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Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2022-03-31 · 165 added, 105 removed, 100 unchanged (73% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and notes thereto included herein as Item 8.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto included herein as Item 8.

This discussion contains forward-looking statements.

Refer to “Forward-Looking Statements” on page 4 and “Risk Factors” beginning on page 12, for a discussion of the uncertainties, risks and assumptions associated

with these statements.

Refer to “Forward-Looking Statements” on page 3 and “Risk Factors” beginning on page 10, for a discussion of the uncertainties, risks and assumptions associated with these statements.

The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

We are a developer of advanced physical security technologies focused on enhancing U.S.

security operations.

Knightscope designs, develops, manufactures, markets, and supports ASRs with real-time on-site data collection and analysis and a proprietary interface for both indoor and outdoor usage.

In addition, we developed and operate the KSOC which allows real-time data access, a service accessible to all our clients.

Our primary focus is on the development, deployment and marketing of our core technologies which are designed to be a force multiplier, offering improved situational awareness to security professionals and are suitable for most environments that require security patrol coverage.

We sell our solutions under an annual subscription, MaaS business model, which includes the ASR rental as well as maintenance, service, support, data transfer, KSOC access, docking stations, and unlimited software, firmware and select hardware upgrades.

Our current strategy is to focus on servicing the United States for the foreseeable future before considering global expansion.

A discussion of our comparison between 2022 and 2021 is presented below.

A discussion of the changes in our results of operations between the years ended December 31, 2021 and, 2020 has been omitted from this Annual Report on Form 10-K but may be found in Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 31, 2022, which is available free of charge on the SEC’s website at www.sec.gov and our corporate website (www.knightscope.com).

Knightscope is a leading provider of autonomous security robots.

Our technologies are Made in the USA and allow public safety professionals to more effectively deter, intervene, capture, and prosecute criminals.

Our mission is to make the United States of America the safest country in the world by helping to protect the people, places, and things where we live, work, study and visit.

To support this mission, we design, develop, manufacture, market, deploy and support Autonomous Security Robots (“ASRs”), autonomous charging stations, the proprietary Knightscope Security Operations Center (“KSOC”) software user interface, and blue light emergency communication devices.

Our core technologies are suitable for most environments that require security patrol coverage and designed to be force multipliers that offer security teams improved situational awareness.

ASRs conduct real-time on-site data collection and analysis in both indoor and outdoor spaces delivering alerts to security professionals through the KSOC.

The KSOC enables clients with appropriate credentials and user permissions to access the data for investigative and evidence collection purposes.

Our blue light emergency communication devices consist of emergency blue light towers, blue light emergency phone (“E-Phone”) towers, fully integrated, solar-powered cellular emergency phone towers, and emergency call box systems (“Call Box”).

Towered devices are tall, highly visible and recognizable apparatuses that provide emergency communications using cellular and satellite communications with solar power for additional safety in remote locations.

E-Phones and Call Boxes offering a smaller, yet still highly visible, footprint than the stationary security towers, but with the same reliable communication capabilities.

We sell our ASR and stationary multi-purpose security solutions under an annual subscription, Machine-as-a-Service business model, which includes the ASR rental as well as maintenance, service, support, data transfer, KSOC access, charging stations, and unlimited software, firmware and select hardware upgrades.

Our stationary blue light, E-Phone, and Call Box towers are sold as point-of-sale modular systems, including Knightscope’s exclusive, self-diagnostic, alarm monitoring system firmware that provides system owners daily email reports on the operational status of their system, a one-year parts warranty, and optional installation services.

Modular upgrades are available for the blue light towers, such as public announcement speaker systems.

Knightscope also offers an extended warranty on this series of stationary security towers.

Our current strategy for all products and services is to focus solely on United States sales and deployments for the foreseeable future before considering global expansion.

Recent Developments

On October 14, 2022, the Company completed the acquisition of Case Emergency Systems (“CASE”) pursuant to an asset purchase agreement entered into on October 10, 2022 (the “CASE Acquisition”).

The Company purchased and assumed substantially all the assets and certain specified liabilities of CASE’s emergency call box and communications business.

The purchase price paid at the closing of the CASE Acquisition consisted of (i) $6.16 million in cash, subject to a working capital and indebtedness adjustment, less an indemnification holdback amount of $672,000 and (ii) $560,000 in the form of an unsecured, non-negotiable promissory note.

On October 10, 2022, the Company entered into a securities purchase agreement with an accredited investor, pursuant to which the Company issued and sold to the investor (i) senior secured convertible notes in an aggregate principal amount of $6.075 million (the “Notes”), at an initial conversion price of $5.00 per share of the Company’s Class A Common Stock, and (ii) warrants to purchase up to 1,138,446 shares of Class A Common Stock with an initial exercise price of $3.25 per share.

On December 30, 2022, the Company and the holder of the Notes entered into an agreement and waiver, pursuant to which, among other things, the conversion price under the Note was reduced to equal the Alternate Conversion Price (as defined in the Notes) then in effect (but with 85% replacing 80% in such definition of Alternate Conversion Price, as applicable).

On January 6, 2023, following the completion of the CASE Acquisition, the Company announced a cost-reduction plan intended to reduce operating costs, improve operating margins, streamline its operations and right-size its combined workforce and continue advancing the Company’s ongoing commitment to profitable growth.

The cost-reduction plan included a reduction of the Company’s workforce by approximately 20%.

In February 2023, the Company commenced an At The Market offering program with H.C.

Wainwright & Co., LLC, acting as sales agent, under which we may offer and sell shares of our Class A Common Stock from time to time through the sales agent having an aggregate offering price of up to $20,000,000.

Critical Accounting Policies and 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.

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.

The discussion and analysis of our financial condition and results of operations is based upon our accompanying consolidated financial statements, which have been prepared in accordance with U.S.

The preparation of these consolidated 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 consolidated financial statements.

For the Company, these estimates include, but are not limited to:

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On a regular basis, we evaluate our estimates, assumptions and judgments and make changes accordingly.

We believe the following critical accounting estimates affect our more significant judgments and estimates used in preparing our financial statements.

Please see Note 1 to our financial statements, which are included in Item 8 “Financial Statements and Supplementary Data” of this Annual Report, for our Company Summary of Significant Accounting Policies.

There have been no material changes made to the critical accounting estimates during the periods presented in the financial statements.

We believe the following critical accounting estimates affect our more significant judgments and estimates used in preparing our consolidated financial statements.

Please see Note 1 to our consolidated financial statements, which are included in Item 8 “Consolidated Financial Statements and Supplementary Data” of this Annual Report.

There have been no material changes made to the critical accounting estimates during the periods presented in the consolidated financial statements.

Business Combinations

We account for our business combinations using the acquisition method of accounting, which requires, among other things, allocation of the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed at their estimated fair values on the acquisition date.

The excess of the fair value of purchase consideration over the values of these identifiable assets and liabilities is recorded as goodwill.

When determining the fair value of assets acquired and liabilities assumed, we make significant estimates and assumptions, especially with respect to intangible assets.

Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

Once the purchase accounting is finalized, any subsequent adjustments are reflected in the consolidated statements of operations.

Acquisition costs, such as legal and consulting fees, are expensed as incurred.

Acquired Intangible Assets

When we acquire a business, a portion of the purchase price is typically allocated to identifiable intangible assets, such as trademarks, acquired technology and customer relationships.

Fair value of these assets is determined primarily using the income approach, which requires us to project future cash flows and apply an appropriate discount rate.

We amortize intangible assets with finite lives over their expected useful lives.

Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.

Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.

Incorrect estimates could result in future impairment charges, and those charges could be material to our results of operations.

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.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination.

Goodwill is not subject to amortization but will be reviewed for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.

Autonomous Security Robots, net (“ ASRs”)

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None of the Company’s ASRs or property and equipment was determined to be impaired during the year ended December 31, 2022 and 2021.

Convertible Preferred Warrant Liabilities and Common Stock Warrants

Freestanding warrants to purchase shares of the Company’s preferred stock are classified as liabilities on the balance sheets at their estimated fair value because the underlying shares of preferred stock are contingently redeemable and, therefore, may obligate the Company to transfer assets at some point in the future.

Convertible Preferred Warrant Liability and Common Stock Warrants

Freestanding warrants to purchase shares of the Company’s preferred stock are classified as liabilities on the consolidated balance sheets at their estimated fair value because the underlying shares of preferred stock are contingently redeemable and, therefore, may obligate the Company to transfer assets at some point in the future.

The preferred stock warrants are recorded at fair value upon issuance and are subject to remeasurement to their respective estimated fair values.

At the end of each reporting period, changes in the estimated fair value of the preferred stock warrants are recorded in the statements of operations.

At the end of each reporting period, changes in the estimated fair value of the preferred stock warrants are recorded in the consolidated statements of operations.

The Company will continue to adjust the liability associated with the preferred stock warrants for changes in the estimated fair value until the earlier of the exercise or expiration of the preferred stock warrants, the completion of a sale of the Company or an underwritten initial public offering (“IPO”).

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The Company issued common stock warrants in connection with the execution of a certain debt financing during the year ended December 31, 2015.

These common stock warrants are not considered derivative liabilities are accounted for at fair value at the date of issuance in additional paid-in capital and remain outstanding as of December 31, 2021.

These common stock warrants are not considered derivative liabilities are accounted for at fair value at the date of issuance in additional paid-in capital and were fully exercised in 2022 and none remain outstanding as of December 31, 2022.

The fair value of these common stock warrants is determined using the Black-Scholes option pricing model.

On October 10, 2022, we issued common stock warrants in connection with the execution of Convertible Notes (“2022 Convertible Notes”).

These warrants are recorded as derivative liabilities as it was determined they were not indeed to the Company’s stock and accounted for at fair value upon issuance.

The derivative liability will be marked to market each reporting period with changes in fair value recorded in changes in fair value of warrant and derivative liability on the consolidated statements of operations.

Share-Based Compensation

The Company accounts for stock-based compensation in accordance with Accounting Standards Codification 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.

Stock-based awards made to nonemployees are measured and recognized based on the estimated fair value on the vesting date and are re-measured at each reporting 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.

For awards with graded vesting, the Company recognizes stock-based compensation expense over the service period using the straight-line method, based on shares ultimately expected to vest.

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.

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Year ended December 31,

Total revenue, net

Cost of revenue, net

Total cost of revenues

Operating Expenses

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Interest expense, net

Change in fair value of warrant liabilities

Change in fair value of warrant and derivative liability

Change in fair value of convertible note

Other income (expense), net

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Income tax expense

Revenue for the year ended December 31, 2021 was relatively flat at approximately $3.4 million, as compared to approximately $3.3 million for the year ended December 31, 2020, primarily due to new deployments in 2021 offset by increased backlog resulting from supply chain delays and client subscription terminations.

Service revenue, net, which includes revenue generated through MaaS agreements for our ASRs and maintenance and support contracts for our Blue Light EPhone Towers and Call Boxes, increased by approximately $1.8 million to $5.2 million, or approximately 53% for the year ended December 31, 2022, from $3.4 million for the year ended December 31, 2021.

The increase was due to the Company’s acquisition of CASE during the fourth quarter of 2022 and ASR renewals and new deployments at a number of new clients in 2022 as the Company was able to conduct business with less disruption from COVID-19 and resulting supply chain issues, which negatively impacted the Company’s service revenue during 2021.

Product revenue of approximately $0.5 million from sales of call boxes and blue light security towers represents incremental new revenue to the Company resulting from the CASE Acquisition (see note 3 to the consolidated financial statements in Item 8).

The Company had no product revenue in 2021.

Cost of revenue, net

Cost of revenue, net for the year ended December 31, 2021 was approximately $5.5 million, as compared to approximately $4.7 million for the year ended December 31, 2020, representing an increase of approximately $0.8 million, or approximately 18%.

As a percentage of revenue, cost of revenue, net increased to 160% from 139%.

The increase in cost of revenue, net was primarily related to increased depreciation, service, consumable supplies and hardware costs relating to deployed ASR’s as well as increased personnel costs partially due to increased headcount.

Gross loss for the year ended December 31, 2021 was approximately $2.1 million, as compared to $1.3 million for the year ended December 31, 2020, representing an increase of $0.8 million, or 59%.

The increase in gross loss was primarily due to revenue remaining unchanged from 2020 to 2021 coupled with an incremental increase in costs during 2021 relating to deployed ASR’s and increased personnel related costs.

Service cost of revenue, net, representing the cost of supporting ASR MaaS and maintenance and support agreements related to call box and blue light tower installations, for the year ended December 31, 2022 was approximately $9.0 million, as compared to approximately $5.5 million for the year ended December 31, 2021, representing an increase of approximately $3.5 million, or approximately 64%.

As a percentage of service revenue, service cost of revenue, net increased to 171% from 160%.

In addition to the costs attributable to a higher volume of business over the prior year, the increase in service cost of revenue, net was primarily related to personnel costs related to an increase of 16 employees resulting from the CASE Acquisition, resulting in a total of 47 employees providing customer services,

and increased costs attributed to the production and service of the ASRs, partially due to increased costs resulting from rising inflation.

The service cost of revenue, net is primarily related to the depreciation and service costs for ASRs and support and maintenance of the blue light towers and call boxes.

Product cost of revenue, net of approximately $0.1 million is related to the costs of call boxes and blue light towers sold pursuant to the CASE Acquisition during the fourth quarter of 2022.

Gross loss for the year ended December 31, 2022 was approximately $3.3 million, as compared to $2.1 million for the year ended December 31, 2021, representing an increase of approximately $1.3 million, or 61%.

Research and Development

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Research and development (“R&D”) expense for the year ended December 31, 2022 was approximately $8.5 million, or 150% of revenue, compared to R&D expense of $5.6 million, or 164% of revenue, for the year ended December 31, 2021.

R&D expense increased primarily due to investment in FedRamp and cybersecurity necessitating increased headcount.

The majority of the increase, $2.6 million, was due to an increase in headcount and personnel related costs associated with the addition of ten new employees, including three as a result of the CASE Acquisition, necessitated by technology development, including but not limited to upgrades to the KSOC platform and existing ASR models, development of all new ASR models like the K1 Hemisphere announced in June 2022 and continued focus on FedRamp.

Sales and marketing

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Sales and marketing expense for the year ended December 31, 2022 was approximately $8.5 million, or 151% of revenue, compared to sales and marketing expense of $12.0 million, or 353% of revenue, for the year ended December 31, 2021.

The increase in sales and marketing expense was primarily due to an increase in in the Company’s advertising expense during the 2020 and 2021 Regulation A Offerings as well as increased investment in professional services to support sales during 2021.

The decrease in 2022 was primarily due to a reduction of approximately $4.6 million in spending on commercial advertising, as the Company did not incur the same level of advertising expenses invested during 2021 in connection with multiple Regulation A offerings.

The Company also eliminated a significant amount of on-line advertising in 2022, This decrease was partially offset by an increase in headcount costs of approximately $0.6 million resulting from the headcount growth related to the CASE acquisition, including the addition of five CASE employees, and employee bonuses of approximately $0.2 million.

General and administrative

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General and administrative (“G&A”) expense for the year ended December 31, 2022 was approximately $11.7 million, or 208% of revenue, compared to G&A expense of $4.9 million, or 143% of revenue, for the year ended December 31, 2021.

The increase in G&A expense was primarily due to an increase in personnel related costs relating to hiring an in-house accounting team and chief financial officer as well as legal and professional services incurred in connection with changing transfer agents, high volumes of stock conversions, and the 2021 Offering and public listing efforts.

The increase was primarily driven by an increase of approximately $3.6 million relating to professional service fees associated with legal, corporate, insurance, investor relations and financial service expenses related to the Company’s public listing on Nasdaq, regulatory filings, and the CASE acquisition, $1.8 million in personnel related costs as a result of an increase in headcount, and an increase in stock-based compensation expense of $1.4 million.

The following table sets forth total other income (expense), as described above, for the periods indicated:

Interest expense, net

Change in fair value of warrant and derivative liability

Change in fair value of convertible note

Other income (expense), net

Total other income (expense)

Interest expense, net

Percentage of total revenue

Interest expense, net for the year ended December 31, 2022 was approximately $9.2 million, compared to interest expense net of $4.3 million for the year ended December 31, 2021.

The increase in interest expense is primarily due to an increase in the amortization of debt discount by $1.5 million and an increase in the cumulative principal balance related to convertible notes.

Change in fair value of warrant liability

The expense relating to the change in the fair value of warrant liability increased by approximately $13.3 million for the year ended December 31, 2021 to $15.7 million, as compared to expense relating to the fair value of warrant liability for the year ended December 31, 2020 of $2.4 million.

The change in the fair value of the warrant liability is attributable to the increase in the fair value of the preferred stock warrants that are accounted for as a liability.

The increase in interest expense, net of $4.9 million resulted from the write off of the remaining debt discount upon the conversion of convertible notes on January 5, 2022 and new note issuances in connection with the CASE acquisition.

Change in fair value of warrant and derivative liability

The change in the fair value of warrant and derivative liability changed by approximately $36.6 million for the year ended December 31, 2022 resulting in other income of $20.9 million compared to an expense of $15.7 million for the year ended December 31, 2021.

The change in the fair value of the warrant and derivative liability is attributable to the decrease in the fair value of the preferred stock and common stock warrants that are accounted for as a liability.

Other income (expense), net

Other income, net for the year ended December 31, 2021 was approximately $0.8 million, as compared to other expense, net of $11 thousand for the year ended December 31, 2020.

The increase in other income, net was primarily due to the PPP Loan (as described in Note 3:

Debt Obligations) forgiveness in May 2021 that was recorded as other income, net offset by fees relating to Dimension Funding referral fees (see Liquidity and Capital Resources below).

The following table sets forth total other income (expense), as described above, for the periods indicated:

Interest expense, net

Change in fair value of warrant liability

Other income, net

Total other income (expense)

Other expense, net for the year ended December 31, 2022 was approximately $0.6 million, attributable to transaction costs related to the CASE acquisition, as compared to other income, net of $0.8 million for the year ended December 31, 2021 primarily resulting from forgiveness of a PPP loan in May 2021.

Liquidity and Capital Resources

As of December 31, 2022, and 2021, we had $4.8 million and $10.7 million, respectively, of cash and cash equivalents.

As of December 31, 2021, the Company also had an accumulated deficit of approximately $113.7 million, working capital of $1.1 million and stockholders’ deficit of $ 82.9 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 addition, as of March 16, 2022, the Company’s cash balance was approximately $22.3 million, which includes net proceeds from the Regulation A Offering terminated on January 26, 2022 as disclosed in Note 10 – Subsequent Events.

As of December 31, 2022, the Company also had an accumulated deficit of $139.3 million, negative working capital of $0.4 million and stockholders’ deficit of $43.6 million.

On April 20, 2021, the Company entered into a Referral Agreement with Dimension Funding, LLC (“Dimension”), whereby the Company can generate up to $10 million of immediate cash flow by referring its clients to Dimension for financing of their annual fees over the MaaS subscription term.

This agreement enables the Company to quickly offset the up-front costs associated with building and deploying ASRs by accelerating collection of its accounts receivable.

In 2022, the Company also began working with a second source for order financing for its ASRs to supplement its ability to finance its backlog.

Following the Company’s listing on Nasdaq, in April 2022, Knightscope established a $100 million committed equity facility with B.

Riley Principal Capital, LLC, enabling the Company to access capital in its discretion, as required, subject to market conditions.

After the Class A Common Stock had been listed for a year, the Company filed a registration statement for up to $20 million, having entered into an At the Market Offering agreement on February 1, 2023 with H.C.

Wainwright & Co., LLC.

This facility provides the Company with additional access to capital, as needed, subject to market conditions.

In addition, as of March 13, 2023, the Company’s cash balance was approximately $3.5 million.

The Company has projected operating losses and negative cash flows of approximately $1.5 million per month, on average, for the next several months.

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.

These factors raise substantial doubt about our ability to continue as a going concern.

There can be no assurance that the Company will be successful in acquiring additional funding at levels sufficient to fund its future operations.

If the Company is unable to raise additional capital in sufficient amounts or on terms acceptable to it, the Company may have to significantly reduce its operations, delay, scale back or discontinue the development of one or more of its platforms or discontinue operations completely.

We intend to monitor the stability of the financial institutions in which we keep our liquid funds to mitigate against the exposure to loss of funds and delays in accessing our cash.

Occasionally, such reviews and other events result in the movement of funds to more stable institutions such as the movement of our cash deposits out of Silicon Valley Bank to Comerica Bank.

The table below, for the periods indicated, provides selected cash flow information:

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Net cash provided by financing activities

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

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, as well as the amount and timing of disbursements to our vendors.

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, sell and service blue light ePhone towers and call boxes, the amount and timing of accounts receivable collections, as well as the amount and timing of disbursements to our vendors.

Net cash used in operating activities for the year ended December 31, 2022 increased by $4.0 million to $24.1 million, compared to $20.1 million for the year ended December 31, 2021.

This increase was due to a net loss increase of approximately $24.5 million and increases in cash used in operating activities over the prior year of approximately $0.6 million and $0.1 million resulting from changes in prepaid expenses and accounts receivable, respectively, along with foregiveness of the PPP loan of approximately $0.8 million.

These increases were partially offset by decreases over the prior year resulting from changes of approximately $13.3 million, $3.1 million, $1.5 million, $1.0 million, $0.4 million, $0.8 million, $0.5 million, $0.4 million, and $0.2 million in the fair value of warrants, accounts payable and accrued expenses, amortization of debt discount, interest related to preferred stock warrants, accured interest, stock compensation expense, other current and noncurrent liabilities, deferred revenue, and depreciation and amortization, respectively.

The increase was primarily due to the reduction in the change in fair value of warrants of $36.6 million, a reduction in interest expense related to warrants for preferred stock of $1.0 million and a decrease in non-cash interest of $0.6 million, partially offset by a decrease in net loss of $18.2 million, an increase in amortization of debt discount of $6.4 million upon the conversion of convertible notes in January 2022, a change in the fair value of convertible notes of $4.7 million, an increase in stock compensation expense of $2.3 million, changes in the operating assets and liabilities, net of $1.4 million, a decrease of $0.8 million of forgiveness of the Paycheck Protection Program loan and interest, and issuance of common stock in exchange for services in 2022 of $0.3 million.

Net Cash Used in Investing Activities

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As our business grows, we expect our capital expenditures to continue to increase.

In 2022, we invested $5.4 million, net of cash acquired for the CASE acquisition.

Net cash used in investing activities for the year ended December 31, 2022 was approximately $9.9 million compared to $2.3 million for the year ended December 31, 2021, an increase of $7.6 million.

The increase was primarily a result of an increase in the investment in ASRs.

The increase was primarily a result of the CASE acquisition and a $2.2 million increase in the investment in ASRs.

Net Cash Provided by Financing Activities

Our financing activities for the year ended December 31, 2021, consisted primarily of raising proceeds through issuing stock in connection with the Company’s 2020 Regulation A offering and the issuance of convertible preferred notes.

Net cash provided by financing activities was approximately $26.1 million for the year ended December 31, 2021, an increase of approximately $3.9 million as compared to the year ended December 31, 2020 primarily driven by an increase in net proceeds from the issuance of convertible notes of approximately $7.1 million and no net loan proceeds and loan payments in 2021 providing approximately $1.7 million offset by lower net proceeds received from the issuance of Series S Preferred Stock of approximately $5.0 million, versus 2020, relating to the sale of Series S Preferred Stock in connection with the 2020 Regulation A Offering that terminated on April 21, 2021.

Series S Preferred Regulation A Offerings

On May 21, 2019 the Company filed an offering statement in connection with a proposed offering of up to $50 million of its Series S Preferred Stock pursuant to Regulation A of the Securities Act, to raise additional capital for operations (the “2019 Regulation A Offering”).

The 2019 Regulation A Offering terminated on July 22, 2020.

The Company issued 2,937,467 shares of Series S Preferred Stock and raised approximately $23.5 million from the 2019 Regulation A offering, offset by $2.2 million in issuance costs.

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 December 31, 2021, the Company issued 2,107,330 shares of Series S Preferred Stock and raised approximately $21.1 million from the 2020 Regulation A Offering, offset by $2.3 million in issuance costs.

Net cash provided by financing activities was approximately $28.0 million for the year ended December 31, 2022, an increase of approximately $1.8 million as compared to the prior year.

Our financing activities for the year ended December 31, 2022, consisted primarily of net proceeds of approximately $19.6 million resulting from issuing stock in connection with our 2021 Regulation A Offering that terminated on January 26, 2022, immediately prior to the Company’s listing on Nasdaq on January 27, 2022.

In addition, the Company received net proceeds from the issuance and sale of shares of Class A Common Stock to B.

Riley Principal Capital under the Purchase Agreement of approximately $2.9 million, received net proceeds of $5.0 million from Convertible Notes and Warrants issued in connection with the CASE acquisition (see note 3), and received proceeds from stock option exercises of approximately $0.5 million during the year ended December 31, 2022.

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 April 30, 2019 the Company signed a Note and Warrant Purchase Agreement under the form of which the Company could 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”).

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 – Capital Stock and Warrants to the audited financial statements for details).

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 – Capital Stock and Warrants to the audited consolidated financial statements for details).

Warrants to purchase shares of Series S Preferred Stock of the Company were also issued to investors who invested in the Convertible Note Financing.

These warrants to purchase shares of Series S Preferred Stock have an exercise price of $4.50 per share and expired 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.

The convertible promissory notes have 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 December 31, 2021, the Company had issued convertible notes in the aggregate principal amount of approximately $14.7 million (out of $15 million).

These warrants to purchase shares of Series S Preferred Stock have an exercise price of $4.50 per share and were initially scheduled to 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.

The convertible promissory notes initially had a maturity date of January 1, 2022, and provided for interest at a rate of 12% per annum payable upon the maturity date, and were generally the most senior company security (subject to limited subordination carve-outs) and provided for significant discounts upon a qualified financing or an initial public offering, and for a premium upon a change of control.

As of December 31, 2021, the Company had issued convertible notes in the aggregate principal amount of approximately $14.7 million (out of $15 million) under the Convertible Note Financing.

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, originally set to expire on December 31, 2021.

On November 18, 2021, the Company agreed to amend the Note and Warrant Purchase Agreement (see Note 3 -- Debt Obligations -- Convertible Note Financing) 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 would automatically convert into Class A common stock upon the listing of the Company’s Class A 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, later amended on November 18, 2021, William Santana Li, Chairman and Chief Executive Officer 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 1.15% of the Company’s aggregate voting power as of February 28, 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 December 31, 2021, 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.

The warrants have an exercise price of $4.50 per share, and originally scheduled to expire on December 31, 2021.

On November 18, 2021, the Company agreed to amend the Note and Warrant Purchase Agreement for the Convertible Note Financing (see Note 3 – Debt Obligations – Convertible Note Financing) 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 would automatically convert into Class A Common Stock upon the listing of the Company’s Class A 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, to 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 remained 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 listing of our Class A Common Stock on the Nasdaq Global Market on January 27, 2022, all of the outstanding convertible notes issued under the Convertible Note Financing converted to Class A Common Stock.

In connection with the placement of the Series m-3 Preferred Stock during the years ended December 31, 2017 and 2018, the Company issued to the purchasers warrants to purchase an aggregate of 1,432,786 shares of Series m-3 Preferred Stock.

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In addition, the cashless exercise feature was removed from the warrants.

Credit Facilities

In November 2016, the Company granted each of Structural Capital Investments II, LP and Structural Capital Investments II-C, LP a warrant to purchase an aggregate of 53,918 Series B Preferred Stock shares.

The warrants have an exercise price of $2.0401 per share and expire upon the later of November 7, 2026 or two years following the Company’s firm commitment underwritten initial public offering of the Company’s common stock pursuant to a registration statement filed under the Securities Act, provided that the aggregate gross proceeds to the Company are not less than $50 million.

In May 2018, the Company entered into a Loan and Security Agreement with Silicon Valley Bank, which allowed for individual term loans to be drawn in amounts totaling up to $3.5 million (the “SVB Loan Facility”).

The Company had the ability to draw funds under the SVB Loan Facility until the earlier of January 10, 2019 or an event of default.

Each individual term loan called for 18 equal monthly payments of principal plus accrued interest which would fully amortize the term loan.

Outstanding borrowings under the term loan agreement bore interest at a floating rate of 1.75% above the prime rate as published in the Wall Street Journal.

Only one individual term loan in the amount of $0.4 million was drawn by the Company in May 2018.

The loan was fully repaid in February 2019 in connection with a new $3 million debt received from Farnam Street Financial (“Farnam”).

In connection with the SVB Loan Facility, the Company granted Silicon Valley Bank a warrant to purchase up to 77,413 shares of the Company’s Class B Common Stock at an exercise price of $1.26 per share and which expires on the earlier of ten years from the date of the warrant or a change in control of the Company.

In order to obtain capital to finance our operations, in February 2019 the Company entered into a financing arrangement with Farnam for $3 million (the “Farnam Financing Arrangement”).

Under the Farnam Financing Arrangement, we collateralized fifty (50) ASRs and had an initial repayment period of two years for a monthly payment of $0.1 million plus tax and an option to repurchase these ASRs for $1.4 million plus tax or, at the end of the two-year period (March 2021) we could elect to extend the repayment period for one additional year at a monthly payment of $0.1 million plus tax with a final payment of $0.6 million plus tax at the end of the additional year.

The effective interest rate under the two and three-year repayment periods was 35% and 31%, respectively.

On April 24, 2020, we amended the Farnam Financing Arrangement with Farnam by deferring the March and April 2020 payments due to Farnam to the end of the Farnam Financing Arrangement and by extending the term of the agreement by two months and forgoing security deposit of $0.2 million paid to Farnam.

The Farnam Financing Arrangement with Farnam was terminated and settled in November 2020, with no subsequent payments due to Farnam.

The final payment to Farnam consisted of the aggregate amount of remaining payments due through March 2021 and a reduced equipment purchase amount of $1 million plus tax.

On April 24, 2020, the Company, entered into a promissory note evidencing an unsecured loan in the aggregate amount of approximately $0.8 million made to Knightscope under the Paycheck Protection Program that was established under the Coronavirus Aid, Relief, and Economic Security Act and was administered by the U.S.

Small Business Administration (“SBA”) (the “PPP Loan”).

The PPP Loan to Knightscope was made through Fresno First Bank.

The interest rate on the PPP Loan was 1.00% and the term is two years.

The Company submitted its PPP Loan forgiveness application to the SBA in January 2021.

The PPP Loan of $0.8 million and the accrued interest of $9 thousand were forgiven by the SBA on May 20, 2021.

Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide this information

2022 Convertible Notes and Common Stock Warrants

On October 10, 2022, we entered into a securities purchase agreement with an accredited investor (the “Buyer”), pursuant to which we sold and issued to the Buyer in a private placement (i) senior secured convertible notes in an aggregate principal amount of $6.075 million (the “2022 Convertible Notes”), at an initial conversion price of $5.00 per share of Class A Common Stock, subject to adjustment upon the occurrence of specified events described in the 2022 Convertible Notes, and (ii) warrants to purchase up to 1,138,446 shares of Class A Common Stock with an initial exercise price of $3.25 per share of Class A Common Stock, exercisable immediately and expiring five years from the date of issuance (the “2022 Common Stock Warrants” and, together with the 2022 Convertible Notes, the “2022 Convertible Notes Offering”), for $5.0 million of gross proceeds.

Digital Offering, LLC, acted as the placement agent for the 2022 Convertible Notes Offering and received a commission of 4.50% of the aggregate principal amount of the 2022 Convertible Notes.

The 2022 Common Stock Warrants are recorded as derivative liabilities as it was determined they are not indexed to the Company’s stock and accounted for at fair value upon issuance.

The 2022 Convertible Notes are senior secured obligations of the Company.

The 2022 Convertible Notes were issued with an original issue discount of approximately 17.65%, bear no interest until an event of default has occurred, upon which interest will accrue at 12.5% per annum, and mature on September 15, 2024 unless earlier converted (upon the satisfaction of certain conditions).

On December 30, 2022, we and the Buyer entered into an Agreement and Waiver (the “Waiver”).

Under the Waiver, we mutually agreed to reduce the minimum cash covenant to $1.5 million and to lower the conversion price in part, such that the conversion price in effect on any given time of determination will equal the Alternate Conversion Price (as defined in 2022 Convertible Notes) then in effect (but with 85% replacing 80% in such definition of Alternate Conversion Price, as applicable).

Common Stock Purchase Agreement with B.

On April 4, 2022, the Company entered into the Purchase Agreement and a Registration Rights Agreement with B.

Riley Principal Capital.

Pursuant to the Purchase Agreement, the Company has the right to sell to B.

Riley Principal Capital, up to the lesser of (i) $100,000,000 of newly issued shares of the Company’s Class A Common Stock and (ii) the Exchange Cap (as defined in the Purchase Agreement) (subject to certain conditions and limitations), from time to time during the term of the Purchase Agreement.

Sales of Class A Common Stock pursuant to the Purchase Agreement, and the timing of any sales, are solely at the option of the Company, and the Company is under no obligation to sell any securities to B.

Riley Principal Capital under the Purchase Agreement.

The per share purchase price for the shares of Class A Common Stock that B.

Riley Principal Capital is required to purchase pursuant to the Purchase Agreement, if any, will be determined by reference to the volume weighted average price of the Class A Common Stock calculated in accordance with the Purchase Agreement, and subject to the terms and conditions set forth in the Purchase Agreement.

As consideration for B.

Riley Principal Capital’s commitment to purchase shares of Class A Common Stock at the Company’s direction upon the terms and subject to the conditions set forth in the Purchase Agreement, upon execution of the Purchase Agreement, the Company issued 98,888 shares of Class A Common Stock to B.

Riley Principal Capital as initial commitment shares.

In addition, (i) upon the Company’s receipt of total aggregate gross cash proceeds equal to $25,000,000 as payment by B.

Riley Principal Capital for all shares of Class A Common Stock purchased under the Purchase Agreement, the Company will issue 59,333 additional shares of Class A Common Stock to B.

Riley Principal Capital as additional commitment shares, and (ii) upon the Company’s receipt of total aggregate gross cash proceeds equal to $50,000,000 from B.

Riley Principal Capital under the Purchase Agreement, the Company will issue an additional 39,555 shares of Class A Common Stock to B.

Riley Principal Capital as additional commitment shares, totaling 98,888 additional commitment shares (in addition to the 98,888 initial commitment shares the Company issued to B.

Riley Principal Capital upon execution of the Purchase Agreement).

Pursuant to the Registration Rights Agreement, the Company filed a registration statement on Form S-1 to register the resale of 12,197,776 shares of Class A Common Stock by B.

Riley Principal Capital, which was declared effective by the SEC on May 11, 2022.

During the three months and full year ended December 31, 2022, we sold 790,030 and 1,209,062 shares of Class A Common Stock, respectively, under the Purchase Agreement.

Net proceeds from such sales totaled $1.5 million and $2.9 million, respectively.

At the Market Offering Program

In February 2023, we commenced an At the Market offering program with H.C.

Wainwright & Co., LLC, as sales agent, which allows us to sell and issue shares of up to approximately $20 million of our Class A Common Stock from time-to-time.

As of March 10, 2023, we issued 2,145,387 shares of Class A Common Stock under the At The Market offering program for total proceeds of $2.4 million, net of commissions and other offering related expenses.

Promissory Note

On October 14, 2022 we issued an unsecured, non-negotiable promissory note for $560,000 in connection with the CASE Acquisition (see note 3 to the Consolidated Financial Statements).The note bears simple interest at the applicable federal rate per annum, will mature in April, 2023, with principal and accrued interest to be paid on the maturity date, and is subordinated to all senior indebtedness of the Company to the extent required by the holders thereof.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis