Knightscope Stock: Not Ready For Public Markets (NASDAQ:KSCP)

Autonomous security robots (ASRs) offer a compelling growth area, but the recent IPO from Knightscope (NASDAQ:KSCP) isn’t ready for prime time. The company has limited financials and the stock valuation is likely elevated due to the large advertising by the firm. My investment thesis is Bearish on the stock until the company starts producing more impressive growth.

Wild IPO

Since going public at $10 on January 27, the stock has been on a wild ride. Knightscope initially sold off below $6 due to the meager financials, but the stock soared to a high over $27 on excitement surrounding a couple of new customer contracts.

The company raised $22.4 million selling 2.2 million shares at $10 per share in order to manufacture more K1, K3 and K5 ASRs and develop new technology for the space. Knightscope now has over 50 million diluted shares outstanding following this offering and the company is nowhere close to producing the revenues necessary to cover costs.

The company has more than 7.4 million options outstanding at an average conversion price of $1.38 and another 4.4 million warrants at an average price of $4.78. With a stock above $8, these options and warrants are likely to be converted in the future.

Knightscope had listed 4 million shares for the IPO offering and the company only sold 2.2 million shares. The company will have a fully diluted share count of 53 million shares now. At $9, the stock has a market value of ~$477 million.

Knightscope plans to use the money to manufacture additional robots and fund operations. The company suggests the 50% reduction in the expected proceeds will reduce growth initiatives and require the hiring of fewer employees.

Business Model Isn’t Ready

Knightscope offers a Machine-as-a-Service (MaaS) business model for their ASRs. The company charges anywhere from $3,300 to $8,150 per ASR per month. The MaaS covers the ASR rental, maintenance, service, support, data transfer and access to the Knightscope Security Operations Center. Knightscope recently launched a remote monitoring service for clients without 24/7 security staff.

The market loves recurring revenue streams from service contracts, but Knightscope doesn’t have much to show investors despite the first paid order occurring back in 2015. The company has only reported financials for the 6 month period ending on June 30, 2021 so investors have no insight into current financials or even quarterly financials.

What investors know is that revenues only grew 9% YoY for the reported period and Knightscope generated revenues of less than $1 million per quarter. The company is spending over $3 million per quarter on sales and marketing and constant advertisements on networks like CNBC would suggest spending has potentially ramped up recent months heading into this IPO.

The company has recently announced contracts for several high profile corporations in the finance and casino sectors without offering much in the way of details. The recent announcement of a Fortune 500 company client in the finance sector suggests the security program only added 1 K5 robot.

Based on the numbers from the SEC filing, Knightscope might only generate up to $8K in monthly revenue from this highly announced deal. While these deals are promising, the company needs deals for multiple ASRs of at least 10 robots to make the investment story far more interesting. Even at the midpoint of the stated monthly MaaS contracts, an order for 10 ASRs might only contribute $500K in annual revenues.

As of September 31, Knightscope did list order to deploy 24 additional ASRs, but the annual subscription value was only ~$1.3 million. The company had just 51 ASRs working at the end of June, but COVID-19 did impact operations at numerous customers.

The company burned $5+ million in cash per quarter for the reported period of 2021 and only raised $22 million in the recent IPO. Knightscope had ~$10 million in cash as of December 31 providing some additional cash to the balance sheet beyond the amounts raised in the IPO.

Knightscope could easily need to raise capital in the future to fund operations until profitable. At the time, additional spending to purchase more ASRs will burn these limited funds rather quickly considering the IPO goal was to raise $40 million and spend up to $15 million on purchasing ASRs.

Takeaway

The key investor takeaway is that Knightscope offers some promising and intriguing technology, but the company isn’t ready for the public markets. Investors should watch Knightscope from the sidelines until additional quarterly results are provided and the company actually enters into a growth phase.