KNIGHTSCOPE, INC.

(KSCP)
Delayed Nasdaq  -  04:00 2022-07-01 pm EDT
3.020 USD   +0.67%
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KNIGHTSCOPE, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/16/2022 | 05:22pm EDT

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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Financials (USD)
Sales 2021 3,41 M - -
Net income 2021 -43,8 M - -
Net cash 2021 2,51 M - -
P/E ratio 2021 -
Yield 2021 -
Capitalization 146 M 146 M -
EV / Sales 2020 -
EV / Sales 2021 -
Nbr of Employees -
Free-Float -
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