The Company and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2024

The Company and Summary of Significant Accounting Policies

The Company and Summary of Significant Accounting Policies

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 innovator in robotics and artificial intelligence (“AI”) technologies focused on public safety. Our technologies are designed to help our clients protect the people, places, and things where we live, work, study, and visit. Our technologies are made in the United States and allow public safety professionals to more effectively identify, deter, intervene, capture, and prosecute criminals.

To support our mission to make the United States the safest country in the world, we design, develop, manufacture, market, deploy and support Autonomous Security Robots (“ASRs”), the proprietary Knightscope Security Operations Center (“KSOC”) software user interface, Blue Light emergency communication devices (“ECDs”), and the proprietary Knightscope Emergency Management System (“KEMS”) software platform.

Basis of Presentation and Liquidity

The unaudited condensed 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 financial statements have been prepared on the same basis as the annual 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, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024 or for other future periods. These condensed financial statements should be read in conjunction with the Company’s audited financial statements and accompanying notes for the year ended December 31, 2023 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on April 1, 2024. The Company’s significant accounting policies are described in Note 1 to those audited financial statements.

Since its inception, the Company has incurred significant operating losses and negative cash flows from operations which is principally the result of scaling the business and significant research and development activities related to the development, continued improvement, and deployment of the Company’s ASRs (hardware and software).

Cash and cash equivalents on hand were $5.2 million as of September 30, 2024, compared to $2.3 million as of December 31, 2023. The Company has historically incurred losses and negative cashflows from operations. As of September 30, 2024, the Company also had an accumulated deficit of approximately $186.2 million and stockholders’ equity of approximately $9.3 million. The Company is dependent on additional fundraising in order to sustain its ongoing operations. Based on current operating levels, the Company will need to raise additional funds in the next twelve months by selling additional equity or incurring debt. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the twelve months from the date of this report.

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. The voting, dividend, liquidation and other rights and powers of the common stock are subject to and qualified by the rights, powers and preferences of any series of preferred stock as may be designated by the Company’s Board of Directors and outstanding from time to time. In accordance with the two-class method, earnings allocated to these participating securities, which include participation rights in undistributed earnings with common stock, are subtracted from net loss to determine net loss attributable to common stockholders upon their occurrence.

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 for the three and nine months ended September 30, 2024 and 2023 consist of the following:

	September 30,	September 30,
	2024	2023
Series A Preferred Stock (convertible to Class B Common Stock)	—	28,368
Series B Preferred Stock (convertible to Class B Common Stock)	—	69,977
Series m Preferred Stock (convertible to Class A Common Stock)	—	35,813
Series m-2 Preferred Stock (convertible to Class B Common Stock)	—	3,200
Series S Preferred Stock (convertible to Class A Common Stock)	—	53,041
Warrants to purchase Class A Common Stock	150,111	22,769
Warrants to purchase Series m-3 Preferred Stock	—	28,656
Warrants to purchase Series S Preferred Stock	—	58,836
Stock options	298,863	210,272
Total potentially dilutive shares	448,974	510,932

As all potentially dilutive securities are anti-dilutive as of September 30, 2024 and 2023, diluted net loss per common share is the same as basic net loss per common share for each period.

On May 15, 2024 (the “Preferred Stock Conversion Date”), pursuant to the terms of the Company’s Amended and Restated Certificate of Incorporation, as amended to date (the “Certificate of Incorporation”) each share of the Company’s Super Voting Preferred Stock was automatically converted into fully-paid, non-assessable shares of Class B common stock and each share of the Company’s Ordinary Preferred Stock (together with the Super Voting Preferred Stock, the “Preferred Stock”) was automatically converted into fully-paid, non-assessable shares of Class A Common Stock, in each case at the then effective applicable Conversion Rate, (as defined in the Certificate of Incorporation), as a result of the receipt by the Company of a written request for such conversion from the holders of a majority of the voting power of the Preferred Stock then outstanding (the “Automatic Conversion”). As a result of the Automatic Conversion, no shares of previously authorized Preferred Stock remain outstanding.

Segments

The Company has one operating segment and one reportable segment as its chief operating decision maker, who is its Chief Executive Officer, reviews financial information on a regular basis for purposes of allocating resources and evaluating financial performance. All long-lived assets are located in the United States and substantially all revenue is attributed to sellers and buyers based in the United States.

Comprehensive Loss

Net loss was equal to comprehensive loss for the three month and nine month periods ended September 30, 2024 and 2023.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make judgements, 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, property and equipment and intangible assets, certain estimates required within revenue recognition, warranty and allowance for credit losses, determination of deferred tax valuation allowances, estimating fair values of the Company’s share-based awards, warrant liability, and derivative liabilities, inclusive of any contingent assets and liabilities. Actual results could differ from those estimates and such differences may be material to the financial statements.

Reclassifications

Certain reclassifications have been made to the condensed balance sheet as of December 31, 2023 to conform to the fiscal year 2024 presentation. The reclassifications had no impact on total assets, total liabilities, or stockholders’ equity (deficit).

Accounting Pronouncements Adopted in 2024

None.

Accounting Pronouncements Not Yet Adopted

In November 2023, Financial Accounting Standards Board (“FASB”) released Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting. The amendment improves financial reporting by requiring disclosure of incremental segment information on an annual and interim basis. It is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Management does not believe the implementation of this pronouncement will have a material impact on the Company’s financial statements.

In December 2023, FASB released ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU enhances income tax disclosures for the effective tax rate reconciliation and income taxes paid. This ASU is effective for fiscal periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating this ASU and the impact it may have on its financial statement disclosures.

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 financial statements.

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,
	2024		2023
Raw materials	$	2,579	$	2,112
Work in process		92		82
Finished goods		225		126
	$	2,896	$	2,320

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 3 to 5 years. Depreciation expense of finished ASRs included in research and development expense amounted to $0 and $2, depreciation expense of finished ASRs included in sales and marketing expense amounted to $0 and $2, and depreciation expense included in cost of revenue, net amounted to $467 and $412 for the three months ended September 30, 2024 and 2023, respectively. Depreciation expense of finished ASRs included in research and development expense amounted to $1 and $6, depreciation expense of finished ASRs included in sales and marketing expense amounted to $0 and $15, and depreciation expense included in cost of revenue, net amounted to $1,457 and $1,182 for the nine months ended September 30, 2024 and 2023, respectively.

ASRs, net, consisted of the following:

	September 30,		December 31,
	2024		2023
Raw materials	$	2,429	$	3,841
ASRs in progress		1,220		1,575
Finished ASRs		10,503		12,130
		14,152		17,546
Less: accumulated depreciation on Finished ASRs		(5,371)		(8,701)
ASRs, net	$	8,781	$	8,845

In the first quarter of 2024, the Company discontinued the K5 v3 machines and as a result, in the first nine months of 2024, wrote off approximately $1.1 million against service cost of revenue, net.

The components of the Finished ASRs, net are as follows:

	September 30,		December 31,
	2024		2023
ASRs on lease or available for lease	$	9,778	$	10,804
Demonstration ASRs		42		607
Research and development ASRs		186		194
Charge boxes		497		525
		10,503		12,130
Less: accumulated depreciation		(5,371)		(8,701)
Finished ASRs, net	$	5,132	$	3,429

Intangible Assets

The gross carrying amounts and accumulated amortization of the intangible assets with determinable lives are as follows:

		September 30, 2024
	Amortization	Gross
	Period	carrying		Accumulated		Carrying
Intangible assets with determinable lives	(years)	amount		amortization		amount, net
Developed technology	5	$	990	$	(388)	$	602
Customer relationships	8		950		(232)		718
Total		$	1,940	$	(620)	$	1,320

		December 31, 2023
	Amortization	Gross
	Period	carrying		Accumulated		Carrying
Intangible assets with determinable lives	(years)	amount		amortization		amount, net
Developed technology	5	$	990	$	(239)	$	751
Customer relationships	8		950		(144)		806
Total		$	1,940	$	(383)	$	1,557

Intangible assets amortization expense totaled $79 and $137 for the three months ended September 30, 2024 and 2023 respectively. Intangible assets amortization was recorded in sales and marketing and cost of revenue, net - service in the amounts of $30 and $49, respectively for the three month period ended September 30, 2024 compared to amortization expense recorded in sales and marketing and cost of revenue, net - service in the amounts of $87 and $50, respectively for the three month period ended September 30, 2023.

Intangible assets amortization expense totaled $237 and $410 for the nine months ended September 30, 2024 and 2023 respectively. Intangible asset amortization was recorded in sales and marketing and cost of revenue, net - service in the amounts of $89 and $148, respectively for the nine month period ended September 30, 2024 compared to amortization expense recorded in sales and marketing and cost of revenue, net - service in the amounts of $261 and $149, respectively for the nine month period ended September 30, 2023.

As of September 30, 2024, future intangible assets amortization expense for each of the next five years and thereafter is as follows:

Year ending December 31,	Amount
2024 (remaining three months)	$	80
2025		317
2026		317
2027		275
2028		118
2029 and thereafter		213
Total	$	1,320

Other Current Liabilities

Other current liabilities consisted of the following:

	September 30,		December 31,
	2024		2023
Sales tax	$	387	$	364
Customer deposits		243		239
Warranty liability		446		406
Other		333		450
	$	1,409	$	1,459

Warranty Liability

The liability for estimated warranty claims is accrued at the time of sale and the expense is recorded in the condensed 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,
	2024		2023
Balance January 1,	$	406	$	145
Provision for warranties issued		331		339
Warranty services provided		(291)		(109)
	$	446	$	375

Accrued Expenses

Accrued expenses consisted of the following:

	September 30,		December 31,
	2024		2023
Legal, consulting and financial services	$	710	$	117
Payroll and payroll taxes		278		604
Credit cards		224		244
Accrued interest		275		10
Other		257		180
	$	1,744	$	1,155

Convertible Preferred Warrant Liabilities and Common Stock Warrants

Freestanding warrants to purchase shares of the Company’s preferred stock were classified as liabilities on the balance sheets at their estimated fair value because the underlying shares of preferred stock were contingently redeemable and, therefore, may have obligated the Company to transfer assets at some point in the future. The preferred stock warrants were recorded at fair value upon issuance and were 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 were recorded in the condensed statements of operations. The Company adjusted the liability associated with the preferred stock warrants for changes in the estimated fair value until the earlier of the exercise or conversion. On May 15, 2024, the preferred stock warrants converted into warrants to purchase common stock and any liabilities recorded for the preferred stock warrants were reclassified to additional paid-in capital and are no longer 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.

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.

Reverse Stock Split

On August 16, 2024, the Company held an annual meeting of stockholders at which the Company’s stockholders approved, among other items, amendments to the Company’s Certificate of Incorporation, to effect a reverse stock split of the Company’s Class A Common Stock at a ratio ranging from any whole number between 1-for-5 and 1-for-50, as determined by the Company’s Board of Directors (the “Board”) in its discretion, subject to the Board’s authority to abandon such amendments (the “Class A Reverse Stock Split Amendment”), and effect a reverse stock split of the Company’s Class B Common Stock at a ratio ranging from any whole number between 1-for-5 and 1-for-50 (which ratio shall be the same ratio as the reverse stock split determined by the Board with respect to the Class A Common Stock), as determined by the Board in its discretion, subject to the Board’s authority to abandon such amendments (the “Class B Reverse Stock Split Amendment” and, together with the Class A Reverse Stock Split Amendment, the “Reverse Stock Split Amendment”). The Reverse Stock Split Amendment was described in the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on July 5, 2024. The Board had previously approved the Reverse Stock Split Amendment. On September 4, 2024, the Board selected a reverse stock split of the Class A Common Stock at a final ratio of 1-for-50 and a reverse stock split of the Class B Common Stock at a final ratio of 1-for-50 and abandoned all other reverse stock split amendments at different ratios. On September 13, 2024, the Company filed a Certificate of Amendment to Certificate of Incorporation (the “Certificate of Amendment”) with the Secretary of State of the State of Delaware to effect the Reverse Stock Split Amendment. The Reverse Stock Split Amendment became effective at 5:00 p.m. Eastern Time on the date of filing of the related Certificate of Amendment. No fractional shares of either Class A Common Stock or Class B Common Stock were issued if, as a result of the Reverse Stock Split Amendment, a stockholder would otherwise have become entitled to a fractional share because the number of shares of Class A Common Stock or Class B Common Stock, as applicable, that they held before the Reverse Stock Split Amendment was not evenly divisible by the split ratio; instead, each stockholder received a cash payment in lieu of such fractional share based on the closing price per share as reported by The Nasdaq Capital Market on September 13, 2024, which totaled approximately $78. All stock options outstanding under the Company’s Equity Incentive plan immediately prior to the Reverse Stock Split Amendment were adjusted by dividing the number of affected shares of common stock by 50 and, as applicable, multiplying the exercise price by 50. All share and per-share amounts in these condensed financial statements have been restated to reflect the Reverse Stock Split Amendment as if it had occurred at the beginning of the earliest period presented.