Knightscope(KSCP) - 2023 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION This section presents Knightscope, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis for the period ended September 30, 2023 Item 1. Financial Statements This section presents Knightscope, Inc.'s unaudited condensed consolidated financial statements and related notes for the periods ended September 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and stockholders' deficit as of September 30, 2023, and December 31, 2022 | ASSETS (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Cash and cash equivalents | $4,611 | $4,810 | | Accounts receivable, net | $2,094 | $1,370 | | Inventory | $3,159 | $2,560 | | Total current assets | $11,182 | $10,089 | | Autonomous Security Robots, net | $7,776 | $5,850 | | Goodwill | $1,922 | $1,344 | | Intangible assets, net | $1,646 | $2,056 | | Total assets | $25,045 | $22,082 | | LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' DEFICIT (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------------------------------------------- | :----------- | :----------- | | Accounts payable | $1,718 | $2,457 | | Accrued expenses | $1,559 | $2,403 | | Deferred revenue | $1,884 | $1,711 | | Debt obligations | $273 | $2,144 | | Total current liabilities | $7,696 | $10,509 | | Preferred stock warrant liability | $6,752 | $10,011 | | Derivative liability | $390 | $1,146 | | Total liabilities | $15,905 | $29,885 | | Total stockholders' deficit | $(25,171) | $(43,586) | | Total liabilities, preferred stock and stockholders' deficit | $25,045 | $22,082 | - Total assets increased by $2.963 million (13.4%) from $22.082 million at December 31, 2022, to $25.045 million at September 30, 2023, driven by ASRs and goodwill, offset by intangible assets[16] - Total liabilities decreased significantly by $13.98 million (46.8%) from $29.885 million to $15.905 million, primarily due to reduced debt obligations and preferred stock warrant liabilities[16] - Stockholders' deficit improved by $18.415 million (42.2%) from $(43.586) million to $(25.171) million[16] Condensed Consolidated Statements of Operations This statement details the company's revenues, expenses, and net loss for the three and nine months ended September 30, 2023, and 2022 | (in thousands, except per share data) | Three-Months Ended Sep 30, 2023 | Three-Months Ended Sep 30, 2022 | Nine-Months Ended Sep 30, 2023 | Nine-Months Ended Sep 30, 2022 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total revenues | $3,324 | $1,296 | $9,784 | $3,281 | | Total cost of revenues, net | $3,274 | $2,195 | $9,938 | $5,420 | | Gross profit (loss) | $50 | $(899) | $(154) | $(2,139) | | Total operating expenses | $6,533 | $6,876 | $18,795 | $21,073 | | Loss from operations | $(6,483) | $(7,775) | $(18,949) | $(23,212) | | Total other income (expense) | $(1,859) | $2,537 | $3,365 | $9,245 | | Net loss | $(8,342) | $(5,238) | $(15,584) | $(13,967) | | Basic and diluted net loss per common share | $(0.11) | $(0.14) | $(0.26) | $(0.40) | - Total revenues for Q3 2023 increased by 156.5% to $3.324 million from $1.296 million in the prior year, primarily driven by product sales from the CASE Acquisition[20][129] - Gross profit improved significantly, turning from a loss of $(0.899) million in Q3 2022 to a profit of $0.050 million in Q3 2023[20][133] - Net loss increased to $(8.342) million in Q3 2023 from $(5.238) million in Q3 2022, largely due to a decrease in other income (expense) from warrant liability fair value changes[20][139] Condensed Consolidated Statements of Stockholders' Deficit This statement outlines changes in equity, including net loss, equity sales, and debt conversions, for the periods presented - Total stockholders' deficit improved from $(43.586) million at December 31, 2022, to $(25.171) million at September 30, 2023, driven by equity sales and debt conversions despite net loss[16][25] - Additional paid-in capital increased from $95.716 million at December 31, 2022, to $129.671 million at September 30, 2023, reflecting equity financing activities[16][25] - Accumulated deficit increased from $(139.340) million at December 31, 2022, to $(154.924) million at September 30, 2023, due to ongoing net losses[16][25] Condensed Consolidated Statements of Cash Flows This statement details the cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2023, and 2022 | Cash Flow Activity (in thousands) | Nine-Months Ended Sep 30, 2023 | Nine-Months Ended Sep 30, 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 change in cash and cash equivalents and restricted cash | $(99) | $220 | | Cash, cash equivalents and restricted cash at end of the period | $4,711 | $11,069 | - Net cash used in operating activities slightly decreased by $0.2 million to $(18.158) million for the nine months ended September 30, 2023, despite increased net loss, due to favorable non-cash items and working capital changes[28][162] - Net cash provided by financing activities remained strong at $21.642 million for the nine months ended September 30, 2023, primarily from the at-the-market offering program, offsetting other cash uses[28][164] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of significant accounting policies, financial instrument valuations, debt, equity, and other financial commitments NOTE 1: The Company and Summary of Significant Accounting Policies This note describes Knightscope's business, its going concern status, and key accounting policies for assets like inventory and intangible assets - Knightscope, Inc. is an advanced public safety technology company focused on Autonomous Security Robots (ASRs), Blue Light emergency communication devices, and the Knightscope Emergency Management System (KEMS) platform[32][33] - The Company has incurred significant operating losses and negative cash flows, with an accumulated deficit of approximately $154.9 million and stockholders' deficit of $25.2 million as of September 30, 2023, raising substantial doubt about its going concern ability without additional fundraising[35][36][155][157] Inventory Breakdown (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :-------------- | :----------- | :----------- | | Raw materials | $2,364 | $2,032 | | Work in process | $91 | $— | | Finished goods | $704 | $528 | | Total Inventory | $3,159 | $2,560 | ASRs, net Breakdown (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------- | :----------- | :----------- | | Raw materials | $3,158 | $2,732 | | ASRs in progress | $1,760 | $773 | | Finished ASRs | $11,797 | $10,198 | | Accumulated depreciation on Finished ASRs | $(8,939) | $(7,853) | | ASRs, net | $7,776 | $5,850 | Intangible Assets, net (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :------------------- | :----------- | :----------- | | Developed technology | $800 | $949 | | Customer relationships | $836 | $925 | | Trademark | $10 | $182 | | Total | $1,646 | $2,056 | NOTE 2: Revenue and Deferred Revenue This note details the company's revenue streams from ASR leases and Blue Light product sales, along with deferred revenue balances - Revenue primarily stems from Machine-as-a-Service (MaaS) leases of ASRs and KSOC software, recognized ratably, and from sales and services of Blue Light Towers, E-Phones, and Call Boxes[63][64][67][69] Revenue Disaggregation by Product Line and Timing of Recognition (in thousands) | Product Line / Timing | Q3 2023 Point in time | Q3 2023 Over time | Q3 2023 Total | 9M 2023 Point in time | 9M 2023 Over time | 9M 2023 Total | | :-------------------- | :-------------------- | :---------------- | :------------ | :-------------------- | :---------------- | :------------ | | ASRs | $89 | $1,075 | $1,164 | $129 | $3,157 | $3,286 | | Blue Light Towers, E-Phones and Call Boxes | $2,119 | $41 | $2,160 | $6,299 | $199 | $6,498 | | Total | $2,208 | $1,116 | $3,324 | $6,428 | $3,356 | $9,784 | - Deferred revenue, mainly from annual advance MaaS billings, was $1.884 million as of September 30, 2023, with $1.339 million recognized as revenue during the nine months ended September 30, 2023[70] NOTE 3: Fair Value Measurement This note explains the classification of financial instruments into a fair value hierarchy, focusing on Level 3 liabilities like warrant and derivative liabilities - The Company classifies financial instruments into a fair value hierarchy, with Level 3 liabilities, including convertible preferred stock warrant and derivative liabilities, requiring significant management judgment[76][77] Level 3 Warrant and Derivative Liabilities (in thousands) | Liability Category | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------------- | :----------- | :----------- | | Warrant liability – Series m-3 Preferred Stock | $412 | $1,282 | | Warrant liability – Series S Preferred Stock | $6,340 | $8,729 | | Derivative liability – Class A Common Stock warrants | $390 | $1,146 | | 2022 Convertible Notes | $— | $8,152 | - The fair value of Level 3 warrant liabilities decreased from $11.157 million to $7.142 million at September 30, 2023, primarily due to revaluation adjustments[79] NOTE 4: Debt Obligations This note details the company's debt obligations, including convertible notes and promissory notes, and recent financing activities Debt Obligations (in thousands) | Debt Type | Sep 30, 2023 | Dec 31, 2022 | | :------------------------ | :----------- | :----------- | | Convertible notes, net of fees and discount | $— | $8,152 | | Promissory notes | $273 | $546 | | Total debt | $273 | $8,698 | | Less: current portion of debt obligations | $273 | $2,144 | | Non-current portion of debt obligations | $— | $6,554 | - The Company fully retired its 2022 Convertible Notes by September 30, 2023, through issuing 10,432,428 shares of Class A Common Stock, totaling $6.075 million in principal amount[81][170] - A Promissory Note related to the CASE Emergency Systems acquisition was paid in full on October 5, 2023[82] - The Company filed an Offering Circular for up to $10.0 million in Public Safety Infrastructure Bonds, issuing $0.421 million in principal by October 31, 2023, generating approximately $0.394 million in net proceeds[83][107] NOTE 5: Stock-Based Compensation This note describes the company's equity incentive plan, stock option activity, and stock-based compensation expenses - The Company operates under the 2022 Equity Incentive Plan, allowing issuance of up to 5,000,000 shares of Class A Common Stock with an annual increase provision[87] Stock Option Activity (Nine-Months Ended September 30, 2023) | Category | Shares Outstanding | | :------------------------------------- | :----------------- | | Available and outstanding as of Dec 31, 2022 | 10,081,915 | | 2022 Plan annual increase | 1,917,456 | | Granted | 2,170,299 | | Exercised | (451,020) | | Forfeited | (1,286,494) | | Available and outstanding as of Sep 30, 2023 | 10,514,700 | | Vested and exercisable as of Sep 30, 2023 | 5,819,297 | - Stock-based compensation expense for the nine months ended September 30, 2023, was $2.020 million, a decrease from $2.571 million in the prior year[92] NOTE 6: Capital Stock and Warrants This note details the company's convertible preferred stock, outstanding warrants, and shares reserved for future issuance, including at-the-market offerings Convertible Preferred Stock Issued and Outstanding (September 30, 2023, in thousands) | Preferred Stock Type | Shares Issued and Outstanding | Proceeds Net of Issuance Costs | Aggregate Liquidation Preference | | :------------------- | :---------------------------- | :----------------------------- | :------------------------------- | | Series A | 1,418,381 | $614 | $1,267 | | Series B | 3,498,859 | $7,098 | $7,138 | | Series m | 1,790,653 | $4,650 | $5,372 | | Series m-2 | 160,000 | $480 | $480 | | Series S | 2,652,041 | $21,469 | $21,216 | | Total | 9,519,934 | $34,311 | $35,473 | Outstanding Warrants (September 30, 2023) | Class of Shares | Number of Warrants | Exercise Price | Expiration Date | | :----------------------- | :----------------- | :------------- | :-------------- | | Series m-3 Preferred Stock | 1,432,786 | $4.0000 | Dec 31, 2027 | | Series S Preferred Stock | 2,941,814 | $4.5000 | Dec 31, 2027 | | Class A Common Stock | 1,138,446 | $3.2500 | Oct 13, 2027 | - The Company extended certain Series m-3 and Series S Preferred Stock warrants to December 31, 2027, in exchange for cancelling 1,500,000 Series S Preferred Stock warrants[93] - As of September 30, 2023, 30,119,599 shares of Class A Common Stock were reserved for future issuance, covering preferred stock conversions, warrants, and stock options[95] - Under its at-the-market offering program, the Company issued 30,769,751 shares of Class A Common Stock for net proceeds of approximately $20.3 million during the nine months ended September 30, 2023[97][166] NOTE 7: Related parties and related-party transactions This note discloses transactions with related parties, including services from a stockholder and rent payments to an employee - Konica Minolta, a Company stockholder, provided $0.297 million in ASR repair services for the nine months ended September 30, 2023, compared to $0.319 million in the prior year[98] - The Company paid $0.135 million in rent for an employee-owned building for the nine months ended September 30, 2023[99] NOTE 8: Commitments and contingencies This note outlines the company's operating lease liabilities, future minimum lease payments, and potential sales tax contingencies Operating Lease Liabilities (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------- | :----------- | :----------- | | Operating lease right-of-use assets | $1,504 | $2,012 | | Operating lease liabilities, current portion | $701 | $731 | | Operating lease liabilities, non-current portion | $783 | $1,309 | | Total operating lease liabilities | $1,484 | $2,040 | - The weighted average remaining lease term for operating leases is 2.0 years as of September 30, 2023, with total future minimum lease payments of $1.645 million[101] - The Company is not currently party to any legal or regulatory actions expected to have a material adverse effect on its financial position, results, or cash flows[102][180] - The Company recorded a use tax liability of $0.4 million as of September 30, 2023, related to potential sales tax contingencies on its MaaS product offering[105] NOTE 9: Subsequent Events This note describes significant events occurring after the reporting period, including further equity sales and a Nasdaq non-compliance notice - From October 1 to November 10, 2023, the Company sold 2,053,111 shares of Class A Common Stock, generating approximately $1.4 million in net proceeds, under its at-the-market offering program[106] - The Company received a Nasdaq notice on October 26, 2023, for non-compliance with the $1.00 per share minimum bid price rule, with a deadline of April 23, 2024, to regain compliance[108][119] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of Knightscope's financial condition, operational results, liquidity, and capital resources for the periods ended September 30, 2023, and 2022 Overview This overview describes Knightscope's mission to enhance public safety through Autonomous Security Robots (ASRs) and related emergency communication systems - Knightscope is an advanced public safety technology company focused on making the U.S. the safest country through Autonomous Security Robots (ASRs), Blue Light emergency communication devices, and the Knightscope Emergency Management System (KEMS) platform[112][113] - The Company operates a Machine-as-a-Service (MaaS) subscription model for ASRs and sells stationary Blue Light Towers, E-Phones, and Call Boxes as point-of-sale modular systems with self-diagnostic alarm monitoring[116][117] - Current strategy focuses solely on United States sales and deployments, with global expansion considered for the future[118] Nasdaq Listing Rules Compliance This section addresses the company's non-compliance with Nasdaq's minimum bid price rule and the deadline for regaining compliance - Knightscope received a Nasdaq notice on October 26, 2023, for non-compliance with the $1.00 per share minimum bid price rule, with a deadline of April 23, 2024, to regain compliance[119] Known or Anticipated Trends This section discusses key business trends, including client demand, sales cycles, supply chain improvements, and management's goals for profitability - The Company's primary goal is to meet client demand, attract new orders, and ensure consistent field performance, focusing on business scaling[120] - Sales pipeline is growing, but enterprise and government municipality sales cycles are lengthy, ranging from months to years[121] - Supply chain issues largely subsided by Q3 2023, with the CASE Emergency Systems acquisition significantly contributing to business growth[122] - Management expects historical gross loss to decrease, aiming for gross profit and net income by scaling, controlling overhead, and optimizing operations through automation and cost reduction[124] - As of October 29, 2023, the Company had a backlog of approximately $4.1 million, comprising $2.4 million for ASRs and $1.7 million for Blue Light emergency communication devices and Call Boxes[125] Results of Operations This section provides a detailed comparison of the company's financial performance for the three and nine months ended September 30, 2023, and 2022 Comparison of the Three-Months Ended September 30, 2023 and 2022 This comparison highlights changes in revenue, gross profit, operating expenses, and net loss for the third quarter of 2023 versus 2022 Key Financials (Three-Months Ended September 30, in thousands) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------- | :------ | :------ | :--------- | :--------- | | Total revenue, net | $3,324 | $1,296 | $2,028 | 156.5% | | Gross profit (loss) | $50 | $(899) | $949 | 105.6% | | Research and development | $1,903 | $2,070 | $(167) | (8)% | | Sales and marketing | $1,395 | $1,907 | $(512) | (27)% | | General and administrative | $3,235 | $2,899 | $336 | 12% | | Loss from operations | $(6,483)| $(7,775)| $1,292 | (16.6)% | | Total other income (expense)| $(1,859)| $2,537 | $(4,396) | (173)% | | Net loss | $(8,342)| $(5,238)| $(3,104) | 59.3% | - Service revenue increased by $0.6 million, primarily from Blue Light products, while $1.4 million in product revenue was new due to the CASE Acquisition[129] - Cost of service revenue increased by $0.4 million due to higher personnel costs and depreciation from the CASE Acquisition, partially offset by lower cellular fees[130] - Research and development expenses decreased by 8% due to workforce reduction, while sales and marketing expenses decreased by 27% due to reduced advertising[134][135] - General and administrative expenses increased by 12% due to higher investor relations, corporate, and state taxes, partially offset by savings in rent, insurance, and legal fees[136] - Total other income (expense) decreased by $4.4 million, primarily due to a $4.3 million decrease in the change in fair value of warrant liability[139] Comparison of the Nine Months Ended September 30, 2023 and 2022 This comparison details the financial performance changes, including revenue growth, expense shifts, and net loss, for the first nine months of 2023 versus 2022 Key Financials (Nine-Months Ended September 30, in thousands) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------- | :------ | :------ | :--------- | :--------- | | Total revenue, net | $9,784 | $3,281 | $6,503 | 198.2% | | Gross loss | $(154) | $(2,139)| $1,985 | (92.8)% | | Research and development | $4,782 | $5,983 | $(1,201) | (20)% | | Sales and marketing | $3,716 | $6,905 | $(3,189) | (46)% | | General and administrative | $10,148 | $8,185 | $1,963 | 24% | | Restructuring charges | $149 | $— | $149 | 100% | | Loss from operations | $(18,949)| $(23,212)| $4,263 | (18.4)% | | Total other income (expense)| $3,365 | $9,245 | $(5,880) | (64)% | | Net loss | $(15,584)| $(13,967)| $(1,617) | 11.6% | - Service revenue increased by $2.2 million (67%), primarily from Blue Light products, and $4.3 million in product revenue was new due to the CASE Acquisition[142][143] - Cost of service revenue increased by $2.0 million due to higher personnel costs, service vehicles, depreciation, warranty, and third-party service costs related to the CASE Acquisition[144] - Research and development expenses decreased by 20% due to reduced personnel and consulting fees, while sales and marketing expenses decreased by 46% due to lower advertising costs[149][150] - General and administrative expenses increased by 24% due to higher corporate, financial services, and investor relations expenses, partially offset by savings in legal fees, rent, and insurance[151] - Restructuring charges of $0.149 million were incurred due to a workforce reduction in January 2023[153] - Total other income (expense) decreased by $5.9 million, primarily due to a $14.2 million decrease in warrant liability fair value change, partially offset by an $8.4 million decrease in interest expense[154] Liquidity and Capital Resources This section assesses the company's cash position, funding needs, and financing activities, highlighting going concern risks and capital raising efforts - As of September 30, 2023, cash and cash equivalents were $4.6 million, down from $4.8 million at December 31, 2022, with an accumulated deficit of $154.9 million and stockholders' deficit of $25.2 million[155] - The Company projects operating losses and negative cash flows of approximately $1.0 million per month, raising substantial doubt about its going concern ability without additional funding[157] - Financing activities for the nine months ended September 30, 2023, provided $21.6 million, primarily from the at-the-market offering program, which has a remaining capacity of approximately $20.5 million[164][166] - The Company also issued $0.421 million in Public Safety Infrastructure Bonds by October 31, 2023, generating $0.394 million in net proceeds[167] - All 2022 Convertible Notes, totaling $6.075 million in principal, were fully retired by June 26, 2023, through conversion into Class A Common Stock[170] Critical Accounting Estimates This section confirms no material changes to critical accounting estimates and notes the adoption of a new accounting standard - There have been no changes to critical accounting estimates from the 2022 Annual Report on Form 10-K[171] - The Company adopted Accounting Standards Update No. 2016-13, 'Financial Instruments – Credit Losses,' in Q1 2023, which did not have a material impact on the financial statements[172] Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Knightscope, Inc. is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, Knightscope is exempt from providing quantitative and qualitative disclosures about market risk[174] Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of September 30, 2023[176] - No material changes in internal control over financial reporting occurred during the three months ended September 30, 2023[177] PART II — OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings Knightscope, Inc. is not currently involved in any legal proceedings expected to have a material adverse impact on its business or financial results - The Company is not currently party to any legal proceedings believed to have a material adverse impact on its business, financial results, and cash flows[180] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes have occurred in the risk factors included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022[181] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities This section indicates that there were no unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities to report for the period - There were no unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities to report[182] Item 3. Defaults Upon Senior Securities This item is not applicable for the reporting period - This item is not applicable[183] Item 4. Mine Safety Disclosures This item is not applicable for the reporting period - This item is not applicable[184] Item 5. Other Information This section indicates that there is no other information to report for the period - There is no other information to report[185] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including corporate documents, employment agreements, certifications, and XBRL interactive data files - The exhibits include corporate documents, employment agreements for key executives, CEO/CFO certifications, and XBRL interactive data files[187] SIGNATURES This section confirms the official signing of the report by the company's Chairman, CEO, President, and CFO Signatures The report is duly signed on behalf of Knightscope, Inc. by William Santana Li, Chairman and Chief Executive Officer, and Mallorie Burak, President and Chief Financial Officer, on November 13, 2023 - The Form 10-Q was signed by William Santana Li, Chairman and CEO, and Mallorie Burak, President and CFO, on November 13, 2023[190][191]