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The Company and Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2023

The Company and Summary of Significant Accounting Policies

The Company and Summary of Significant Accounting Policies

NOTE 1: The Company and Summary of Significant Accounting Policies

Description of Business

Knightscope, Inc., was incorporated on April 4, 2013 under the laws of the State of Delaware.

Knightscope, Inc. (the “Company”) is a leading provider of autonomous security robots. The Company’s technologies are “Made in the USA” and allow public safety professionals to more effectively deter, intervene, capture, and prosecute criminals. The Company’s mission is to make the United States of America the safest country in the world by helping to protect the people, places, and assets where we live, work, study and visit.

To support this mission, the Company designs, develops, manufactures, markets, deploys, and supports Autonomous Security Robots (“ASRs”), autonomous charging stations, the proprietary Knightscope Security Operations Center (“KSOC”) software user interface, and blue light emergency communication devices.

Basis of Presentation and Liquidity

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures have been condensed or omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair presentation of the period presented. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to the expected for the year ending December 31, 2023 or for other future periods. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 31, 2023. The Company’s significant accounting policies are described in Note 1 to those audited consolidated financial statements.

Since its inception, the Company has incurred significant operating losses and negative cash flows from operations which is principally the result of significant research and development activities related to the development and continued improvement of the Company’s ASRs and KSOC (hardware and software).

Cash and cash equivalents on hand were $2.4 million as of March 31, 2023, compared to $4.8 million as of December 31, 2022. The Company has historically incurred losses and negative cashflows from operations. As of March 31, 2023, the Company also had an accumulated deficit of approximately $141.8 million and stockholders’ deficit of $35.4 million. The Company is dependent on additional fundraising in order to sustain its ongoing operations. Based on current operating levels, the Company will need to raise additional funds in the next twelve months by selling additional equity or incurring debt. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the twelve months from the date of this report.

Basic and Diluted Net Loss per Share

Net loss per share of common stock is computed using the two-class method required for participating securities based on their participation rights. All series of convertible preferred stock are participating securities as the holders are entitled to participate in common stock dividends with common stock on an as converted basis. Holders of Series m-4 Preferred Stock were entitled to receive cumulative dividends payable semi-annually in arrears at the rate per share of Series m-4 Preferred Stock equal to the dividend rate for the Series m-4 Preferred Stock, in each case subject to compliance with applicable law. Dividends to holders of Series m-4 Preferred Stock are paid in kind as a dividend of additional shares of Series m-4 Preferred Stock for each dividend period on the applicable dividend payment date using a price per share equal to the original issue price, provided that the Company shall not issue any fractional shares of Series m-4 Preferred Stock. The holders of the Company’s preferred stock, other than m-4 preferred stock, are also entitled to noncumulative dividends prior and in preference, to the Company’s common stock and do not have a contractual obligation to share in the losses of the Company. All shares of Series m-4 Preferred Stock have converted to Class A Common Stock, leaving no outstanding balance of the Series m-4 Preferred Stock as of March 31, 2023. In accordance with the two-class method, earnings allocated to these participating securities, which include participation rights in undistributed earnings with common stock, are subtracted from net loss to determine net loss attributable to common stockholders upon their occurrence.

Basic net loss per share is computed by dividing net loss attributable to common stockholders (net adjusted for preferred stock dividends declared or accumulated) by the weighted average number of common shares outstanding during the period. All participating securities are excluded from basic weighted average shares outstanding. In computing diluted net loss attributable to common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities. Diluted net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by diluted weighted average shares outstanding, including potentially dilutive securities, unless anti-dilutive. Potentially dilutive securities that were excluded from the computation of diluted net loss per share consist of the following:


		March 31,			March 31,
		2023			2022
Series A Preferred Stock (convertible to Class B Common Stock)			1,418,381			4,308,812
Series B Preferred Stock (convertible to Class B Common Stock)			3,498,859			3,557,371
Series m Preferred Stock (convertible to Class A Common Stock)			1,808,498			2,037,910
Series m-2 Preferred Stock (convertible to Class B Common Stock)			160,000			826,666
Series S Preferred Stock (convertible to Class A Common Stock)			2,693,500			2,855,743
Warrants to purchase Class A Common Stock			1,138,446			—
Warrants to purchase Series m-3 Preferred Stock			1,432,786			1,432,786
Warrants to purchase Series s Preferred Stock			4,441,814			4,441,814
2022 Convertible Notes			5,191,966			—
Stock options			9,053,683			8,493,831
Total potentially dilutive shares			30,837,933			27,954,933

As all potentially dilutive securities are anti-dilutive as of March 31, 2023 and 2022, diluted net loss per share is the same as basic net loss per share for each period.

Comprehensive Loss

Net loss was equal to comprehensive loss for the three-month periods ended March 31, 2023 and 2022.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Specific accounts that require management estimates include, but are not limited to, estimating the useful lives of the Company’s ASRs and property, equipment and software, certain estimates required within revenue recognition, estimating fair values of Company’s common stock, share-based awards and warrant liabilities, inclusive of any contingent assets and liabilities. Actual results could differ from those estimates and such differences may be material to the condensed consolidated financial statements.

Accounting Pronouncements Adopted in 2023

In June 2016, the Financial Accounting Standards Board released Accounting Standards Update No. 2016-13, “Financial Instruments – Credit Losses.” The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including but not limited to available-for-sale debt securities and accounts receivable. The Company’s implementation of this pronouncement did not have a material impact on the Company’s condensed consolidated financial statements.

Inventory

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.


		March 31,			December 31,
		2023			2022
Raw materials		$	2,235		$	2,032
Work in process			—			—
Finished goods			463			528
		$	2,698		$	2,560

Autonomous Security Robots, net

ASRs consist of materials, ASRs in progress and finished ASRs. ASRs in progress and finished ASRs include materials, labor and other direct and indirect costs used in their production. Finished ASRs are valued using a discrete bill of materials, which includes an allocation of labor and direct overhead based on assembly hours. Depreciation expense on ASRs is recorded using the straight-line method over their estimated expected lives, which currently ranges from 3 to 5 years. Depreciation expense of finished ASRs included in research and development expense amounted to $2 and $20, depreciation expense of finished ASRs included in sales and marketing expense amounted to $12 and $14, and depreciation expense included in cost of revenue, net amounted to $361 and $307 for the three months ended March 31, 2023 and 2022, respectively.

ASRs, net, consisted of the following:


		March 31,			December 31,
		2023			2022
Raw materials		$	2,157		$	2,732
ASRs in progress			990			773
Finished ASRs			10,884			10,198
			14,031			13,703
Accumulated depreciation on Finished ASRs			(8,227)			(7,853)

ASRs, net		$	5,804		$	5,850

The components of the Finished ASRs, net are as follows:


		March 31,			December 31,
		2023			2022
ASRs on lease or available for lease		$	9,595		$	9,002
Demonstration ASRs			648			622
Research and development ASRs			194			194
Docking stations			447			380
			10,884			10,198
Less: accumulated depreciation			(8,227)			(7,853)
Finished ASRs, net		$	2,657		$	2,345

Intangible Assets

The gross carrying amounts and accumulated amortization of the intangible assets with determinable lives are as follows (in thousands):


				March 31, 2023
		Amortization		Gross
		Period		carrying			Accumulated			Carrying
Intangible assets with determinable lives		(years)		amount			amortization			amount, net
Developed technology		5		$	990		$	(91)		$	899
Customer relationships		8			950			(55)			895
Trademark		1			230			(105)			125
Total				$	2,170		$	(251)		$	1,919


				December 31, 2022
		Amortization		Gross
		Period		carrying			Accumulated			Carrying
Intangible assets with determinable lives		(years)		amount			amortization			amount, net
Developed technology		5		$	990		$	(41)		$	949
Customer relationships		8			950			(25)			925
Trademark		1			230			(48)			182
Total				$	2,170		$	(114)		$	2,056

Intangible assets amortization expense totaling $137 for the three months ended March, 31, 2023 was recorded in sales and marketing and cost of revenue, net - service in the amounts of $87 and $50, respectively.

As of March 31, 2023, future intangible assets amortization expense for each of the next five years and thereafter is as follows (in thousands):


Year ending December 31,		Amount
2023		$	362
2024			317
2025			317
2026			317
2027			275
Thereafter			331
Total		$	1,919

Other Current Liabilities

Other current liabilities consisted of the following (thousands):


		March 31,			December 31,
		2023			2022
Sales tax		$	463		$	419
Customer and vendor deposits			406			50
Warranty liability			109			145
Lease liability – short term			88			92
Other			357			357
		$	1,423		$	1,063

Accrued Warranty

The liability for estimated warranty claims is accrued at the time of sale and the expense is recorded in the condensed consolidated statements of operations in cost of revenue, net - product. The liability is established using historical warranty claim experience. The current provision may be adjusted to take into account unusual or non-recurring events in the past or anticipated changes in future warranty claims. Adjustments to the warranty accrual are recorded if actual claim experience indicates that adjustments are necessary. Warranty reserves are reviewed to ensure critical assumptions are updated for known events that may impact the potential warranty liability.

Change in the warranty liability for the three months ended consisted of the following (thousands):


		March 31,
		2023			2022
Balance January 1,		$	145		$	—
Provision for warranties issued during the quarter			—			—
Warranty services provided			(36)			—
		$	109		$	—

Accrued Expenses

Accrued expenses consisted of the following (thousands):


		March 31,			December 31,
		2023			2022
Bonuses earned during 2022		$	961		$	961
Payroll and payroll taxes			311			696
Legal, consulting, and financial services			344			542
Other			227			204
		$	1,843		$	2,403

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. 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 condensed 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 initial public offering (“IPO”). Upon an

IPO, the preferred stock warrants will convert into warrants to purchase common stock and any liabilities recorded for the preferred stock warrants will be reclassified to additional paid-in capital and will no longer be subject to remeasurement.

Common stock warrants that are not considered derivative liabilities are accounted for at fair value at the date of issuance in additional paid-in capital. The fair value of these common stock warrants is determined using the Black-Scholes option-pricing model.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with Accounting Standards Codification (“ASC”) 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. 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. The Company recognizes forfeitures as they occur when calculating stock-based compensation for its equity awards.