More Problems at Knightscope - A Supplemental Report – Capybara Research
Knightscope (KSCP) financial analysis reveals critical insolvency risks: extreme share dilution, negative margins, minimal robot revenue, auditor concerns, and potential bankruptcy threatening investor capital.
Knightscope's recent 10-Q filing reveals a company rapidly approaching insolvency with alarming financial deterioration, including a 50% increase in shares outstanding in just three months through toxic convertible notes and aggressive dilution tactics.
Stock Info:
- Ticker: KSCP (NASDAQ)
- Position: Capybara Research has disclosed they are short KSCP
Why it matters:
- Imminent Financial Crisis: Cash reserves of only $2.9 million are insufficient to sustain operations, with auditors expressing "substantial doubt" about the company's ability to continue as a going concern
- Extreme Dilution: Share count exploded from ~44 million to ~67 million in just three months, with convertible note holders receiving shares at steep discounts (~$0.58) and immediately liquidating
- Deteriorating Performance: Net margins plummeted from -84.41% in Q1 2023 to -134.61% in Q2 2023, with the company resorting to selling future income streams to cover expenses
- Minimal Robot Revenue: Despite marketing itself as a robotics company, actual robot sales contribute negligibly to revenue, with most growth coming from the CASE acquisition
- Accounting Red Flags: Material weaknesses in internal controls since 2014, suspicious auditor switch from Ernst & Young to BPM LLP (recently censured by PCAOB)
- Questionable Leadership: Unlicensed CFO Mallorie Burak was previously terminated for accounting failures, while CEO William Santana Li takes $2M+ compensation despite poor performance
Zoom in:
- Knightscope has ceased reporting key performance indicators since Q3 2021, concealing true business performance
- CEO holds super-voting shares (10 votes per share), effectively controlling the company despite owning a minority stake
- The company is now targeting retail investors through Google ads and a $10 million bond offering after failing to secure institutional funding
- In bankruptcy, common shareholders would likely lose everything, as they stand behind significant debt and preferred shares
- Half of non-employee directors resigned in January 2023, suggesting governance instability
- The company employs aggressive discounting and absorbs 50% of losses on defaults in financing deals, further eroding already negative margins
FAQs:
What is causing Knightscope's rapid share dilution?
Knightscope has been issuing shares through an ATM offering and converting toxic notes at steep discounts (85% of VWAP), allowing note holders to profit even as the stock price falls. This has increased shares outstanding by more than 50% in just three months.
How serious are Knightscope's financial problems?
Extremely serious. With only $2.9 million in cash as of mid-August 2023, worsening negative margins (reaching -134.61%), and auditors issuing a "going concern" warning, bankruptcy appears increasingly likely without significant capital infusion.
Why did Knightscope switch auditors from Ernst & Young to BPM LLP?
The switch occurred during an annual audit period, which is highly unusual and suggests potential issues with financial statements. BPM LLP has been censured and fined by the PCAOB, with the same audit partner involved in Knightscope's audit being part of the disciplinary action.
Is Knightscope's robotics business successful?
No. Despite marketing itself as a robotics company, robot sales contribute minimally to revenue. Recent growth primarily came from the CASE acquisition and call box sales, while the company has stopped reporting robot-specific metrics since Q3 2021.
What red flags exist in Knightscope's corporate governance?
Several major concerns include: a CFO with a history of forecasting errors who lacks CPA/CFA credentials; a CEO with super-voting shares who received over $2 million in compensation despite poor performance; half the non-employee directors resigning in January 2023; and repeated material weaknesses in internal controls since 2014.
What happens to shareholders if Knightscope goes bankrupt?
Common shareholders would likely lose their entire investment, as they stand behind significant debt obligations and preferred shares in the capital structure. This mirrors patterns from CEO Li's past ventures.
How is Knightscope trying to raise capital currently?
The company is targeting retail investors through Google ads and a $10 million bond offering with high fees, suggesting they've been unable to secure institutional funding. The final amount raised is likely to be considerably less than the target.
What accounting irregularities has Capybara Research identified?
Knightscope has disclosed material weaknesses in internal controls every year from 2014 through 2022, switched auditors during an annual audit period, and appointed a CFO with a history of accounting issues. The company has also advised that financial statements from 2014-2016 "should not be relied upon."
Disclaimer
This summary is based on a report by Capybara Research. For the full, detailed analysis, please refer to the original source material: https://capybararesearch.com/reports/more-problems-at-knightscope/
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