |
| $ Change |
| % Change |
| ||||
Change in fair value of warrant liability | $ | 4,015 | $ | 18,190 | $ | (14,175) |
| (78) | % | |||
Interest expense, net | (462) | (8,910) | 8,448 |
| 95 | % | ||||||
Other income (expense), net |
| (188) |
| (35) |
| (153) |
| 437 | % | |||
Total other income (expense) | $ | 3,365 | $ | 9,245 | $ | (5,880) |
| (64) | % |
Total other income (expense) decreased by approximately $5.9 million, or 64%, for the nine-months ended September 30, 2023, as compared to the same period in 2022, resulting in other income of approximately $3.4 million for the nine-months ended September 30, 2023, compared to other income of approximately $9.2 million for the same period in 2022. Interest expense decreased by $8.4 million as the Company wrote off the debt discount related to the conversion of convertible notes in the same period in 2022. The decrease in the fair value of warrant liabilities for the nine-month period ended September 30, 2023, was $14.2 million less than in the same period in 2022. Other income (expense) increased approximately $0.2 million related to referral fees paid to Dimension Funding LLC (“Dimension”) as described below.
Liquidity and Capital Resources
As of September 30, 2023, and December 31, 2022, we had $4.6 million and $4.8 million, respectively, of cash and cash equivalents. As of September 30, 2023, the Company also had an accumulated deficit of approximately $154.9 million and stockholders’ deficit of $25.2 million.
On April 20, 2021, the Company entered into a Referral Agreement with Dimension, whereby the Company can generate up to $10 million of immediate cash flow by referring its clients to Dimension for financing of their annual fees over the MaaS subscription term. This agreement enables the Company to quickly offset the up-front costs associated with building and deploying ASRs by accelerating collection of its accounts receivable. In 2022, the Company also began working with a second source for order financing for its ASRs to supplement its ability to finance its backlog.
In February 2023, we filed a Registration Statement on Form S-3 for the issuance of up to $100 million of Class A Common Stock, and we commenced an at-the-market offering program, which allows us to sell and issue shares of our Class A Common Stock, from time-to-time, of up to approximately $20.0 million. On August 18, 2023, we amended the at-the-market offering program and increased the current available capacity to up to $25.0 million of Class A Common Stock. This at-the-market offering program provides the Company with additional access to capital, as needed, subject to market conditions. We filed an Offering Circular dated September 29, 2023 for the issuance of up to $10.0 million in Public Safety Infrastructure Bonds (the “Bonds”) pursuant to Regulation A of the Securities Act of 1933, as amended. The Offering Circular was qualified with the SEC on October 2, 2023. With the net proceeds from the at-the-market offering program, intended monthly rolling closings under the Bond offering, and continued collection of trade receivables, as of November 7, 2023, the Company’s cash balance was approximately $3.4 million. The Company has projected operating losses and negative cash flows of approximately $1.0 million per month, on average, for the next several months. These factors raise substantial doubt about our ability to continue as a going concern. There can be no assurance that the Company will be successful in acquiring additional funding at levels sufficient to fund its future operations. If the Company is unable to raise additional capital in sufficient amounts or on terms acceptable to it, the Company may have to significantly reduce its operations, delay, scale back or discontinue the development of one or more of its platforms or discontinue operations completely. We intend to monitor the stability of the financial institutions in which we keep our liquid funds to mitigate against the exposure to loss of funds and delays in accessing our cash. Occasionally, such reviews and other events result in the movement of funds to more stable institutions, such as the movement of our cash deposits out of Silicon Valley Bank to Comerica Bank earlier in 2023, and we further diversified our deposit accounts with the addition of Wells Fargo Bank.
31
Cash Flow
The table below, for the periods indicated, provides selected cash flow information:
Nine-Months Ended | ||||||
September 30, | ||||||
| 2023 |
| 2022 | |||
Net cash used in operating activities | $ | (18,158) | $ | (18,391) | ||
Net cash used in investing activities |
| (3,583) |
| (2,832) | ||
Net cash provided by financing activities |
| 21,642 |
| 21,443 | ||
Net increase (decrease) in cash and cash equivalents | $ | (99) | $ | 220 |
Net Cash Used in Operating Activities
Net cash used in operating activities is influenced by the amount of cash we invest in personnel, marketing, and infrastructure to support the anticipated growth of our business, the number of clients to whom we lease our ASRs, the number of Blue Light Towers, E-Phones and Call Box products sold, the amount and timing of accounts receivable collections, inventory procurement, as well as the amount and timing of disbursements to our vendors.
Net cash used in operating activities was approximately $18.2 million for the nine-months ended September 30, 2023. Net cash used in operating activities resulted from a net loss of $15.6 million and changes in working capital and non-cash charges.
Net cash used in operating activities for the nine months ended September 30, 2023, decreased by approximately $0.2 million as compared to the same period in 2022. The decrease was primarily a result of a decrease in the change in fair value of warrant liabilities of $14.2 million, an increase in accrued interest of approximately $0.4 million, an increase in depreciation and amortization of approximately $0.6 million, and an increase in common stock issued in exchange for services of approximately $0.3 million partially offset by an increase in the net loss of approximately $1.6 million, a decrease in debt discount amortization of $8.9 million, changes in operating assets and liabilities of approximately $4.2 million, and a decrease in stock compensation expense of approximately $0.6 million.
Net Cash Used in Investing Activities
Our primary investing activities have consisted of capital expenditures and investment in ASRs. As our business grows, we expect our capital expenditures to continue to increase.
Net cash used in investing activities for the nine-months ended September 30, 2023 and 2022, was approximately $3.6 million compared to approximately $2.8 million in the same period in 2022.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was approximately $21.6 million for the nine months ended September 30, 2023, an increase of approximately $0.2 million as compared to the same period in 2022. Our financing activities for the nine months ended September 30, 2023, consisted primarily of net proceeds from the issuance of Class A Common Stock under our at-the-market offering program. In the same period in 2022 financing activities consisted primarily of net proceeds resulting from the Company’s 2021 Regulation A Offering that terminated on January 2022, immediately prior to the listing of our Class A Common Stock on Nasdaq in January 2022.
At-the-Market Offering Program
In February 2023, we commenced an at-the-market offering program, which allows us to sell and issue shares of our Class A Common Stock from time-to-time of up to approximately $20.0 million. On August 18, 2023, we amended the at-the-market offering program and increased the current available capacity to up to $25.0 million of Class A Common Stock.
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During the three months ended September 30, 2023, the Company issued 8,799,634 shares of Class A Common Stock under the at-the-market offering program for net proceeds of approximately $7.4 million, net of brokerage and placement fees of approximately $0.3 million. During the nine months ended September 30, 2023, we issued 30,769,751 shares of Class A Common Stock under the at-the-market offering program for net proceeds of approximately $20.3 million, net of brokerage and placement fees of approximately $0.8 million. As of September 30, 2023, we had remaining capacity to issue up to approximately $20.5 million of Class A Common Stock under the at-the-market offering program (subject to available unreserved authorized shares under our certificate of incorporation.)
Public Safety Infrastructure Bonds
We filed an Offering Circular dated September 29, 2023 (the “Offering Circular”) for the issuance of up to $10.0 million in Public Safety Infrastructure Bonds (the “Bonds”) pursuant to Regulation A of the Securities Act of 1933, as amended. The Offering Circular was qualified with the SEC on October 2, 2023. The price per Bond is $1,000. The Bonds are unsecured, bearing interest at 10% per annum, payable annually on December 31 each year, starting on December 31, 2024, with the Bonds maturing on the fifth anniversary of issuance. The Company intends to conduct closings on accepted investments in the bonds on a rolling basis intended to occur on or about the last business day of each calendar month. From October 2, 2023 to October 31, 2023, we have issued bonds totaling a principal amount of $421 thousand, in aggregate, generating net proceeds to the Company of approximately $394 thousand, net of issuance costs of $27 thousand.
2022 Convertible Notes and Common Stock Warrants
On October 10, 2022, we entered into a securities purchase agreement with an accredited investor (the “Buyer”), pursuant to which we sold and issued to the Buyer in a private placement (i) senior secured convertible notes in an aggregate principal amount of $6.075 million (the “2022 Convertible Notes”), at an initial conversion price of $5.00 per share of Class A Common Stock, subject to adjustment upon the occurrence of specified events described in the 2022 Convertible Notes, and (ii) warrants to purchase up to 1,138,446 shares of Class A Common Stock with an initial exercise price of $3.25 per share of Class A Common Stock, exercisable immediately and expiring five years from the date of issuance (the “2022 Common Stock Warrants” and, together with the 2022 Convertible Notes, the “2022 Convertible Notes Offering”), for $5.0 million of gross proceeds.
The 2022 Convertible Notes were senior secured obligations of the Company. The 2022 Convertible Notes were issued with an original issue discount of approximately 17.65%, would bear no interest until an event of default has occurred, upon which interest would accrue at 12.5% per annum, and were scheduled to mature on September 15, 2024 unless earlier converted (upon the satisfaction of certain conditions). On December 30, 2022, we and the Buyer entered into an Agreement and Waiver (the “Waiver”), pursuant to which we mutually agreed to reduce the minimum cash covenant to $1.5 million and to lower the conversion price in part, such that the conversion price in effect on any given time of determination would equal the Alternate Conversion Price (as defined in 2022 Convertible Notes) then in effect (but with 85% replacing 80% in such definition of Alternate Conversion Price, as applicable).
As of June 26, 2023, the entire outstanding principal balance of the 2022 Convertible Notes was fully retired. From January 1, 2023 through June 26, 2023, we issued 10,432,428 shares of Class A Common Stock in connection with various conversions of the 2022 Convertible Notes by the Buyer, representing an aggregate principal amount of $6.075 million. The 2022 Common Stock Warrants remain outstanding.
Critical Accounting Estimates
There have been no changes to our critical accounting estimates from what was reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
Effective the first quarter of fiscal year 2023, the Company implemented Accounting Standards Update No 2016-13, “Financial Instruments – Credit Losses.”, issued by the Financial Accounting Standards Board in June 2016. The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including but not limited to available-for-sale debt securities and accounts receivable. The Company’s implementation of this pronouncement did not have a material impact on the Company’s condensed consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide this information.
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2023. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.
Based upon their evaluation of these disclosure controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended September 30, 2023, that have materially affected, or reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
We may be subject to litigation from time to time in the ordinary course of business. We are not currently party to any legal proceedings that we believe would reasonably have a material adverse impact on its business, financial results, and cash flows.
Item 1A. Risk Factors
You should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, which could materially affect our business, financial condition, cash flows or future results. There have been no material changes in our risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2022. The risks described in our Annual Report on Form 10-K for the year ended December 31, 2022 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit |
| Description |
3.1 | ||
3.2 | ||
10.1* | ||
10.2* | ||
10.3* | ||
31.1† | ||
31.2† | ||
32.1+ | ||
32.2+ | ||
101.INS† | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
101.SCH† | XBRL Taxonomy Extension Schema Document | |
101.CAL† | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF† | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB† | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE† | XBRL Taxonomy Extension Presentation Linkbase Document | |
104† | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
† | Filed herewith. |
+ | Furnished herewith. |
* | Represents management contract or compensatory plan or arrangement. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto, duly authorized.
Date: November 13, 2023
KNIGHTSCOPE, INC. | ||
By: | /s/ William Santana Li | |
Name: | William Santana Li | |
Title: | Chairman and Chief Executive Officer | |
(Principal Executive Officer) | ||
By: | /s/ Mallorie Burak | |
Name: | Mallorie Burak | |
Title: | President and Chief Financial Officer | |
(Principal Financial Officer) |
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