The following discussion of our financial condition and results of operations
should be read in conjunction with the (1) unaudited condensed financial
statements and the related notes thereto included elsewhere in of this report,
and (2) 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, 2021 included in our 2021 Annual
Report on Form 10-K.
The historical results presented below are not necessarily indicative of the
results that may be expected for any future period.
Overview
Knightscope, Inc. was founded in Mountain View, California in April 2013 and has
since developed revolutionary Autonomous Security Robots ("ASR") with real-time
on-site data collection and analysis and an interface, primarily through funding
from both strategic and private investors. Knightscope currently offers three
products: (1) the K5 ASR ("K5") for outdoor usage, (2) the K3 ASR ("K3") for
indoor usage, and (3) the K1 ASR ("K1") for stationary usage indoors or
outdoors. The Company also provides access to the Knightscope Security
Operations Center ("KSOC") to all its clients, a proprietary, browser-based
interface that allows clients real-time data access. The Company works
continuously to improve and upgrade the ASR and KSOC, and their precise
specifications may change over time.
The Company operates on a Machine-as-a-Service ("MaaS") business model. The
Company's standard subscription term is twelve months and includes the ASR
rental as well as maintenance, service, support, data transfer, KSOC access
docking stations and unlimited software, firmware and select hardware upgrades.
In 2021, the Company added "Knightscope+" remote monitoring services as an
optional service that can be bundled into its MaaS subscriptions, primarily for
clients that operate without a fully staffed 24/7 Security Operation Center
("SOC").
Our current primary focus is on the deployment and marketing of our core
technologies. We continue to receive client orders for K1, K3 and K5 ASRs, and
production of machines is expected to continue out of our corporate headquarters
in Mountain View, California.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations
is based upon our accompanying financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("U.S. GAAP"). The preparation of these financial statements requires us
to make estimates, assumptions and judgments that can have significant impact on
the reported amounts of assets and liabilities, revenues and expenses, and
related disclosure of assets and liabilities at the date of our financial
statements. For the Company, these estimates include, but are not limited to:
deriving the useful lives of ASRs, determination of the cost of ASRs, assessing
assets for impairment, and the valuation of convertible preferred stock warrants
and stock options. Actual results could differ from those estimates. We base our
estimates, assumptions and judgments on historical experience and various other
factors that we believe to be reasonable under the circumstances. Actual results
may differ from these estimates under different assumptions or conditions. On a
regular basis, we evaluate our estimates, assumptions and judgments and make
changes accordingly.
Known or Anticipated Trends
Our primary goal remains meeting client demands 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 three months ended March 31, 2022 showed demand across all
of Knightscope's product service lines. The sales pipeline continues to grow and
is strong, though similar to many business-to-business transactions, the
enterprise sales cycle is lengthy. Although we have executed contracts in less
than 30 days, notionally these negotiations can range up to several years,
taking into account the client's budget, finance, legal, cyber security, human
resources, facilities and other reviews. The sales process for this brand-new
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.
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During the first quarter of 2022, both limited resources, including supply chain
delays, increased minimum order requirements of raw materials and components,
cash on-hand, as well as the COVID-19 pandemic had a negative impact on the
Company's performance. Additionally, a portion of clients hardest hit by
COVID-19 restrictions have had to terminate or place their service on hold due
to budget constraints, and numerous others have had to delay deployments due to
accessibility to their premises resulting from continued uncertainty regarding
state and local guidelines related to granting facility access. However, the
Company has continued to sign on new clients during the pandemic and, with the
recent influx of new capital in January 2022, has begun to fund and build
inventory, as well as recruit additional employees, which we believe will
partially offset the negative impact on our performance.
Due to numerous geopolitical events, new safety requirements resulting from the
COVID-19 pandemic, 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. At the same time, we 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.
Results of Operations
Comparison of the Three Months Ended March 31, 2022 and 2021
The following table sets forth selected statements of operations data (in
thousands, other than share data) and such data as a percentage of total
revenues.
Three months ended March 31,
2022 % 2021 %
Revenue, net $ 944 100 $ 866 100
Cost of revenue, net 1,493 158 1,183 137
Gross loss (549) (58) (317) (37)
Research & development 1,838 195 1,127 130
Sales & marketing 3,490 370 3,069 354
General & administrative 2,326 246 544 63
Total operating expenses 7,654 811 4,740 547
Loss from operations (8,203) (869) (5,057) (584)
Interest expense, net (8,911) (944) (540) (62)
Change in fair value of warrant liabilities 7,522 797 - 0
Other income (expense), net (5) (1) 20 2
Total other income (expense) (1,394) (148) (520) (60)
Net loss before income tax (9,597) (1,017) (5,577) (644)
Income tax expense - - - -
Net loss (9,597) (1,017) $ (5,577) (644)
Revenue, net
Revenue, net for the three months ended March 31, 2022 increased approximately
$0.1 million versus revenue, net for the same period in 2021. Despite the impact
of COVID-19, which affected our existing client base, causing some contracts to
be placed on hold or postponed during 2021, coupled with supply chain
constraints, recently exacerbated by the conflict in Ukraine, causing delays in
our ability to deploy ASRs during the first quarter of 2022, the Company was
able to offset some of that financial impact with the addition of new clients
later in 2021 and through March 31, 2022. As of May 2, 2022, the Company has a
backlog of orders to deploy 29 ASRs, representing an aggregate annual
subscription value of approximately $1.6 million.
Cost of revenue, net
Cost of revenue, net for the three months ended March 31, 2022 increased by
approximately $0.3 million to $1.5 million, compared to the three months ended
March 31, 2021, primarily due to an increase in personnel costs related to
increased headcount of approximately $0.1 million and increased costs attributed
to production, shipping and service of the ASRs. The cost of revenue, net is
primarily related to the average service cost per machine and stock-based
compensation.
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Gross Loss
The revenue and cost of services described above resulted in a gross loss for
the three months ended March 31, 2022 of approximately $0.5 million compared to
$0.3 million for the three months ended March 31, 2021.
As our business scales and becomes more streamlined, management expects gross
loss to decrease once a critical mass of deployed ASRs 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 should obtain expertise, economies of scale and efficiency
that would increase revenue and reduce costs over the medium to long-term. For
example, we continued to refine our sales strategy in 2021, which is expected to
increase and enhance our revenue streams. Our ASR materials sourcing,
production, assembly and manufacturing are expected to become more efficient
over time, and the costs associated with these processes reduced as we grow.
However, with global supply chain constraints resulting from the COVID-19
pandemic and the conflict in Ukraine, the Company experienced increased minimum
order requirements and lead times for certain components used in our products
during 2021and throughout the first quarter of 2022. The Company expects this to
continue throughout 2022 and into 2023. As operations scale, we believe we will
be in a better position to negotiate volume-based pricing terms with suppliers
as well as optimize our designs for design-for-assembly and design-for-service.
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, alleviating the need for a
dramatic increase in headcount. Additionally, new service cost reduction
initiatives are underway to further reduce our ongoing operating costs. Our
overall strategy is to try to keep our fixed costs as low as possible while
achieving our overall growth objectives.
Research and Development
Three Months Ended
March 31,
2022 2021 $ Change % Change
Research and development $ 1,838 $ 1,127 $ 711 63 %
Percentage of total revenue 195 % 130 %
Research and development expenses increased by $0.7 million, or 63%, for the
three months ended March 31, 2022 as compared to the respective period of the
prior year. The increase is primarily due to personnel related costs and
increased headcount focused on technology advancements and new product
development, including but not limited to, the K1 Hemisphere and K5 5th
generation ASR as well as increased investment in our Federal Risk and
Authorization Management Program ("FedRamp") certification efforts during the
first quarter of 2022 compared to the same period during the prior year. The
Federal Government adopted the Cloud First Policy, which requires all cloud
service providers that hold federal data to be FedRamp certified. FedRamp
compliance will enable federal agencies to do business with Knightscope.
Sales and Marketing
Three Months Ended
March 31,
2022 2021 $ Change % Change
Sales and marketing $ 3,490 $ 3,069 $ 421 14 %
Percentage of total revenue 370 % 354 %
Sales and marketing expenses increased by $0.4 million, or 14%, for the three
months ended March 31, 2022 as compared to the respective period of the prior
year. The increase was primarily due to increased investment in building our
sales force, a significant increase in commercial advertising expenses designed
to increase public awareness of the Company and its products to potential
customers and investors, and personnel related costs in 2022 compared to the
respective period of the prior year.
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General and Administrative
Three Months Ended
March 31,
2022 2021 $ Change % Change
General and administrative $ 2,326 $ 544 $ 1,782 328 %
Percentage of total revenue 246 % 34 %
General and administrative expenses increased by approximately $1.8 million, or
approximately 328%, for the three months ended March 31, 2022 as compared to the
respective period of the prior year. The increase was primarily driven by an
increase in legal, corporate, and financial service expenses related to the
Company's public listing in January 2022 as well as increased personnel related
costs.
Other Income/(Expense), Net
Three Months Ended
March 31
2022 2021 $ Change % Change
Interest expense, net $ (8,911) $ (540) $ (8,371) (1,550) %
Change in fair value of warrant
liability 7,522 - 7,522 -
Other income (expense), net (5) 20 (25) (125) %
Total other income (expense) $ (1,394) $ (520) $ (874) (168) %
Total other expense increased by approximately $0.9 million, or 168%, for the
three months ended March 31, 2022 as compared to the respective period of the
prior year. The increase is primarily due to the write off of the debt discount
related to the conversion of convertible notes on January 5, 2022 which was
recorded as interest expense, offset by change in fair value of warrant
liability.
Liquidity and Capital Resources
As of March 31, 2022, and December 31, 2021, we had $21.1 million and $10.7
million, respectively, of cash and cash equivalents. As of March 31, 2022, the
Company also had an accumulated deficit of approximately $123.3 million, working
capital of $19.7 million and stockholders' deficit of $38.7 million. On April
20, 2021, the Company entered into a Referral Agreement with Dimension Funding,
LC ("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
ASR's by accelerating collection of its accounts receivable. In January 2022,
the Company terminated its offering under Regulation A, raising net proceeds of
$19.5 million. In addition, in April 2022, the Company announced the execution
of a stock purchase agreement in connection with a committed equity facility
that provides Knightscope with the right, without obligation, to sell and issue
up to $100 million of its Class A Common Stock over a period of 24 months to B.
Riley at Knightscope's discretion, subject to certain limitations and
conditions. The Company has projected operating losses and negative cash flows
of approximately $1.5 million per month for the next several months. As of the
date of this report, the Company has sufficient working capital to fund at least
twelve months of operations. There can be no assurance that the Company will be
successful in acquiring additional funding at levels sufficient to fund its
future operations beyond this period. If the Company is unable to raise
additional capital in sufficient amounts or on terms acceptable to it, or at
all, 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.
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Cash Flow
The table below, for the periods indicated, provides selected cash flow
information:
Three Months Ended
March 31,
2022 2021
Net cash used in operating activities $ (8,352) $ (5,758)
Net cash used in investing activities
(805) (387)
Net cash provided by financing activities 19,503 6,423
Net increase in cash and cash equivalents $ 10,346 $ 278
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
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 $8.4 million for the
three months ended March 31, 2022. Net cash used in operating activities
resulted from a net loss of $9.6 million, partially offset by changes in working
capital and non-cash charges.
Net cash used in operating activities for the three months ended March 31, 2022
increased by approximately $2.6 million as compared to the respective period of
the prior year. The increase was primarily a result of an increase in the net
loss of $4.0 million due to operating activities and the Company's public
listing in January 2022, an increase in the fair value of warrants of $7.5
million, and changes in working capital of $0.1 million, partially offset by an
increase in debt discount amortization of $8.5 million and an increase in stock
compensation expense of $0.5 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 three months ended March 31, 2022
was approximately $0.8 million compared to $0.4 million in the respective period
last year, or $0.4 million higher. The increase was primarily a result of higher
investment in ASRs.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was approximately $19.5 million for
the three months ended March 31, 2022, an increase of approximately $13.1
million as compared to the respective period of the prior year. Our financing
activities for the three months ended March 31, 2022, consisted primarily of net
proceeds resulting from issuing stock in connection with the Company's 2021
Regulation A Offering that terminated on January 26, 2022, immediately prior to
the Company's listing on Nasdaq on January 27, 2022.
Series S Preferred Regulation A Offering
On September 15, 2020, the Company filed an offering statement in connection
with a proposed offering of up to $25 million of its Series S Preferred Stock
pursuant to Regulation A of the Securities Act, to raise additional capital for
operations (the "2020 Regulation A Offering"). The 2020 Regulation A Offering
terminated on April 21, 2021. As of March 31, 2022, the Company issued 2,107,330
shares of Series S Preferred Stock and raised gross proceeds of approximately
$21.1 million from the 2020 Regulation A Offering offset by $2.3 million in
issuance costs.
Class A Common Stock Regulation A Offering
On October 15, 2021, the Company filed an offering statement in connection with
a proposed offering of up to $40 million for its Class A Common Stock pursuant
to Regulation A of the Securities Act, to raise additional capital for
operations (the "2021 Regulation A
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Offering"). The offering statement was qualified by the SEC on November 29,
2021, and the Company commenced the 2021 Regulation A Offering shortly
thereafter, and terminated on January 26, 2022. Gross proceeds generated
through this offering was $22.4 million.
Convertible Promissory Notes and Series S Preferred Stock Warrants, and the
Related Conversion of Certain Series m-3 Preferred Stock into Series m-4
Preferred Stock
On April 30, 2019 the Company signed a Note and Warrant Purchase Agreement under
the form of which the Company can issue up to $15 million of convertible
promissory notes and warrants to purchase up to 3,000,000 shares of Series S
Preferred Stock (the "Convertible Note Financing"). Pursuant to the terms of the
Convertible Note Financing, the Company became obligated to exchange certain of
its outstanding shares of Series m-3 Preferred Stock for the newly authorized
shares of Series m-4 Preferred Stock upon the closing of at least $1 million in
aggregate principal amount of convertible promissory notes under the Convertible
Note Financing. On September 10, 2019, the Company issued, to the same group of
Convertible Note Financing investors, 1,432,786 shares of its Series m-4
Preferred Stock in exchange for 1,432,786 shares of its shares of Series m-3
Preferred Stock held by such investors. The Series m-4 Preferred Stock has a
senior liquidation preference to all other Preferred Stock and Common Stock of
the Company, has an accruing payment in kind dividend in the form of Series m-4
Preferred Stock of 12%, and has certain other preferential rights, including
voting rights, as further explained in the Company's amended and restated
certificate of incorporation. Exchange of Series m-3 Preferred Stock for
Series m-4 Preferred Stock was inclusive of inducement expenses of $0.9 million
(see Note 4 to the audited financial statements for details). The convertible
promissory notes had a maturity date of January 1, 2022, provide for interest at
a rate of 12% per annum payable upon the maturity date, are generally the most
senior company security (subject to limited subordination carve-outs) and
provide for significant discounts upon a qualified financing or an initial
public offering, and for a premium upon a change of control. As of March 31,
2022, the Company had issued convertible notes in the aggregate principal amount
of approximately $14.7 million (out of $15 million), all of which have converted
during the quarter ended March 31, 2022. Warrants for the purchase of up to
2,941,814 shares of Series S Preferred Stock were also issued and accrued for,
respectively, to the same convertible note holders. The warrants have an
exercise price of $4.50 per share and expire on the earlier of December 31, 2024
or 18 months after the closing of the Company's first firm commitment
underwritten initial public offering of the Company's common stock pursuant to a
registration statement filed under the Securities Act (the "IPO").
On November 18, 2021, the Company agreed to amend the Note and Warrant Purchase
Agreement and the convertible notes and warrants to purchase Series S Preferred
Stock issued thereunder principally as follows: (i) the scheduled maturity date
of the convertible notes was extended from January 1, 2022 to January 1, 2024,
(ii) the interest rate of the convertible notes was reduced from 12% per annum
to 3% per annum starting on January 1, 2022, (iii) the conversion terms of the
convertible notes were revised so that the convertible notes will automatically
convert into Class A Common Stock upon the listing of the Company's common stock
for trading on a nationally recognized securities exchange (e.g., the New York
Stock Exchange) or inter-dealer quotation system (e.g., Nasdaq), (iv) the
exercise period of the warrants was extended from December 31, 2021 to December
31, 2024 and will commence on January 1, 2023, and (v) the cashless exercise
feature was removed from the warrants. The conversion price of the convertible
notes for conversion into Class A Common Stock was not changed and remains at
$2.50 per share and the exercise price of the warrants to purchase Series S
Preferred Stock was not changed and remains at $4.50 per share.
In connection with the Convertible Note Financing, William Santana Li, the Chief
Executive Officer and director of the Company, was granted a voting proxy to
vote substantially all of the shares of the Company's Series m-4 Preferred
Stock, the stock issued upon the conversion of warrants to purchase all of the
shares of the Company's Series m-3 Preferred Stock, the stock issued upon the
conversion of warrants to purchase shares of the Company's Series S Preferred
Stock, and the stock issued upon conversion of the convertible promissory notes
issued as part of the Convertible Note Financing, in each case to the extent
that such shares are held by participants in the Convertible Note Financing (the
"Voting Proxy"). The votes held by Mr. Li, as a result of the Voting Proxy and
related to the outstanding securities to which the Voting Proxy applies,
represents approximately 1.2% of the Company's aggregate voting power as of
March 31, 2022.
The Series S Preferred Stock has a right to convert at any time into Class A
Common Stock. The initial conversion rate was 1:1, which conversion rate will
continue to be adjusted pursuant to the broad-based weighted average
anti-dilution adjustment provisions provided for in the Company's amended and
restated certificate of incorporation, including without limitation as a result
of the issuance of warrants to purchase Series S Preferred Stock in connection
with the Convertible Note Financing referenced in the paragraph above, which may
continue to have closings simultaneously with the Regulation D Offering of
Series S Preferred Stock. As of March 31, 2022, the conversion rate has been
adjusted to approximately 1.1069 shares of Class A Common Stock for every 1
share of Series S Preferred Stock, and remains subject to further adjustment. In
addition, as of March 31, 2022, the conversion rate has been adjusted to
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approximately 1.0187 shares of Class A Common Stock for every 1 share of Series
m, m-1, and m-2 Preferred Stock, and remains subject to further adjustment.
In connection with the placement of the Series m-3 Preferred Stock during
the year ended December 31, 2018, the Company issued to the purchasers warrants
to purchase an aggregate of 410,972 shares of Series m-3 Preferred Stock, of
which 16,757 shares expired on June 1, 2020. These warrants have an exercise
price of $4.00 per share. In connection with the exchange of the Company's
Series m-3 Preferred Stock into Series m-4 Preferred Stock, the term of these
warrants was extended such that the warrants would expire on the earlier of
December 31, 2021, or 18 months after the closing of the Company's first firm
commitment underwritten initial public offering of the Company's common stock
pursuant to a registration statement filed under the Securities Act.
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