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In February, I wrote a bearish piece on SA about autonomous security robot (‘ASR’) producer Knightscope (NASDAQ: KSCP) in which I said the stock price was probably below $10 in the near coming. Well, it’s been less than 5 months since then and the stock price has fallen below $4.00. Still, I think the situation probably won’t improve and Knightscope could be below $1.00 per share by the end of 2022. You see, the company still generates less than $1 million in revenue per share. quarter and it looks like the addressable market is just too small right now. As of May 2, the backlog included fewer than 30 robots, representing a total annual subscription value of just $1.6 million.

I think Knightscope will likely run out of cash by early 2023, which could lead to significant stock dilution. Let’s review.

Overview of recent developments

In case you haven’t read my previous article on Knightscope, here’s a quick rundown. The company is focused on the design and production of ASR for indoor and outdoor surveillance under a machine-as-a-service (MaaS) business model. In 2017, Knightscope caught global media attention as one of its K5 robots. drowned in a fountain. It was also not the first time that there had been accidents captured by news stations – earlier that year a drunken man managed to tear down one of his robots, and in 2016 a K5 accidentally crushed a toddler. Still, I consider Knightscope to be one of the leading manufacturers of autonomous security robots despite these crashes, as they have over a million operating hours for their robots. Currently, the company’s robots patrol 5 US time zones.

Let’s pay attention to the financial performance of the company. Knightscope was established in 2013 and raised over $95 million from investors before listing on Nasdaq in late January 2022 after an initial public offering (“IPO”) of $22.36 million. According to the IPO presentation, the short-term market opportunity was $4.1 billion, including about 36,000 bots.

Knightscope addressable market


However, it appears that Knightscope has significantly overestimated ASR’s demand, as its revenue and backlog are barely growing. In the first quarter of 2022, the company generated net revenue of just $0.94 million, representing growth of just $0.08 million from the prior year. This is despite increased spending on marketing and research and development. On top of that, the gross profit margin deteriorated from minus 36.6% to minus 58.2%.

Knightscope Q1 2022 income statement


Knightscope explained its weak Q1 2022 financial performance with supply chain issues as well as the effects of the COVID-19 pandemic on its clients’ budgets (page 24 here). He added that these issues have also caused delays in its ability to deploy ASRs during the first quarter of 2022. However, this makes the backlog situation even worse as there were only orders to deploy 29 ASR as of May 2, which was a total. annual subscription value of approximately $1.6 million. For comparison, the backlog included 24 ASRs as of September 28, representing an aggregate annual underwriting value of approximately $1.3 million. The backlog has barely grown in the past 7 months despite delayed deployments and millions of dollars paid out in commercial advertising. This leads me to conclude that the short-term market opportunity is well below the $4.1 billion calculated by Knightscope and that the majority of companies simply don’t want to move to ASRs just yet. And that poses a problem for Knightscope as cash burn accelerates. In the first quarter of 2022, net cash used in operating activities was $8.35 million, compared to $5.76 million a year earlier. The company’s cash balance stood at $21.1 million in March 2022, which means the company could need to raise capital in less than 8 months. Of course, the backlog includes robots with a total annual subscription value of around $1.6 million, but keep in mind that this amount will not be directly added to quarterly revenue because some of the current contracts will expire without being renewed. Knightscope MaaS subscription contracts are generally for 12 months.

Overall, I don’t think Knightscope’s operating cash flow will improve over the next few months. The backlog looks disappointing and that means quarterly revenue should stay around the $1 million mark in 2022. With revenue barely growing and profitability looking a long way off, I think Knightscope stock price will continue to decline over the next few months. . Given that cash could run out around the start of 2023, there could be significant stock dilution unless something drastically changes.

So how do you play this one? Well, the data from Fintel shows that the short-term borrowing cost rate is 47.95% at the time of writing, which seems high. There are no put options available yet, so it would be best to avoid Knightscope stocks unless you have a high risk tolerance.

Regarding the risks for the bearish case, I think there are two main ones. First, I may be underestimating the impact of COVID-19 on Knightscope’s business and the recovery in orders over the remainder of 2022. This should boost revenue and improve the cash position. Second, Knightscope is a strong player in the ASR space despite its low revenue and its low market valuation could attract a takeover bid from a major tech company interested in the space.

Takeaway for investors

I think Knightscope is among the companies whose business looked good during the COVID-19 pandemic, but the growth just didn’t materialize as the world returns to normal. Having robot security guards sounds cool and futuristic, but it seems the demand for them just isn’t there right now.

Knightscope has failed to increase sales and grow its backlog despite increased marketing spend, and I doubt its financial performance will improve anytime soon. With no clear catalyst on the horizon, I think the stock price will likely continue to decline and could drop below $1.00 before the end of 2022. With liquidity depleted in maybe around 8 months, there could be significant stock dilution.

That being said, opening a short position is not for the faint-hearted, as the short borrowing fee rate is currently close to 50%. There are no put options available and it may be best for risk averse investors to avoid this stock.