Knightscope: An Unprofitable Company With a Flawed Product, High Cash Burn, and Inevitable Dilution

Initial Disclosure: After extensive research, we have taken a short position in shares of Knightscope Inc (NASDAQ: KSCP). This report represents our opinion and is not financial advice. Do your own due diligence and don't take financial advice from strangers on the internet. Please read our full disclaimer at the bottom of this report.

• Knightscope claims their robots “fight crime” but in reality they’re “Roombas” with cameras.
• Knightscope is short on cash and will likely dilute shareholders to raise capital.
• Knightscope has an active $93m shelf and an ATM, from which it can issue shares.
• As of July 14, 2023, Knightscope is no longer subject to Baby Shelf Rule and can now take full advantage of the $93m shelf.
• Operations are funded through toxic dilution and crowdfunding.
• Revenue has flatlined over the past few years despite spending $10s of millions on marketing and continuing to spend big on R&D.
• Cash burn continues to increase and a there is no clear path to profitability.
• Knightscope’s founder and CEO has a track record of failed ventures and an impressive ability to raise capital, even when faced with a looming bankruptcy.
• Knightscope’s services are heavily disliked and customers aren’t satisfied with their services.

Introduction

Knightscope is a self-proclaimed American security and robotics company established in 2013 which builds Autonomous Security Robots (ASR’s). Since its establishment, it has managed to capture attention with its laughable attempts at innovation with “security” robots that resemble rejected Star Wars characters. The company parades itself as a solution for surveillance, but a closer look reveals those claims to be more smoke and mirrors than actual substance. In this report, we will dissect Knightscope’s impending dilution, highlighting its consistent lack of profitability, inability to scale, ineffective robotic technology, lack of customer satisfaction, and the threat of delisting from Nasdaq.

As of Friday, the company is no longer under the “Baby Shelf” rule (which limits dilution via Shelf Registration), and is now able to utilize the $93m shelf to its full capacity. As is outlined in the “Financial” section, it will become clear how necessary it is for Knightscope to dilute stock in order to raise capital. Also highlighted is the company’s consistent usage of its “At-The-Market” agreement with HC Wainwright (known for facilitating share dilution for questionable small-cap companies with a history of cash burn, and lack of shareholder value creation), that ultimately led to a -75% move with only a few shares issued.

We believe there is a clear agenda in play, with the stock running from $0.38 to $2.16 in a short time frame on no substantial news, and that the company’s shares will experience a significant decline with or without dilution.

Founded in 2013 by William Santana Li, Knightscope presents its CEO as a successful leader with a track record of creating substantial value. Li’s previous venture, Carbon Motors Corporation, aimed to build purpose-built police cars but ultimately failed after a decade-long struggle, including a rejected government loan request. This history raises doubts about Li’s ability to deliver success in the security niche. Nevertheless, Li has proven to be adept at raising funds through various means. However, our concern lies in his best asset, which appears to be the ability to exploit unsuspecting investors by heavily promoting stocks and companies, thereby raising questions about his ethical practices and intentions.

Knightscope stoops to a remarkably low level by shamelessly leveraging tragedies such as the Sandy Hook shooting, the Boston Marathon bombing, and the 9/11 attacks as a means to promote their company. This exploitative tactic demonstrates a disturbing lack of moral integrity, as they attempt to capitalize on these horrific events while conveniently concealing the fact that their product, a “Roomba with a camera”, would offer little to no actual effectiveness in preventing or addressing such incidents. Unsurprisingly, many customers have soured on the product contributing to the company’s inability to scale and generate meaningful revenue.

Pre-IPO Financing

Prior to going public, Knightscope funded most of its activities through crowdfunding. As of April 2021, Knightscope had raised a total of $64.6 million using equity crowdfunding.

After its initial crowdfunding raises, Knightscope announced they would not be raising any additional capital. Not long after in a 1-SA (filed Sep 28 2021), Knightscope dropped this bombshell:

“Without additional equity fundraising, typically and historically conducted on a rolling close basis, or debt financing, the Company will not be solvent after the second quarter of 2022.”

And subsequently this led to another crowdfunding, in which this time the promise was to go public.

A cursory review of Knightscope’s 1-SA filings reveals a pattern of statements akin to the one mentioned above (including the recent 10-K), where it becomes apparent with minimal due diligence that the company heavily relies on continuous funding. They often assert having sufficient capital, only to subsequently declare the need for further funding, perpetuating a seemingly endless cycle. This raises concerns about the company’s transparency, financial stability, and their ability to provide accurate and reliable information to investors.

Upon its Nasdaq debut, Knightscope concluded its Regulation A Offering on January 26, 2022, successfully issuing 2,236,619 shares of Class A common stock and generating approximately $19.5 million in net proceeds.

Public crowdfundings are often viewed negatively due to their inherent drawbacks. Generally, there is heightened risk associated with early-stage ventures, liquidity concerns, lack of regulatory oversight and inadequate investor protections.

The Nanalyze article The Problem with Equity Crowdfunding Platforms provides a good overview on the problems with crowdfunding equity.

During the concluding crowdfunding campaign, Li drew comparisons between Knightscope’s aspiration to go public and the trajectory of companies like FUV that followed the same path. There is no issue in that, until you see what happened to FUV’s stock price, which has experienced a staggering 99% decline from its all-time high.

A company which went public after raising funds in a similar fashion, was AMV (current ticker NXU) which is now down 99% from its ATH.

Knightscope and its founder William Li, have proven adept at fundraising while burning through cash with no clear path to profitability.

Knightscope’s Flagship K5 Robot

Before we take a look at Knightscope’s financials, let’s take a look at the company’s flagship product, the K5 robot. A 300+ lb hunk of metal, which looks like a knock-off of R2D2. Now that this slow-moving, buggy, and overpriced robot is on the market, criminals have been in a panic from coast to coast.

According to the Bureau of Labor and Statistics, a security guard’s job is to “guard, patrol, or monitor premises to prevent theft, violence, or infractions of rules”. Knightscope’s K5 robot is a far cry from this definition, as it is incapable of performing any of these tasks. The K5 robot is a glorified security camera on wheels, which is incapable of preventing crime, and is only capable of recording it. The K5 robot is not a security guard, it is a security camera, and a poor one at that.

With a Max Speed of 3mph, The K5 Can’t Keep up With a Kindergartener

The Knightscope robot is laughably ineffective. With a maximum speed of 3 mph it can’t keep up with a 5-year-old child. Its primary purpose seems to be limited to monitoring, making it questionable to spend $1200 per week (at a cost of $7 per hour) on a malfunctioning robot that ignores people in distress and even ran over a toddler’s foot in a past incident. Such occurrences raise serious concerns about the safety and reliability of the robot, making its use both impractical and potentially harmful. Funding for public safety is better spent on realistic and cost-effective solutions. We’re sure taxpayers, concerned citizens, and police unions would all agree.

“Smart” Robot Drowns Itself in Fountain

Upon discovering that it was a useless waste of money, one Knightscope robot took matters into its own hands and drowned itself in a nearby fountain.

K5 Robot Ignores Crime Victim’s Calls for Help, Telling Her to “Step Out of the Way”

NBC News reported on an incident where a fight broke out at a local park and the Knightscope robot failed to respond appropriately. When a woman attempted to use the robot’s emergency alert button, it persistently instructed her to “step out of the way”. As the altercation continued, the robot carried on rolling down the sidewalk, playing a whimsical tune from its speakers, and sporadically reminding bystanders to “please keep the park clean”. This lack of responsiveness and misplaced behavior raises serious doubts about the robot’s effectiveness in handling real-time emergencies and its ability to fulfill its intended security functions.

Subsequently, it was discovered that the emergency calls made by the woman during the park fight were actually directed to Knightscope’s headquarters. This revelation suggests that the primary objective of the robot was not to address security concerns but rather to intermittently remind park visitors to “please keep the park clean.” This revelation further reinforces the notion that the robot’s focus and capabilities are far from being aligned with effective security measures, raising doubts about its true purpose and usefulness in critical situations.

Drunk Man KOs Knightscope Robot at Company HQ

Highlighting how impractical the K5 robot is, CET reported on an incident where a drunk man defeated the robot by tipping it over, thus thwarting its crime-fighting powers. Embarrassingly, this incident occurred at Knightscope’s headquarters in Mountain View, California.

K5 Robot Assaults 16-month-old Toddler While “Keeping The Public Safe”

Another incident occurred at a shopping mall in 2016, where the 300 lb+ K5 robot collided with a toddler and ran over the child’s foot. Witnesses reported that the robot continued on its way as the toddler cried intensely. This raises concerns about Knightscope’s ability to ensure basic safety protocols. This incident proves that Knightscope’s robots, can’t even follow “Asimov’s first law of robotics”, which prioritizes the protection of human life above anything else.

The mother of the toddler involved in the incident commented, “The robot hit my son’s head, and he fell down facing the floor, but the robot didn’t stop, it just kept moving forward.” The parents of the toddler also stated that the robot ran over his right foot, causing swelling, and he suffered a scrape on his leg. The intensity of the toddler’s crying following was reported by witnesses as a concern for the robot’s potential to cause distress rather than prevent.

Check it out for yourself, there are a lot of videos of the K5 robot on YouTube. Watch a couple and ask yourself if these robots are worth the high price tag.

What are Knightscope’s Customers Saying?

It turns out that many of Knightscope’s customers aren’t happy with their expensive, impractical, and malfunctioning robots, let’s take a look at a few.

Trinity Metro - Fort Worth, TX

In May 2020, Trinity Metro did a pilot test for the K5 Robot, having it patrol the Fort Worth Central Station lobby area. As is with many customers who introduce Knightscope’s services it was done so in addition to “existing physical security staff patrols, providing video surveillance capabilities in the regions that had limited use of cameras”.

These were the costs per month of each of Knightscopes Services.

• K-5 Robot (1): $6,500
• SCOT Tower (2): $2,190
• ROSA Device (5): $730 each

The monthly leasing costs came to a hefty $14,530 per month, for basically glorified cameras. The robot, which they named Sundance, had other unintended effects: “another pertinent fact is “that Sundance” has damaged the floor at Fort Worth Central Station, which requires repairs costing nearly $75,000.00.”

Surprising no one, Trinity Metro decided to end the pilot for all Knightscope services.

source: Trinity Metro, Operations Report, July 2022[page 43]

Hayward

The city of Hayward dispatched its robot in a city parking garage in 2018. The following year, a man attacked and knocked over the robot, and no one ended up being arrested, showing the value placed on the robot’s services. In 2020 the city decided not to renew its contract with Knightscope after spending $137,000. When Hayward’s chief information officer was asked about whether the city had seen any concrete evidence of a crime reduction from the robot, he did not provide any.

Other Lost Contracts

In the past, Knightscope has touted signing on notable clients such as the Sacramento Kings and Westfield Valley Fair Mall in Santa Clara CA. However, these clients no longer maintain contracts with Knightscope.

PG&E

California utility company PG&E also employed Knightscope’s robots with less than stellar results. The robot roamed along the sidewalks, and was considered a nuisance by many pedestrians, bystanders, and locals.

A bartender who worked close by said, “It’s creepy. No one likes this. Just — no one likes this”, Emily, a 25-year-old bartender at The Homestead, located across from PG&E’s property.

Another local resident living near PG&E’s land, said that the robots were “especially troubling”, because “the robot annoys the hell out of anyone trying to do as much as just stand here”, and moreover, “We can hear the annoying sound that the robot makes all day long, including when we’re trying to sleep at night”.

Well, those locals would be happy to hear that recently PG&E decided not to continue with the security robot experiment as a PG&E spokesperson said they “will not be continuing with plans to deploy the unit at our Folsom location”.

source: One of America’s most hated companies hired a security robot. It didn’t go well; ZDNET; 2023-01-08

See it for yourself, there’s a YouTube video of the neighborhood creep, lurking around, making people uncomfortable.

Knightscope’s Customers Per Website

There are only two companies on Knightscope’s website that show examples of crime being reduced, Huntington Park, CA and Las Vegas, NV. Let’s take a look at these two examples.

Huntington Park, CA

Huntington Park is where the previously mentioned “fighting incident” occurred, where the robot mocked a victim and continued on its merry way. Years later, Huntington park still has only one robot deployed. If the robot was as miraculously effective as Knightscope claims, surely the county would have allocated more funds to Knightscope’s miraculous crime-fighting services.

Apartment Complex in Las Vegas, NV

A Knightscope robot was deployed to an apartment complex in Las Vegas, NV. During that time, it’s reported that the number of calls for service decreased substantially. It’s hard to imagine a single slow-moving robot with cameras leading to a significant drop in 911 calls. We question the validity of these claims and believe that other factors are more likely to have contributed to the drop in calls. Correlation does not equal causation.

source: https://web.archive.org/web/20230602004708/https://www.knightscope.com/crime

Financials

Kngihtscope charges monthly for their ASR’s ranging from $3000 to $8500 per month. And since 2015 have been receiving paid orders. And for the first 2 years revenue grew quickly, but until the IPO stage revenue flatlined, even with tens of millions of dollars spent on marketing and R&D. Now, 10 years after the company’s founding, they just figured out how to “detect gunshot sounds”, a feature competitors have offered for over a decade. Since 2020, R&D spend has averaged around 137% of annual revenue.

Truth on their Revenue and Growth

One might say all their R&D/cash burn is “finally” starting to pay off, with revenue increasing 64.1% in 2022. However, that is not all the truth. They had an increase in customers and machines from 9 in 2016 to 30 in 2018, 14 machines to 52 machines, respectively. Which represents the significant jump in revenue from 2016 > 2018. From 2017 to 2018, customers dropped from 30 to 23, then stayed the same into 2019.

In 2018, they stopped sharing how many customers and machines they had. But since revenues have flatlined, we assume these numbers have not materially improved.

In 2022, they had a significant revenue jump, however “The increase was due to the Company’s acquisition of CASE during the fourth quarter of 2022.” As such, Knightscope has shown its consistent inability to generate any growth in revenues over the last 5 years.

Estimated Cash Position

The real problem lies in the company’s cash position and profitability. They will not be able to continue further without raising additional capital.

Taken from their latest 10Q, for Q1 2023:

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.

As of March 31, 2023, (end of Q1) Knightscope had cash equivalents of $2.48 million.

Cash Burn Estimate 4/1 > 7/15:

In Q1, Knightscope burnt just under $6.6 million which is ~$2.2 million per month.

As of July 15, 2023, 3 months and 2 weeks have passed since end of Q1. This comes out to ~$8 million burnt.

In the “NOTE 9: Subsequent Events” section of their 10Q, Knightscope disclosed:

From April 1 to the 28th in 2023, the Company issued 1,954,344 shares of common stock to holders of the 2022 Convertible Notes for settlement of conversion of an aggregate principal amount of approximately $1.0 million.

From April 1 to May 11 in 2023, the Company sold 5,404,207 shares of Class A Common Stock, generating approximately $3.2 million of proceeds, net of commissions and other issuance costs, under the Company’s at-the-market offering program.

source: Knightscope 10Q 2023-03-31

Estimated, Knightscope currently has -$1.32 million in cash.

Looking at Knightscope’s cash equivalents, it has been burning through cash since its IPO and all that spending has resulted in a small increase in revenues. This leads Knightscope to rely heavily on dilution as a means to continue operations.

Dilution

Knightscopes high cash burn and continued losses has led the company to rely on dilutive fundraising.

On Feb 1 2023, Knightscope filed an S-3 registration for a total of $100 million, and subsequently an At-The-Market agreement for $20 million with HC Wainwright. The ATM capacity is now at $13.2 million.

source: https://www.sec.gov/cgi-bin/browse-edgar?filenum=333-269493&action=getcompany

But here’s the catch, prior to Friday’s (7/14/23) close of $2.16, Knightscope was subject to the IB6 (known as Baby shelf rule) which states that “if the value of a company’s public float is less than $75m, it can only raise ⅓ of its float value over the previous 12-month period.” i.e. Considering recent dilution via ATM, they were extremely limited in how much they could raise.

However, on Friday with a close of $2.16, Knightscope’s public float value was > than $75 million, which takes them off this restriction, so now the company is able to raise the full value of the remaining shelf.

We believe Knightscope has fabricated this recent move from $0.38 to $2.16 and will fully take advantage of their new ability to raise funds as it is now no longer restricted by the “Baby Shelf” Rule. Either via its ATM program, or through an offering.

Here is a table summarizing the amount they were able to raise as a result of Baby Shelf and the recent run-up. Note, Baby Shelf once lifted, sustains until the next 10-K is filed. So for the next year, Knightscope will be free to raise any amount registered on the shelf. This is why we believe there was a clear agenda in play to promote the stock, and get its stock price higher over the last 3 weeks.

Knightscope also has 1.1 million warrants outstanding, with an exercise price of $3.25.

Summary of ATM Usage and Insider Sells

During Q1, which is when the Shelf/ATM was filed, Knightscope “issued 3,573,536 shares of Class A Common Stock under the at-the-market offering program for net proceeds of approximately $3.4 million, net of brokerage and placement fees of approximately $0.1 million.”

Also, “From April 1 2023 to May 11 2023, the Company sold 5,404,207 shares of Class A Common Stock, generating approximately $3.2 million of proceeds, net of commissions and other issuance costs, under the Company’s at-the-market offering program”.

When the Chief Design Officer, Aaron J Lehnhardt, exercised stock options, he immediately sold the shares leaving him with 0 shares in the company.

Management

Board of Directors

These are the four members of the board and their respective backgrounds:

• William Santana Li: Robotics
• Linda Keene Solomon: Consulting and government sales
• Patricia L Watkins: Sales and marketing
• Patricia Howell: Operations

We find it concerning that the board of directors has no relevant experience in law enforcement, criminal justice, or community safety. This is a company that claims to be a security company, yet the board of directors has no experience in the field.

Only one board member, Howell, has experience actually delivering a physical product. The others have spent their careers in sales, marketing, and consulting.

CEO William Santana Li and His Disastrous Track Record

Li is an expert at raising money and has a history of losing it all in failed ventures.

It’s not uncommon for a resume to be embellished, but Li’s is generously exaggerated and goes far beyond what’s acceptable for a public company CEO. It brings into question his integrity and his ability to lead a company.

source: https://www.knightscope.com/board-of-directors

Ford Motor Company; GreenLeaf LLC

Li claims to have been the youngest senior executive at Ford Motor Company. This is not true. Li was a mid-level manager at Ford, and calling him a senior executive is like saying Carrot Top is a much respected comedian.

Li touts his experience as GreenLeaf LLC and securing $250 million for the project. What he left out is that the project was a money-losing venture and Ford sold much of it back to the original owners at a loss.

source: Former Owners Re-Acquire Automotive Recycling Businesses from Ford; Auto Service World

Not only is Li never mentioned in any of Ford’s SEC filings, but he’s also not mentioned in any of Ford’s press releases. In fact, GreenLeaf was mentioned only twice in Ford’s SEC filings with no financial or operational details provided.

Li’s claims of being a “senior executive” at Ford can be debunked with a simple Google search.

Carbon Motors Corporation

Despite raising around $200m in funding, Carbon Motors failed to deliver a single vehicle. Li blamed the DOE for the failure because it rejected the company’s application for a $310 million government-funded loan.

The DOE saw what Li could not. It’s far more economical for police departments to use modified versions of existing vehicles than to purchase purpose-built vehicles from Carbon Motors.

This follows a pattern of Li pitching impractical products and blaming others when they fail.

source: https://www.indystar.com/story/money/2014/01/23/former-carbon-motors-e7-supercar-sells-quietly-for-74000/4805317/

Model E Corporation and Build-To-Order Inc

Model E Corporation was a startup that tried and failed to sell build-to-order cars via the internet. Rather than admit his company was a failure, Li proved once again his ability to raise funds and sought more investors to merge it with Flint Inc.

source: https://www.computerworld.com/article/2795503/online-build-to-order-carmaker-looks-for-boost-from-merger.html

Model E Corp then abandoned its business plan of subscription auto services and started over with a plan to sell customized cars on the internet. “Build-To-Order”

After 1 year, Build-To-Order ceased operations in 2002.

Stock Promotion

Knightscope is known for its consistent stock promotion, with Li frequently appearing on CNBC and on Mad Money, as a means to promote the stock for his crowdfunding campaign. For starters take a look at just a subset of the PRs in the last 2 months:

Always having PR marathons, rarely disclosing any details of new orders, contracts etc. But with the amount of deals they announce, one would think their revenue would achieve substantial sequential growth.

Mr Li has also frequently appeared on the “Stock Day Podcast”, a company whose means of business is to receive money in exchange for promoting companies. But one quick look at their website, and you get an idea of the type of companies they promote, mostly OTCs and shady businesses.

One may argue the recent run-up is because of recent analyst coverage. On 6/23/23, Ascendiant initiated with a Buy, $3.5 target. Ascendiant also believes the company will not be profitable until at least 2025, and mentions cash a concern, and the need to raise capital within Q2/Q3. Overall we believe this is a very poorly made report that fails to address multiple issues with the company, take a look at it for yourself Ascendiant Report

While Ascendiant claims they have received no compensation, we find that hard to believe. Once again, Knightscope has been behind the campaigning for this price target, posting PRs over several days on it, as well as audio promotion.

Marketing Spend

Knightscope somehow seems to spend more money on marketing than it generates in revenue. For a company that benefits from going direct to clients to showcase their services, it sure does spend a lot of money on marketing.

Nasdaq Non-compliance Warning

Knightscope received notice from Nasdaq that it is not in compliance with the minimum bid rule. Knightscope will need to close above $1 per share for 10 consecutive business days to regain compliance.

• KSCP