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  • Writer's pictureCapybara Research

More Problems at Knightscope (Supplemental to our initial report)

Following the release of their recent 10Q, and upon uncovering new information we believe the company is deteriorating at a faster pace then we previously expected.


Disclosure: We hold a short position in shares of $KSCP .

  • Large scale dilution: shares outstanding increased by more than 50% in 3 months, from 43.9M to 67.2M.

  • Knightscope prides themselves as being a future robot company but the majority of their revenue increase isn't actually robots.

  • Stock is likely only at these prices due to its heavy promotion targeting retail investors, consisting of almost daily PRs of new contracts with no details, running google ads and more.

  • After Q3 2021, Knightscope stopped reporting important KPIs for the robot business. We believe this is an intentional effort to obscure the true economics of the business and hide poor performance. 2021, 2020, 2019, 2018

  • Sales of call boxes is subsidizing the failed robot biz. Unfortunately, for Knightscope, call boxes are a highly competitive, low-margin business.

  • The company’s cash position is worse than it appears, we believe the company has insufficient cash-on-hand to service its existing contracts and will need to raise more capital.

  • From reviewing Knightscope contracts and speaking with customers, we believe Knightscope is discounting their products to boost sales.

  • When customers finance their purchase, Knightscope is compensating the finance company by applying another discount of 9-12%.

  • On top of the finance discount, when a customer defaults on their financing, Knightscope assumes 50% of the loss.

  • Snuck in a Bond offering to retail of $10mln (Noteworthy they mentioned this at the very end of a prerecorded video but unheard in their earnings report)

  • Knightscope’s independent auditor, BPM states that there is “Substantial Doubt about the Company's Ability to Continue as a Going Concern”

  • If Knightscope goes bankrupt, like Li’s previous company, common shareholders will get nothing because they’re liquidation rights are superseded by debt holders and 4 classes of preferred shares.

  • We believe the interests of management are not aligned with other shareholders and that common shareholders bear substantially all the risk of the Company failing.

  • While the company performed poorly in 2022, CEO Li and his wife were paid over $2 million by Knightscope. Li even received a substantial raise.

  • Management owns a minority of shares but has virtual control of the Company through super-voting shares that get 10 votes each.

  • There are numerous red flags which indicate accounting issues and lead us to question the accuracy of the Company’s financial statements.

  • Knightscope disclosed material weaknesses in internal controls over financial reporting in years 2022[1][2], 2021, 2020, 2019, 2017, 2016, 2015, and 2014.

  • On January 26, 2023, half of the non-employee directors voluntarily resigned from the Company’s board: Kristi Ross, Jackeline Hernandez Fentanez and Suzanne Muchin.

  • After repeated accounting challenges, Knightscope hired Mallorie Burak as CFO, who was fired from her last role for what the CEO alleged were significant material weaknesses in internal control.

  • CFO Mallorie Burak is neither a licensed CPA or CFA.

  • Knightscope changed auditors on Nov. 2 2020 while the annual audit was likely underway. The Company switched from E&Y to the less reputable firm BPM LLP.

  • Knightscope’s new auditor, BPM LLP, was censured and fined $50k less than a month ago by the PCAOB. The partner in question is the same one responsible for the Knightscope audit.


Dilution - Update


As per our initial report, we were confident Knightscope would have to Dilute shares through its ATM agreement. And as expected they did. From July 1, 2023 to August 11, 2023, the Company sold 3,764,215 shares of Class A Common Stock.




But the sweet kicker here is that just in the last 3 months, shares Outstanding increased from 43,917,405 to 67,267,946! (May 2nd > August 5th)


Company has also resorted to doing toxic convertible note deals which allow shares to be issued at a discount to the market in this case the deal was done at 85% of the VWAP of the Common Stock. In essence Note holders would always be converting and selling shares for a profit. The lower the price goes, the more shares can be issued. And as of the latest 10-Q we can now see the extent to which this caused dilution.


This led to 10,432,428 shares being converted and sold into market, for just $6 million at a conversion price of ~0.58






KSCP 2023-06-30 10-Q.pdf


Even with all this dilution, Knightscope’s balance sheet has barely benefited from this…



Problems with their cash flow


In our original report we reiterated the fact that one of Knightscope’s main issues is their cash burn, and low levels of cash on hand. Based on their new cash burn, and cash at end of Q2, we estimate they have ~$2.9m cash on hand as of 8/15/23. Barely enough to last them until the end of the quarter.



To alleviate their cash problem, Knightscope has been selling their future income streams to a financing company for up-front cash. This has allowed the company to continue operating despite mounting losses, but the company is spending money that it needs to service the contracts it’s already sold. This strategy is not sustainable and we believe the company will need to raise significant amounts of capital to fill the growing deficit and continue operating.


Problems with their Margins


Net Margin Q2 2023 vs. Q1 2023: The net margin worsened from -84.41% in Q1 2023 to -134.61% in Q2 2023. For a company with limited margins and limited revenue gross from what they don't say isn't their robots, it seems profitability may be a long way.




What happened to disclosing Robots?


After Q3 2021, Knightscope stopped reporting essential KPIs for the robot business. We believe this is an intentional effort to obscure the true economics of the business and hide poor performance. 2021, 2020, 2019, 2018


Discounting Robots, and bad financing practices


Also, to generate sales, Knightscope is heavily discounting their products. Additionally, when a customer finances their purchase, KSCP applies another 9-12% discount to compensate the financing company, Dimension Funding LLC. SEC #15


On top of the 9-12% fee, Knightscope assumes 50% of the loss when a customer defaults SEC #14




SRs Revenue Contribution:

Despite being a robotics-oriented company, Knightscope's revenue from its robotics division, particularly from its Autonomous Security Robots (ASRs), remains relatively modest. In the most recent reporting period, revenue directly attributed to ASRs increased by approximately $0.1 million. This indicates that while robotics is a central aspect of their branding, it currently accounts for a relatively small portion of their overall revenue.


CASE Acquisition Impact: A pivotal driver of Knightscope's recent revenue growth stems from its strategic acquisition of CASE. The integration of CASE's capabilities has significantly bolstered the company's revenue. Notably, the acquisition has led to an increase in maintenance and service revenue of approximately $0.7 million. This can be attributed to services related to installed Blue Light Towers, E-Phones, Call Box products, and the deployed ASRs. This shift in revenue composition highlights the strategic importance of diversification beyond core robotic offerings.


In essence, while Knightscope's branding highlights robotics as a central focus, the revenue generated from ASRs is relatively limited. The acquisition of CASE has emerged as a key driver of recent revenue growth and not their robots..


Accounting Problems


There are numerous red flags which indicate accounting issues and lead us to question the accuracy of the company’s financial statements.


Knightscope has disclosed instances of material weaknesses in internal controls over financial reporting in years 2022 [1][2], 2021, 2020, 2019, 2017, 2016, 2015, and 2014. The company claimed repeatedly to have fixed the deficiencies only to disclose problems again soon after.


State that the financials from 2014, 2015, 2016 were not to be relied on. SEC


After repeated accounting challenges, Knightscope hired Mallorie Burak as CFO, who was fired from her last role for what the CEO alleged were significant material weaknesses in internal control. Further, Burak is neither a licensed CPA or CFA.


We believe Knightscope’s accounting challenges contributed to its decision in 2020 to switch auditors from E&Y to the less reputable firm BPM LLP.


Knightscope changed auditors on Nov. 2 2020 while the annual audit was likely underway. Changing auditors at the end of the year is highly unusual and often indicates problems with a company’s accounting. SEC


Knightscope’s new auditor, BPM LLP, was censured and fined $50k less than a month ago by the PCAOB for falsely claiming to be an “independent” auditor when in fact the firm had been providing services to the client. The audit partner in question is the same one responsible for KSCP’s audit. Pcaobus


Issues with CFO


The Company's CFO, Mallorie Burak, was fired from her previous position as CFO of Thin Film Electronics. Thin Film’s CEO stated that Burak was terminated for “her significant error in forecasting company cash” and for the theft of $236,000 by a computer hacker, “largely attributable to Ms. Burak’s failure to maintain adequate safeguards and approval protocols for the transfer of large sums of money.”


MALLORIE BURAK VS THIN FILM ELECTRONICS INC, Case No. 20CV367979

Burak then went on to sue Thin Film, which was on the brink of insolvency, to get liquidation preferences for her severance pay over the claims of creditors and shareholders. MALLORIE BURAK VS THIN FILM ELECTRONICS INC, Case No. 20CV367979



CEO’s Compensation


William Santana through his investor presentations continuously presents himself as a large Knightscope shareholder, and how important it is for him to work on getting the stock price up.


However, while the company performed poorly in 2022, CEO Li and his wife were paid over $2 million by Knightscope. And despite the company’s horrible performance and plummeting share price, Li’s pay more than doubled from the year before, and both he and his wife received substantial bonuses.




It is clear to us that William Santans primary goal is likely to keep the company afloat, one of his methods to raise cash now is a “Retail Bond Offering”


Also, the super-voting shares (10 votes / share) effectively takes control from shareholders and gives it to the founders whose interests do NOT align with shareholders. SEC


Bankruptcy + Bond Offering


Knightscope is also looking to raise $10 million through a “Bond Offering” targeted at retail. Because of their deteriorating financials, we believe the Company is finding it difficult to raise from institutional investors. Adding to the Company's difficulties, they’re paying exorbitant fees in the bond offering lowering the actual amount raised by the company to approximately 90% of the nominal offering, based on the Company’s disclosures and our estimations.


We also believe it’s important to note the auditor’s disclosure about “substantial doubt about the Company’s ability to continue as a going concern.”





Knightscope’s independent auditor, BPM states that there is “Substantial Doubt about the Company's Ability to Continue as a Going Concern” SEC


If Knightscope goes bankrupt, like Li’s previous company, common shareholders will get nothing because they’re liquidation rights are superseded by debt holders and 4 classes of preferred shares. SEC








Promotion scheme continues / Targeting unsophisticated retail investors using a feel-good story that has no substance


Knightscope continues to put out press releases of new contracts/deals, take a look for yourself what one of their PR’s looks like which never discloses any details:




Fun Fact: Knightscope was the first AD to show when searching in google, terms like "What stock should I buy" "Best AI Stock"







Disclaimer: Opinion, Not Financial Advice


The information provided here is solely for informational purposes and represents our personal opinions and viewpoints. It should not be considered as financial advice or recommendations for any specific course of action. We are not financial professionals, and any decisions made based on the information presented are at your own risk. Always conduct thorough research and consult with qualified financial advisors before making any investment or financial decisions. We do not assume any responsibility for the accuracy or completeness of the content and disclaim any liability for any losses or damages incurred in connection with the use of this information.






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