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Item 7. Management’s Discussion and Analysis

2024-04-01 compared with 2023-03-31 · 153 added, 115 removed, 150 unchanged (64% 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 consolidated 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 financial statements and notes thereto included herein as Item 8.

This discussion contains forward-looking 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.

Refer to “Forward-Looking Statements” and “Risk Factors” herein, for a discussion of the uncertainties, risks, assumptions, and other important factors associated with these statements.

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

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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, 2022, filed with the SEC on March 31, 2023, 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.

Knightscope is a public safety advanced technology company that builds fully autonomous security robots and blue light emergency communications systems.

Our technologies are designed to help our clients protect the people, places, and things where we live, work, study, and visit.

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

To support our mission to make the USA the safest country in the world, we design, develop, manufacture, market, deploy and support ASRs, autonomous charging stations, the KSOC software user interface, Blue Light emergency communication devices, and our newly released KEMS software platform.

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.

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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.

Our ECDs that comprise our K1B portfolio of products consist of the K1 Blue Light Tower, E-Phone, and the K1 Call Box.

Tower 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 offer a smaller, yet still highly visible, footprint than the towers, but with the same reliable communication capabilities.

In October 2022, we completed the acquisition of substantially all of the assets of Case Emergency Systems (the “CASE Acquisition”), which consisted of their emergency call box and communications business.

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

Our stationary ECD technologies are sold as point-of-sale modular systems, including Knightscope’s exclusive, self-diagnostic, alarm monitoring software solution that provides system owners daily email reports on the operational status of their system, a one-year parts warranty, and optional installation services which was announced in 2023 as the Knightscope Emergency Communication System (“KEMS”) platform.

The cloud-based application monitors the system wide state-of-health, alerts users concerning operational issues, provides technicians real-time error detection/diagnostics, and collects/reports system performance statistics.

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

The Company has incurred net losses since inception.

Our net loss was $22.1 million for the year ended December 31, 2023 and $25.6 million for the year ended December 31, 2022.

As of December 31, 2023, we had an accumulated deficit of $161.5 million.

Cash and cash equivalents on hand were $2.3 million as of December 31, 2023, compared to $4.8 million as of December 31, 2022.

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

Risk Factors—Risks Related to the Business and the Global Economy—We have not yet generated any profits, anticipate that we will incur continued losses for the foreseeable future, and may never achieve profitability .

Known or Anticipated Trends

Our primary goal remains meeting client demand 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 and increasing demand through various marketing efforts, including our nationwide Robot Roadshow and media coverage, which continues to drive an increase in orders and client inquiries.

Sales trends for the year ended December 31, 2023 showed demand across all of Knightscope’s product and service lines.

The sales pipeline continues to grow, however, due to the nature of business-to-business transactions, with enterprises and government municipalities, the sales cycle is lengthy.

Although we have executed some contracts in less than 30 days, in some cases negotiations can range up to several months and years, due to the client’s budget, finance, legal, cyber security, human resources, facilities and other

The sales process for brand-new technology as well as mature, trusted technology requires significant streamlining and improvements, and we are taking steps to improve our sales processes to move our products through the sales pipeline quicker.

Delays due to supply chain issues and the COVID-19 pandemic that negatively impacted the Company’s performance during the first half of 2022 had largely subsided by the end of fiscal 2023, although supply chain constraints can still be unpredictable and problematic.

The CASE Acquisition also contributed to a significant increase in the Company’s revenues for the year ended December 31, 2023.

Due to geopolitical events and safety requirements as well as various high-profile incidents of violence across the USA, we believe that the market for our technologies will continue to grow.

We also 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.

The Company is aiming to scale its business and become more streamlined, which management expects will decrease gross loss over time.

Therefore, we are focusing our resources on growing the business, in order to be able to generate both a gross profit and net income.

We are continually evaluating and taking a number of near-term actions to facilitate this result, and as the Company matures, we expect to obtain economies of scale and efficiency that will help to increase revenue and reduce costs over the medium to long-term.

We are also focused on controlling general overhead costs, such as

● decreasing expenditures for real estate leases;

● optimizing team composition and size;

● optimizing the manufacturing process through leverage of third-party manufacturers;

● reducing telecommunication service and cloud costs to further reduce our ongoing support, repair and maintenance costs;

● transitioning our ASR and ECD production processes from a work cell environment to a more traditional assembly line process, for improved quality, efficiency and throughput.

Our strategy is to try to keep fixed costs as low as possible and minimize variable costs while achieving our overall growth objectives.

As of March 24, 2024, the Company had a total backlog of approximately $2.8 million, comprised of $1.8 million related to ASR orders and $1.0 million related to orders for ECDs.

The Company’s continued focus on addressing supply chain constraints and implementing operational efficiencies has contributed to a reduction in the backlog, which directly contributes to increased revenue, net.

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 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.

On February 23, 2024, we filed a definitive proxy statement with the SEC in connection with a special meeting of stockholders to be held on April 5, 2024 to approve an amendment to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of our Class A Common Stock from 114,000,000 to 228,000,000 (the “Share Increase Amendment”).

See Liquidity and Capital Resources .

On October 26, 2023, the Company was listed on The Nasdaq Global Market and received written notice (the “Notice”) from Nasdaq indicating that the Company is no longer in compliance with Nasdaq Listing Rule 5450(a)(1) (the “Minimum Bid Price Requirement”), as the minimum bid price of the Company’s Class A Common Stock had been below $1.00 per share for the last 31 consecutive business days.

The notification of noncompliance had no immediate effect on the listing or trading of the Company’s Class A Common Stock on The Nasdaq Global Market at that time.

The Company has 180 calendar days, or until April 23, 2024, to regain compliance with the Minimum Bid Price Requirement.

The Company transferred to The Nasdaq Capital Market effective as of March 4, 2024.

As a result, provided that the Company meets continued listing requirements for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and provides written notice of its intention to cure the bid price deficiency during the second compliance period by April 23, 2024, the Company may be eligible for an additional 180-calendar day compliance period, to regain compliance with the Minimum Bid Price Requirement.

If we fail to regain compliance with the Minimum Bid Price Requirement by April 23, 2024, we expect to receive a determination letter from the Nasdaq staff that our Class A Common

Stock is subject to delisting.

If we receive such a determination letter, we expect to have a period of seven days to submit a written request for a review of the delisting determination by the Nasdaq Hearings Panel (the “Hearings Panel”).

There can be no assurance that the Company will be able to regain compliance with the Minimum Bid Price Requirement or that a Hearings Panel would grant an exception to the Minimum Bid Price Requirement to give us additional time to comply with the rule.

On September 29, 2023, we filed an Offering Circular (the “Offering Circular”) for the issuance of up to $10.0 million in Public Safety Infrastructure Bonds (the “Bonds”) pursuant to Regulation A of the Securities Act of 1933, as amended.

The Offering Circular was qualified with the SEC on October 2, 2023.

The price per Bond is $1,000.

The Bonds are unsecured, bearing interest at 10% per annum, payable annually on December 31 each year, starting on December 31, 2024, with the Bonds maturing on the fifth anniversary of the initial issuance.

We issued Bonds totaling a principal amount of approximately $1.4 million, in aggregate, generating net proceeds to the Company of approximately $1.2 million, net of issuance costs of approximately $0.2 million during the year ended December 31, 2023.

We closed the Bond issuance on March 14, 2024 and issued Bonds totaling a principal amount of approximately $2.8 million, in aggregate, generating net proceeds to the Company of approximately $2.6 million, net of issuance costs of approximately $0.2 million during the period starting January 1, 2024 and ending on March 14, 2024.

Overall, we issued Bonds totaling a principal amount of approximately $4.2 million, in aggregate, generating net proceeds to the Company of approximately $3.8 million, net of issuance costs of approximately $0.4 million during the life of the offering.

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 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.

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.

deriving the useful lives of ASRs, determination of the cost of ASRs, assessing assets for impairment, accounts receivable – estimated credit losses, determination of deferred tax valuation allowances, the valuation of convertible preferred stock warrants, estimating fair values of the Company’s share-based awards, and derivative liabilities.

Actual results could differ from those estimates.

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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 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.

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.

Business Combinations

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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.

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

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

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If the assets are determined to be recoverable, but the useful lives are shorter than originally estimated, the Company will depreciate or amortize the net book value of the assets over the newly determined remaining useful lives.

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

None of the Company’s ASRs, property, equipment and software or intangible assets were determined to be impaired during the years ended December 31, 2023 and 2022.

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.

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.

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 consolidated 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 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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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 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 statements of operations.

On April 7, 2023, the Company entered into an Amendment and Cancellation Agreement with certain holders of warrants to purchase Series m-3 and Series S Preferred Stock.

Under the terms of the agreement, the expiration date for warrants to purchase 1,432,786 shares of Series m-3 Preferred Stock and 2,941,814 shares of Series S Preferred Stock was extended to the earlier of December 31, 2027 or eighteen (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 of 1933, as amended, in exchange for the cancellation of warrants to purchase 1,500,000 shares of Series S Preferred Stock.

Stock-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.

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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.

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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Cost of revenue, net

Total cost of revenues

Total cost of revenue, net

Operating Expenses

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General and administrative

Restructuring costs

Total operating expenses

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Change in fair value of convertible note

Other income (expense), net

Total other expense, net

Other expense, net

Total other income, net

Loss before income tax expense

Income tax expense

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.

Service revenue, net, which includes revenue generated through MaaS agreements for our ASRs and maintenance and support contracts for our K1B portfolio of ECDs, increased by approximately $2.0 million to $7.2 million, or approximately 39%, for the year ended December 31, 2023, from $5.2 million for the year ended December 31, 2022.

The increase resulted from having a full year of services for ECDs after the Company’s acquisition of CASE during the fourth quarter of 2022.

Product revenue of approximately $5.6 million from sales of ECDs, an increase of 1100% over the prior year, primarily represents a full year of sales as compared to product revenue of approximately $0.5 million in the prior year, as a result of the CASE Acquisition in the fourth quarter of the fiscal year ended December 31, 2022.

Cost of revenue, net

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%.

Service cost of revenue, net, representing the cost of supporting ASR MaaS and maintenance and support agreements related to ECD installations, for the year ended December 31, 2023, was approximately $9.9 million, as compared to approximately $8.8 million for the year ended December 31, 2022, representing an increase of approximately $1.1 million, or approximately 12%.

The increase was due to increased warranty costs and higher service revenue volume over the prior year.

As a percentage of service revenue, service cost of revenue, net decreased to 138% from 171%.

The service cost of revenue, net is primarily related to the depreciation and service costs for ASRs and support and maintenance of the ECDs.

Product cost of revenue, net of approximately $4.9 million and $0.1 million for the years ended December 31, 2023 and 2022, respectively, increased primarily due to the costs of ECDs sold pursuant to the CASE Acquisition during the fourth quarter of 2022.

Gross loss for the year ended December 31, 2023 was approximately $2.0 million, as compared to $3.3 million for the year ended December 31, 2022, representing a decrease of approximately $1.3 million, or 39%.

Research and Development

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Research and development (“R&D”) expense for the year ended December 31, 2023 was approximately $6.4 million, or 50% of revenue, compared to R&D expense of $8.4 million, or 150% of revenue, for the year ended December 31, 2022.

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.

The decrease was primarily due to expense reduction initiatives taken by the Company in early 2023, which also included headcount reductions in departments that support R&D.

In addition, revenue growth, which included a full year cycle of the K1B business line (formerly CASE) occurred at a higher pace than our R&D expenses, leading to the lower R&D expense as a percent of total revenue.

Sales and marketing

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Sales and marketing expense for the year ended December 31, 2023 was approximately $5.2 million, or 40% of revenue, compared to sales and marketing expense of $8.5 million, or 151% of revenue, for the year ended December 31, 2022.

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.

The decrease in 2023 was primarily due to lower spend on advertising activities in 2023.

In addition, revenue growth, which included a full year cycle of the K1B business line (formerly CASE) occurred at a higher pace than our sales and marketing expenses, leading to the lower sales and marketing expense as a percent of total revenue.

General and administrative

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Percentage of total revenue

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 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:

General and administrative (“G&A”) expense for the year ended December 31, 2023 was approximately $12.6 million, or 98% of revenue, compared to G&A expense of approximately $11.7 million, or 208% of revenue, for the year ended December 31, 2022.

The increase was primarily driven by an increase of approximately $2.5 million for investor relations expense, approximately $0.6 million for payroll expense as a result of a full year realization of the acquired CASE business, and approximately $0.3 million for real estate and property tax expense, partially offset by decreases in bonus expense of approximately $1.0 million, director and officer insurance expense of approximately $0.7 million, bad debt expense of approximately $0.6 million, and rent expense of approximately $0.3 million.

Restructuring Charges

Percentage of total revenue

We incurred restructuring charges for the year ended December 31, 2023, of $149 thousand as a result of a work force reduction initiated in January 2023.

Other Income, Net

Interest expense, net

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Change in fair value of convertible note

Other income (expense), net

Total other income (expense)

Other expense, net

Total other income

Interest expense, net

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, 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.

Interest expense, net for the year ended December 31, 2023 was approximately $0.6 million, compared to interest expense net of approximately $9.2 million for the year ended December 31, 2022.

The decrease in interest expense, net resulted from the full amortization of the debt discount in the year ended December 31, 2022 from the conversion of all of the notes outstanding in 2022 and paying off the promissory note issued in connection with the CASE acquisition in 2022, partially offset by interest on the Bonds issued in 2023.

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 warrant and derivative liability for the year ended December 31, 2023 resulting in other income of approximately $4.9 million compared to other income of approximately $20.9 million for the year ended December 31, 2022.

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 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.

Other expense, net

Other expense, net for the year ended December 31, 2023 was approximately $0.2 million, and was incurred in connection with the Referral Agreement with Dimension Funding, LLC (see below), as compared to other expense, net of $0.6 million for the year ended December 31, 2022 attributable to transaction costs related to the CASE acquisition.

Liquidity and Capital Resources

As of December 31, 2023 and 2022, we had $2.3 million and $4.8 million, respectively, of cash and cash equivalents.

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.

As of December 31, 2023, the Company also had an accumulated deficit of $161.5 million, working capital of $1.3 million and stockholders’ deficit of $26.6 million.

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.

Management’s plans include seeking additional financing, such as issuances of equity and issuances of debt and/or convertible debt instruments.

Sales of additional equity securities, convertible debt and/or warrants by the Company could result in the dilution of the interests of existing stockholders.

The Company will require significant additional financing to meet its planned capital and operational needs and is pursuing opportunities to obtain additional financing through equity and/or debt alternatives.

However, there can be no assurance that financing will be available when required in sufficient amounts, on acceptable terms or at all.

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.

Share Increase Amendment

We are currently authorized to issue 114,000,000 shares of Class A common stock.

Our ability to conduct financing activities, including our at-the-market offering program, will be limited unless the Share Increase Amendment is approved.

Referral Agreement with Dimension

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.

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

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Net cash provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net (decrease) increase in cash, cash equivalents, and restricted cash

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, 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 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 ECDs, 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, 2023 increased by $0.1 million to $24.2 million, compared to $24.1 million for the year ended December 31, 2022.

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.

Loan discount amortization and a change in fair value of convertible notes in 2022 was immaterial in 2023 and accounted for an increase in cash used in operating activities of $13.5 million for the year ended December 31, 2023 as compared to the year ended December 31, 2022.

Changes in operating assets and liabilities, net of $6.1 million, and a decrease in stock compensation expense of $0.8 million also contributed to the increase in cash used in operating expenses for the year ended December 31, 2023 compared to the prior year.

These increases were partially offset by a decrease in net loss of $3.5 million, a decrease in the change in the fair value of warrant liabilities of $15.9 million, an increase in depreciation and amortization expense of $0.7 million, an increase in stock issued for consulting services of $0.1 million and an increase in accrued interest of $0.1 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 the CASE acquisition and a $2.2 million increase in the investment in ASRs.

Net cash used in investing activities for the year ended December 31, 2023 was $5.1 million compared to $9.9 million for the year ended December 31, 2022, a decrease of $4.8 million.

The decrease was primarily a result of the CASE acquisition in the prior year for $5.4 million partially offset by higher investments in ASRs and equipment of $0.6 million in the current year.

Net Cash Provided by Financing Activities

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 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”).

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 – 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 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, 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.

Net cash provided by financing activities was approximately $26.8 million for the year ended December 31, 2023, a decrease of approximately $1.1 million as compared to the prior year.

Our financing activities for the year ended December 31, 2023, consisted primarily of the issuance and sale of shares of Class A Common Stock for net proceeds of approximately $26.0 million, net proceeds from the issuance of Regulation A bonds of approximately $1.2 million, and Class A Common Stock issued as a result of option exercises of approximately $0.3 million, partially offset by a note repayment of approximately $0.6 million.

Warrants to Purchase Shares of, Series m-3 Preferred 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.

On April 7, 2023, the Company entered into an Amendment and Cancellation Agreement with certain holders of warrants to purchase Series m-3 and Series S Preferred Stock.

2022 Convertible Notes and Common Stock Warrants

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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).

During the year ended December 31, 2023, the Company issued 10,432,428 shares of Class A Common Stock in connection with various conversions of the 2022 Convertible Notes by the Buyer, representing an aggregate principal amount of $6.075 million.

As of December 31, 2023, the entire outstanding principal balance of the 2022 Convertible Notes was fully retired.

The 2022 Common Stock Warrants remain outstanding.

Common Stock Purchase Agreement with B.

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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.

During the year ended December 31, 2023 we sold and issued 851,109 shares of Class A Common Stock under the Purchase Agreement for total net proceeds of $1.3 million.

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.

Wainwright & Co., LLC, as sales agent, in connection with which we filed a prospectus supplement filed on February 9, 2023 (the “February Prospectus Supplement”), allowing us to offer and sell from time to time of up to $20.0 million in shares of Class A Common Stock, subject to, and in accordance with, SEC rules.

Pursuant to General Instruction I.B.6 of Form S-3, our prospectus supplement provided that in no event would we sell any securities in a public primary offering with a value exceeding one-third of our non-affiliated public float in any 12-month period unless our non-affiliated public float subsequently rose to $75.0 million or more.

On August 18, 2023, after our non-affiliated public float subsequently rose to an amount greater than $75.0 million, we filed a new prospectus supplement (the “August Prospectus Supplement”) providing for the offer and sale from time to time of up to $25.0 million in shares of Class A Common Stock subject to, and in accordance with, SEC rules.

For the year ended December 31, 2023, we issued 25,734,332 shares of Class A Common Stock under the at-the-market offering program for net proceeds of approximately $16.4 million, net of brokerage and placement fees of approximately $0.6 million pursuant to the February Prospectus Supplement, and 11,817,912 shares of Class A Common Stock under the at-the-market offering program for net proceeds of approximately $8.2 million, net of brokerage and placement fees of approximately $0.3 million pursuant to the August Prospectus Supplement.

Public Safety Infrastructure Bonds

We filed an Offering Circular dated September 29, 2023 (the “Offering Circular”) for the issuance of up to $10.0 million in Public Safety Infrastructure Bonds (the “Bonds”) pursuant to Regulation A of the Securities Act of 1933, as amended.

The Offering Circular was qualified with the SEC on October 2, 2023.

The price per Bond is $1,000.

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.

On June 30, 2023, Knightscope and CASE executed a Promissory Note Partial Payment and Extension Agreement, whereby the maturity date of the Seller’s Note (“Note”) issued on October 14, 2022 in the amount of $560,000 in connection with the acquisition of CASE was extended to October 6, 2023.

The balance of the Note was payable in two installments with the first payment made July 10, 2023 and the final payment made on October 5, 2023.

Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide information under this item.

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