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  • Writer's pictureCapybara Research

Knightscope (KSCP) - From a RoboCop Inspired Fairytale to an Inevitable Dilution Dilemma $0.5 target

Updated: Jul 17, 2023




Disclosure: We hold a short position in shares of $KSCP and firmly believe that its equity will crater as extensive dilution is inevitable. Otherwise, it is likely that the company will file for bankruptcy.


  • Knightscope claims their robots “fight crime” but in reality, are more like “roombas” with cameras.

  • Knightscope is negative on cash and needs to dilute

    • Has an active $93m shelf (+ ATM) from which it can issue shares

    • As of 7/14/23 it is no longer subject to Baby Shelf Rule (can dilute full $93m now)

  • Funds its operations through toxic dilution and crowdfunding

  • Revenues have flatlined for the last few years

    • Despite $10s of millions in marketing

    • And $10s of millions in R&D

  • Cash burn continues to increase, and the promise of profitability is nowhere near

  • Founder and CEO has a track record of failed ventures, but an amazing ability to continuously raise capital

  • Knightscope’s services are heavily disliked, and customers aren’t satisfied with their services






Summary


Knightscope ($KSCP), is a self-proclaimed American security camera 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 a company that is 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 $100m 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 (annotated chart later in the document) .


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


Introduction

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 (more on Li in”Management”). 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" shootings, the "Boston bombings," 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 as we like to call it, would offer little to no actual effectiveness in preventing or addressing such incidents. Later we go over what the community as well as customers actually think about them.


Pre-IPO Financing


Prior to going public, Knightscope funded most of its activities through crowdfunding. As of April 22, 2021 Knightscope had raised a total of $64.6 million using equity crowdfunding.






After its initial crowdfunding raises, Knightscope announced they will not be raising any additional capital. Not long after in a 1-SA (filed 9/28/21), 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 be finally going 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.

This article 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 it's all-time high.

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



At this point it should be already clear, that Knightscope along with its founder William Li, has proved itself in the ability to secure fund raising whilst seemingly burning through cash and providing zero value to investors.


The K5 Robot (flagship)


Before we take a look at Knightscope’s financials, let’s take a look at its “Suicidal Robot(s)” which people decided to invest their money into.




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”


We will mainly be looking at its flagship robot, the K5. A 300 lb+ hunk of metal, which appears to be a knock-off copy of R2D2 that doesn’t even have a functioning arm. So yes, throwing a blanket over K5 would render it useless.



In simple terms, the Knightscope robot is highly ineffective, with a maximum speed of 3 mph that falls short of even a six-year-old's running pace. 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 not only ignores people in distress but has also been known to run over a toddler's foot in past incidents, even at such slow speeds. Such occurrences raise serious concerns about the safety and reliability of the robot, making its use both impractical and potentially harmful. The cost outweighs the benefits, making it an impractical and unreliable investment.


In a specific incident at a local park (Huntington), when a fight broke out, the Knightscope robot failed to respond appropriately. When a woman attempted to utilize 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.







Our favorite incident was when the Knightscope robot faced off against a "drunk man" and ended up being overpowered and tipped over. This episode makes their "Robots Winning Against Crime," statement almost comical.



A further incident occurred at a shopping mall in 2016, where the 300 lb+ K5 robot collided and ran over a 16-month-old toddler and continued operating without immediate intervention. 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.


As competition in the robotics industry grows, and with advancements in AI, the achievement of full autonomy becomes more accessible, posing challenges for Knightscope and the competition it may face.


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.



It is common to see videos like this on Youtube when searching for videos on Knightscope, clearly showcasing its best asset is to entertain children's attention and irritate anyone passing by with its annoying and loud sounds.


What are Knightscopes customers/ saying?


Well as one might imagine with a $7 per hour malfunctioning robot, many of them aren’t happy and not renewing contracts, lets take a look at a few.


Trinity Metro - Fort Worth


Take Trinity Metro, who began a pilot test for the K5 Robot, Sundance in May of 2020 to patrol the Fort Worth Central Station lobby area. As is with many customers who introduce Knightscope’s services it is 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 Towers (2): $2,190

each ROSA Devices (5): $730 each


The monthly leasing costs were a whopping $14,530 per month, for basically glorified cameras. And, “another pertinent fact is “that Sundance” has damaged the floor at Fort Worth Central Station, which requires repairs costing nearly $75,000.00.”

As one might expect, Trinity Metro decided to end the pilot for all Knightscope services.





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 lack of care by the department for its “property”. Then in 2020 the city did not renew 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, Kostrzak did not provide any.





Previously, Knightscope had promoted notable clients such as the Sacramento Kings and Westfield Valley Fair Mall in Santa Clara. However, it is worth noting that these clients no longer maintain contracts with Knightscope.


PG&E


PG&E, a California utility company who recently pleaded guilty to 84 wildfire deaths, employed Knightscope’s robots, but that too, didn’t go too well. With the robot roaming along the sidewalks, being a nuisance to pedestrians, bystanders, locals etc.



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."

Here is a demonstration of the exact robot in question from the PG&E location, from the quotes above: Youtube




Knightscope’s Customers Per Website


There are only two companies on Knightscope’s website that show examples of crime being reduced. Huntington park, which had the “fighting incident” described previously. Years later and Huntington park still only has one robot deployed, surely if it was so effective the county would allocate more funds into Knightscope’s services.


The other, a Las Vegas police department. Whose only reported benefit has been seeing a drop in 911 calls. That's it








Financials

Kngihtscope charges monthly revenues 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 pretty much flatlined, even with the tens of millions of $ they spent which they received through financing, and all of their investments into R&D. It is now 10 years after its founding, and they just figured out how to “detect gunshot sounds,” something we believe the human ear can do as well, one really wonders what truly happens to all this R&D spend. Since 2020, its spend on R&D has been on average around 137% of its annual revenue.


Truth on their Revenues/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 clearly, since their revenues flatlined, you can assume they've been relatively flat since.


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.




Cash Position (estimate) On disclosed statements

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


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 3/31/23 (end of Q1) $KSCP has cash equivalents of $2.48 million.


Cash Burn Estimate 4/1 > 7/15:

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

As of 7/15/23 3 months and 2 weeks have passed since end of Q1. This comes out to ~$8 million burnt.


As is disclosed in their “NOTE 9: Subsequent Events” section of their 10Q.

From April 1, 2023 to May 11, 2023, the Company sold 5,404,207 shares and raised $3.2 million via their ATM program generating approximately $3.2 million of proceeds” And “ 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.”


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


Here is a look at Knightscope’s cash equivalents, note since its IPO, it has just been burning through cash, and the only thing to account for it has been a small increase in revenues. $KSCP heavily relies on its ability to dilute as a means to continue operations.





Dilution (ability to raise cash)


This is where $KSCPs, active shelf registration, comes into play.


On 2/1/23, 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 (capacity of ATM at $13.2 million now).


But here's the catch, prior to Friday’s (7/14/23) close of $2.16, KSCP 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, KSCPs public float value was > than $75 million, which takes them off this restriction, so now $KSCP is able to raise the full value of the remaining shelf.


We believe $KSCP 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 runup. 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 a small amount of warrants (1.1 million) at $3.25 remaining to be exercised.


Summary of ATM Usage + Insider Sells



Just 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”


Also Chief Design Officer Lehnhardt Aaron J exercised stock options, and sold shares immediately. At a price of $0.41, now owns 0 shares.



Management

Board

There are 4 board members:

  • William Santana Li: Robotics

  • Linda Keene Solomon: Consulting and government sales

  • Patricia L Watkins: Sales and marketing

  • Patricia Howell: Operations


BoD has NO relevant experience:

  • No law enforcement experience

  • No criminal justice experience

  • No community safety experience

Only one board member (Howell) has work 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.

As we mentioned earlier, Li is an expert at raising money and losing it all in failed ventures.

First of all, his bio is not accurate. To say it’s exaggerated would be quite generous. For a public company CEO, we think Li has embellished his resume far too much.


GreenLeaf LLC GreenLeaf touted by Li as securing $250 million for the project ended up being sold at a loss by Ford. “At the age of 28, Bill was the youngest senior executive at Ford Motor Company worldwide.” - official bio (https://www.knightscope.com/board-of-directors)


Looking at Ford’s it is evident that there are only two mentions of GreenLeaf LLC. These mentions can be found in the 2000 and 2001 10-K filings. However, no financial information or specific details regarding GreenLeaf are provided in these filings.

Ford ended up breaking up the business into small pieces and then reselling it back to the people they originally had bought it from.


Carbon Motors Corporation

As mentioned earlier, Carbon Motors Corporation, a business in the same realm as Knightscope, was a complete disaster. In its 10 years of existence, the company appears to have delivered 0 police vehicles. Carbon Motors failed and rather than own the failure, Li blamed it on the DOE, because they had rejected the company’s application for a $310 million government-funded loan.


Build-To-Order, Inc and Model E Corporation

Model E Corporation was a startup that without success tried to sell build-to-order cars via the internet. Computerworld. 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.

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

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


Stock Promotion + Marketing Spend

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 the amount of PR’s (not all) 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 seem to close, 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 $ 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 runup 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


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


Chart on its 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 sure does spend a lot of money on marketing. Tie this up with the amount of PR’s they put out, and you can just infer they spend more money and time on promoting their stock, vs anything else.




Extra

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


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