OFFERING CIRCULAR DATED JULY 18, 2019

 

KNIGHTSCOPE, INC.

 

 

1070 Terra Bella Avenue

Mountain View, CA 94043

(650) 924-1025

 

www.knightscope.com

 

 

UP TO 6,250,000 SHARES OF SERIES S PREFERRED STOCK CONVERTIBLE INTO SHARES OF CLASS A COMMON STOCK

SEE “SECURITIES BEING OFFERED” AT PAGE 40

 

MINIMUM INDIVIDUAL INVESTMENT: 125 Shares ($1,000)

 

   Price Per Share to
Public
   Total Number of Shares
Being Offered
   Proceeds to Issuer, before
expenses, discounts and
commissions*
 
Series S Preferred Stock  $8.00    6,250,000   $50,000,000 

 

An Issuer may raise an aggregate of up to $50 million in a 12 month period pursuant to Tier II of Regulation A of the Securities Act in this offering (this “Offering”).

  

*See “Plan of Distribution” for details regarding the compensation payable to placement agents in connection with this offering. The Company has engaged Maxim Group LLC and StartEngine Primary LLC to serve as a placement agent to assist in the placement of its securities.

 

The Company expects that the amount of expenses of the offering that it will pay will be approximately $3,770,000, not including state filing fees.

 

The offering will terminate at the earlier of: (1) the date at which the maximum offering amount has been sold, (2) the date that is twelve months from the date this Offering Statement is qualified by the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”), or (3) the date at which the offering is earlier terminated by the Company in its sole discretion, which may occur at any time. The offering is being conducted on a best-efforts basis without any minimum target. The Company may undertake one or more closings on a rolling basis. After each closing, funds tendered by investors will be available to the Company.

 

In the event the Company raises enough capital and acquires enough round lot investors to qualify for a listing on Nasdaq or another exchange, the Company intends to file an amendment to this Form 1-A to follow the disclosure format of Form S-1 and subsequently to file a Form 8-A in order to register the Company’s Common Stock with the Commission and list publicly following the conclusion of this offering.

  

THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OR GIVE ITS APPROVAL OF ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SOLICITATION MATERIALS. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED ARE EXEMPT FROM REGISTRATION.

 

GENERALLY NO SALE MAY BE MADE TO YOU IN THIS OFFERING IF THE AGGREGATE PURCHASE PRICE YOU PAY IS MORE THAN 10% OF THE GREATER OF YOUR ANNUAL INCOME OR NET WORTH. DIFFERENT RULES APPLY TO ACCREDITED INVESTORS AND NON-NATURAL PERSONS. BEFORE MAKING ANY REPRESENTATION THAT YOUR INVESTMENT DOES NOT EXCEED APPLICABLE THRESHOLDS, WE ENCOURAGE YOU TO REVIEW RULE 251(d)(2)(i)(C) OF REGULATION A. FOR GENERAL INFORMATION ON INVESTING, WE ENCOURAGE YOU TO REFER TO www.investor.gov.

 

This offering is inherently risky. See “Risk Factors” on page 7.

 

Sales of these securities will commence on or shortly after the date that this Offering Statement is qualified by the Commission.

 

The Company is following the “Offering Circular” format of disclosure under Regulation A.

  

 1 

 

  

TABLE OF CONTENTS

 

Summary 3
Risk Factors 7
Dilution 16
Use of Proceeds to Issuer 18
The Company’s Business 19
The Company’s Property 23
Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
Directors, Executive Officers and Significant Employees 34
Compensation of Directors and Officers 36
Security Ownership of Management and Certain Stockholders 38
Interest of Management and Others in Certain Transactions 39
Securities Being Offered 40
Plan of Distribution 47
Audited Financial Statements for the Years Ended December 31, 2018 and 2017 48

 

In this Offering Circular, the term “Knightscope,” “we,” “us,” “our” or “the Company” refers to Knightscope, Inc.

 

THIS OFFERING CIRCULAR MAY CONTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO, AMONG OTHER THINGS, THE COMPANY, ITS BUSINESS PLAN AND STRATEGY, AND ITS INDUSTRY. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON THE BELIEFS OF, ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY’S MANAGEMENT. WHEN USED IN THE OFFERING MATERIALS, THE WORDS “ESTIMATE,” “PROJECT,” “BELIEVE,” “ANTICIPATE,” “INTEND,” “EXPECT” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, WHICH CONSTITUTE FORWARD LOOKING STATEMENTS. THESE STATEMENTS REFLECT MANAGEMENT’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE THE COMPANY’S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO REVISE OR UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER SUCH DATE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.

 

 2 

 

 

SUMMARY

 

Knightscope, Inc. (the “Company,” “we,” “us” or “Knightscope”) was founded in Mountain View, California in April 2013 and has since developed revolutionary Autonomous Data Machines (“ADMs”) with real-time on-site data collection and analysis and an interface, primarily through funding from both strategic and private investors. Knightscope currently offers three products: (1) the K5 ADM (“K5”) for outdoor usage, (2) the K3 ADM (“K3”) for indoor usage, and (3) the K1 ADM (“K1”) for stationary usage indoors or outdoors. The Company also provides access to the Knightscope Security Operations Center (“KSOC”) to all of its customers, a browser-based interface that allows customers real time data access. The Company works continuously to improve and upgrade the ADMs and KSOC, and their precise specifications may change over time.

 

The first version of the Company’s flagship K5 was completed in December 2013 and the first version of the K3 was completed in June 2016. The Company began producing the first K1 units during March 2018. The initial proof-of-concept for Knightscope’s products and services occurred in May 2015 and we received our first paid order in June 2015. Currently, the Company operates on a Machine-as-a-Service (“MaaS”) business model. Since June 2016, we have recognized recurring monthly revenues averaging between $4,200-$8,400 per ADM per month, which includes the ADM rental as well as setup, configuration, maintenance, service, support, data transfer, KSOC access, charging system and unlimited software, firmware and select hardware upgrades when and if available. We charge additional fees for special decals or other markings on the ADMs as well as cellular costs in certain locations.

 

Our current primary focus is on the deployment and marketing of our core technologies. We are also working on the development and eventual production of the K7 ADM (“K7”) for multi-terrain outdoor usage, which will be built on a four-wheel architecture and have the capability to operate in more difficult environments. We continue to generate customer orders and our production of machines is currently conducted out of our primary corporate headquarters located in Mountain View, California.

 

THE OFFERING

 

Securities offered:   Maximum of 6,250,000 shares of Series S Preferred Stock (the “Shares”), convertible into shares of Class A Common Stock at a ratio of 1:1, which conversion ratio is subject to further adjustment as described in the section titled “Convertible Promissory Notes and Series S Preferred Stock Warrants, and the Related Conversion of Certain Series m-3 Preferred Stock into Series m-4 Preferred Stock” below 
     
Class B Common Stock outstanding immediately before the Offering (1)   10,179,000 shares    
     
Class A Common Stock outstanding immediately before the Offering (1)   0 shares    
     
Series A Preferred Stock outstanding immediately before the Offering   8,936,015 shares     
     
Series B Preferred Stock outstanding immediately before the Offering   4,653,583 shares    
     
Series m Preferred Stock outstanding immediately before the Offering   5,339,215 shares    
     
Series m-2 Preferred Stock outstanding immediately before the Offering   1,660,756 shares    

 

 3 

 

  

Series m-3 Preferred Stock outstanding immediately before the Offering   16,757 shares    
     
Series m-4 Preferred Stock outstanding immediately before the Offering   1,432,786 shares  
     
Series S Preferred Stock outstanding immediately before the Offering   469,140 shares    
     
Use of Proceeds   The net proceeds of this offering will be used to for working capital and growth capital purposes, including increasing sales and optimizing production of our ADMs. The details of our plans are set forth in “Use of Proceeds.”

 

(1)Does not include shares issuable upon the exercise of options issued under the 2014 Equity Incentive Plan, shares allocated for issuance pursuant to the 2014 Equity Incentive Plan, the 2016 Equity Incentive Plan or outstanding warrants.

 

 4 

 

 

Selected Risks Associated with Our Business

 

Our business is subject to a number of risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this summary. These risks include, but are not limited to, the following:

 

·We are an early stage company and have not yet generated any profits or significant revenues.

 

·We may not be able to continue to operate the business if we are not successful in securing significant additional fundraising in a short time frame.

 

·The Company relies on rolling closes of equity infusions for its financings which may pose a risk to having sufficient capital on hand at any point in time.

 

·The Company has a history of losses and expects to experience future losses. In order to continue operations despite these losses, the Company has financed itself through debt and equity offerings, as well as through the sale and lease back of the majority of its ADMs.

 

·The Company has a limited operating history by which performance can be gauged.

 

·The Company is subject to potential fluctuations in operating results.

 

·The Company’s future operating results are difficult to predict and may be affected by a number of factors, many of which are outside of the Company’s control.

 

·Unanticipated obstacles may hinder the execution of the Company’s business plan.

 

·We have a limited number of deployments, and limited market acceptance of our products could harm our business.

 

·We cannot assure you that we will effectively manage our growth.

 

·Our costs may grow more quickly than our revenues, harming our business and profitability.

 

·We expect to raise additional capital through equity and/or debt offerings and to provide our employees with equity incentives. Therefore, your ownership interest in the Company is likely to continue to be diluted.

 

·All of our assets, possibly including our intellectual property, may be pledged as collateral to a lender.

 

·The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could harm our business.

 

·If we are unable to protect our intellectual property, the value of our brand and other intangible assets may be diminished and our business may be adversely affected.

 

·Our financial results will fluctuate in the future, which makes them difficult to predict.

 

·We may face additional competition.

 

·Our ability to operate and collect digital information on behalf of our clients is dependent on the privacy laws of jurisdictions in which our ADMs operate, as well as the corporate policies of our clients, which may limit our ability to fully deploy our technologies in various markets.

 

 5 

 

 

·We have limited experience in operating our ADMs in a variety of environments and increased interactions may lead to collisions, possible liability and negative publicity.

 

·Our failure to implement and maintain effective internal control over financial reporting could have resulted or may in the future result in material misstatements in our financial statements, which has and could in the future require us to restate financial statements, cause investors to lose confidence in our reported financial information and could have an adverse effect on our ability to fundraise.

 

·We realized a gross and net loss for each period since our inception to date, and there can be no assurances that the Company will become profitable in the future. As a result of our recurring losses from operations, negative cash flows from operating activities and the need to raise additional capital, our independent auditor included an emphasis of matter paragraph expressing substantial doubt about the Company’s ability to continue as a going concern in its report on our audited financial statements for the year ended December 31, 2018.

 

·The private security industry is undergoing structural changes in technology and services.

 

·The Company is controlled by its officers and other stockholders.

 

 6 

 

 

RISK FACTORS

 

The Commission requires the Company to identify risks that are specific to its business and its financial condition. The Company is still subject to all the same risks that all companies in its business, and all companies in the economy, are exposed to. These include risks relating to economic downturns, political and economic events and technological developments (such as hacking and the ability to prevent hacking). Additionally, early-stage companies are inherently more risky than more developed companies. You should consider general risks as well as specific risks when deciding whether to invest.

 

Selected Risks Related to the Offering

 

The Company is dependent on the proceeds of this offering and we may need to seek additional funds if the full offering amount is not raised, and the Company will not be solvent after July 2019 without additional fundraising.

 

We are dependent on the proceeds of this offering to maintain our operations and support our business growth. As of June 30, 2019, the Company had cash on hand of approximately $0.4 million. The Company has projected operating losses and negative cash flows of approximately $1 million per month for the next several months. Without additional fundraising, typically and historically conducted on a rolling close basis, the Company will not be solvent after July 2019. If the maximum offering amount is not raised, we may require additional funds to maintain our operations and respond to business challenges and opportunities, including the need to develop new products or enhance our existing products, enhance our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in subsequent equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our existing capital stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. Such financing could also require us to pledge assets as security for borrowings. If we were to leverage our business by incurring significant debt, we may be required to devote a substantial portion of our cash flow to service that indebtedness. This could require us to modify our business plan, for example, by delaying the expansion of our business. If we are unable to obtain adequate financing or financing on terms satisfactory to us, the Company may have to significantly reduce its operations or delay, scale back or discontinue the development of one or more of its platforms, seek alternative financing arrangements, declare bankruptcy or terminate its operations entirely.

 

The Shares are not registered with the Commission or any state securities commission, and there is no public market for the Shares.

 

We have not registered, and may never register, the Shares with the Commission. Currently, no public trading market exists for the Shares and one may never exist. The Shares may not be resold unless we register the Shares with the Commission or an exemption from registration requirements is available for the proposed sale. The Shares will be restricted securities under United States federal and applicable state securities laws and, as such, may not be transferred, sold or otherwise disposed of except in compliance with federal registration and applicable state qualification requirements or unless an exemption from such registration and qualification requirements is available. In addition, investors must comply with any contractual restrictions on transferability applicable to the Shares. The lack of any public market for the Shares limits investors’ ability to sell their shares and investors should be prepared to hold such shares indefinitely. We can provide no assurance that there will ever be a public market for the Shares or that investors will ever be able to dispose of their shares at a price they find attractive, or at all.

 

The offering price for the Shares has been determined by the Company rather than any of the investors.

 

The offering price of the Shares was determined by the Company. The price of the Shares and the terms of the Shares do not necessarily bear any relationship to established valuation criteria such as earnings, book value or assets. Rather, the price of the Shares was derived based upon various factors including prevailing market conditions, our future prospects and our capital structure. This price does not necessarily accurately reflect the actual value of the Shares or the price that may be realized upon disposition of the Shares.

 

 7 

 

 

An investment in the Shares is not a diversified investment.

 

The Shares do not provide a diversified investment portfolio to investors. Investors will not have exposure to any other classes of securities or to any other asset classes through their investments in the Shares.

 

Investors may not realize a return on their investment and could lose their entire investment.

 

Investing in the Shares is highly speculative and involves a high degree of risk. There can be no assurance that investors will realize any return on their investment. Investors should not invest in the Shares unless they are prepared to lose all or part of their investment.

 

The Company is not providing prospective investors with separate legal, accounting or business advice or representation.

 

Neither the Company nor any of its affiliates will provide investors with any advice regarding their investments in the Shares. Investors are solely responsible for deciding whether an investment in the Shares meets their investment goals and is generally an appropriate investment for them. In addition, investors are solely responsible for understanding the terms and restrictions of the Shares. Because the Shares constitute a complex investment product, they are only appropriate for highly sophisticated investors. Investors are also advised to seek the counsel of their own investment advisers in this regard. The Company makes no recommendation as to whether prospective investors should invest in the Shares. The Company encourages prospective investors to consult their legal counsel, accountant and/or financial and tax adviser before making any investment decision.

 

The holders of the Shares may be further diluted by, or your liquidation preference may become junior to, concurrent or subsequent offerings of the Company’s capital stock or convertible debt.

 

If you purchase the Shares in this offering, you may be further diluted, without limitation, by (i) concurrent or subsequent offerings of the capital stock or convertible debt of the Company, including without limitation (a) the Company’s ongoing offering of its shares of Series S Preferred Stock pursuant to the Regulation D Offering that it has been conducting since July 11, 2018 and that is ongoing as of the date of this offering circular, and (b) the Company’s ongoing offering of convertible promissory notes and warrants to purchase Series S Preferred Stock pursuant to the Convertible Note Financing, and (ii) by the recapitalizations by the Company of its existing or future stock or debt, the most recent of which was the exchange of a portion of the Company’s Series m-3 Preferred Stock for shares of its Series m-4 Preferred Stock at a ratio of 1 to 1 in connection with the Convertible Note Financing. Concurrent or subsequent offerings or recapitalizations are and may continue to be conducted at a price lower than the price at which the Shares are offered, and the liquidation preferences and rights offered to the holders of such other securities may be significantly better than those offered to the Shares (such as, for example, those given to the holders of Series m-4 Preferred Stock). The liquidation preference of the Series m-4 Preferred Stock and of any such subsequent offerings is and may in the future also be senior to that of the Shares. The effect of such concurrent or subsequent offerings or recapitalizations of the capital stock or debt of the Company would be to dilute the relative value of the Shares. In addition, further dilution will occur upon exercise of outstanding options and warrants and the exercise of options and warrants granted by us concurrently or in the future.

 

Subsequent offerings or recapitalizations of the Company’s capital stock below the offering price or on terms better than the Shares may adversely affect the market price of the Company’s capital stock and may make it difficult for the Company to continue to sell Shares or other equity or debt securities.

 

If the Company makes one or more subsequent offerings or recapitalizations of its capital stock or debt at a price below the offering price or on terms otherwise better than those awarded to the Shares, it could potentially create a benchmark price below the offering price and could proportionately reduce the relative attractiveness of the Shares to investors, or could otherwise adversely impact the ability of the company to sell the Shares or other equity or debt securities. This may in turn impact on the rights of the securities and could adversely affect the market price of the Company’s capital stock, and may make it difficult for the Company to continue to sell Shares or other equity or debt securities.

 

The Company may apply the proceeds of this offering to uses for which you may disagree.

 

We will have broad discretion as to how to spend the proceeds from this offering and may spend these proceeds in ways in which you may not agree. We currently intend to use the proceeds of this offering to fund further expansion and for other working capital and general corporate purposes. While we expect to use the proceeds of this offering as described in this memorandum, we may use our remaining cash for other purposes. There can be no assurance that any investment of the proceeds will yield a favorable return, or any return at all.

 

 8 

 

 

There is no current market for any of our shares of stock.

 

There is no formal marketplace for the resale of the Series S Preferred Stock, and the Company currently has no plans to list any of its shares on any over-the-counter, or similar, exchange unless and until it can satisfy exchange listing requirements. Investors should assume that they may not be able to liquidate their investment for some time or be able to pledge their shares as collateral.

 

Selected Risks Related to the Business

  

We are an early stage company and have not yet generated any profits or significant revenues.

 

The Company was formed in 2013 and made its first pilot sales in 2015. Accordingly, the Company has a limited history upon which to evaluate its performance and future prospects. Our current and proposed operations are subject to all the business risks associated with new enterprises. These include likely fluctuations in operating results as the Company makes significant investments in research, development and product opportunities, and reacts to developments in its market, including purchasing patterns of customers, and the entry of competitors into the market. We will only be able to pay dividends on any shares once our board of directors determines that we are financially able to do so. The Company has incurred a net loss and generated limited revenues since inception. We cannot assure you that we will be profitable in the next several years or generate sufficient revenues to pay dividends to the holders of the shares or meet our debt servicing and payment obligations.

 

We may not be able to continue to operate the business if we are not successful in securing additional fundraising.

 

We are dependent on additional fundraising in order to sustain its ongoing operations. As of June 30, 2019, the Company had cash on hand of approximately $0.4 million. The Company has projected operating losses and negative cash flows of approximately $1 million per month for the next several months. Without additional fundraising, typically and historically conducted on a rolling close basis, the Company will not be solvent after July 2019. There can be no assurance that the Company will be successful in raising funds in this offering, or acquiring additional funding at levels sufficient to fund its future operations beyond the current cash runway. 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 or delay, scale back or discontinue the development of one or more of its platforms, seek alternative financing arrangements, declare bankruptcy or terminate its operations entirely.

 

The Company relies on rolling closes of equity infusions for its financings which may pose a risk to having sufficient capital on hand at any point in time.

 

The Company relies on rolling closes of equity financings to maintain adequate working capital. If we are unable to raise enough money in this offering and in subsequent closes of equity financings, we will have insufficient working capital to pay the costs needed for us to continue operations.

 

The Company has a history of losses and expects to experience future losses. In order to continue operations despite these losses, the Company has financed itself through debt and equity offerings, as well as through the sale and lease back of the majority of its ADMs.

 

We have incurred net losses since our inception, and we expect to continue to incur net losses in the future. To date, we have funded our operations from the sale of equity and debt securities, by means of credit facilities as well as by the financing arrangement under which we collateralized fifty (50) ADMs. The financing arrangement that was entered into in February 2019 was a one-time arrangement pursuant to which we were able to obtain cash up front in exchange for the sale of a large portion of our machines, and we are not able to continue to use this method of financing in the future, since the majority of our machines have already been sold. We expect to continue to increase operating expenses as we implement our business strategy, which include development, sales and marketing, and general and administrative expenses and, as a result, we expect to incur additional losses and continued negative cash flow from operations for the foreseeable future. We will need to generate significant revenues to achieve profitability. There can be no assurance that we will ever generate sufficient revenues to achieve profitability. If we do achieve profitability in some future period, we cannot assure you that we can sustain profitability on a quarterly or annual basis in the future. In addition, we may not achieve profitability before we have expended the proceeds to be raised in this offering. If our revenues grow more slowly than we anticipate or if our operating expenses exceed our expectations or cannot be adjusted accordingly, our business, operating results and financial condition will be materially and adversely affected.

 

 9 

 

 

The Company has a limited operating history by which performance can be gauged.

 

Any evaluation of our business and our prospects must be considered in light of our limited operating history and the risks and uncertainties encountered by companies in our stage of development. Further, our industry is characterized by rapid technological change, changing customer needs, evolving industry standards and frequent introduction of new products and services. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries. If we do not address these risks successfully, our operating results will be harmed.

 

The Company is subject to potential fluctuations in operating results.

 

Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense. As a result, our sales are difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate significantly. We spend substantial amount of time, effort and money in our sales efforts without any assurance that our efforts will produce any revenue and the timing of our revenue is difficult to predict. Our sales efforts involve educating our customers about the use and benefit of our new products, including their technical capabilities and potential cost savings to the customers. Customers typically undertake a significant evaluation process that has in the past resulted in a lengthy sales cycle. In addition, product purchases are frequently subject to budget constraints, regulatory and administrative approvals, and other delays. If sales expected from a specific customer for a particular quarter are not realized in that quarter or at all, our business, operating results and financial condition could be materially and adversely affected.

 

The Company’s future operating results are difficult to predict and may be affected by a number of factors, many of which are outside of the Company’s control.

 

The market for advanced physical security technology is relatively new and unproven and is subject to a number of risks and uncertainties. The industry is characterized by rapid change, new and complex technology and intense competition. Our ability to gain market share depends upon our ability to satisfy customer demands, enhance existing products and services and develop and introduce new products and services. Our ability to gain market share also depends on a number of factors beyond our control, including the perceived value associated with our products and services, the public’s perception of the use of robots to perform tasks traditionally reserved for humans, and our customers’ acceptance that security services can be performed more efficiently and cost-effectively through the use of our products and ancillary services. If any of these factors turns against us, our future operating results could be materially and adversely affected.

 

Unanticipated obstacles may hinder the execution of the Company’s business plan.

 

Because of the number and range of the assumptions underlying our projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond our reasonable control, some of the assumptions inevitably will not materialize and unanticipated obstacles may occur subsequent to the date of this offering, including:

 

·Our failure to maintain and grow the client base;
·Our clients may suffer downturns, financial instability or be subject to mergers or acquisitions;
·Our failure to develop and introduce new products;
·Adverse changes affecting our suppliers and other third-party service providers;
·Adverse litigation judgments, settlements, or other litigation-related costs; and
·Adverse changes in business or macroeconomic conditions including regulatory changes.

 

The occurrence of any of these unanticipated obstacles will hinder the execution of our business plan and adversely affect our operating results.

 

 10 

 

 

We have a limited number of deployments, and limited market acceptance of our products could harm our business.

 

The market for advanced physical security technology is relatively new and unproven and is subject to a number of risks and uncertainties. The numbers, types and locations of ADMs in service vary depending on the duration of each customer contract, customer demand and similar factors. As a result, the numbers, types and locations of ADMs in service that are currently deployed may not be representative of customer contracts and customer demand in the future. In order to grow our business and extend our market position, we will need to place into service more of the recently-introduced K1 ADMs, expand our service offerings, including by developing the K7 ADM, and expand our presence nationwide. Our ability to expand the market for our products depends on a number of factors, including the cost, performance and perceived value associated with our products and services. Furthermore, the public’s perception of the use of robots to perform tasks traditionally reserved for humans may negatively affect demand for our products and services. Ultimately, our success will depend largely on our customers’ acceptance that security services can be performed more efficiently and cost effectively through the use of our ADMs and ancillary services.

 

We cannot assure you that we will effectively manage our growth.

 

Knightscope’s employee headcount and the scope and complexity of our business have increased significantly since we were first formed, and Knightscope expects to continue hiring additional employees. The growth and expansion of our business and products create significant challenges for our management, operational, and financial resources, including managing multiple relationships and interactions with users, distributors, vendors, and other third parties. As the Company continues to grow, our information technology systems, internal management processes, internal controls and procedures and production processes may not be adequate to support our operations. To ensure success, we must continue to improve our operational, financial, and management processes and systems and to effectively expand, train, and manage our employee base. As we continue to grow, and implement more complex organizational and management structures, we may find it increasingly difficult to maintain the benefits of our corporate culture, including our current team’s efficiency and expertise, which could negatively affect our business performance.

 

Our costs may grow more quickly than our revenues, harming our business and profitability.

 

Providing Knightscope’s products is costly because of our research and development expenses, production costs, operating costs and need for employees with specialized skills. We expect our expenses to continue to increase in the future as we expand our product offerings beyond the K1, K3 and K5, expand production capabilities and hire additional employees. Historically, Knightscope’s costs have increased each year due to these factors and the Company expects to continue to incur increasing costs, in particular for working capital to purchase inventory, marketing and product deployments as well as costs of customer support in the field. Our expenses may be greater than we anticipate, which would have a negative impact on our financial position, assets and ability to invest further in the growth and expansion of the business. In addition, expansion across the country will require increased marketing, sales, promotion and other operating expenses. Further, as additional competitors enter our market, we expect an increased pressure on production costs and margins.

 

We expect to raise additional capital through equity and/or debt offerings and to provide our employees with equity incentives. Therefore, your ownership interest in the Company is likely to continue to be diluted and subordinated.

 

In order to fund future growth and development, the Company will likely need to raise additional funds in the future by offering shares of its preferred stock and/or other classes of equity or debt that convert into shares of preferred or common stock, any of which offerings would dilute the ownership percentage of investors in this offering. Furthermore, if and then the Company raises debt, including, but not limited to the notes issued in the Convertible Note Financing being conducted contemporaneously with conducting this offering, the holders of the debt will have priority over holders of common and preferred stock, including the Shares issuable in this offering, and the Company may accept terms that restrict its ability to incur more debt.

 

 11 

 

 

All of our assets, possibly including our intellectual property, may be pledged as collateral to a lender.

 

From time to time, the Company may utilize a variety of forms of debt or other financing arrangements, for example the financing arrangement that we entered into in February 2019 under which we collateralized fifty (50) ADMs, and credit facilities that may contain covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:

 

·incur certain additional indebtedness;
·pay dividends on, repurchase or make distributions in respect our capital stock;
·make certain investments;
·sell or dispose of certain assets;
·grant liens; and
·consolidate, merge, sell or otherwise dispose of all or substantially all of our assets.

 

A breach of any of these covenants could result in a default under the credit facility and permit the lender to cease making loans to us. Upon the occurrence of an event of default under the loan agreement, the lender could elect to declare all amounts outstanding thereunder to be immediately due and payable. We may pledge a significant portion of our assets, inclusive of our intellectual property, as collateral under to support a new loan agreement. If the lender accelerates the repayment of borrowings, we may not have sufficient assets to repay them and we could experience a material adverse effect on our financial condition and results of operations.

 

The loss of one or more of Knightscope’s key personnel, or Knightscope’s failure to attract and retain other highly qualified personnel in the future, could harm our business.

 

Knightscope currently depends on the continued services and performance of key members of its management team, in particular, its founders, William Santana Li and Stacy Dean Stephens as well as Marina Hardof, its executive vice president and Chief Financial Officer. If we cannot call upon them or other key management personnel for any reason, our operations and development could be harmed. The Company has not yet developed a succession plan. Furthermore, as the Company grows, it will be required to hire and attract additional qualified professionals such as accounting, legal, finance, production, service and engineering experts. The Company may not be able to locate or attract qualified individuals for such positions, which will affect the Company’s ability to grow and expand its business.

 

If we are unable to protect our intellectual property, the value of our brand and other intangible assets may be diminished and our business may be adversely affected.

 

Knightscope relies and expects to continue to rely on a combination of confidentiality agreements with its employees, consultants, and third parties with whom it has relationships, as well as trademark, copyright, patent, trade secret, and domain name protection laws, to protect its proprietary rights. The Company has filed in the United States various applications for protection of certain aspects of its intellectual property, and currently holds four patents. However, third parties may knowingly or unknowingly infringe our proprietary rights, third parties may challenge proprietary rights held by Knightscope, and pending and future trademark and patent applications may not be approved. In addition, effective intellectual property protection may not be available in every country in which we intend to operate in the future. In any or all of these cases, we may be required to expend significant time and expense in order to prevent infringement or to enforce our rights. Although we have taken measures to protect our proprietary rights, there can be no assurance that others will not offer products or concepts that are substantially similar to those of Knightscope and compete with our business. If the protection of our proprietary rights is inadequate to prevent unauthorized use or appropriation by third parties, the value of our brand and other intangible assets may be diminished and competitors may be able to more effectively mimic our service and methods of operations. Any of these events could have an adverse effect on our business and financial results.

 

 12 

 

 

Our financial results will fluctuate in the future, which makes them difficult to predict.

 

Knightscope’s financial results have fluctuated in the past and will fluctuate in the future. Additionally, we have a limited operating history with the current scale of our business, which makes it difficult to forecast future results. As a result, you should not rely upon the Company’s past financial results as indicators of future performance. You should take into account the risks and uncertainties frequently encountered by rapidly growing companies in evolving markets. Our financial results in any given quarter can be influenced by numerous factors, many of which we are unable to predict or are outside of our control, including:

 

·Knightscope’s ability to maintain and grow its client base;
·Our clients may suffer downturns, financial instability or be subject to mergers or acquisitions;
·The development and introduction of new products by Knightscope or its competitors;
·Increases in marketing, sales, service and other operating expenses that we may incur to grow and expand our operations and to remain competitive;
·Knightscope’s ability to achieve gross margins and operating margins;
·Changes affecting our suppliers and other third-party service providers;
·Adverse litigation judgments, settlements, or other litigation-related costs; and
·Changes in business or macroeconomic conditions including regulatory changes.

 

We may face additional competition.

 

We are aware of a number of other companies that are developing physical security technology in the United States and abroad that may potentially compete with our technology and services. These or new competitors may have more resources than us or may be better capitalized, which may give them a significant advantage, for example, in offering better pricing than the Company, surviving an economic downturn or in reaching profitability. There can be no assurances that we will be able to compete successfully against existing or emerging competitors. Additionally, existing private security firms may also compete on price by lowering their operating costs, developing new business models or providing other incentives.

 

Our ability to operate and collect digital information on behalf of our clients is dependent on the privacy laws of jurisdictions in which our ADMs operate, as well as the corporate policies of our clients, which may limit our ability to fully deploy our technologies in various markets.

 

Our ADMs collect, store and may analyze certain types of personal or identifying information regarding individuals that interact with the ADMs. While we maintain stringent data security procedures, the regulatory framework for privacy and security issues is rapidly evolving worldwide and is likely to remain uncertain for the foreseeable future. Federal and state government bodies and agencies have in the past adopted, and may in the future adopt, laws and regulations affecting data privacy, which in turn affect the breadth and type of features that we can offer to our clients. In addition, our clients have separate internal policies, procedures and controls regarding privacy and data security with which we may be required to comply. Because the interpretation and application of many privacy and data protection laws are uncertain, it is possible that these laws may be interpreted or applied in a manner that is inconsistent with our current data management practices or the features of our products. If so, in addition to the possibility of fines, lawsuits and other claims and penalties, we could be required to fundamentally change our business activities and practices or modify our products, which could have an adverse effect on our business. Additionally, we may become a target of information-focused or data collection attacks and any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable privacy and data security laws, regulations, and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our clients may limit the use and adoption of, and reduce the overall demand for, our products. Privacy and data security concerns, whether valid or not valid, may inhibit market adoption of our products, particularly in certain industries and foreign countries. If we are not able to adjust to changing laws, regulations, our business may be harmed.

 

 13 

 

 

We have limited experience in operating our ADMs in a variety of environments and increased interactions may lead to collisions, possible liability and negative publicity.

 

Our ADMs operate autonomously in environments, such as shopping malls, parking lots and stadiums, that are surrounded by various moving and stationary physical obstacles and by humans and vehicles. Such environments are prone to collisions, unintended interactions and various other incidents, regardless of our technology. Therefore, there is a possibility that our ADMs may be involved in a collision with any number of such obstacles. Our ADMs contain a number of advanced sensors that are designed to effectively prevent any such incidents and are intended to stop any motion at the detection of intervening objects. Nonetheless, real-life environments, especially those in crowded areas, are unpredictable and situations may arise in which the ADMs may not perform as intended. Recent highly publicized incidents of autonomous vehicle and human interactions have focused consumer attention on the safety of such systems. We continuously test the ADMs in a number of unpredictable environments and continue to improve each model’s obstacle-sensing and crash-prevention technology. Furthermore, the maximum speed of the ADMs typically does not exceed 3 mph, which is not different from normal human walking pace and is unlikely to lead to any significant damage. However, there can be no assurance that a collision, with property or with humans, will not occur, which could damage the ADM, or lead to personal injury or property damage and may subject us to lawsuits. Moreover, any such incident, even without damage, may lead to adverse publicity for us. Such lawsuits or adverse publicity would negatively affect our brand and harm our business, prospects, financial condition and operating results.

 

Our failure to implement and maintain effective internal control over financial reporting could have resulted or may in the future result in material misstatements in our financial statements, which has and could in the future require us to restate financial statements, cause investors to lose confidence in our reported financial information and could have an adverse effect on our ability to fundraise.

 

As we previously reported on our filings with the Commission, the Company restated its 2016 financial statements on October 6, 2017 because certain accounting principles were incorrectly applied. In connection with the errors detected in applying certain accounting principles, Company management determined that as of December 31, 2017 a material weakness existed in internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. The material weakness identified was an insufficient complement of resources with an appropriate level of accounting knowledge, experience and training commensurate with our structure and financial reporting requirements. We initiated various remediation efforts to address these items. For example, in June 2018 the Company hired experienced chief financial officer, who among other things oversees financial reporting. Additional material weaknesses in our internal control over financial reporting may be identified in the future. Any failure to maintain existing or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, and cause us to fail to meet our reporting obligations. If we are unable to effectively remediate material weaknesses in a timely manner, investors could lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our ability to sell our securities and to conduct future fundraising.

 

We realized a gross and net loss for each period since our inception to date, and there can be no assurances that the Company will become profitable in the future.

 

We have incurred a gross loss and net loss in all periods since our inception, and while we are taking steps to achieve a gross profit and profitability, we expect that we will continue to report gross losses and net losses for the foreseeable future. We are evaluating and taking a number of near-term actions to achieve a gross profit and work towards profitability, and expect that as the Company matures, we will obtain expertise, economies of scale and efficiency that should increase revenue and reduce costs over the medium to long-term. However, there can be no assurances that these actions will prove to be effective. If we fail to increase our revenue and/or manage our expenses, we may not achieve or sustain profitability in the future.

 

 14 

 

 

The private security industry is undergoing structural changes in technology and services.

 

The private security industry is undergoing structural changes, consolidation, changing customer needs, evolving industry standards and introduction of new products and services. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in such industries. If we do not address these risks successfully, our business will be harmed. Our ability to gain market share depends upon our ability to satisfy customer requirements, enhance existing products and develop and introduce new products. Further, we expect the intensity of competition to increase in the future. Increased competitiveness may result in reductions in the prices of our products and services, lower-than-expected gross margins or loss of market share, any of which would harm our business.

 

The Company is controlled by its officers and early stage investors.

 

The Company’s officers and sole director, in particular, William Santana Li and Stacy Dean Stephens, currently hold approximately 29.73% and 11.47% of the Company’s voting securities, respectively, and at the conclusion of this offering will continue to hold a significant portion of the Company’s voting rights. Current stockholders of Class B Common Stock or holders of stock convertible into Class B Common Stock of the Company, including holders of Series A Preferred Stock, Series B Preferred Stock and Series m-2 Preferred Stock, are entitled to ten votes for each such share held at a regular meeting of stockholders, subject to the provisions of the Delaware General Corporate Law and the relevant provisions of the Company’s amended and restated certificate of incorporation. Current stockholders of Class A Common Stock or holders of stock convertible into Class A Common Stock of the Company are entitled to one vote for each such share held at a regular meeting of stockholders, subject to the provisions of the Delaware General Corporate Law and the relevant provisions of the Company’s amended and restated certificate of incorporation. The Series S Preferred Stock will also have no series-based votes or protections. Therefore, investors in this offering will not have the ability to control the board of directors and will not have significant ability to control any specific vote of stockholders.

 

 15 

 

 

DILUTION

 

Dilution means a reduction in value, control or earnings of the shares the investor owns.

 

Immediate dilution

 

An early-stage company typically sells its shares (or grants options over its shares) to its founders and early employees at a very low cash cost, because they are, in effect, putting their “sweat equity” into the company. When the Company seeks cash investments from outside investors, like you, the new investors typically pay a much larger sum for their shares than the founders or earlier investors, which means that the cash value of your stake is diluted because all the shares are worth the same amount, and you paid more than earlier investors for your shares.

 

The following table presents the Company’s capitalization as of July 11, 2019 and compares the price that new investors are paying for their shares with the effective cash price paid by existing stockholders, assuming full conversion of preferred stock and full vesting and exercise of outstanding stock options, and based on the assumption that the price per share in this offering is $8.00. This method gives investors a better picture of what they will pay for their investment compared to the Company’s insiders.

 

INCLUDING ALL ISSUED (NON-FORFEITED) OPTIONS AND SHARES:

 

    Dates
Issued
  Issued Shares     Potential Shares     Total Issued and
Potential Shares
    Effective
Cash Price
per Share at
Issuance or
Potential
Conversion
 
                             
Common Stock   2013-2015     10,179,000               10,179,000     $ 0.0038 (1)
Series A Preferred Stock   2014-2015     4,200,889               4,200,889       0.8932  
Series A Preferred Stock (issued in exchange for conversion of convertible notes)   2014     4,735,126               4,735,126       0.3317 (2)
Series B Preferred Stock   2015-2016     4,322,005               4,322,005       2.0401  
Series B Preferred Stock (issued in exchange for conversion of convertible notes)   2016     331,578               331,578       1.7340 (2)
Series m Preferred Stock   2017     5,339,215               5,339,215     $ 3.00  
Series m-2 Preferred Stock   2018     1,660,756               1,660,756     $ 3.00  
Series m-3 Preferred Stock   2017-2018    

16,757

      0      

16,757

    $ 3.50  
Series m-4 Preferred Stock   2019    

1,432,786

      0 (3)    

1,432,786

    $ 3.50 (3)
Series S Preferred Stock   2018-2019     469,140               469,140     $ 8.00  
Outstanding Stock Options   Various             7,679,635 (4)     7,679,635     $ 0.99 (5)
Warrants   Various            

2,166,735

(4)    

2,166,735

    $ 3.72 (5)
                                     
Total Common Share Equivalents         32,687,252      

9,846,370

     

42,533,622

         
Investors in this offering, assuming $50 million raised         6,250,000               6,250,000     $ 8.0000  
                                     
Total after inclusion of this offering         38,937,252      

9,846,370

     

48,783,622

         

 

(1)Common shares issued for various prices ranging from $0.001 to $0.16 per share. Weighted average pricing presented.
(2)Convertible notes were converted at a discount to the triggering preferred stock offering. The table presents the effective pricing of the conversion based on the original principal and accrued interest on the note.
(3)1,432,786 shares of Series m-4 Preferred Stock were issued in exchange for 1,432,786 shares of Series m-3 Preferred Stock at a ratio of 1:1 in connection with the investors receiving such stock investing additional capital into the Company pursuant to the terms of the Convertible Note Financing.
(4)Assumes conversion at exercise price of all outstanding warrants and options.
(5)Stock option and warrant pricing is the weighted average exercise price of outstanding options and warrants, respectively.

 

Future dilution

 

Another important way of looking at dilution is the dilution that happens due to future actions by the company. The investor’s stake in a company could be diluted due to the company issuing additional shares. In other words, when the company issues more shares, the percentage of the company that you own will go down, even though the value of the company may go up. You will own a smaller piece of a larger company. This increase in number of shares outstanding could result from a stock offering (such as an initial public offering, another crowdfunding round, a venture capital round, angel investment), employees exercising stock options, or by conversion of certain instruments (e.g., convertible bonds, preferred shares or warrants) into stock.

 

If the company decides to issue more shares, an investor could experience value dilution, with each share being worth less than before, and control dilution, with the total percentage an investor owns being less than before. There may also be earnings dilution, with a reduction in the amount earned per share (though this typically occurs only if the company offers dividends, and most early stage companies are unlikely to offer dividends, preferring to invest any earnings into the company).

 

 16 

 

 

The type of dilution that hurts early-stage investors most occurs when the company sells more shares in a “down round,” meaning at a lower valuation than in earlier offerings. An example of how this might occur is as follows (numbers are for illustrative purposes only):

 

·In June 2014, Jane invests $20,000 for shares that represent 2% of a company valued at $1 million.
·In December, the company is doing very well and sells $5 million in shares to venture capitalists on a valuation (before the new investment) of $10 million. Jane now owns only 1.3% of the company but her stake is worth $200,000.
·In June 2015, the company has run into serious problems and in order to stay afloat it raises $1 million at a valuation of only $2 million post money (the “down round”). Jane now owns only 0.89% of the company and her stake is worth only $17,800.

 

This type of dilution might also happen upon conversion of convertible notes into shares. Typically, the terms of convertible notes issued by early-stage companies provide that in the event of another round of financing, the holders of the convertible notes get to convert their notes into equity at a “discount” to the price paid by the new investors, i.e., they get more shares than the new investors would for the same price. Additionally, convertible notes may have a “price cap” on the conversion price, which effectively acts as a share price ceiling. Either way, the holders of the convertible notes get more shares for their money than new investors. In the event that the financing is a “down round,” the holders of the convertible notes will dilute existing equity holders, and even more than the new investors do, because they get more shares for their money. Investors should pay careful attention to the amount of convertible notes that the company has issued and may issue in the future, and the terms of those notes.

 

If you are making an investment expecting to own a certain percentage of the Company or expecting each share to hold a certain amount of value, it is important to realize how the value of those shares can decrease by actions taken by the Company. Dilution can make drastic changes to the value of each share, ownership percentage, voting control, and earnings per share.

 

 17 

 

 

USE OF PROCEEDS TO ISSUER

 

The net proceeds of a fully subscribed $50,000,000 offering, after estimated total offering expenses and commissions will be approximately $46,000,000. Knightscope plans to use these proceeds as follows:

 

New Machines-in-Network  $15,000,000 
K1 R&D  $1,000,000 
K3 R&D  $1,000,000 
K5 R&D  $1,000,000 
K7 R&D  $2,000,000 
SG&A  $15,000,000 
Expenses & Commissions  $4,000,000 
Financing arrangements payoff  $1,350,000 
General corporate and business purposes  $9,650,000 
TOTAL  $50,000,000 

 

·Approximately $15,000,000 of the proceeds will be used to fund the manufacture of additional K1, K3, and K5 ADMs and related investments in SG&A of $15,000,000 to support the expansion nationwide. The total includes additional expenses related to product development of new versions, technological upgrades, system improvements, infrastructure and production.

 

·Approximately $5,000,000 of the proceeds will be used for research and development (“R&D”), to fund additional product development of new versions of the ADMs, technological upgrades, systems and process improvements.

 

·Approximately $10,000,000 of the proceeds, which represents approximately 20% of the net proceeds, will be used for general corporate and business purposes (“SG&A”), a portion of which may be used to pay employee and executive compensation.

 

·Approximately $4,000,000 of the proceeds will be used to pay general overhead company expenses as well as commissions.

 

·Approximately $1,350,000 of the proceeds will be used as payoff of financing arrangements that were previously entered into with Farnam Street Financial (“Farnam”), to repurchase from Farnam fifty (50) of our ADMs, which were sold to Farnam in February 2019 and are being leased back by the Company in order to service its customers pursuant to the Financing Arrangement.

 

·The remainder of the proceeds will be used for general corporate and business purposes.

 

If the offering size were to be at 75% of our target proceeds, at $37,500,000 in the aggregate, then we estimate that the net proceeds to the Company would be approximately $34,500,000. In such an event, Knightscope would adjust its use of proceeds by limiting the speed of growth, delaying or canceling key initiatives and maintaining a smaller number of employees.

 

If the offering size were to be $25,000,000 in line with our prior Reg A+ offering, then we estimate that the net proceeds to the Company would be approximately $23,000,000. In such an event, Knightscope would adjust its use of proceeds by limiting the speed of growth, delaying or canceling key initiatives and maintaining a smaller number of employees.

 

If the offering size were to be at 25% of our target proceeds, at $12,500,000 in the aggregate, then we estimate that the net proceeds to the Company would be approximately $11,000,000. In such an event, Knightscope would adjust its use of proceeds by limiting the speed of growth, delaying or canceling key initiatives and maintaining a smaller number of employees.

 

Because the offering is a “best efforts” offering without a required minimum offering amount, we may close the offering without sufficient funds for all the intended purposes set out above. There is no arrangement to return funds to subscribers if all of the securities offered are not sold.

 

The Company reserves the right to change the above use of proceeds without notice if management believes it is in the best interests of the Company. 

 

 18 

 

   

THE COMPANY’S BUSINESS

 

Overview

 

Knightscope, Inc. was founded in Mountain View, California in April 2013 and has since developed revolutionary Autonomous Data Machines (“ADMs”) with real-time on-site data collection and analysis and an interface, primarily through funding from both strategic and private investors. Knightscope currently offers three products: (1) the K5 ADM (“K5”) for outdoor usage, (2) the K3 ADM (“K3”) for indoor usage, and (3) the K1 ADM (“K1”) for stationary usage indoors or outdoors. The Company also provides access to the Knightscope Security Operations Center (“KSOC”) to all of its customers, a browser-based interface that allows customers real time data access. The Company works continuously to improve and upgrade the ADMs and KSOC, and their precise specifications may change over time.

 

The first version of the Company’s flagship K5 was completed in December 2013 and the first version of the K3 was completed in June 2016. The Company began producing the first K1 units during March 2018. The initial proof-of-concept for Knightscope’s products and services occurred in May 2015 and we received our first paid order in June 2015. Currently, the Company operates on a Machine-as-a-Service (“MaaS”) business model. Since June 2016, we have recognized recurring monthly revenues averaging between $4,200-$8,400 per ADM per month, which includes the ADM rental as well as setup, configuration, maintenance, service, support, data transfer, KSOC access, charging system and unlimited software, firmware and select hardware upgrades when and if available. We charge additional fees for special decals or other markings on the ADMs as well as cellular costs in certain locations.

 

Our current primary focus is on the deployment and marketing of our core technologies. We are also working on the development and eventual production of the K7 ADM (“K7”) for multi-terrain outdoor usage, which will be built on a four-wheel architecture and have the capability to operate in more difficult environments. We continue to generate customer orders and our production of machines is currently conducted out of our primary corporate headquarters located in Mountain View, California.

 

ADMs

 

The K3 and K5 are designed to roam a geo-fenced area autonomously by utilizing numerous sensors and lasers, either on a random basis or based on a particular patrolling algorithm. They can successfully navigate around people, vehicles and objects in dynamic indoor or outdoor environments. To do this, the ADMs employ a number of autonomous motion and self-driving technologies, including lasers, ultrasonic sensors, inertial measurement unit (“IMU”), and wheel encoders as well as a robust navigation technology stack. Each ADM can generate 1 to 2 terabytes of data per week and over 90 terabytes of data per year, which is accessible for review and analysis via the KSOC. Customers can recall, review, and save the data for analysis, forensic or archival purposes. Each ADM is able to autonomously charge and recharge on a 24-hour basis, 7 days per week without human intervention. Customers may also utilize the patrol scheduler feature on the KSOC to schedule periodic or regular patrols during certain times for alternative patrol routes.

 

The dimensions of the K5 are as follows:

 

·Height: 5 feet
·Width: 3 feet
·Weight: 398 pounds

 

The K5 is designed to be used primarily outdoors in such environments as open air malls, corporate campuses, hospitals, stadiums, retailers, warehouses, logistics facilities, college campuses, airports, train stations and multi-level parking structures. The K5’s advanced anomaly detection features include:

 

·360 degree high definition night and day video capture positioned at eye-level;
·Live streaming and recorded high definition video capabilities;
·Automatic license plate recognition;
·Parking space utilization feature, which provides information regarding use and utilization of parking spaces in any given parking structure;

 

 19 

 

 

·Parking meter feature, which assesses the top 10 vehicles and their “dwell time” in a particular location. If a vehicle is parked for more than 24 hours in the same location, a user can receive an alert or have the data flagged. The parking meter feature can also track the top 10 stationary vehicles in an area and accurate parking meter readout for each such vehicle;
·People detection, which can alert a user in real-time of people detected on their premises, together with 360-degree recorded high-definition video. A user can use the time-stamp of the recording to search through other data detected to assess and better understand other conditions in the area patrolled by the ADM;
·Thermal imaging, which allows for triggered alerts based on temperature. For example, assisting with alerts regarding increased risks of fires;
·Two-way communication feature may be utilized for both public announcements and avoidance of human physical confrontations with dangerous individuals;
·Signal detection can be utilized as a rogue router detector for sensitive locations such as a data center.

 

The dimensions of the K3 are as follows:

 

·Height: 4 feet
·Width: 2 feet
·Weight: 340 pounds

 

The K3 is tailored for indoor usage, allowing it to autonomously navigate complex dynamic indoor environments such as an indoor mall, office building, manufacturing facility, stadium plaza, warehouse or school. It has the same suite of advanced anomaly detection capabilities, but the parking utilization, parking meter and license plate recognition features are turned off.

 

The ADMs include several communications features. The units can transfer data over both 4G LTE networks and Wi-Fi. Each one has an available intercom that may be used for two-way communication with security. In addition, one or multiple units may be used as a live broadcast public address system or to deliver pre-recorded messages.

 

The ADMs run on rechargeable batteries. They are configured to patrol autonomously for approximately two to three hours, following which, without human intervention, the ADMs find and dock to a charging station, recharging for approximately 20 minutes before resuming patrol. The ADMs remain operational during the charging period, providing 24/7 uptime to customers.

 

The K1 carries all of the relevant features from the K3 and K5 but in a stationary format. It can be used indoors or outdoors and especially at ingress/egress points for both people and vehicles.

 

The dimensions of the K1 are as follows:

 

·Height: 5.75 feet
·Width: 2.7 feet
·Weight: 150 pounds

 

KSOC

 

The KSOC is our intuitive, browser-based interface that, coupled with ADMs, provides security professionals with “smart mobile eyes and ears.” Once alerted of an abnormal event, such as a person spotted during a specific time in a particular location, authorized users can view the live stream of data in the KSOC from each of the ADMs in the user’s network, accessing it from a security operations center or a remote laptop.

 

 20 

 

 

Products in Development

 

The Company is in the process of developing the K7 multi-terrain ADM. The Company unveiled the concept prototype of the K7 ADM at the ASIS International conference in Las Vegas in September 2017. The K7 is expected to have the same features as the K5, but to employ four wheels for use on more rugged outdoor terrain such as dirt, sand, and gravel. We expect that the K7 could be utilized at airfields, power utilities, borders, solar farms, wind farms or oil or gas fields. While this technology builds on a great deal of our technology stack, we anticipate that its development will require additional time before it can be launched into full-scale production.

 

We are also using existing working capital in part to finance the development of these new ADMs, capabilities and features.

 

Our current strategy is to focus on the United States for the foreseeable future before considering global expansion.

 

KNOC

 

The Company has built a custom set of tools that enables it to manage and monitor the network of ADMs operating in the field nationwide, which it refers to as the Knightscope Network Operations Center (“KNOC”). These tools allow our team to monitor the health of the ADMs down to the millisecond, with dozens of alerts related to critical indicators and statistics, including charging, software, navigation and temperatures. We also use the KNOC to execute over-the-air software upgrades, patches and other related items. The KNOC is staffed 24/7 by the Company.

 

Market and Business Model

 

Knightscope’s products are designed to supplement the work of security professionals and are suitable for most environments that require security patrol coverage. In the United States there are more than 8,000 private security firms and nearly 18,000 law enforcement agencies – a fragmented marketplace that we believe offers numerous opportunities for disruption.

 

We have used a large portion of our working capital to scale our production of ADMs to enable us to sell our MaaS offering to more customers in California and nationwide. With the nationwide expansion in mind, we have partnered with one of our strategic investors, Konica Minolta, Inc., to train their technicians, which number over 2,000 across the United States, to service, maintain and support our machines-in-network and assist us with our nationwide scaling efforts.

 

Knightscope operates on a Machine-as-a-Service business model. We enter into contracts with typical duration of one year that generate annual revenues in amounts approximately between $4,200 and $8,400 per ADM depending on the ADM model and/or selected offering package. We believe that this price range is a better economic proposition for our customers relative to a human guard or a mobile vehicle patrol unit operating 24/7.

 

In order to obtain capital to finance our operations, in February 2019 we entered into a financing arrangement with Farnam Street Financial (“Farnam”) for $3,000,000 (“Financing Arrangement”). Under this Financing Arrangement, we collateralized fifty (50) ADMs and have an initial repayment period of two years for a monthly fee of $121,129 per month plus tax and an option to purchase these ADMs back for $1,350,000 plus tax or, at the end of the two year period (ending in March 2021) we can elect to extend the repayment period for additional year at a monthly fee of $66,621 per month plus tax with an final payment of $600,000 plus tax at the end of the additional year. The effective interest rate under the two and or three-year repayment periods is 35% and 31%, respectively.

 

We market our products at trade shows, including GSX, ISC West, ISC East as well as Company-sponsored private events and on-site private demonstrations. We regularly advertise in the media through various online and offline channels.

 

 21 

 

 

Competition

 

At the moment, we are not aware of any direct competitors in the advanced physical security technology space that have viable commercial products in the field at the same scale as Knightscope with actual paying customers. It is a common misconception among some people outside of the security industry that we compete against closed-circuit television (CCTV) providers. They are not in fact competitive products because cameras do not provide a physical presence, are typically used for forensics after an event, and do not offer a client the plethora of capabilities available in an ADM/KSOC combination. We believe that having these two types of systems working together provides a more holistic approach to reducing crime. While traditional human guards provide a closer comparator or competitor in some cases, we believe that utilizing our “Software+Hardware+Humans” approach is much more effective.

 

We are aware of a self-funded start-up, SMP Robotics Services Corp. (“SMP”), which produces an outdoor autonomous security platform that it markets through third-party distributors. We had previously listed Gamma 2 Robotics and SHARP Electronics as potential competitors in this space. However, according to industry sources, we understand that both Gamma 2 Robotics and SHARP Electronics have ceased operations in the security robot space after failed attempts to enter the market and SMP also ceased efforts with its North American distributor. Cobalt Robotics, an early stage company, announced in early 2017 that it had released an autonomous mobile robot designed for indoor security applications at nighttime only on a trial pilot and in March 2018 that it completed its Series A financing.

 

We compete indirectly with private physical security firms that provide customers with security personnel and other security services. There are more than 8,000 such firms in the United States alone. Our ADMs offer customers a significant cost reduction relative to the cost of human security guards. In addition, ADMs offer significantly more capabilities, such as license plate detection, data gathering, thermal imaging and people detection that are delivered consistently, on a 24-hour, 7 day per week basis, without regular human intervention. In certain cases, our technology complements and improves the operations of traditional security firms.

 

Manufacturing and Suppliers

 

Knightscope assembles its ADMs at its Mountain View, California headquarters from components manufactured by more than 20 suppliers. The Company’s top three suppliers, measured by spending, are Minarik Automation & Control (a division of Kaman Corporation), based in Indiana, Velodyne LiDAR and EandM, which are both based in California. The Company is not highly dependent on any one supplier and believes it can easily source components from other suppliers and has done so when necessary. The manufacturing lead-time for two-thirds of the Company’s components is 30 - 60 days or less, with the remainder requiring up to 90 days.

 

Research and Development

 

For the years ended December 31, 2018 and 2017, we incurred $3,542,432 and $1,891,867 for research and development expenses, respectively. We expect to continue to incur similar levels of expenditures on research and development. Our research and development efforts focus primarily on the development of robust base technology as well as scaling efforts. In addition, we will continue to enhance our ADMs’ capabilities and to develop a four-wheel version of our ADM technology, the K7, which is intended to operate in a wider range of challenging terrains.

 

Employees

 

As of July 11, 2019, we had 32 full-time employees working primarily out of our combined headquarters and production facility in Mountain View, California.

 

 22 

 

 

Intellectual Property

 

The Company holds four patents covering its ADMs (“Autonomous Data Machines and Systems” U.S. Patent Nos. 9,329,597 and 9,910,436), the security data analysis and display features of the KSOC (U.S. Patent No. 9,792,434) and its parking monitor feature (U.S. Patent No. 9,773,413). We have also filed one provisional patent, covering the ADMs’ behavioral autonomous technology. The Company has trademarked its name “Knightscope” in the U.S. The Company relies and expects to continue to rely on a combination of confidentiality agreements with its employees, consultants, and third parties with whom it has relationships, as well as trademark, copyright, patent, trade secret, and domain name protection laws, to protect its proprietary rights.

 

Litigation

 

The Company is not involved in any litigation, and its management is not aware of any pending or threatened legal actions relating to its intellectual property, conduct of business activities or otherwise. From time to time, we may be involved in pending or threatened claims relating to contract disputes, employment, intellectual property and other matters that arise in the normal course of our business, which we do not deem to be material to the business.

 

THE COMPANY’S PROPERTY

 

Knightscope currently leases its premises and owns no significant plant or equipment. The Company’s nearly 15,000 square foot facility in Mountain View, California serves as its headquarters, where it designs, engineers, tests, manufactures and supports all of its technologies. The Company wholly owns its ADMs, with the exception of fifty (50) ADMs that were sold pursuant to the Farnam Financing Arrangement, and typically builds in batches based on client demand refraining where possible in stocking inventory or finished products.

 

 23 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes included elsewhere in this Offering Statement. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ significantly from those discussed in the forward-looking statements. Unless otherwise indicated, the latest results discussed below are as of December 31, 2018.

 

Overview and Operations

 

We are a technology company located in Silicon Valley that develops, builds and deploys advanced physical security technology utilizing autonomous robots, analytics and a user interface for patrolling both indoor and outdoor environments. Knightscope, Inc. was founded in Mountain View, California in April 2013 and has since developed the revolutionary Knightscope K5, K3 and K1 ADMs primarily through funding from both strategic and private investors. The first version of the Company’s flagship K5 was completed in December 2013 and the first version of the K3 was completed in June 2016. The Company began producing the first K1 units during March 2018. Currently, the Company operates on a Machine-as-a-Service business model. Since June 2016, we have recognized recurring monthly revenues around $6,000 per ADM per month, which includes the ADM rental as well as setup, configuration, maintenance, service, support, data transfer, KSOC access, charging station and unlimited software, firmware and select hardware upgrades, when and if available. We charge additional fees for decals or other markings on the ADMs as well as cellular costs in certain locations. Since February 2019, we have been incurring additional monthly costs relating to financing arrangement lease of our ADMs from Farnam.

 

Our ADMs are fully autonomous, including autonomous recharging. There is minimal to no downtime during recharging, as the ADMs are still operational while charging – and charging stations are typically located in a prominent location that would be suitable as an observation point or an ingress/egress point.

 

Our current primary focus is on the deployment and marketing of our core technologies. We are also working on the development and eventual production of the K7 ADM, which will be built on a four-wheel architecture and have the capability to operate in more difficult terrain. We continue to generate customer orders on K1, K3 and K5 ADMs and our production is expected to continue out of our primary corporate headquarters.

 

Components of Results of Operations

 

Revenue

 

Our revenues for the years presented, consisted of Machine-as-a-Service subscriptions and other revenues. We provide our subscriptions to our customers pursuant to contractual arrangements that range in duration, with typical duration of one year. We offer our subscriptions based on the functionalities and services selected by a client, and generally our subscription arrangements automatically renew for additional periods at the end of the initial subscription term.

 

We typically bill our Machine-as-a-Service subscription fees on a monthly basis or annually in advance. We recognize MaaS subscription revenue over the term of the agreement. Amounts billed in excess of revenue recognized for the period are reported as deferred revenue on our balance sheet.

 

“Other revenues” includes revenues from special decals, training and professional services. Revenue is recognized when products/services have been delivered to the customer.

 

 24 

 

 

Cost of Services

 

For the year 2018, our cost of machine as a services subscriptions revenue primarily consisted of routine maintenance, depreciation, third party software licensing costs, deployment related costs, ADM communications costs, data storage costs, facilities allocations, plus direct compensation and benefits. Since February 2019, we have been incurring additional monthly costs relating to the financing arrangement of our ADMs from Farnam.

 

Operating Expenses

 

We classify our operating expenses as research and development, sales and marketing, and general and administrative expenses.

 

Our research and development efforts are focused on developing new and expanded features for our products and improvements to our backend architecture. Research and development expenses consist primarily of personnel costs for employees and contractors, including share-based compensation expenses, and allocated costs of facilities and information technology and software tools. We expense research and development costs as incurred. We believe that continued investment in our products is important for our future growth, and we expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future, although these expenses may fluctuate as a percentage of our total revenues from period to period depending on the timing of these expenses.

 

Sales and marketing expenses are the largest component of our operating expenses and consist primarily of personnel costs for employees and contractors directly associated with our sales and marketing activities including share-based compensation expenses, advertising expenses, public relations, trade shows, travel expenses, marketing and promotional activities, and allocated costs of facilities and information technology. We expect our sales and marketing expenses to continue to increase in absolute dollars for the foreseeable future as we expand our sales and marketing efforts and continue to build our brand, although these expenses may fluctuate as a percentage of our total revenues from period to period depending on the timing of these expenses.

 

General and administrative expenses consist primarily of personnel costs, including share-based compensation expenses, for employees engaged in infrastructure and administrative activities to support the day-to-day operations of our business. Other significant components of general and administrative expenses include professional service fees, allocated costs of facilities and information technology, and the costs of legal matters. We expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future, although these expenses may fluctuate as a percentage of our total revenues from period to period, depending on the timing of these expenses.

 

 25 

 

 

Results of Operations

 

The following tables set forth selected statements of operations data and such data as a percentage of total revenues. The historical results presented below are not necessarily indicative of the results that may be expected for any future period:

 

   Year ended December 31, 
   2018   2017 
Revenue  $2,938,634   $1,572,009 
Cost of services   6,248,813    4,638,380 
Total gross loss   (3,310,179)   (3,066,371)
           
Operating expenses:          
Research & development   3,542,432    1,891,867 
Sales & marketing   5,074,469    5,476,806 
General & administrative   2,444,114    1,779,307 
Total operating expenses   11,061,015    9,147,980 
           
Loss from operations   (14,371,194)   (12,214,351)
           
Other income (expense):          
Interest expense, net   (188,344)   (184,383)
Change in fair value of warrant liabilities   1,170,511    - 
Other income, net   -    (2,084)
Total other income (expense)   982,167    (186,467)
           
Net loss before income tax   (13,389,027)   (12,400,818)
Income tax expense   (800)   (800)
Net loss  $(13,389,827)  $(12,401,618)

 

Percentages of Revenue

 

   Year ended December 31, 
   2018   2017 
Revenue   100%   100%
Cost of services   (213)   (295)
Total gross loss   (113)   (195)
           
Operating expenses:          
Research & development   121    120 
Sales & marketing   172    349 
General & administrative   83    113 
Total operating expenses   376    582 
           
Loss from operations   (489)   (777)
           
Other income (expense):          
Interest expense, net   (6)   (12)
Change in fair value of warrant liabilities   39    - 
Other income, net   -    - 
Total other income (expense)   33    (12)
           
Net loss before income tax   (456)   (789)
Income tax expense   -    - 
Net loss   (456)%   (789)%

 

 26 

 

 

Revenue

 

Revenue increased by $1.3 million from $1.6 million for the year ended December 31, 2017 to $2.9 million for the year ended December 31, 2018, or by 87%. The increase in revenue was due primarily to an increase in the number of customers the Company had in 2018 when compared to 2017 and an increase in the number of ADMs in network resulting from new customers as well as existing customers increasing the number of ADMs they employed under contract. As of December 31, 2018, we had 23 customers and 52 machines-in-network. This compares to 21 customers and 36 machines-in-network at December 31, 2017.

 

Cost of Services

 

Cost of services for the year ended December 31, 2018 was $6.2 million, compared to $4.6 million for the year ended December 31, 2017, an increase of 35%. The increase in cost of services is primarily related to the increase in the number of machines-in-network.

 

Gross Profit (Loss)

 

The revenue and cost of services described above resulted in a gross loss for the year ended December 31, 2018 of $3.3 million compared to $3.1 million for the year ended December 31, 2017.

 

As the business scales and becomes more streamlined, management expects the gross profit loss to decrease. We are focusing our resources on growing the business to be able to generate both a gross profit and overall net income. We are continually evaluating and taking a number of near-term actions to facilitate this result, and expect that as the Company matures, we will obtain expertise, economies of scale and efficiency that should increase revenue and reduce costs over the medium to long-term.

 

For example, we continue to refine our pricing strategy for 2019 which is expected to increase and enhance our revenue streams. We are also updating our data architecture strategy to minimize connectivity and data usage through cellular carriers, creating new tools for more efficient use of cellular data during the deployment setup phase, changing the option pricing for cellular connectivity and revisiting contracts with our cellular providers. In addition, our ADM materials sourcing, production, assembly and manufacturing is expected to become more efficient and the costs associated with these processes reduced as we grow and are thus able to negotiate better volume-based pricing terms with suppliers in connection with making these ADMs. We are also focused on controlling general overhead costs, such as expenditures for real estate leases and optimizing team composition and size. We believe that with the building of new internal tools, the Company will be much more efficient in deployment timing and resources, and alleviating the need for a dramatic increase in headcount. Additionally, new service cost reduction initiatives have been underway to further reduce our ongoing operating costs. Our overall strategy is to keep our fixed costs as low as possible while achieving our overall growth objectives.

 

Research and Development

 

   Year ended December 31,         
   2018   2017   $ Change   % Change 
Research and development  $3,542,432   $1,891,867   $1,650,565    87%
Percentage of total revenue   121%   120%          

 

Research and development expenses increased by $1.6 million, or 87% for the year ended December 31, 2018 as compared to the respective period of the prior year. The increase is due to the investment in time and resources we made into the ongoing enhancement of the design, functionality, and efficiency of our technology as well as scaling efforts. We expect research and development expenses to continue to increase in absolute dollars as we continue to invest in such developments.

 

 27 

 

 

Sales and Marketing

   Year ended December 31,         
   2018   2017   $ Change   % Change 
Sales and marketing  $5,074,469   $5,476,806   $(402,337)   (7)%
Percentage of total revenue   173%   348%          

 

Sales and marketing expenses decreased by $0.4 million, or 7% for the year ended December 31, 2018 as compared to the respective period of the prior year. The decrease was primarily due to lower marketing expenditures relating to the Regulation D Offering in the year ended December 31, 2018 compared to the Regulation A Offering in the year ended December 31, 2017. We expect sales and marketing expenses to generally increase in absolute dollars as we continue to expand our market presence.

 

General and Administrative

   Year ended December 31,         
   2018   2017   $ Change   % Change 
General and administrative  $2,444,114   $1,779,307   $664,807    37%
Percentage of total revenue   83%   113%          

 

General and administrative expenses increased by $0.7 million, or 37% for the year ended December 31, 2018 as compared to the respective period of the prior year. The increase was primarily driven by additional accounting and audit fees that we incurred surrounding our ongoing financial reporting requirements. We anticipate that our general and administrative expenses will continue to increase as we continue to grow, expand, and invest in our management team and the ongoing implementation of internal controls over financial reporting and general corporate and legal compliance.

 

Other Income/(Expense), Net

   Year ended December 31         
   2018   2017   $ Change   % Change 
Interest expense, net  $(188,344)  $(184,383)  $(3,961)   2%
Change in fair value of warrant liabilities   1,170,511    -    1,170,511      
Other income, net   -    (2,084)   2,084      
Total other income (expense)  $982,167   $(186,467)  $1,168,634    627%

 

Total other income (expense) increased by $1.2 million, or 627% for the year ended December 31, 2018 as compared to the respective period of the prior year. The increase is primarily due to the interest income recorded from revaluation of warrants accounted for as marked-to-market.

 

Liquidity and Capital Resources

 

As of December 31, 2018, and December 31, 2017, we had $1.4 million and $11.6 million, respectively, of cash and cash equivalents. As of December 31, 2018, the Company also had an accumulated deficit of approximately $36.9 million, working capital of $0.7 million and stockholders’ deficit of $34.9 million. These factors raise substantial doubt regarding our ability to continue as a going concern. We have financed our operations through a combination of debt financing and ongoing rolling close equity investment, including the Regulation A Offering and private placements of Series m-3 and Series m-2 Preferred Stock and ongoing private placement of Series S Preferred Stock, as well as Farnam financing against a number of our ADMs. We expect to continue generating losses from operations in 2019 and additional fundraising will be required to fund our ongoing operations. As of May 8, 2019, the Company had cash on hand of approximately $0.8 million. The Company has projected operating losses and negative cash flows of approximately $1 million per month for the next several months. Without additional fundraising, typically and historically conducted on a rolling close basis, the Company will not be solvent after May 2019. There can be no assurance that the Company will be successful in acquiring additional funding at levels sufficient to fund its future operations beyond this period. 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 a result of our recurring losses from operations, negative cash flows from operating activities and the need to raise additional capital, our independent auditor included an emphasis of matter paragraph expressing substantial doubt about the Company’s ability to continue as a going concern in its report on our audited financial statements for the year ended December 31, 2018.

 

 28 

 

 

Cash Flow

 

The table below, for the periods indicated, provides selected cash flow information:

 

   Year ended December 31, 
   2018   2017 
Net cash used in operating activities  $(13,168,113)  $(10,719,567)
Net cash used in investing activities   (1,222,041)   (2,006,967)
Net cash provided by financing activities   4,384,695    21,542,746 
Net (decrease) increase in cash and cash equivalents  $(10,005,459)  $8,816,212 

 

Net Cash Used in Operating Activities

 

Cash provided by operating activities is influenced by the amount of cash we invest in personnel, marketing, and infrastructure to support the anticipated growth of our business, the number of customers to whom we leas our ADMs, the amount and timing of accounts receivable collections, as well as the amount and timing of disbursements to our vendors.

 

Net cash used in operating activities was approximately $13.2 million for the year ended December 31, 2018. Net cash used in operating activities resulted from net loss of $13.4 million and offset by changes in working capital.

 

Net cash used in operating activities for the year ended December 31, 2018 increased by $2.4 million as compared to the prior year. The increase was primarily as a result of an increase in net loss of $1.0 million, a change in fair value of issued warrants of $1.2 million, changes in working capital of $0.5 million partially offset by an increase in depreciation and amortization of $0.2 million and stock-based compensation expenses of $0.2 million.

 

Net Cash Used in Investing Activities

 

Our primary investing activities have consisted of capital expenditures and investment in ADMs. As our business grows, we expect our capital expenditures to continue to increase.

 

Net cash used in investing activities for the year ended December 31, 2018 was approximately $1.2 million compared to $2.0 million in the respective period last year, or $0.8 million lower. The decrease can be attributed primarily to decreased number of ADMs to adjust production demands.

 

Net Cash Provided by Financing Activities

 

Our financing activities have consisted primarily of raising proceeds through issuing stock, net of repayment of debt.

 

Net cash provided by financing activities was approximately $4.4 million for the year ended December 31, 2018, primarily driven by $5.0 million in proceeds from issuance of stock and $0.4 million in proceeds from issuance of loan payable that was partially offset by loan repayment of $1.1 million.

 

Net cash provided by financing activities for the year ended December 31, 2018 decreased by $17.2 million as compared to the respective period of the prior year primarily due to lower proceeds realized from the issuance of stock.

 

In fiscal year 2019, as of the date of the filing of this Offering Circular, we have raised approximately $2.3 million through financing activities.

 

 29 

 

 

Series S Preferred Regulation D Offering

 

On July 11, 2018, the Company commenced an offering of up to $50 million of its Series S Preferred Stock pursuant to Regulation D and Regulation S to raise additional capital for operations (the “Regulation D Offering”). We are offering to sell up to 6,250,000 shares of Series S Preferred Stock, which are convertible into shares of Class A Common Stock, at a price of $8.00 per share. Consistent with prior financings by the Company, the Regulation D Offering has been conducted with rolling closes, and such closes may continue for another 6 to 15 months. As of December 31, 2018, the Company received net proceeds of approximately $2.6 million through the Regulation D Offering.

 

Regulation A Offering; Issuance of Series m Preferred Stock and Series m-3 Preferred Stock and Related Warrants; Issuance of Series m, m-2, and m-3 Preferred Stock; Conversion of Certain Series m Preferred Stock into Series m-2 Preferred Stock and Related Warrants

 

On January 10, 2017, the Company commenced an offering of up to $20 million of its Series m Preferred Stock pursuant to Regulation A of the Securities Act of 1933, as amended (the “Securities Act”), to raise additional capital for operations (the “Regulation A Offering”). We offered to sell up to 6,666,666 shares of Series m Preferred Stock, convertible into shares of Class A Common Stock, at a price of $3.00 per share. We concluded all sales of stock pursuant to the Regulation A Offering in the fourth quarter of 2017. The net proceeds of the sales of our Series m Preferred Stock through the Regulation A Offering as well as through private placement transactions conducted around the same period, after deduction of total offering expenses and commissions, was $18,172,666. Following the termination of the Regulation A Offering, the Company raised additional funds in private placements pursuant to Regulation D under the Securities Act (“Regulation D”) and Regulation S under the Securities Act (“Regulation S”) through the issuance of its Series m-3 Preferred Stock and warrants to purchase Series m-3 Preferred Stock, which generated net proceeds of $1,438,402 or $3.50 per share during the year ended December 31, 2018. In January and February 2018, the Company converted 1,327,423 shares of Series m Preferred Stock into shares of Series m-2 Preferred Stock at a 1:1 conversion ratio. The Company sold shares of its Series m-2 Preferred Stock for $3.00 per share in a private placement pursuant to Regulation D during the year ended December 31, 2018 for net proceeds of $999,999 after deduction of total offering expenses.

 

In connection with the term loan received in May 2018, the Company issued a warrant to purchase an aggregate of 77,413 shares of Class B Common Stock. The warrants have an exercise price of $1.26 per share and expire on the earlier of ten years from the date of the warrant or a change of control of the Company.

 

As part of its compensation arrangement with SI Securities, LLC, which was the sole and exclusive placement agent for the Regulation A Offering in October 2017, the Company issued a warrant to SI Securities, LLC, to purchase up to a total 266,961 shares of Series m-1 Preferred Stock at an exercise price of $3.00 per share. In connection with the placement of the Series m-3 Preferred Stock in 2017, the Company issued to the purchasers warrants for an aggregate of 1,038,571 shares of Series m-3 Preferred Stock. The warrants have an exercise price of $4 per share. In connection with the exchange of the Company’s Series m-3 Preferred Stock into Series m-4 Preferred Stock, the term of these warrants was extended such that the warrants would expire on the earlier of December 31, 2021 or 18 months after the closing of the Company’s first firm commitment underwritten initial public offering of the Company’s common stock pursuant to a registration statement filed under the Securities Act.

 

Convertible Promissory Notes and Series S Preferred Stock Warrants, and the Related Conversion of Certain Series m-3 Preferred Stock into Series m-4 Preferred Stock

 

On April 30, 2019 the Company signed a Note and Warrant Purchase Agreement under the form of which the Company can issue up to $15,000,000 of convertible promissory notes and warrants to purchase up to 3,000,000 shares of Series S Preferred Stock (20% warrant coverage) (the “Convertible Note Financing”). Pursuant to the terms of the Convertible Note Financing, the Company was obligated to exchange its outstanding shares of Series m-3 Preferred Stock for the newly authorized shares of Series m-4 Preferred stock upon the closing of at least $1,000,000 in aggregate principal amount of convertible promissory notes under the Convertible Note Financing. Warrants to purchase shares of Series S Preferred Stock of the Company were also issued to investors who invested in the Convertible Note Financing. The warrants to purchase shares of Series S Preferred Stock have an exercise price of $4.50 per share and expire on the earlier of December 31, 2021 or 18 months after the closing of the Company’s first firm commitment underwritten initial public offering of the Company’s common stock pursuant to a registration statement filed under the Securities Act. The convertible promissory notes have a maturity date of January 1, 2022, provide for payment in kind (PIK) interest at a rate of 12% per annum, are generally the most senior company security (subject to limited subordination carve-outs) and provide for significant discounts upon a qualified financing or an initial public offering, and for a premium upon a change of control. As of July 11, 2019, the Company has issued convertible notes in the aggregate principal amount of $1,372,000 and warrants to purchase up to 274,400 shares of Series S Preferred Stock.

 

Pursuant to the terms of the Convertible Note Financing, the Company became obligated to exchange certain of its outstanding shares of Series m-3 Preferred Stock for the newly authorized shares of Series m-4 Preferred Stock. On June 10, 2019, the Company issued 1,432,786 shares of its Series m-4 Preferred Stock in exchange for 1,432,786 shares of its shares of Series m-3 Preferred Stock. The Series m-4 Preferred Stock has a senior liquidation preference to all other Preferred Stock and Common Stock of the Company, has an accruing payment in kind (PIK) dividend of 12%, and has certain other preferential rights, including voting rights, as further explained in the Company’s amended and restated certificate of incorporation.

 

In connection with the Convertible Note Financing, William Santana Li, the Chief Executive Officer and sole director of the Company, was granted a voting proxy to vote substantially all of the shares of the Company’s Series m-4 Preferred Stock, and the stock issued upon the conversion of warrants to purchase all of the shares of the Company’s Series m-3 Preferred stock and upon the conversion of warrants to purchase shares of the Company’s Series S Preferred stock, and the stock issuable upon conversion of the convertible promissory notes issued as part of the Convertible Note Financing, in each case to the extent that such shares are held by participants in the Convertible Note Financing (the “Voting Proxy”). The votes held by Mr. Li as a result of the conversion of outstanding convertible securities subject to the Voting Proxy cannot be determined as of the date of this offering circular, but the outstanding securities to which the Voting Proxy applies represents approximately 2.96% of the Company’s aggregate voting power.

 

The Series S Preferred Stock has a right to convert at any time into Class A Common Stock. The initial conversion rate for the conversion is 1:1, which conversion rate will continue to be adjusted pursuant to the broad-based weighted average anti-dilution adjustment provisions provided for in the Company’s certificate of incorporation, including without limitation as a result of the issuance of warrants to purchase Series S Preferred Stock in connection with the Convertible Note Financing referenced in the paragraph above, which may continue to have closings simultaneously with this Offering. It is expected that the conversion ratio will begin to be adjusted to a number greater than 1 to 1 at the time that warrants to purchase an aggregate of at least 1,712,735 shares of Series S preferred Stock are issued in connection with the Convertible Note Financing (assuming no other changes to the capitalization table of the Company as of June 17, 2019).

 

 30 

 

 

In connection with the placement of the Series m-3 Preferred Stock during the year ended December 31, 2018, the Company issued to the purchasers warrants to purchase an aggregate of 410,972 shares of Series m-3 Preferred Stock. The warrants have an exercise price of $4.00 per share. In connection with the exchange of the Company’s Series m-3 Preferred Stock into Series m-4 Preferred Stock, the term of these warrants were extended such that the warrants would expire on the earlier of December 31, 2021 or 18 months after the closing of the Company’s first firm commitment underwritten initial public offering of the Company’s common stock pursuant to a registration statement filed under the Securities Act.

 

The proceeds of the Regulation A Offering and private placements of the convertible promissory notes, Series m-3 Preferred Stock, Series m-2 Preferred Stock and Series S Preferred Stock have been used to expand our sales nationwide, to further develop our current technology, and to develop a four-wheel version of our ADM technology, the K7, which is intended to operate in a wider range of challenging terrains. The proceeds of the Convertible Note Financings have been used to maintain the daily operations of the business of the Company as the Company continues its fundraising efforts through the sale of Series S Preferred Stock.

  

Credit Facilities

 

In November 2016, the Company entered into a Loan and Security Agreement with Structural Capital Investments II, LP providing for a term loan in the principal amount of $1,100,000. The loan facility had an interest rate of prime +8.5% and was scheduled to mature 3 years after closing. It was secured by all of the Company’s assets other than its intellectual property. We used proceeds of the term loan to finance the production of our ADMs in order to meet client order demands. The loan was fully repaid in May 2018.

 

Additionally, in November 2016, the Company granted each of Structural Capital Investments II, LP and Structural Capital Investments II-C, LP a warrant to purchase an aggregate of 53,918 Series B Preferred Stock shares. The warrants have an exercise price of $2.0401 per share and expire upon the later of November 7, 2026 or two years following the Company’s initial public offering.

 

In May 2018, the Company entered into a Loan and Security Agreement with Silicon Valley Bank, which allowed for individual term loans to be drawn in amounts totaling up to $3,500,000 (the “SVB Loan Facility”). The Company was permitted to draw funds under the SVB Loan Facility until the earlier of January 10, 2019 or an event of default. Each individual term loan called for 18 equal monthly payments of principal plus accrued interest which would fully amortize the term loan. Outstanding borrowings under the term loan agreement would bear interest at a floating rate of 1.75% above the prime rate as published in the Wall Street Journal. Only one individual term loan in the amount of $425,000 was drawn by the Company in May 2018. The individual term loan was set to mature in October 2019 and as of December 31, 2018, $250,000 in principal remained outstanding on the loan. The maturity date of the SVB Loan Facility was July 1, 2020. The loan was secured by all of the Company’s assets other than its intellectual property. The SVB Loan Facility contained representations, warranties and covenants customary to similar credit facilities. As of December 31, 2018, we have complied with this and all other affirmative and negative covenants in the SVB Loan Facility. In connection with the SVB Loan Facility, the Company granted Silicon Valley Bank a warrant to purchase up to 77,413 shares of the Company’s Class B Common Stock at an exercise price of $1.26 per share and expire on the earlier of ten years from the date of the warrant or a change of control of the Company.

 

 31 

 

 

The SVB Loan Facility was fully repaid in February 2019 in connection with a new $3 million dollars received from Farnam Street Financial (“Farnam”). Under this Financing Arrangement, the Company collateralized fifty (50) ADMs, which have an initial repayment period of two years for a monthly fee of $121,129 per month plus tax and an option to purchase these ADMs back for $1,350,000 plus tax or, at the end of the two year period (March 2021), the Company can elect to extend the repayment period for additional year at a monthly fee of $66,621 per month plus tax with an final payment of $600,000 plus tax at the end of the additional year. The effective interest rate under the two and or three-year repayment periods is 35% and 31%, respectively.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations is based upon our accompanying financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates, assumptions and judgments that can have significant impact on the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of assets and liabilities at the date of our financial statements. For the Company, these estimates include, but are not limited to: deriving the useful lives of ADMs, determination of the cost of ADMs, assessing assets for impairment, ability to realize deferred tax assets, the valuation of convertible preferred stock warrants, and the valuation of stock options, and contingencies. Actual results could differ from those estimates. We base our estimates, assumptions and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On a regular basis, we evaluate our estimates, assumptions and judgments and make changes accordingly.

 

Useful Life of the ADMs

 

Depreciation on the ADMs is recorded using the straight-line method over the expected life of the asset, which ranges from three to four years. The useful life of the ADMs will at times need to be evaluated to assess whether the remaining useful lives continue to be appropriate or require adjustments to reflect changes in the functionalities of the ADMs, the potential effects from the introduction of new versions and upgrades, and technological obsolescence.

 

Impairment of Long-Lived Assets

 

We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected to result from their use or eventual disposition. If estimates of future undiscounted net cash flows are insufficient to recover the carrying value of the assets, we will record an impairment loss in the amount by which the carrying value exceeds the fair value. If the assets are determined to be recoverable, but the useful lives are shorter than originally estimated, we will depreciate or amortize the net book value of the assets over the newly determined remaining useful lives of such assets. None of the Company’s ADMs or property and equipment was determined to be impaired as of December 31, 2018 and December 31, 2017. Accordingly, no impairment loss has been recognized in any of the periods presented.

 

 32 

 

 

Estimated Fair Value of Convertible Preferred Stock Warrants

 

Freestanding warrants for shares that are contingently redeemable upon a liquidation event of the Company are classified as a liability on the balance sheet at their estimated fair value. At the end of each reporting period, the change in estimated fair value during the period is recorded in other income (expense), net in the statements of operations. With the assistance of an unrelated third-party valuation specialist, we historically have estimated the fair values of these warrants using the backsolve method based on the proximity of the valuation date to the closing of a financing, or a combination of both the backsolve method from recent financings and the discounted cashflow method. We then utilized an option pricing model to allocate the enterprise value of the Company to the warrants. We will continue to adjust the carrying value of the warrants until such time as these instruments are exercised, expire or convert into warrants to purchase shares of common stock. At that time, the liabilities will be reclassified to additional paid-in-capital, a component of stockholders’ deficit.

 

Recent Accounting Pronouncements

 

See Note 2 in the notes to our financial statements under the caption Recent Accounting Pronouncements for a discussion of new accounting pronouncements.

 

Trend Information

 

Our primary goal remains meeting client demands for additional orders of our technology and ensuring consistent performance in the field. The Company is focused on scaling its business to meet incoming orders. Increasing demand, along with media coverage in the United States, has driven and continues to drive an increase in orders and client inquiries.

 

Sales trends for the year ended December 31, 2018 showed strong demand across all of Knightscope’s product service lines. The sales pipeline continues to grow and is strong, though similar to many business-to-business transactions, the enterprise sales cycle is extremely lengthy. Although we have executed contracts in less than 30 days, notionally these negotiations can range up to several years, taking into account the customer’s budget, finance, legal, cyber security, human resources, facilities and other reviews. The sales process for this brand-new technology requires significant streamlining and improvements, and we are taking steps to ensure our sales processes are robust, repeatable, and can enable our products to move through the sales pipeline quicker.

 

Due to numerous geopolitical events, as well as various high-profile incidents of violence across the United States, we believe that the market for our technologies will continue to grow. At the same time, we expect that competing products may appear in the marketplace in the near future, creating pressures on us to improve on our production methods, cost, quality and product features. 

 

 33 

 

 

DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES

 

The Company’s executive officers and key members of the management team (the “Leadership”) and the sole member of the board of directors of the Company as of July 11, 2019 are listed below. The sole director and Leadership are full-time employees.

 

Name   Current Position   Age   Date Appointed to Current Position
Director, Executive Officers, and Key Employees:
 
William Santana Li   Sole director and CEO   49   Appointed to indefinite term of office April 5, 2013
Stacy Dean Stephens   Chief Client Officer   47   Reappointed to indefinite term of office June 18, 2018
Mercedes Soria   Chief Intelligence Officer   45   Reappointed to indefinite term of office June 18, 2018
Aaron J. Lehnhardt   Chief Design Officer   46   Reappointed to indefinite term of office June 18, 2018
Marina Hardof   Chief Financial Officer   40   Appointed to indefinite term of office June 18, 2018

 

William Santana Li, Chairman and CEO

 

William (“Bill”) Santana Li has served as our sole director and CEO since April 2013. Mr. Li is an American entrepreneur with over 25 years of experience from working in the global automotive sector and founding and leading a number of startups. From 1990 to 1999, Mr. Li held multiple business and technical positions at Ford Motor Company across four continents.

 

His positions at Ford ranged from component, systems, and vehicle engineering with the Visteon, Mazda, and Lincoln brands; to business and product strategy on the United States youth market, India, and the emerging markets in Asia-Pacific and South America; as well as the financial turnaround of Ford of Europe. In addition, he was on the “Amazon” team, which established an all-new modular plant in Brazil. Subsequently, he served as Director of Mergers & Acquisitions.

 

After internally securing $250 million in financing, Mr. Li founded and served as COO of GreenLeaf LLC, a Ford Motor Company subsidiary that became the world’s second largest automotive recycler. Under his leadership, GreenLeaf grew to more than 600 employees, 20 locations worldwide, and annual sales of approximately $150 million. At the age of 28, Bill was the youngest senior executive at Ford Motor Company worldwide.

 

After successfully establishing GreenLeaf, Mr. Li was recruited by SoftBank Venture Capital to establish and serve as the President and CEO of the Model E Corporation, a newly established automobile manufacturer that focused on the “Subscribe and Drive” model in California. Mr. Li also founded Carbon Motors Corporation in 2003, and as its Chairman and CEO until February 2013, focused it on developing the world’s first purpose-built law enforcement patrol vehicle.

 

Bill earned a BSEE from Carnegie Mellon University and an MBA from the University of Detroit Mercy. He is married to Mercedes Soria.

 

Stacy Dean Stephens, EVP and Chief Client Officer

 

Stacy Dean Stephens is our Chief Client Officer and co-founded the Company in April of 2013. Previously, he co-founded Carbon Motors Corporation with Mr. Li, where he led marketing operations, sales, product management, partnership marketing and customer service. At Carbon Motors, Mr. Stephens established the “Carbon Council,” a customer interface and users group consisting of over 3,000 law enforcement professionals across all 50 states and actively serving over 2,200 law enforcement agencies.

 

 34 

 

 

Prior to co-founding Carbon Motors Corporation, Mr. Stephens served as a police officer for the Coppell (Texas) Police Department from 2000 to 2002. In recognition of his accomplishments, Mr. Stephens was named one of Government Technology magazine’s “Top 25 Doers, Dreamers & Drivers” in 2011.

 

Mr. Stephens studied aerospace engineering at the University of Texas in Arlington. He subsequently earned a degree in criminal justice and graduated as valedictorian from Tarrant County College in Fort Worth, Texas. He is a member of the International Association of Chiefs of Police (“IACP”) and also sits on the IACP Division of State Associations of Chiefs of Police SafeShield Project, which seeks to critically examine existing and developing technologies for the purpose of preventing and minimizing officer injuries and fatalities.

 

Mercedes Soria, EVP and Chief Intelligence Officer

 

Mercedes Soria is our Chief Intelligence Officer and has been with Knightscope since April 2013. Ms. Soria is a technology professional with over 15 years of experience in systems development, life cycle management, project leadership, software architecture and web applications development.

 

Ms. Soria led IT strategy development at Carbon Motors Corporation from 2011 until 2013. From 2002 to 2010, Ms. Soria was Channel Manager and Software Development Manager for internal operations at Deloitte & Touche LLP, where her team deployed software that was used daily across the firm’s thousands of employees. From 1998 to 2002, Ms. Soria worked as a software developer at Gibson Musical Instruments leading the effort to establish its online presence.

 

Ms. Soria obtained Bachelor and Master’s degrees in Computer Science from Middle Tennessee State University with honors, as well as an Executive MBA from Emory University. She is also a certified Six Sigma green belt professional and a member of the Society of Hispanic Professional Engineers. She is married to William Santana Li.

 

Aaron J. Lehnhardt, EVP and Chief Design Officer

 

Aaron Lehnhardt has served as our Chief Design Officer since November 2015. Previously, from the Company’s inception in April 2013 until November 2015, Mr. Lehnhardt served as Chief Designer of the Company. From 2002 to April 2013, Mr. Lehnhardt was the co-owner of Lehnhardt Creative LLC where he worked on advanced propulsion vehicle design, personal electronics, product design, video game design, and concept development work.

 

From 2004 to 2011, Mr. Lehnhardt was Chief Designer at California Motors (“Calmotors”), where he led the design for various concepts for HyRider hybrid vehicles, the Calmotors 1000 horsepower hybrid super car, Terra Cruzer super off road vehicle, multiple vehicles for the U.S. Military, and various other hybrid and electric vehicles. He was also the lead designer and partner of Ride Vehicles LLC, a sister company to Calmotors, which worked on a 3-wheeled, standup personal mobility vehicle.

 

Mr. Lehnhardt began his career in 1994 in the Large Truck Design Studio of Ford Motor Company, where he worked on the Aeromax and Excursion truck programs. His progress led him to the Large Vehicle Production Studio to work on the Mustang and Windstar models. He also successfully aided the development of the GT90, My Mercury, Th!nk, P2000 Prodigy, and certain concept vehicles.

 

Mr. Lehnhardt earned his Bachelor of Fine Arts in Transportation Design from the College for Creative Studies in Detroit, Michigan. He also served as an Alias 3D instructor at the College for Creative Studies.

 

 35 

 

 

Marina Hardof, EVP and Chief Financial Officer

 

Marina Hardof has served as our Chief Financial Officer since June 2018. Ms. Hardof has over 15 years of financial leadership and corporate management experience working across various industry sectors and in both public and private enterprise. Most recently, from 2013 to 2018, Ms. Hardof was the Chief Financial Officer and Vice President of Finance-Controller for Cloudmark Inc., a messaging security company which was acquired by Proofpoint, Inc. Previously to that, she held various finance roles at Unwired Planet, Inc. (f.k.a. Openwave Systems, Inc.), which was acquired by a private equity firm. Prior to Unwired Planet, Inc. she spent over nine years with Ernst and Young LLP and Deloitte serving customers in the technology industry. Ms. Hardof holds a Master of Business Administration from Haas School of Business, University of California, Berkeley, and a Bachelor of Science in Economics and Accounting from Hebrew University of Jerusalem. She is also a licensed CPA in California. 

 

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

 

For the fiscal year ended December 31, 2018, we compensated the Leadership as follows:

 

Name  Capacities in which
compensation was
received
  Cash
Compensation
   Other
Compensation
   Total
Compensation
 
William Santana Li  CEO  $257,558   $-   $257,558 
Stacy Dean Stephens  Chief Client Officer  $188,476   $-   $188,476 
Mercedes Soria  Chief Intelligence Officer  $227,814   $3,041   $230,855 
Aaron J. Lehnhardt  Chief Design Officer  $208,066   $3,041   $211,107 
Marina Hardof  Chief Financial Officer  $153,383   $6,586   $159,969 

 

Other compensation represents non-cash stock-based compensation.

 

Other than cash compensation, health benefits and stock options, no other compensation was provided. The Company’s sole director did not receive any compensation in connection with his directorship.

 

Employee and Service Provider Equity Incentive Plans

 

The Company has adopted a 2014 Equity Incentive Plan (the “2014 Plan”) and a 2016 Equity Incentive Plan (the “2016 Plan”). The 2014 Plan was terminated upon the adoption of the 2016 Plan. However, the 2014 Plan will continue to govern the terms and conditions of the outstanding awards previously granted thereunder. Each of the 2016 Plan and the 2014 Plan provide for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, to our employees and any parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options, stock appreciation rights, restricted stock, or restricted stock units to our employees, directors and consultants and our parent and subsidiary corporations’ employees and consultants. Both plans are administered by our board of directors and the board of directors is referred to in this section as the “administrator” of the plan.

 

Authorized Shares. Stock options for the purchase of 2,693,800 shares of our Class B Common Stock are outstanding under our 2014 Plan and an additional 187,200 shares of our Class B Common Stock have been reserved for issuance pursuant to our 2014 Plan. A total of 1,748,814 shares of our Class A Common Stock have been reserved for issuance pursuant to our 2016 Plan. In addition, the shares of Class A Common Stock reserved for issuance under our 2016 Plan also include (i) a number of shares of Class A Common Stock equal to the number of shares of Class B Common Stock reserved but unissued under the 2014 Plan, as of immediately prior to the termination of the 2014 Plan, and (ii) a number of shares of Class A Common Stock equal to the number of shares subject to awards under the 2014 Plan that, on or after the termination of the 2014 Plan, expire or terminate and shares previously issued pursuant to the 2014 Plan, that, on or after the termination of the 2014 Plan, are forfeited or repurchased by us (provided that the maximum number of shares of Class A Common Stock that may be added to our 2016 Plan pursuant to (i) and (ii) is 2,881,000 shares).

 

 36 

 

 

If an award expires or becomes unexercisable without having been exercised in full, is surrendered pursuant to an exchange program, or, with respect to restricted stock or restricted stock units, is forfeited to or repurchased due to failure to vest, the unpurchased shares (or for awards other than stock options or stock appreciation rights, the forfeited or repurchased shares) will become available for future grant or sale under the 2016 Plan.

 

Stock Options. The 2014 Plan was terminated as of December 21, 2016. As a result, new stock options may only be granted under our 2016 Plan. The exercise price of options granted under our 2016 Plan must at least be equal to the fair market value of our Class A Common Stock on the date of grant. The term of an option may not exceed 10 years, except that with respect to any participant who owns more than 10% of the voting power of all classes of our outstanding stock, the term on an incentive stock option granted to such participant must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator will determine the methods of payment of the exercise price of an option, which may include cash, shares or other property acceptable to the administrator, as well as other types of consideration permitted by applicable law. If an individual’s service terminates other than due to the participant’s death or disability, the participant may exercise his or her option within 30 days of termination or such longer period of time as provided in his or her award agreement. If an individual’s service terminates due to the participant’s death or disability, the option may be exercised within six months of termination, or such longer period of time as provided in his or her award agreement. However, in no event may an option be exercised after the expiration of its term. Subject to the provisions of our 2016 Plan the administrator determines the other terms of options.

 

Non-Transferability of Awards. Unless the administrator provides otherwise, our 2014 Plan and 2016 Plan generally do not allow for the transfer of awards and only the recipient of an award may exercise an award during his or her lifetime.

 

 37 

 

 

SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS

 

The following table sets out, as of July 11, 2019, the voting securities of the Company that are beneficially owned by the executive officers and sole director, and other persons holding more than 10% of any class of the Company’s voting securities, or having the right to acquire those securities.

 

 

Beneficial Owner   Title of
Class
  Address of Beneficial Owner   Amount and
Nature of
Beneficial
Ownership
    Amount and
Nature of
Beneficial
Ownership
Acquirable
(Stock
Options)
    Percent
of Class
    Total
Voting
Power(1)
 
Director and Executive Officers Owning Over 10% of Common Stock
William Santana Li (2)   Class B Common   455 W. Evelyn Ave.
Mountain View, CA 94041
    7,000,000               68.77 %    

29.73

%
Stacy Dean Stephens   Class B Common   5400 Broken Bend Drive McKinney, TX 75070     3,000,000               29.47 %     11.47 %
All current officers and directors as a group (2 in total):   Class B Common         10,000,000               98.24 %    

40.20

%
                                         
Stockholders with Over 10% Beneficial Ownership of Preferred Stock  
New Direction IRA Inc.   Series m Preferred Stock   1070 West Century Drive
Louisville, CO 80027
    5,339,215               23.75 %     2.04 %
NetPosa Technologies (Hong Kong) Limited   Series B Preferred Stock   Suite 1023, 10/F, Ocean Centre, 5 Canton Road, Tsim Sha Tsui, Kowloon Hong Kong     2,450,860               10.9 %     15.34 %

  

(1)Percentage of total voting power represents voting power with respect to all shares of the Company’s outstanding capital stock as if converted to Class A Common Stock and Class B Common Stock, as applicable, as a single class. The holders of Series A Preferred Stock, Series B Preferred Stock, Series m-2 Preferred Stock and Class B Common Stock are entitled to ten votes per share. The holders of our Series m Preferred Stock, Series m-1 Preferred Stock, Series m-3 Preferred Stock, Series m-4 Preferred Stock and Class A Common Stock are entitled to one vote per share.
   
(2)In connection with the Convertible Note Financing, Mr. Li was granted the Voting Proxy. The votes held by Mr. Li as a result of the conversion of outstanding convertible securities subject to the Voting Proxy cannot be determined as of the date of this offering circular, and are not reflected in the above chart, but the outstanding securities to which the Voting Proxy applies represents approximately 2.96% of the Company’s aggregate voting power.

 

 38 

 

 

INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS

 

Other than grants of stock options, we have not entered into any transactions in which the management or related persons have an interest outside of the ordinary course of our operations.

 

 39 

 

 

SECURITIES BEING OFFERED

 

General

 

The Company is offering up to 6,250,000 shares of Series S Preferred Stock, which are convertible into shares of Class A Common Stock.

 

The following description summarizes the most important terms of the Company’s capital stock. This summary does not purport to be complete and is qualified in its entirety by the provisions of Knightscope’s amended and restated certificate of incorporation and bylaws, copies of which have been filed as exhibits to the Offering Statement of which this Offering Circular is a part. For a complete description of Knightscope’s capital stock, you should refer to the amended and restated certificate of incorporation and bylaws and to the applicable provisions of Delaware law.

 

Immediately prior to filing of this Offering Statement with the Securities and Exchange Commission, Knightscope’s authorized capital stock will consist of 114,000,000 shares of Class A Common Stock, $0.001 par value per share, 30,000,000 shares of Class B Common Stock, $0.001 par value per share, and 43,405,324 shares of Preferred Stock, $0.001 par value per share, of which 8,936,015 shares will be designated Series A Preferred Stock, 4,707,501 will be designated as Series B Preferred Stock, 6,666,666 will be designated as Series m Preferred Stock, 333,334 will be designated as Series m-1 Preferred Stock, 1,660,756 will be designated as Series m-2 Preferred Stock, 3,490,658 will be designated as Series m-3 Preferred Stock, 13,108,333 will be designated as Series S Preferred Stock, and 4,502,061 will be designated as Series m-4 Preferred Stock.

 

Immediately prior to the filing of this Offering Statement with the Securities and Exchange Commission, the outstanding shares and options of the Company are expected to be as follows:

 

·10,179,000 shares of Class B Common Stock that are issued, outstanding and fully vested;
·8,936,015 shares of Preferred Stock designated as Series A Preferred Stock that have been issued and are outstanding;
·4,653,583 shares of Preferred Stock designated as Series B Preferred Stock that have been issued and are outstanding;
·5,339,215 shares of Preferred Stock designated as Series m Preferred Stock that have been issued and are outstanding;
·1,660,756 shares of Preferred Stock designated as Series m-2 Preferred Stock that have been issued and are outstanding;
·17,757 shares of Preferred Stock designated as Series m-3 Preferred Stock that have been issued and are outstanding;
·1,432,786 shares of Preferred Stock designated as Series m-4 Preferred Stock that have been issued and are outstanding;
· 469,140 shares of Preferred Stock designated as Series S Preferred Stock that have been issued and are outstanding;
· 1,256,216 shares of Class B Common Stock that are issuable pursuant to employee stock options that have been issued under the 2014 Equity Plan and 5,140,974 shares of Class A Common Stock that are issuable pursuant to employee stock options that have been issued under the 2016 Equity Plan, including options committed by the board of the directors of the Company that will be issued prior to the qualification of the Offering Statement by the Securities and Exchange Commission.

 

Class A Common Stock and Class B Common Stock

 

Prior to the qualification of this Offering Statement by the Securities and Exchange Commission, we have two authorized classes of common stock, Class A Common Stock and Class B Common Stock. All currently outstanding stock options are eligible to be settled in or exercisable for shares of our Class B Common Stock. All currently outstanding shares of Preferred Stock are convertible into shares of either Class A Common Stock or Class B Common Stock. The Series A Preferred Stock, the Series B Preferred Stock and the Series m-2 Preferred Stock (collectively, the “Super Voting Preferred Stock”) are convertible into shares of Class B Common Stock. The Series m Preferred Stock, the Series m-1 Preferred Stock, the Series m-3 Preferred Stock, the Series m-4 Preferred Stock and the Series S Preferred Stock (collectively, the “Ordinary Preferred Stock”) are convertible into shares of Class A Common Stock. 

 

 40 

 

 

Voting Rights

 

Holders of our Class A Common Stock and Class B Common Stock have identical rights, provided however that, except as otherwise expressly provided in our amended and restated certificate of incorporation or required by applicable law, on any matter that is submitted to a vote of our stockholders, holders of Class A Common Stock are entitled to one vote per share of Class A Common Stock and holders of Class B Common Stock are entitled to 10 votes per share of Class B Common Stock. Holders of shares of Class A Common Stock and Class B Common Stock vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders, unless otherwise required by Delaware law or our amended and restated certificate of incorporation. Delaware law could require either holders of our Class A Common Stock or Class B Common Stock to vote separately as a single class if we were to seek to amend our amended and restated certificate of incorporation in a manner that alters or changes the powers, preferences or special rights of a class of our capital stock in a manner that affected its holders adversely, then that class would be required to vote separately to approve the proposed amendment.  

 

Our board of directors currently consists of a sole member and we have not provided for cumulative voting for the election of directors in our certificate of incorporation.

 

Dividend Rights

 

Holders of the Company’s common stock are entitled to receive dividends, as may be declared from time to time by the board of directors out of legally available funds and only following payment to holders of the Company’s Preferred Stock, as detailed in the Company’s amended and restated certificate of incorporation. Following payment of dividends to the holders of Preferred Stock in accordance with the preferential order set out in the amended and restated certificate of incorporation, including the Series S Preferred Stock, any additional dividends set aside or paid in a given year, shall be set aside and paid among the holders of the Preferred Stock and common stock on an as-converted basis. The rights to dividends are not cumulative. The Company has never declared or paid cash dividends on any of its capital stock and currently does not anticipate paying any cash dividends after this offering or in the foreseeable future.

 

Liquidation Rights

 

In the event of a voluntary or involuntary liquidation, dissolution, or winding up of the Company, the holders of common stock are entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all debts and other liabilities of the Company and only after the satisfaction of any liquidation preferences granted to the holders of all shares of the outstanding Preferred Stock in accordance with the liquidation stack provided for in the amended and restated certificate of incorporation of the Company.

 

Rights and Preferences

 

Holders of the Company’s common stock have no preemptive, conversion, or other rights, and there are no redemptive or sinking fund provisions applicable to the Company’s common stock.

  

Conversion Rights

 

Each share of Class B Common Stock shall automatically convert into one share of Class A Common Stock upon any transfer of such shares other than for tax planning purposes and certain other limited exceptions, as outlined in the Company’s amended and restated certificate of incorporation.

 

Each share of Class B Common Stock shall be convertible into one share of Class A Common Stock at the option of the holder thereof at any time upon written notice of such transfer to the Company’s transfer agent.

 

 41 

 

 

Ordinary Preferred Stock

 

The Company has authorized the issuance Series m Preferred Stock, the Series m-1 Preferred Stock, the Series m-3 Preferred Stock, the Series m-4 Preferred Stock and the Series S Preferred Stock (the “Ordinary Preferred Stock”), which contains substantially similar rights, preferences, and privileges, as other series of Preferred Stock, except as described below.

 

Conversion Rights

 

Shares of Ordinary Preferred Stock are convertible, at the option of the holder, at any time, into fully-paid nonassessable shares of the Company’s Class A Common Stock at the then-applicable conversion rate. At the date of this Offering Circular, the conversion rate for the Ordinary Preferred Stock other than Series S Preferred Stock is one share of Class A Common Stock, as applicable, per one share of Ordinary Preferred Stock. At the date of this Offering Circular, the conversion rate for the Series S Preferred Stock is one share of Class A Common Stock per one share of Series S Preferred Stock. The conversion rate is subject to anti-dilution protective provisions that will be applied to adjust the number of shares of Class A Common Stock issuable upon conversion of the shares of the respective series of Preferred Stock, except Series m-3 Preferred Stock, in case shares of common stock, on an as converted basis, are issued for a price per share below the price per share of the relevant series of Preferred Stock, subject to customary exceptions, in accordance with the Company’s amended and restated certificate of incorporation.

 

The Series S Preferred Stock has a right to convert at any time into Class A Common Stock. The initial conversion rate for the conversion is 1:1, which conversion rate will continue to be adjusted pursuant to the broad-based weighted average anti-dilution adjustment provisions provided for in the Company’s certificate of incorporation, including without limitation as a result of the issuance of warrants to purchase Series S Preferred Stock in connection with the Convertible Note Financing referenced above, which may continue to have closings simultaneously with this Offering. 

 

Additionally, each share of Preferred Stock will automatically convert into Class A Common Stock or Class B Common Stock, as applicable, (i) immediately prior to the closing of a firm commitment underwritten public offering, registered under the Securities Act, (ii) with respect to Preferred Stock other than the Series m-4 Preferred Stock, upon the receipt by the Company of a written request for such conversion from the holders of a majority of the Preferred Stock other than the Series m-4 Preferred Stock then outstanding, or (iii) with respect to the Series m-4 Preferred Stock, upon the receipt by the Company of a written request for such conversion from the holders of a majority of the Series m-4 Preferred Stock then outstanding. The stock will convert in the same manner as a voluntary conversion.

 

Voting Rights

 

Each holder of Ordinary Preferred Stock is entitled to that number of votes equal to the number of votes of shares of Class A Common Stock into which such shares are convertible. This means that, at the time of qualification of the Offering Statement by the Securities and Exchange Commission, holders of Ordinary Preferred Stock shall be entitled to one vote for each share of Preferred Stock. Fractional votes are not permitted and if the conversion results in a fractional share, it will be disregarded. Holders of Ordinary Preferred Stock are entitled to vote on all matters submitted to a vote of the stockholders, including the election of directors, as a single class with the holders of common stock.

 

William Santana Li, the Chief Executive Officer and sole director of the Company, holds the Voting Proxy.

 

Dividends Rights

 

Holders of Series m-4 Preferred Stock are entitled to receive cumulative dividends payable semi-annually in arrears with respect to each dividend period ending on and including the last calendar day of each six-month period ending March 31 and September 30, respectively (each such period, a “Dividend Period” and each such date, a “Dividend Payment Date”), at the rate per share of Series m-4 Preferred Stock equal to the Dividend Rate for the Series m-4 Preferred Stock, in each case subject to compliance with applicable law. Dividends to holders of Series m-4 Preferred Stock are paid in kind as a dividend of additional shares of Series m-4 Preferred Stock (“PIK Dividends”) for each Dividend Period on the applicable Dividend Payment Date using a price per share equal to the original issue price; provided that the Company shall not issue any fractional shares of Series m-4 Preferred Stock.

 

 42 

 

 

Except as described above, the Company has no obligation to pay any dividends to the holders of Series m-4 Preferred Stock, except when, as and if declared by the Board of Directors out of any assets at the time legally available therefor or as otherwise specifically provided in our amended and restated certificate of incorporation. No distribution will be made with respect to the Series S Preferred Stock, the Series B Preferred Stock, the Series m Preferred Stock, the Series m-1 Preferred Stock, the Series m-2 Preferred Stock, Series A Preferred Stock, Series m-3 Preferred Stock or the Common Stock until all declared or accrued but unpaid dividends on the Series m-4 Preferred Stock have been paid or set aside for payment to the Series m-4 Preferred Stock holders.

 

Right to Receive Liquidation Distributions

 

In the event of any Liquidation Event, as defined in our amended and restated certificate of incorporation (which includes the liquidation, dissolution, merger, acquisition or winding up of the Company), the holders of the Series m-4 Preferred Stock are entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the Series S Preferred Stock, Series A Preferred Stock, Series B Preferred Stock, Series m Preferred Stock, Series m-1 Preferred Stock, Series m-2 Preferred Stock, Series m-3 Preferred Stock or Common Stock by reason of their ownership of such stock, an amount per share for each share of Series m-4 Preferred Stock held by them equal to the greater of (A): the sum of (i) the Liquidation Preference specified for such share of Series m-4 Preferred Stock, and (ii) all accrued but unpaid PIK Dividends (if any) on such share of Series m-4 Preferred Stock, whether or not declared, or (B) the consideration that such Holder would receive in the Liquidation Event if all shares of Series m-4 Preferred Stock were converted to Class A Common Stock immediately prior to such Liquidation Event, or (C) such lesser amount as may be approved by the holders of the majority of the outstanding shares of Series m-4 Preferred Stock, where for purposes of (B) such Holder is deemed to hold, in addition to each of its shares of Series m-4 Preferred Stock, any additional shares of Series m-4 Preferred Stock that constitute all accrued but unpaid PIK Dividends, whether or not declared. If upon the Liquidation Event, the assets of the Company legally available for distribution to the holders of the Series m-4 Preferred Stock are insufficient to permit the payment to such holders of the full amounts specified in our amended and restated certificate of incorporation, then the entire assets of the Company legally available for distribution shall be distributed with equal priority and pro rata among the holders of the Series m-4 Preferred Stock in proportion to the full amounts they would otherwise be entitled to receive. The Series m-4 Preferred Stock has a $7 per share liquidation preference, which is 2x its original issue price.

 

The holders of the Series S Preferred Stock are entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the Series A Preferred Stock, Series B Preferred Stock, Series m Preferred Stock, Series m-1 Preferred Stock, Series m-2 Preferred Stock, Series m-3 Preferred Stock or Common Stock by reason of their ownership of such stock, an amount per share for each share of Series S Preferred Stock held by them equal to the greater of (A): the sum of (i) the Liquidation Preference specified for such share of Series S Preferred Stock, and (ii) all declared but unpaid dividends (if any) on such share of Series S Preferred Stock, or (B) the amount such Holder would receive if all shares of Series S Preferred Stock were converted to Common Stock immediately prior to such Liquidation Event, or (C) such lesser amount as may be approved by the holders of the majority of the outstanding shares of Series S Preferred Stock. If upon the Liquidation Event, the assets of the Company legally available for distribution to the holders of the Series S Preferred Stock are insufficient to permit the payment to such holders of the full amounts specified in our amended and restated certificate of incorporation, then the entire assets of the Company legally available for distribution shall be distributed with equal priority and pro rata among the holders of the Series S Preferred Stock in proportion to the full amounts they would otherwise be entitled to receive.

 

The holders of the Series B Preferred Stock, the Series m Preferred Stock, the Series m-1 Preferred Stock and the Series m-2 Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the Series A Preferred Stock, Series m-3 Preferred Stock or Common Stock by reason of their ownership of such stock, an amount per share for each share of Series B Preferred Stock, the Series m Preferred Stock, the Series m-1 Preferred Stock and the Series m-2 Preferred Stock held by them equal to the greater of (A): the sum of (i) the Liquidation Preference specified for such share of Series B Preferred Stock, Series m Preferred Stock, Series m-1 Preferred Stock or Series m-2 Preferred Stock, as applicable, and (ii) all declared but unpaid dividends (if any) on such share of Series B Preferred Stock, Series m Preferred Stock, Series m-1 Preferred Stock or Series m-2 Preferred Stock, as applicable, or (B) the amount such Holder would receive if all shares of the applicable series of Preferred Stock were converted to Common Stock immediately prior to such Liquidation Event, or (C) such lesser amount as may be approved by the holders of the majority of the outstanding shares of Series B Preferred Stock, Series m Preferred Stock, Series m-1 Preferred Stock and Series m-2 Preferred Stock, voting together as a single class. If upon the Liquidation Event, the assets of the Company legally available for distribution to the holders of the Series B Preferred Stock, the Series m Preferred Stock, the Series m-1 Preferred Stock and the Series m-2 Preferred Stock are insufficient to permit the payment to such holders of the full amounts specified in our amended and restated certificate of incorporation, then the entire assets of the Company legally available for distribution shall be distributed with equal priority and pro rata among the holders of the Series B Preferred Stock, the Series m Preferred Stock, the Series m-1 Preferred Stock and the Series m-2 Preferred Stock in proportion to the full amounts they would otherwise be entitled to receive.

 

 43 

 

 

The holders of Series m-3 Preferred Stock are entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of Common Stock by reason of their ownership of such stock, an amount per share for each share of Series m-3 Preferred Stock held by them equal to the greater of (A): the sum of (i) the Liquidation Preference specified for such share of Series m-3 Preferred Stock and (ii) all declared but unpaid dividends (if any) on such share of Series m-3 Preferred Stock, or (B) the amount such Holder would receive if all shares of Series m-3 Preferred Stock were converted to Common Stock immediately prior to such Liquidation Event, or (C) such lesser amount as may be approved by the holders of the majority of the outstanding shares of Series m-3 Preferred Stock. If upon a Liquidation Event, the assets of the Company legally available for distribution to the holders of the Series m-3 Preferred Stock are insufficient to permit the payment to such holders of the full amounts specified in our amended and restated certificate of incorporation, then the entire assets of the Corporation legally available for distribution shall be distributed with equal priority and pro rata among the holders of the Series m-3 Preferred Stock in proportion to the full amounts they would otherwise be entitled to receive.

 

After payment of all liquidation preferences to the holders of the Preferred Stock, as outlined below, all remaining assets of the Company legally available for distribution shall be distributed pro rata to the holders of the common stock, without any participation in such liquidation by the Preferred Stock. Our amended and restated certificate of incorporation explicitly requires that before any shares of Preferred Stock are converted into common stock, the relevant holder’s right to liquidation preference be surrendered, in order to prevent treatment of shares as both Preferred Stock and common stock for the purpose of distributions of assets upon a Liquidation Event.

 

Super Voting Preferred Stock

 

The Company has authorized the issuance of three other series of Preferred Stock. The series are designated Series A Preferred Stock, Series B Preferred Stock and Series m-2 Preferred Stock (the “Super Voting Preferred Stock”). Each series of Super Voting Preferred Stock contains substantially similar rights, preferences, and privileges, except as described below.

 

Dividend Rights

 

In any calendar year, the holders of outstanding shares of Preferred Stock are entitled to receive dividends, when, as and if declared by the Board of Directors, out of any assets at the time legally available therefor, at the dividend rate specified for such shares of Preferred Stock payable in preference and priority to any declaration or payment of any distribution on Common Stock of the Company in such calendar year. Except dividends to Series m-4 Preferred Stock specified above, the right to receive dividends on shares of Preferred Stock is not cumulative, and no right to dividends shall accrue to holders of Preferred Stock by reason of the fact that dividends on said shares are not declared or paid.

 

No distributions shall be made with respect to the Series S Preferred Stock, the Series B Preferred Stock, the Series m Preferred Stock, the Series m-1 Preferred Stock, the Series m-2 Preferred Stock, Series A Preferred Stock or Series m-3 Preferred Stock unless dividends on the Series m-4 Preferred Stock have been declared in accordance with the preferences stated in the amended and restated certificate of incorporation and all declared or accrued dividends on the Series m-4 Preferred Stock have been paid or set aside for payment to the Series m-4 Preferred Stock holders.

 

No distributions shall be made with respect to the Series B Preferred Stock, the Series m Preferred Stock, the Series m-1 Preferred Stock, the Series m-2 Preferred Stock, Series A Preferred Stock or Series m-3 Preferred Stock unless dividends on the Series S Preferred Stock have been declared in accordance with the preferences stated in the amended and restated certificate of incorporation and all declared dividends on the Series S Preferred Stock have been paid or set aside for payment to the Series S Preferred Stock holders.

 

 44 

 

 

No distributions shall be made with respect to the Series A Preferred Stock or Series m-3 Preferred Stock unless dividends on the Series B Preferred Stock, the Series m Preferred Stock, the Series m-1 Preferred Stock and the Series m-2 Preferred Stock have been declared in accordance with the preferences stated in the amended and restated certificate of incorporation and all declared dividends on the Series B Preferred Stock, the Series m Preferred Stock, the Series m-1 Preferred Stock and the Series m-2 Preferred Stock have been paid or set aside for payment to the Series B Preferred Stock holders, the Series m Preferred Stock holders, the Series m-1 Preferred Stock holders and the Series m-2 Preferred Stock holders, as applicable.

 

No Distributions shall be made with respect to the Series m-3 Preferred Stock unless dividends on the Series A Preferred Stock have been declared in accordance with the preferences stated in the amended and restated certificate of incorporation and all declared dividends on the Series A Preferred Stock have been paid or set aside for payment to the Series A Preferred Stock holders.

 

No Distributions shall be made with respect to the Common Stock unless dividends on the Series m-3 Preferred Stock have been declared in accordance with the preferences stated in the amended and restated certificate of incorporation and all declared dividends on the Series m-3 Preferred Stock have been paid or set aside for payment to the Series m-3 Preferred Stock holders.

 

The Company has never declared or paid cash dividends on any of its capital stock and currently does not anticipate paying any cash dividends after this offering or in the foreseeable future.

 

Conversion Rights

 

Shares of Preferred Stock are convertible, at the option of the holder, at any time, into fully-paid nonassessable shares of the Company’s Class A Common Stock or Class B Common Stock at the then-applicable conversion rate. Any shares of Super Voting Preferred Stock shall be convertible to shares of the Company’s Class B Common Stock. Any share of Preferred Stock convertible to shares of Class B Common Stock that has been transferred for any reason other than for tax planning purposes and certain other limited exceptions, as outlined in the Company’s amended and restated certificate of incorporation, shall become convertible into shares of Class A Common Stock. At the date of this Offering Circular, the conversion rate for both the Series A Preferred Stock and the Series B Preferred Stock is one share of Class A Common Stock or Class B Common Stock, as applicable, per one share of Preferred Stock. The conversion rate is subject to anti-dilution protective provisions that will be applied to adjust the number of shares of Class A Common Stock or Class B Common Stock, as applicable, issuable upon conversion of the shares of the respective series of Preferred Stock.

 

Additionally, each share of Preferred Stock will automatically convert into Class A Common Stock or Class B Common Stock, as applicable, (i) immediately prior to the closing of a firm commitment underwritten public offering, registered under the Securities Act, (ii) with respect to Preferred Stock other than the Series m-4 Preferred Stock, upon the receipt by the Company of a written request for such conversion from the holders of a majority of the Preferred Stock other than the Series m-4 Preferred Stock then outstanding, or (iii) with respect to the Series m-4 Preferred Stock, upon the receipt by the Company of a written request for such conversion from the holders of a majority of the Series m-4 Preferred Stock then outstanding. The stock will convert in the same manner as a voluntary conversion.

 

Voting Rights

 

Each holder of Preferred Stock is entitled to that number of votes equal to the number of votes of shares of Class A Common Stock or Class B Common Stock, as applicable, into which such shares are convertible. This means that, at the date that the Securities and Exchange Commission qualifies this Offering Statement, holders of Super Voting Preferred Stock shall be entitled to ten votes for each share held. Fractional votes are not permitted and if the conversion results in a fractional share, it will be disregarded. Holders of Preferred Stock are entitled to vote on all matters submitted to a vote of the stockholders, including the election of directors, as a single class with the holders of common stock.

 

William Santana Li, the Chief Executive Officer and sole director of the Company, holds the Voting Proxy.

 

Preemptive Rights

 

The Company has granted one investor in its Series m Preferred Stock financing the right to invest up to their pro rata share on a fully-diluted basis in the offerings of securities of the Company. The combined pro-rata rights of such stockholder immediately prior to the filing of the Offering Statement is less than 1% of the fully-diluted capitalization of the Company.

 

 45 

 

 

Right to Receive Liquidation Distributions

 

In the event of a Liquidation Event, the holders of the Series B Preferred Stock, the Series m Preferred Stock, the Series m-1 Preferred Stock and the Series m-2 Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the Series A Preferred Stock, Series m-3 Preferred Stock or Common Stock by reason of their ownership of such stock, an amount per share for each share of Series B Preferred Stock, the Series m Preferred Stock, the Series m-1 Preferred Stock and the Series m-2 Preferred Stock held by them equal to the greater of: (A) the sum of (i) the Liquidation Preference specified for such share of Series B Preferred Stock, Series m Preferred Stock, Series m-1 Preferred Stock or Series m-2 Preferred Stock, as applicable, and (ii) all declared but unpaid dividends (if any) on such share of Series B Preferred Stock, Series m Preferred Stock, Series m-1 Preferred Stock or Series m-2 Preferred Stock, as applicable, or (B) the amount such Holder would receive if all shares of the applicable series of Preferred Stock were converted to Common Stock immediately prior to such Liquidation Event, or (C) such lesser amount as may be approved by the holders of the majority of the outstanding shares of Series B Preferred Stock, Series m Preferred Stock, Series m-1 Preferred Stock and Series m-2 Preferred Stock, voting together as a single class. If upon the Liquidation Event, the assets of the Company legally available for distribution to the holders of the Series B Preferred Stock, the Series m Preferred Stock, the Series m-1 Preferred Stock and the Series m-2 Preferred Stock are insufficient to permit the payment to such holders of the full amounts specified in our amended and restated certificate of incorporation, then the entire assets of the Company legally available for distribution shall be distributed with equal priority and pro rata among the holders of the Series B Preferred Stock, the Series m Preferred Stock, the Series m-1 Preferred Stock and the Series m-2 Preferred Stock in proportion to the full amounts they would otherwise be entitled to receive.

 

The holders of Series A Preferred Stock are entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of Common Stock or Series m-3 Preferred Stock by reason of their ownership of such stock, an amount per share for each share of Series A Preferred Stock held by them equal to the greater of: (A) the sum of (i) the Liquidation Preference specified for such share of Series A Preferred Stock and (ii) all declared but unpaid dividends (if any) on such share of Series A Preferred Stock, or (B) the amount such Holder would receive if all shares of Series A Preferred Stock were converted to Common Stock immediately prior to such Liquidation Event, or (C) such lesser amount as may be approved by the holders of the majority of the outstanding shares of Series A Preferred Stock. If upon a Liquidation Event, the assets of the Company legally available for distribution to the holders of the Series A Preferred Stock are insufficient to permit the payment to such holders of the full amounts specified in our amended and restated certificate of incorporation, then the entire assets of the Company legally available for distribution shall be distributed with equal priority and pro rata among the holders of the Series A Preferred Stock in proportion to the full amounts they would otherwise be entitled to receive.

 

After payment of all liquidation preferences to the holders of Preferred Stock, as outlined above, all remaining assets of the Company legally available for distribution shall be distributed pro rata to the holders of the common stock, without any participation in such liquidation by the Preferred Stock.

 

Our amended and restated certificate of incorporation explicitly requires that before any shares of Preferred Stock are converted into common stock, the relevant holder’s right to liquidation preference be surrendered, in order to prevent treatment of shares as both preferred stock and common stock for the purpose of distributions of assets upon a Liquidation Event.

 

 46 

 

 

PLAN OF DISTRIBUTION AND SELLING STOCKHOLDERS

 

Plan of Distribution

 

The Company is offering up to 6,250,000 shares of Series S Preferred Stock, as described in this Offering Circular. Maxim Group LLC (“Maxim”) has agreed to act as a placement agent to assist in connection with this Offering, subject to the terms and conditions of the placement the agency agreement dated March 12, 2019, as amended from time to time. Maxim is not purchasing or selling any securities offered by this prospectus, nor is it required to arrange the purchase or sale of any specific number or dollar amount of securities, but has agreed to use its best efforts to arrange for the sale of all of the securities offered hereby. In addition, Maxim may engage other brokers to sell the securities on its behalf. As of the date hereof, Maxim has engaged StartEngine Primary LLC to assist Maxim in connection with this Offering. The Company may also sell securities directly to participants in this Offering.

 

Commissions and Discounts

 

We have agreed to pay the placement agents a placement agent fee equal to 6.5% of the aggregate purchase price of the shares of our Series S Preferred Stock sold in this offering.

 

The following table shows the per share and total cash placement agents commissions we will pay to the placement agents in connection with this offering, assuming the purchase of all of the shares offered hereby:

 

   Per Share   Total 
Public offering price  $8.00   $50,000,000.00 
Placement Agent commissions  $0.52   $3,250,000.00 
Proceeds, before expenses, to us  $7.48   $46,750,000.00 

 

Placement Agent Compensation

 

In addition to commissions, we are responsible for all Offering fees and expenses, including the following: (i) fees and disbursements of our legal counsel, accountants, and other professionals we engage; (ii) fees and expenses incurred in the production of Offering documents, including design, printing, photograph, and written material procurement costs; (iii) all filing fees, including those charged by the Financial Industry Regulatory Authority (“FINRA”); (iv) all of the legal fees related to FINRA clearance; and (v) our transportation, accommodation, and other roadshow expenses, up to a maximum aggregate expense allowance of $60,000.

 

Assuming that the full amount of the offering is raised, we estimate that the legal and audit expenses of the offering payable by us, excluding the placement agents’ fees, will be approximately $520,000, excluding marketing expenses, which are expected to be approximately $150,000 per month and which may increase as the Company obtains sufficient capital to allow it to do so.

  

Other Terms

 

The Company is not under any contractual obligation to engage Maxim to provide any services to the Company after this offering, and has no present intent to do so. 

  

Maxim and StartEngine Primary LLC intend to utilize two online platforms for this offering, at the domain names, https://m-vest.com/KnightscopeInc and www.startengine.com/knightscope, respectively (the “Online Platforms”), to provide technology tools to allow for the sales of securities in this offering.

 

Upon Maxim raising an aggregate of $10,000,000 in this Offering and the Regulation D Offering, Maxim shall have a right to participate as an underwriter with at least 25% of the economics in the Company’s initial public offering pursuant to a Form S-1 filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended. Such right of participation shall terminate on the third anniversary of the commencement of sales under this Offering.

 

Selling Stockholders

 

No securities are being sold for the account of stockholders; the Company will receive all the net proceeds of this offering.

 

Investors’ Tender of Funds

 

After the Offering Statement has been qualified by the Securities and Exchange Commission, the Company will accept tenders of funds to purchase the Series S Preferred Stock. The Company may close on investments on a “rolling” basis (so not all investors will receive their shares on the same date). Upon closing, funds tendered by investors will be made available to the Company for its use.

 

In order to invest, you will either subscribe to the offering via the Online Platforms, or through either the Company or Maxim, and in each case will agree to the terms of the offering, Subscription Agreement and any other relevant exhibit attached thereto. When subscribing through the Online Platforms or through Maxim, payment for the Series S Preferred Stock shall be paid to Prime Trust, LLC (the “Escrow Agent”), pursuant to the terms of the Escrow Agreement between the Company, Maxim and the Escrow Agent, from the subscriber by ACH electronic transfer, wire transfer of immediately available funds, deposit check or other means approved by the Company prior to the applicable Closing.

 

In the event that it takes some time for the Company to raise funds in this offering, the Company will rely on income from sales and cash on hand ($0.4 million as of June 30, 2019) as well as other private financing offerings until it gets to profitability through an increased number of machines-in-network.

 

 47 

 

 

KNIGHTSCOPE, INC.

 

AUDITED FINANCIAL STATEMENTS

 

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

TABLE OF CONTENTS

 

  Page
   
Independent Auditors’ Report 49
   
Financial Statements:  
   
Balance Sheets 50
   
Statements of Operations 51
   
Statements of Cash Flows 52
   
Statements of Preferred Stock and Stockholders’ Deficit 53
   
Notes to Financial Statements 54

 

 48 

 

 

Report of Independent Auditors

 

The Board of Directors and Stockholders

Knightscope, Inc.

 

We have audited the accompanying financial statements of Knightscope, Inc., which comprise the balance sheets as of December 31, 2018 and 2017, and the related statements of operations, preferred stock and stockholders’ deficit and cash flows for the years then ended, and the related notes to the financial statements.

 

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Knightscope, Inc. at December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

 

Knightscope’s Ability to Continue as a Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has recurring losses from operations, negative cash flows from operations and therefore will require additional capital to fund its operations, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

 

/s/ Ernst & Young LLP  
   
San Francisco, California  
April 29, 2019  

 

 49 

 

 

KNIGHTSCOPE, INC.

BALANCE SHEETS

 

   December 31, 
   2018   2017 
ASSETS          
Current assets:          
Cash and cash equivalents  $1,358,399   $11,563,858 
Restricted cash   200,000    - 
Accounts receivables   1,178,625    345,304 
Prepaid expenses and other current assets   755,436    435,289 
Total current assets   3,492,460    12,344,451 
           
Non-current assets:          
Autonomous data machines, net   3,311,122    3,091,108 
Property and equipment, net   106,265    140,437 
Other assets   77,650    294,650 
Total non-current assets   3,495,037    3,526,195 
           
Total assets  $6,987,497   $15,870,646 
           
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable  $751,529   $424,774 
Accrued expenses   667,880    667,912 
Deferred revenue   896,138    539,176 
Debt obligations   198,352    396,448 
Other current liabilities   290,624    113,095 
Total current liabilities   2,804,523    2,141,405 
           
Non-current liabilities:          
Debt obligations   -    403,289 
Preferred stock warrant liability   284,848    1,280,718 
Other noncurrent liabilities   -    31,800 
Deferred rent   21,280    17,523 
Total non-current liabilities   306,128    1,733,330 
           
Total liabilities   3,110,651    3,874,735 
           
Commitments and contingencies (Note 9)          
           
Preferred Stock, $0.001 par value; 25,794,930 shares authorized as of December 31, 2018 and 2017, respectively, 22,387,749 and 21,294,807 shares issued and outstanding at December 31, 2018 and 2017, respectively; aggregate liquidation preference of $46,337,834 and $41,110,337 as of December 31, 2018 and 2017, respectively   38,757,215    33,904,613 
           
Stockholders' deficit:          
Class A common stock, $0.001 par, 94,000,000 shares authorized, 0 shares issued and outstanding as of December 31, 2018 and 2017   -    - 
Class B common stock, $0.001 par, 30,000,000 shares authorized, 10,179,000 shares issued and outstanding as of December 31, 2018 and 2017   10,179    10,179 
Additional paid-in capital   2,060,071    1,641,911 
Accumulated deficit   (36,950,619)   (23,560,792)
Total stockholders' deficit   (34,880,369)   (21,908,702)
Total liabilities, preferred stock and stockholders’ deficit  $6,987,497   $15,870,646 

 

See accompanying notes to financial statements. 

 

 50 

 

 

KNIGHTSCOPE, INC.

STATEMENTS OF OPERATIONS

 

   Year ended December 31, 
   2018   2017 
         
Revenue  $2,938,634   $1,572,009 
Cost of services   6,248,813    4,638,380 
Total gross loss   (3,310,179)   (3,066,371)
           
Operating expenses:          
Research & development   3,542,432    1,891,867 
Sales & marketing   5,074,469    5,476,806 
General & administrative   2,444,114    1,779,307 
Total operating expenses   11,061,015    9,147,980 
           
Loss from operations   (14,371,194)   (12,214,351)
           
Other income (expense):          
Interest expense, net   (188,344)   (184,383)
Other expense, net   -    (2,084)
Change in fair value of warrant liabilities   1,170,511    - 
Total other income (expense)   982,167    (186,467)
           
Net loss before income tax   (13,389,027)   (12,400,818)
Income tax expense   (800)   (800)
Net loss  $(13,389,827)  $(12,401,618)
           
Basic and diluted net loss per common share  $(1.32)  $(1.22)
Weighted average shares used to compute basic and diluted net loss per share   10,179,000    10,179,000 

 

See accompanying notes to financial statements. 

 

 51 

 

 

KNIGHTSCOPE, INC.

STATEMENTS OF CASH FLOWS

 

   Year ended December 31, 
   2018   2017 
Cash Flows From Operating Activities          
Net loss  $(13,389,827)  $(12,401,618)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   1,207,186    966,744 
Stock compensation expense   338,515    88,719 
Change in warrants fair value   (1,170,511)   - 
Amortization of debt discount   78,967    23,582 
Amortization of loan fees   61,138    24,802 
Loss from damage of autonomous data machines   137,538    - 
Changes in operating assets and liabilities:          
Accounts receivable   (833,321)   (331,636)
Prepaid expenses and other current assets   (329,457)   (117,741)
Other assets   217,000    (205,400)
Accounts payable   96,140    290,182 
Accrued expenses   (87,929)   488,135 
Deferred revenue   356,962    321,179 
Other current and noncurrent liabilities   145,729    144,895 
Deferred rent   3,757    (11,410)
Net cash used in operating activities   (13,168,113)   (10,719,567)
           
Cash Flows From Investing Activities          
Autonomous data machines   (1,180,302)   (2,003,850)
Purchase of property and equipment   (41,739)   (3,117)
Net cash used in investing activities   (1,222,041)   (2,006,967)
           
Cash Flows From Financing Activities          
Proceeds from issuance of Series m Preferred Stock offering   -    19,999,914 
Proceeds from issuance of Series m-3 Preferred Stock offering   1,438,402    3,634,999 
Payment of issuance costs in Series m Preferred Stock offering   (19,736)   (1,827,249)
Payment of offering costs in Series m-3 Preferred Stock offering   -    (19,297)
Repayments of financing obligations   (16,235)   (15,671)
Proceeds from issuance of Series s Preferred Stock offering   2,789,100    - 
Payment of offering costs in Series s Preferred Stock offering   (161,225)   - 
Proceeds from issuance of Series m-2 Preferred Stock offering   999,999    - 
Principal repayments on loan payable   (1,049,041)   (225,959)
Capital lease payment   -    (3,991)
Proceeds from issuance of loan payable, net of issuance costs   403,431    - 
Net cash provided by financing activities   4,384,695    21,542,746 
Net change in cash and cash equivalents   (10,005,459)   8,816,212 
Cash, cash equivalents and restricted cash at beginning of year   11,563,858    2,747,646 
Cash, cash equivalents and restricted cash at end of year  $1,558,399   $11,563,858 
Supplemental Disclosure of Cash Flow Information          
Cash paid for interest during the year  $57,528   $134,249 
Cash paid for income taxes  $800   $800 
           
Supplemental Disclosure of Non-Cash Financing and Investing Activities          
Issuance of warrant for Common Stock  $79,645   $- 
Issuance of warrants for Preferred Stock  $174,641   $1,209,976 
Series m conversion for Series m-2 stock  $3,982,269   $- 
Offering costs included in other assets  $19,297   $19,297 
Autonomous data machines costs in accounts payables  $140,968   $110,758 
Autonomous data machines costs in accrued expenses  $77,910   $18,473 

 

See accompanying notes to financial statements.

 

 52 

 

 

KNIGHTSCOPE, INC.

STATEMENTS OF PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

 

   Series m
Preferred Stock
  Series m-2 
Preferred Stock
  Series m-3
Preferred Stock
  Series s 
Preferred Stock
  Series A
Preferred Stock
  Series B
Preferred Stock
  Class A
Common Stock
  Class B
Common Stock
          
   Number
of
Shares
  Amount  Number
of
Shares
  Amount  Number
of
Shares
  Amount  Number
of
Shares
  Amount  Number
of
Shares
  Amount  Number
of
Shares
  Amount  Number
of
Shares
  Amount  Number
of
Shares
  Amount  Additional
Paid-In
Capital
  Accumulated
Deficit
  Total
Stockholders' Deficit
 
Balance at December 31, 2016   -  $-   -  $-   -  $-   -  $-   8,936,015  $3,865,155   4,653,583  $9,441,770   -   -   10,179,000  $10,179  $1,553,192  $(11,159,174) $(9,595,803)
                                                                              
Stock based compensation   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   88,719   -   88,719 
Issuance of Series m  Preferred stock   6,666,638  $19,999,914   -       -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Offering costs   -   (1,827,249)  -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Issuance of Series m-3 Preferred stock   -   -   -   -   1,038,571   3,634,999   -   -   -   -   -   -   -   -   -   -   -   -   - 
Issuance cost related to Series m-3  Preferred Stock warrant   -   (285,648)  -   -   -   (924,328)  -   -   -   -   -   -   -   -   -   -   -   -   - 
Net loss   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   (12,401,618)  (12,401,618)
Balance at December 31, 2017   6,666,638 17,887,017   -  $-   1,038,571  $2,710,671   -   -   8,936,015  $3,865,155   4,653,583  $9,441,770   -   -   10,179,000  $10,179  $1,641,911  $(23,560,792) $(21,908,702)
                                                                              
Stock based compensation   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   338,515   -   338,515 
Issuance of Series m-2  Preferred stock   -   -   333,333   999,999   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Series m conversion for series m-2 stock net of offering costs   (1,327,423)  (4,021,302)  1,327,423   3,982,269   -   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Issuance of Series m-3 Preferred stock   -   -   -   -   410,972   1,438,402   -   -   -   -   -   -   -   -   -   -   -   -   - 
Issuance of Series s Preferred stock, net of issuance costs                           348,637   2,627,875                                             
Issuance cost related to Series m-3  Preferred Stock warrant   -   -   -   -   -   (174,641)  -   -   -   -   -   -   -   -   -   -   -   -   - 
Issuance of Class B common Stock warrant   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   79,645   -   79,645 
Net loss   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   -   (13,389,827)  (13,389,827)
Balance at December 31, 2018   5,339,215 $13,865,715   1,660,756  $4,982,268   1,449,543 $3,974,432   348,637  $2,627,875   8,936,015 $3,865,155   4,653,583  $9,441,770   -   -   10,179,000 10,179 2,060,071 $(36,950,619) $(34,880,369)

 

See accompanying notes to financial statements.

  

 53 

 

 

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

NOTE 1: The Company and Summary of Significant Accounting Policies

 

Description of business

 

Knightscope, Inc. (the “Company”), was incorporated on April 4, 2013 under the laws of the State of Delaware.

 

The Company designs, develops, builds, deploys, and supports advanced physical security technologies. The Knightscope solution to reducing crime combines the physical presence of our proprietary autonomous data machines (“ADMs”) with real-time on-site data collection and analysis and a human-machine interface. Two of our ADMs, the outdoor “K5” and the indoor “K3”, autonomously patrol client sites without the need for remote control to provide a visible, force multiplying, physical security presence to help protect assets, monitor changes in the environment and deter crime. They gather real-time data using a large array of sensors. The data is accessible through the Knightscope Security Operations Center (“KSOC”), an intuitive, browser-based interface that enables security professionals to review events generated from “really smart mobile eyes and ears” to do their jobs more effectively.

 

Basis of Presentation and Liquidity

 

These financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles (“GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).

 

Since its inception, the Company has incurred significant operating losses and negative cash flows from operations which is principally the result of significant research and development activities related to the development and continued improvement of the Company’s ADMs (hardware and software).

 

Cash and cash equivalents on hand was $1.4 million at December 31, 2018, compared to $11.6 million at December 31, 2017. The Company has historically incurred losses and negative cashflows from operations. At December 31, 2018, the Company also had an accumulated deficit of approximately $37.0 million, working capital of $0.5 million and stockholders’ deficit of $34.9 million. The Company is dependent on additional fundraising in order to sustain its ongoing operations. Without additional fundraising, typically and historically conducted on a rolling close basis, the Company will not be solvent after May 2019. There can be no assurance that the Company will be successful in raising funds at levels sufficient to fund its future operations beyond the current cash runway. 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 or delay, scale back or discontinue the development of one or more of its platforms, seek alternative financing arrangements, declare bankruptcy or terminate its operations entirely. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of one year from the issuance date of these financial statements. Management’s plans include seeking additional financing activities such as issuances of equity, issuances of debt and convertible debt instruments. The Company’s projected cash flows are subject to various risks and uncertainties, and the unavailability or inadequacy of financing to meet future capital needs could force it to modify, curtail, delay, or suspend some or all aspects of its planned operations. Sales of additional equity securities by the Company could result in the dilution of the interests of existing stockholders. The Company will require significant additional financing and is pursuing opportunities to obtain additional financing in the future through private equity and/or debt financings. However, there can be no assurance that financing will be available when required in sufficient amounts, on acceptable terms or at all. These financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary in the event the Company can no longer continue as a going concern.

 

 54 

 

 

NOTE 1: The Company and Summary of Significant Accounting Policies (Continue)

 

Reclassifications

 

Certain reclassifications limited to reclassification with the balance sheet current to current line items have been made to the 2017 financial statements to conform to the 2018 financial statement presentation. These reclassifications had no effect on net loss as previously reported.

 

Comprehensive Loss

 

Net loss was equal to comprehensive loss for years ended December 31, 2018 and 2017.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Specific accounts that require management estimates include, but are not limited to, estimating the useful lives of our ADMs and property and equipment, certain estimates required within revenue recognition, estimating fair values of Company’s common stock, share-based awards and warrant liabilities, inclusive of any contingent assets and liabilities. Actual results could differ from those estimates and such differences may be material to the financial statements.

 

Cash Equivalents

 

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company places its cash and cash equivalents in highly liquid instruments with, and in the custody of, financial institutions with high credit ratings.

 

Restricted Cash

 

The Company has restricted cash as a collateral for the Company’s corporate credit cards. As of December 31, 2018 and 2017, the carrying value of restricted cash was $0.2 million and null, respectively.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company limits the credit exposure of its cash and cash equivalent balances by maintaining its accounts in high credit quality financial institutions. Cash and cash equivalent deposits with financial institutions may occasionally exceed the limits of insurance on bank deposits; however, the Company has not experienced any losses on such accounts. As of December 31, 2018 and 2017, the Company had cash and cash equivalent balances exceeding FDIC insured limits by $1.1 million and $11.3 million, respectively.

 

The Company extends credit to customers in the normal course of business and performs ongoing credit evaluations of its customers. Concentrations of credit risk with respect to accounts receivable exist to the full extent of amounts presented in the financial statements. The Company does not require collateral from its customers to secure accounts receivable.

 

Accounts receivable are derived from the rental of proprietary ADMs along with access to browser-based interface Knightscope Security Operations Center (KSOC). The Company reviews its receivables for collectability based on historical loss patterns, aging of the receivables, and assessments of specific identifiable customer accounts considered at risk or uncollectible and provides allowances for potential credit losses, as needed. The Company also considers any changes to the financial condition of its customers and any other external market factors that could impact the collectability of the receivables in the determination of the allowance for doubtful accounts. Based on these assessments, the Company determined that an allowance for doubtful accounts on its accounts receivable balance as of December 31, 2018 and 2017 was not necessary.

 

 55 

 

 

NOTE 1: The Company and Summary of Significant Accounting Policies (Continue)

 

At December 31, 2018, the Company had three customers whose accounts receivable balances each totaled 10% or more of the Company’s total accounts receivable (54%, 12% and 12%) compared with four such customers at December 31, 2017 (19%, 16%, 11% and 10%).

 

For the year ended December 31, 2018, the Company had one customer who individually accounted for 10% or more of the Company’s total customer revenue (23%) compared with no such customers for the year ended December 31, 2017.

 

ADMs

 

ADMs consist of materials, ADMs in progress and finished ADMs. ADMs in progress and finished ADMs include materials, labor and other direct and indirect costs used in their production. Finished ADMs are valued using a discrete bill of materials, which includes an allocation of labor and direct overhead based on assembly hours. Depreciation expense on ADMs is recorded using the straight-line method over their estimated expected lives, which currently ranges from 3 to 4.5 years. Depreciation expense of finished ADMs included in research and development expense amounted to $67,037 and $55,663, depreciation expense of finished ADMs included in sales and marketing expense amounted to $117,522 and $42,358, and depreciation expense included in cost of services amounted to $946,965 and $783,516 for the years ended December 31, 2018 and 2017, respectively.

 

ADMs, net, consisted of the following:

 

   December 31, 
   2018   2017 
Raw materials  $586,529   $632,863 
ADMs in progress   205,678    175,027 
Finished ADMs   4,904,397    3,672,105 
    5,696,604    4,479,995 
Accumulated depreciation on Finished ADMs   (2,385,482)   (1,388,887)
           
ADMs, net  $3,311,122   $3,091,108 

  

The components of the Finished ADMs, net at December 31, 2018 are as follows:

 

ADMs on lease with customers  $3,234,993 
Available for lease   728,522 
Demonstration ADMs   680,541 
Research and development ADMs   81,571 
      
Charge boxes   178,770 
    4,904,397 
Less: accumulated depreciation   (2,385,482)
Finished ADMs, net  $2,518,915 

 

Property, Equipment and Software

 

Property, equipment and software, net is stated at cost less accumulated depreciation and amortization, and is depreciated using the straight-line method over the estimated useful lives of the assets. Computer equipment, software and furniture, fixtures and equipment are depreciated over useful lives ranging from three to five years, and leasehold improvements are depreciated over the respective lease term or useful lives, whichever is shorter. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the balance sheet and any resulting gain or loss is reflected in the statements of operations in the period realized.

 

 56 

 

 

NOTE 1: The Company and Summary of Significant Accounting Policies (Continue)

 

Property and equipment, leasehold improvements and software, as of December 31, 2018 and 2017 are as follows:

 

   December 31 
   2018   2017 
         
Computer equipment  $51,922   $43,893 
Software   8,185    8,185 
Furniture, fixtures & equipment   296,938    263,228 
Leasehold improvements   44,510    44,510 
    401,555    359,816 
Accumulated depreciation   (295,290)   (219,379)
Property and equipment, net  $106,265   $140,437 

 

Depreciation and amortization expense on property and equipment included in general and administrative expenses amounted to $75,910 and $85,208 as of December 31, 2018 and 2017, respectively. Depreciation and amortization expense relating to cost of services, research and development and sales and marketing was insignificant for all periods presented.

 

Impairment of Long-Lived Assets

 

The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected to result from their use or eventual disposition. If estimates of future undiscounted net cash flows are insufficient to recover the carrying value of the assets, the Company will record an impairment loss in the amount by which the carrying value exceeds the fair value. If the assets are determined to be recoverable, but the useful lives are shorter than originally estimated, the Company will depreciate or amortize the net book value of the assets over the newly determined remaining useful lives. None of the Company’s ADMs or property and equipment was determined to be impaired as of December 31, 2018 and 2017.

 

Convertible Preferred Warrant Liabilities and Common Stock Warrants

 

Freestanding warrants to purchase shares of the Company’s preferred stock are classified as liabilities on the balance sheets at their estimated fair value because the underlying shares of preferred stock are contingently redeemable and, therefore, may obligate the Company to transfer assets at some point in the future. The preferred stock warrants are recorded at fair value upon issuance and are subject to remeasurement to their respective estimated fair values. At the end of each reporting period, changes in the estimated fair value of the preferred stock warrants are recorded in the statements of operations. The Company will continue to adjust the liability associated with the preferred stock warrants for changes in the estimated fair value until the earlier of the exercise or expiration of the preferred stock warrants, the completion of a sale of the Company or an IPO. Upon an IPO, the preferred stock warrants will convert into warrants to purchase common stock and any liabilities recorded for the preferred stock warrants will be reclassified to additional paid-in capital and will no longer be subject to remeasurement.

 

The Company issued common stock warrants in connection with the execution of a certain debt financing during the year ended December 31, 2015. Common stock warrants that are not considered derivative liabilities are accounted for at fair value at the date of issuance in additional paid-in capital. The fair value of these common stock warrants is determined using the Black-Scholes option-pricing model.

 

 57 

 

 

NOTE 1: The Company and Summary of Significant Accounting Policies (Continue)

 

Revenue Recognition

 

The Company derives its revenues primarily from lease of proprietary ADMs along with access to the browser-based interface KSOC through contracts under the lease accounting that typically have a twelve (12) month term. In addition, the Company derives non-lease revenue items such as professional services related to ADMs’ deployments, special decals and training if any, recognized when control of these services is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

 

The Company determines revenue recognition through the following steps:

 

·identification of the contract, or contracts, with a customer;
·identification of the performance obligations in the contract;
·determination of the transaction price;
·allocation of the transaction price to the performance obligations in the contract; and
·recognition of revenue when, or as, the Company satisfies a performance obligation.

 

The Company recognizes revenue as follows:

 

ADM subscription revenue

 

ADM subscription revenue is generated from lease of proprietary ADMs along with access to the browser-based interface KSOC through contracts that typically have 12-month terms. These revenue arrangements adhere to lease accounting guidance and are classified as leases for revenue recognition purposes. Currently, all revenue arrangements qualify as operating leases where consideration allocated to the lease deliverables is recognized ratably over the lease term.

 

Other revenue

 

Other non-ADM related revenue such as deployment services, decals and training revenue. Non-ADM revenue is recognized when services are delivered.

 

Cost of Services

 

Cost of services includes depreciation of the ADMs over the useful lives of the ADMs, labor and associated benefits incurred in the production and maintenance of the ADMs, data and communications fees, routine maintenance costs, shipping costs, and other direct costs incurred during assembly and deployment.

 

Deferred Revenues

 

In connection with the rentals of the Company’s ADMs, the Company may receive payments for deployment before the earnings process is complete. In these situations, the Company records the payments received as deferred revenues and amortizes them over the term of the lease, which generally is a 12-month period.

 

Shipping and Handling Costs

 

The Company classifies certain shipping and handling costs as cost of services in the accompanying statements of operations. The amounts classified as cost of services represent shipping and handling costs associated with the deployment or returns of the ADMs directly to or from customers. Management believes that the classification of these shipping and handling costs as cost of services better reflects the cost of producing the ADMs and selling its services. Shipping and handling costs associated with the transportation of demonstration units shipped to sales personnel and customers are recorded as sales and marketing expenses.

 

 58 

 

 

NOTE 1: The Company and Summary of Significant Accounting Policies (Continue)

 

The shipping and handling costs recorded within cost of services totaled approximately $86,624 and $48,327 for the years ended December 31, 2018 and 2017, respectively. Shipping and handling costs recorded within sales and marketing totaled approximately $68,021 and $67,203 for years ended December 31, 2018 and 2017, respectively.

 

Share-Based Compensation

 

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation, which requires that the estimated fair value on the date of grant be determined using the Black-Scholes option pricing model with the fair value recognized over the requisite service period of the awards, which is generally the option vesting period. Stock-based awards made to nonemployees are measured and recognized based on the estimated fair value on the vesting date and are re-measured at each reporting period. The Company’s determination of the fair value of the stock-based awards on the date of grant, using the Black-Scholes option pricing model, is affected by the fair value of the Company’s common stock as well as other assumptions regarding a number of highly complex and subjective variables. These variables include but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected employee option exercise behaviors. Because there is insufficient historical information available to estimate the expected term of the stock-based awards, the Company adopted the simplified method of estimating the expected term of options granted by taking the average of the vesting term and the contractual term of the option. For awards with graded vesting, the Company recognizes stock-based compensation expense over the service period using the straight-line method, based on shares ultimately expected to vest. Beginning January 1, 2017, the Company elected to recognize forfeitures as they occur when calculating stock-based compensation for its equity awards.

 

Deferred Offering Costs

 

Prior to the completion of an offering, offering costs are capitalized. The deferred offering costs are charged against the net proceeds of the related stock issuances upon the completion of an offering or to expense if the offering is not completed or aborted.

 

Deferred Rent

 

Deferred rent consists of the difference between cash payments and the recognition of rent expense on a straight-line basis over the term of the lease.

 

Research & Development Costs

 

Research and development costs primarily consist of employee-related expenses, including salaries and benefits, share-based compensation expense, facilities costs, depreciation and other allocated expenses. Research and development costs are expensed as incurred.

 

Advertising Costs

 

Advertising costs are recorded in sales and marketing expense in the Company’s statements of operations as incurred. Advertising expense was $2.3 million and $3.9 million for the years ended December 31, 2018 and 2017, respectively.

 

 59 

 

 

NOTE 1: The Company and Summary of Significant Accounting Policies (Continue)

 

Income Taxes

 

The Company uses the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is unlikely that the deferred tax assets will not be realized. We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. In accordance with ASC 740-10, for those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, our policy will be to record the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit will be recognized in the financial statements. 

 

Basic and Diluted Net Loss per Share

 

Net loss per share of common stock is computed using the two-class method required for participating securities based on their participation rights. All series of convertible preferred stock are participating securities as the holders are entitled to participate in common stock dividends with common stock on an as converted basis. The holders of the Company’s convertible preferred stock are also entitled to noncumulative dividends prior and in preference to common stock and do not have a contractual obligation to share in the losses of the Company. In accordance with the two-class method, earnings allocated to these participating securities, which include participation rights in undistributed earnings with common stock, are subtracted from net loss to determine net loss attributable to common stockholders upon their occurrence.

 

Basic net loss per share is computed by dividing net loss attributable to common stockholders by basic weighted-average shares outstanding during the period. All participating securities are excluded from basic weighted-average shares outstanding. In computing diluted net loss attributable to common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities. Diluted net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by diluted weighted-average shares outstanding, including potentially dilutive securities, unless anti-dilutive. Potentially dilutive securities that were excluded from the computation of diluted net loss per share consist of the following:

 

   December 31, 
   2018   2017 
         
Series A Preferred Stock (convertible to common stock)   8,936,015    8,936,015 
Series B Preferred Stock (convertible to common stock)   4,653,583    4,653,583 
Series m Preferred Stock (convertible to common stock)   5,339,215    6,666,638 
Series m-2 Preferred Stock (convertible to common stock)   1,660,756    - 
Series m-3 Preferred Stock (convertible to common stock)   1,449,543    1,038,571 
Series S Preferred Stock (convertible to common stock)   348,637    - 
Warrants to purchase common stock   121,913    44,500 
Warrants to purchase Series B Preferred Stock   53,918    53,918 
Warrants to purchase of Series m-1 Preferred Stock   266,961    266,961 
Warrants to purchase of Series m-3 Preferred Stock   1,449,543    1,038,571 
Stock options   9,029,814    2,340,883 
Total potentially dilutive shares   33,309,898    25,039,640 

 

As all potentially dilutive securities are anti-dilutive as of December 31, 2018 and 2017, diluted net loss per share is the same as basic net loss per share for each year.

 

 60 

 

 

NOTE 1: The Company and Summary of Significant Accounting Policies (Continue)

 

Accounting Pronouncements Adopted in 2018

 

On January 1, 2018, the Company adopted the requirements of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) issued by the FASB utilizing the modified retrospective (cumulative effect) method of transition. Topic 606 also includes subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, the Company refers to Topic 606 and Subtopic 340-40 as “Topic 606” or the “new standard”. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, ASU 2014-09 includes provisions within a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation. Although the adoption of the new standard did not have impact on the Company’s financial statements as previously reported prior to the adoption of Topic 606, it did impact the timing of when certain performance obligations get recognized, such as deployment services which were previously bundled with the ADM and recognized over the term of the customer arrangement versus under Topic 606, these are required to be recognized when the deployment services are being completed.

 

In November 2016, the FASB issued ASU 2016-08, Statement of Cash Flows: Restricted Cash, which requires entities to present the aggregate changes in cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, the statement of cash flows will be required to present restricted cash and restricted cash equivalents as part of the beginning and ending balances of cash and cash equivalents. The ASU is effective for interim and reporting periods beginning after December 31, 2017. Adoption of the ASU is retrospective. The Company adopted the ASU on January 1, 2018, and it did not have a material impact on its cash flow statements.

 

In March 2018, the FASB issued ASU 2018-05, Income Taxes Topic (740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("ASU 2018-05") to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts And Jobs Act. As of December 31, 2018, the Company’s accounting for the Tax Act is complete and the Company did not have any significant adjustments to the provisional amounts recorded as of December 31, 2017. The Company recognizes that the IRS is continuing to publish and finalize ongoing guidance with respect to the Tax Act, which may modify accounting interpretation for the Tax Act. The Company would look to account for these impacts in the period of such change is enacted.

 

Recent Accounting Pronouncements Not Yet Effective

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires that lessees recognize a right-of-use asset and a lease liability on the balance sheet for all leases, with the exception of short-term leases. Both capital and operating leases will need to be recognized on the balance sheet. The standard is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. In 2018, the FASB issued ASU 2018-10 and 2018-11, providing, among other things, codification improvements and the optional transition method. The Company will adopt the standard in the first half of 2019, utilizing the optional transition method for adoption of Topic 842, which allows entities to continue to apply the legacy guidance in ASC 840, Leases, including disclosure requirements, in the comparative periods presented in the year of adoption. While the Company is continuing to assess the potential impact that the standard will have on its financial statements and related disclosures, the Company expects to take advantage of the transition package of practical expedients permitted within the new standard, which among other things, allows the Company to carryforward its historical lease classifications. The Company expects the impact of adoption of the new standard on the Company’s statements of operations not to be material. The Company anticipates the most significant impact of adopting the new standard will primarily be the establishment of a right-of-use asset and a corresponding lease liability in its balance sheets.

 

 61 

 

 

NOTE 1: The Company and Summary of Significant Accounting Policies (Continue)

 

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include and simplify financial reporting for share-based payments issued to nonemployees. This amendment is applicable to all public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The adoption of this amendment is not expected to have a material impact on the Company’s financial statements or disclosures.

 

In June 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurements, which expands the disclosure requirements for Level 3 fair value measurements and expands disclosures for entities that calculate net assets value. This amendment is applicable to all public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company expects to adopt this update effective fiscal half of 2020. The adoption of this amendment is not expected to have a material impact on the Company’s financial statements or disclosures

 

NOTE 2: Fair Value Measurement

 

The Company determines the fair market values of its financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following are three levels of inputs that may be used to measure fair value:

 

  · Level 1 – Quoted prices in active markets for identical assets or liabilities. The Company considers a market to be active when transactions for the asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

 

  · Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

  · Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The valuation of Level 3 investments requires the use of significant management judgments or estimation.

 

In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3. Level 3 liabilities that are measured at fair value on a recurring basis consist of the convertible preferred stock warrant liabilities. The inputs used in estimating the fair value of the warrant liabilities are described in Note 5 — Capital Stock and Warrants.

 

 62 

 

 

NOTE 2: Fair Value Measurement (Continue)

 

The following tables summarize, for each category of assets or liabilities carried at fair value, the respective fair value as of December 31, 2018 and 2017 and the classification by level of input within the fair value hierarchy:

 

   Total   Level 1   Level 2   Level 3 
December 31, 2018                    
Assets                    
Cash equivalents:                    
Money market funds  $601,465   $601,465   $-   $- 
Liabilities                    
Warrant liability – Series B Preferred Stock  $39,899   $-   $-   $39,899 
Warrant liability – Series m-1 Preferred Stock  $133,481   $-   $-   $133,481 
Warrant liability – Series m-3 Preferred Stock  $111,468   $-   $-   $111,468 

 

   Total   Level 1   Level 2   Level 3 
December 31, 2017                    
Assets                    
Cash equivalents:                    
Money market funds  $6,829,813   $6,829,813   $-   $- 
Liabilities                    
Warrant liability – Series B Preferred Stock  $70,742   $-   $-   $70,742 
Warrant liability – Series m-1 Preferred Stock  $285,648   $-   $-   $285,648 
Warrant liability – Series m-3 Preferred Stock  $924,328   $-   $-   $924,328 

 

During the years ended December 31, 2018 and 2017, there were no transfers between Level 1, Level 2, or Level 3 assets or liabilities reported at fair value on a recurring basis and the valuation techniques used did not change compared to the Company’s established practice.

 

The following table sets forth a summary of the changes in the fair value of Company’s Level 3 financial liabilities during the year ended December 31, 2018, which were measured at fair value on a recurring basis:

 

   Warrant Liability 
Balance at December 31, 2017  $1,280,718 
Initial fair value of Series m-3 Preferred Stock warrants   174,641 
Recovery on revaluation of Series B, m-1 and m-3 Preferred Stock warrants   (1,170,511)
Balance at December 31, 2018  $284,848 

 

NOTE 3: Debt Obligations

 

Loan Payable and Security Agreement

 

In November 2016, the Company entered into a loan and security agreement (the “Loan Agreement”) for $1,100,000 available to be used for general working capital purposes. The Loan Agreement is collateralized by all assets of the Company. Monthly payments of interest only are due in advance for the first six months, then principal and interest payments of $42,714 are due monthly for thirty months until maturity. The maturity date of each advance under the Loan Agreement is the date that is 36 months following the date the advance is made. Once repaid, the principal amount of the advance may not be re-borrowed. Outstanding borrowings under the Loan Agreement bear interest at 8.5% above the prime rate per annum (13.00% at December 31, 2017). Interest expense on the Loan Agreement during the years ended December 31, 2018 and 2017 was $44,246 and $133,213, respectively. The loan was fully repaid in May 2018.

 

 63 

 

 

NOTE 3: Debt Obligations (Continue)

 

Term Loan Agreement

 

In May 2018, the Company entered into a term loan agreement which allowed for individual term loans to be drawn in amounts totaling up to $3,500,000 until January 10, 2019. Each individual term loan called for 18 equal monthly payments of principal plus accrued interest which would fully amortize the term loan. Outstanding borrowings under the term loan agreement bear interest at 1.75% above the prime rate per annum. Only one individual term loan in the amount of $425,000 was drawn by the Company in May 2018. The individual term loan will mature in October 2019 and as of December 31, 2018 $250,000 in principal remained outstanding on the loan. Interest expense on the individual term loan during the year ended December 31, 2018 was $12,039. The loan was fully repaid in February 2019.

 

The Loan Agreement contains representations, warranties and covenants customary to similar credit facilities. To date, the Company has been compliant with this and all other affirmative and negative covenants in the term loan agreement. A warrant for 77,413 shares of Common B Stock was also issued to the lender in conjunction with this Loan Agreement and was recorded within Loan Payable as a debt issuance cost and is being amortized to interest expense using the effective interest method over the term of the loan (see Note 4 — Capital Stock and Warrants).

 

The amortized carrying amount of our debt consists of the following:

 

   December 31, 
   2018   2017 
Loan due 2019, net of loan fees and discount  $194,199   $779,349 
Capital lease obligation   4,153    20,388 
Total debt   198,352    799,737 
Less: current portion   (198,352)   (396,448)
Long-term debt  $-   $403,289 

  

The following table presents the scheduled principal payments by fiscal year of all the Company’s outstanding financing arrangements as of December 31, 2018:

 

   Debt
Obligations
 
2018  $250,000 

 

NOTE 4: Capital Stock and Warrants

 

In July 2018, the Company amended and restated its Certificate of Incorporation. As of December 31, 2018, the Company was authorized to issue three classes of $0.001 par value stock consisting of Class A common stock (“Class A Common Stock”), Class B common stock (“Class B Common Stock”) and Preferred Stock totaling 159,169,930 shares. The total number of shares the Company has the authority to issue under each class consists of common stock designated as 94,000,000 shares of Class A Common Stock and 30,000,000 shares of Class B Common Stock, 35,169,930 shares of $0.001 par value Preferred Stock, with Preferred Stock designated as 8,936,015 shares of Series A Preferred Stock (“Series A Preferred Stock”), 4,707,501 shares of Series B Preferred Stock (“Series B Preferred Stock”), 6,666,666 shares of Series m Preferred Stock (“Series m Preferred Stock”), 333,334 shares of Series m-1 Preferred Stock (“Series m-1 Preferred Stock”), 1,660,756 shares of Series m-2 Preferred Stock (“Series m-2 Preferred Stock”), 3,490,658 shares of Series m-3 Preferred Stock (“Series m-3 Preferred Stock”) and 9,375,000 shares of Series S Preferred Stock (“Series S Preferred Stock”).

 

Preferred Stock

 

Other than a change of control or in a liquidation, dissolution or winding up of the Company whether voluntary or involuntary or upon the occurrence of a deemed liquidation event, the preferred stock is non-redeemable. As a result of the liquidation preference, the preferred stock was not classified as part of stockholders’ deficit in the accompanying balance sheets in accordance with ASC 480-10-S99, SEC Materials. The Company has excluded all series of preferred stock from being presented within stockholders’ deficit in the accompanying balance sheets due to the nature of the liquidation preferences.

 

 64 

 

 

NOTE 4: Capital Stock and Warrants (Continue)

 

During the year ended December 31, 2017, the Company issued 6,666,638 shares of Series m Preferred stock for $3.00 per share pursuant to Regulation A of the Securities Act of 1933 as amended and from private placement transactions for total net proceeds of $18.2 million. The Company entered into Series m-3 Preferred Stock Purchase Agreements with certain purchasers pursuant to which the Company issued and sold directly to the purchasers an aggregate of 1,038,571 and 410,972 shares of the Company’s Series m-3 Preferred Stock in December 2017 and the first half of 2018, respectively, par value $0.001 per share, at a price of $3.50 per share. The Company received net proceeds of approximately $3.6 million and $1.4 million in December 2017 and the first half of 2018, respectively.

 

 In January and February 2018, the Company converted 1,327,423 shares of Series m Preferred Stock into shares of Series m-2 Preferred Stock at a 1:1 conversion ratio. In January 2018, the Company issued 333,333 shares of Series m-2 Preferred Stock, par value $0.001 per share, at a price of $3.00 per share.

 

On July 11, 2018, the Company commenced an offering of up to $50 million of its Series S Preferred Stock pursuant to Regulation D of the Securities Act, to raise additional capital for operations. The offering is to sell up to 6,250,000 shares of Series S Preferred Stock, which are convertible into shares of Class A Common Stock, at a price of $8.00 per share. As of December 31, 2018, the Company received net proceeds of approximately $2.6 million through the Regulation D offering.

 

The following tables summarize convertible preferred stock authorized and issued and outstanding as of December 31, 2018 and 2017:

 

       Shares   Proceeds
Net
   Aggregate 
   Shares   Issued and   of Issuance   Liquidation 
December 31, 2018  Authorized   Outstanding   Costs   Preference 
                 
Series A Preferred Stock   8,936,015    8,936,015   $5,219,778   $7,981,649 
Series B Preferred Stock   4,707,501    4,653,583    9,441,770    9,493,775 
Series m Preferred Stock   6,666,666    5,339,215    18,133,632    16,017,645 
Series m-1 Preferred Stock   333,334    -    -    - 
Series m-2 Preferred Stock   1,660,756    1,660,756    999,999    4,982,268 
Series m-3 Preferred Stock   3,490,658    1,449,543    4,898,760    5,073,401 
Series S Preferred Stock   9,375,000    348,637    2,627,875    2,789,096 
    35,169,930    22,387,749   $41,321,814   $46,337,834 

 

All classes of preferred stock have a par value of $0.001 per share.

 

Conversion Rights

 

Each share of Series A Preferred Stock, Series B Preferred Stock and Series m-2 Preferred Stock (collectively known as “Super Voting Preferred Stock”) is convertible at the option of the holder at any time after the date of issuance of those shares into fully paid non-assessable shares of Class B Common Stock. Each share of Series m Preferred Stock, Series m-1 Preferred Stock, Series m-3 Preferred Stock and Series S Preferred Stock (collectively known as “Ordinary Preferred Stock”) is convertible at the option of the holder at any time after the date of issuance of such shares into fully paid non-assessable shares of Class A Common Stock. Both Super Voting Preferred Stock and Ordinary Preferred Stock will be automatically converted into fully paid non-assessable shares of Class A Common Stock (i) immediately prior to an IPO, or (ii) upon receipt by the Company of a written request for such conversion from the holders of a majority of the preferred stock then outstanding and voting as a single class on an as-converted basis.

 

 65 

 

 

NOTE 4: Capital Stock and Warrants (Continue)

 

Voting rights

  

The holders of the Series A, Series B, Series m and Series m-3 Preferred Stock are entitled to voting rights equal to the number of shares of common stock into which each share of preferred stock could be converted at the record date for a vote, except as otherwise required by law, and has voting rights and powers equal to the voting rights and powers of the common stockholders. Super Voting Preferred stockholders vote on an as converted to Class B Common Stock basis and Class B Common Stock are entitled to ten votes for each share of Class B Common Stock held. Ordinary Preferred stockholders are entitled to one vote for each share of Class A Common Stock held. Class A and Class B Common stockholders vote together as one class on all matters. The holders of the preferred stock, the Class A Common Stock and Class B Common Stock vote together and not as separate classes.

 

Dividends

 

The holders of the outstanding shares of preferred stock are entitled to receive dividends, when, as and if declared by the Board of Directors, out of any assets at the time legally available payable and in preference and priority to any declaration or payment of any dividend on the common stock of the Company. Dividends would be payable at the following non-cumulative dividend rates: $0.0536 and $0.1224 per share for Series A Preferred Stock and Series B Preferred Stock, respectively, $0.1800 for Series m, Series m-1 and Series m-2 Preferred Stock, and $0.2100 and $0.48 for Series m-3 Preferred Stock and Series S Preferred Stock, respectively.

 

No distributions will be made with respect to the Series B Preferred Stock, the Series m Preferred Stock, the Series m-1 Preferred Stock, the Series m-2 Preferred Stock, Series A Preferred Stock or Series m-3 Preferred Stock unless dividends on the Series S Preferred Stock have been paid or payment has been set aside for payment to them.

 

No distributions will be made with respect to the Series A Preferred Stock or Series m-3 Preferred Stock unless dividends on the Series B Preferred Stock, Series m Preferred Stock, Series m-1 Preferred Stock and Series m-2 Preferred Stock have been paid or payment has been set aside for payment to them.

 

No distributions will be made with respect to the Series m-3 Preferred Stock until dividends on the Series A Preferred Stock have been paid or payment has been set aside for payment. No distributions will be made with respect to the Common Stock unless all declared dividends on the Series m-3 Preferred Stock have been paid or payment has been set aside for payment.

 

The right to receive dividends is not cumulative. No dividends were declared through December 31, 2018.

 

Liquidation Rights

 

The preferred stockholders have liquidation preferences over the common stockholders in the amount of $0.8932 and $2.0401 for the Series A Preferred Stock and Series B Preferred Stock, respectively, $3.00 per share for the Series m Preferred Stock, Series m-1 Preferred Stock and Series m-2 Preferred Stock, $3.50 per share for the Series m-3 Preferred Stock and $8.00 per share for the Series S Preferred Stock, respectively.

 

In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of Series S Preferred Stock are entitled to received, prior and in preference to any distribution of any of the assets of the Company to the holders of the Series A Preferred Stock, Series B Preferred Stock, Series m Preferred Stock, Series m-1 Preferred Stock, Series m-2 Preferred Stock, Series m-3 Preferred Stock or Common Stock, an amount per share equal to their respective liquidation preferences and all declared and unpaid dividends on such shares, if any. If upon the occurrence of such event, the assets and funds distributed among the holders of the Series S Preferred Stock are insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, the entire assets and funds of the Company legally available for distribution are to be distributed with equal priority and pro rata among the holders of the Series S Preferred Stock in proportion to the full amounts they would otherwise be entitled to receive.

 

 66 

 

 

NOTE 4: Capital Stock and Warrants (Continue)

 

After such payment has been made to the holders of Series S Preferred Stock, the holders of Series B Preferred Stock, Series m Preferred Stock, Series m-1 Preferred Stock and Series m-2 Preferred Stock are entitled to receive, prior and in preference to any distribution of any of the assets of the Company of the holders of Series A Preferred Stock and Series m-3 Preferred Stock or Common stock, an amount per share equal to their respective liquidation preferences and all declared and unpaid dividends on such shares, if any. If upon the occurrence of such event, the assets and funds distributed among the holders of the Series B Preferred Stock, Series m Preferred Stock, Series m-1 Preferred Stock and Series m-2 Preferred Stock are insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, the entire assets and funds of the Company legally available for distribution are to be distributed with equal priority and pro rata among the holders of the Series B Preferred Stock, Series m Preferred Stock, Series m-1 Preferred Stock and Series m-2 Preferred Stock in proportion to the full amounts they would otherwise be entitled to receive.

 

After such payment has been made to the holders of Series S Preferred Stock, Series B Preferred Stock, Series m Preferred Stock, Series m-1 Preferred Stock and Series m-2 Preferred Stock, the holders of Series A Preferred Stock are entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of Common stock or Series m-3 Preferred Stock, amounts per share equal to the liquidation preference specified for each share of Series A Preferred Stock and all declared but unpaid dividends on such shares. If upon the occurrence of such event, the assets and funds distributed among the holders of the Series A Preferred Stock are insufficient to permit the payment to such holders of the full preferential amounts, then the entire assets and funds of the Company legally available for distribution to Series A Preferred stockholders are to be distributed with equal priority and pro rata among the holders of the Series A Preferred Stock in proportion to the full amounts they would otherwise be entitled to receive.

 

After the holders of the Series S Preferred Stock, Series B Preferred Stock, Series m Preferred Stock, Series m-1 Preferred Stock, Series m-2 Preferred Stock and the Series A Preferred Stock have been paid in full, the holders of the Series m-3 Preferred Stock will be entitled to receive, prior and in preference to any distribution of the assets of the Company to the holders of Common stock amounts per share equal to the liquidation preference specified for each share of Series m-3 Preferred Stock and all declared but unpaid dividends on such shares. If upon the occurrence of such event, the assets and funds distributed among the holders of the Series m-3 Preferred Stock are insufficient to permit the payment to such holders of the full preferential amounts, then the entire assets and funds of the Company legally available for distribution to Series m-3 Preferred stockholders are to be distributed with equal priority and pro rata among the holders of the Series m-3 Preferred Stock in proportion to the full amounts they would otherwise be entitled to receive.

 

After such payments have been made to the holders of all convertible preferred stock, no further payments shall be made to the holders of the convertible preferred stock and any remaining assets of the Company shall be distributed with equal priority and pro rata among the holders of the Company’s Common stock.

 

Common Stock

 

Each share of Class B Common Stock is convertible into one fully paid and non-assessable share of Class A Common Stock at the option of the holder at any time. Each share of Class B Common Stock will automatically convert into one fully paid and non-assessable share of Class A Common Stock upon the sale, assignment, transfer or disposition of the share or any interest in the share.

  

Warrants

 

Warrants to purchase 44,500 shares of common stock for $0.25 per share were outstanding as of December 31, 2018. The warrants expire in April 2025 and are subject to automatic conversion if the fair value of the Company’s stock exceeds the exercise price as of the expiration date.

 

 67 

 

 

NOTE 4: Capital Stock and Warrants (Continue)

 

On November 7, 2016, the Company issued warrants to purchase 53,918 shares of Series B Preferred Stock in connection with a Loan and Security Agreement (see Note 4 – Debt Obligations). The exercise price for the Series B Preferred Stock warrants is the lower of (1) the lowest price per share paid by new cash investors in the next round of financing, (2) the initial offering price per share to the public in a Qualified IPO of the Company, (3) the Regulation A Price, or (4) $2.0401 per share. The warrants issued qualify as liability instruments as the warrants are exercisable into Series B Preferred Stock, which are redeemable upon a change of control or any liquidation or winding up of the Company, whether voluntary or involuntary. The warrants expire in November 2026 or two years following qualifying events and are subject to automatic conversion if the fair value of the Company’s stock exceeds the exercise price as of the expiration date. In lieu of exercising Series B Preferred Stock warrants, if the fair value of one share is greater than the exercise price (at the date of calculation), the warrants may be exchanged for a number of Series B Preferred Stock shares.

 

On February 8, 2017, the Board of Directors approved the issuance of a warrant to the Company’s exclusive placement agent in connection with the Regulation A Issuer Agreement between the Company and the placement agent as partial consideration for services rendered in connection with the Company’s Regulation A offering in which the Company sold Series m Preferred Stock. The warrant was for the purchase of up to 5% of the number of securities issued (or issuable) to prospects in the Regulation A offering or up to a maximum of 317,460 shares of Series m Preferred Stock at an exercise price equal to the price per share paid by the prospects in the offering. The expiration date of the warrant is five years from the qualification of the offering with the SEC. On December 17, 2017, the measurement date, the Company issued the Series m-1 warrant to the placement agent for the right to purchase 266,961 shares of the Company’s Series m-1 Preferred Stock at an exercise price of $3.00 per share with an expiration date of December 23, 2021. The Company currently has no shares of Series m-1 Preferred Stock issued or outstanding. The warrants issued qualify as liability instruments as the warrants are exercisable into Series m-1 Preferred Stock which are redeemable upon a change of control or any liquidation or winding up of the Company whether voluntary or involuntary. The warrants have been classified as a noncurrent liability on the Company's balance sheets and were recorded as a component of the issuance costs related to the Regulation A offering. The Series m-1 warrant is valued at market at the end of every reporting period until the warrant is exercised or expires with the change in fair value being recorded in other income/(expense) on the Company’s statements of operations.

 

On December 19, 2017, the Company issued warrants in connection with the Company’s Series m-3 financing under Regulation D to purchase an aggregate of 1,038,571 shares of the Company’s Series m-3 Preferred Stock. The warrants have an exercise price of $4.00 per share and expire on the earlier of: a) two years from the date of the warrant; b) the acquisition of the Company by another entity by means of any transaction or series of transactions to which the Company is a party or sale, lease or disposition of all or substantially all of the assets of the Company, or c) immediately prior to the closing of an initial public offering pursuant to an effective registration statement filed under the Securities Act covering the offering and sale of the Company’s common stock. The warrants issued qualify as liability instruments as the warrants are exercisable into Series m-3 Preferred Stock which are redeemable upon a change of control or any liquidation or winding up of the Company whether voluntary or involuntary. The warrants have been classified as a noncurrent liability on the Company's balance sheets and were recorded as a component of the issuance costs related to the Series m-3 Preferred Stock. The Series m-3 warrant is valued at market at the end of every reporting period until the warrant is exercised or expires with the change in fair value being recorded in other income/(expense) on the Company’s statements of operations.

 

On January 16, 2018, March 16, 2018, and June 20, 2018, the Company issued warrants in connection with the Company’s Series m-3 financing to purchase an aggregate of 410,972 shares of the Company’s Series m-3 Preferred Stock. The warrants have an exercise price of $4.00 per share and expire on the earlier of: a) two years from the date of the warrant; b) the acquisition of the Company by another entity by means of any transaction or series of transactions to which the Company is a party or sale, lease or disposition of all or substantially all of the assets of the Company, or c) immediately prior to the closing of an initial public offering pursuant to an effective registration statement filed under the Securities Act covering the offering and sale of the Company’s common stock. The warrants issued qualify as liability instruments as the warrants are exercisable into Series m-3 Preferred Stock which are redeemable upon a change of control or any liquidation or winding up of the Company whether voluntary or involuntary. The warrants have been classified as a noncurrent liability on the Company's balance sheets and were recorded as a component of the issuance costs related to the Series m-3 Preferred Stock. The Series m-3 warrant is valued at market at the end of every reporting period until the warrant is exercised or expires with the change in fair value being recorded in other income/(expense) on the Company’s statements of operations.

 

 68 

 

 

NOTE 4: Capital Stock and Warrants (Continue)

 

In connection with the Term Loan Agreement entered into in May 2018 (see Note 4 – Debt Obligations), the Company issued a warrant to purchase 77,413 shares of Class B Common Stock. The warrant has an exercise price of $1.26 per share and expires on the earlier of ten years from the date of the warrant and is subject to automatic conversion if the fair value of the Company’s stock exceeds the exercise price as of the expiration date. The Company determined the fair value of this warrant using the Black-Scholes option pricing model. The fair-value of the Series B warrant of $79,645 was recorded as a discount to the underlying loan at the execution date of the Term Loan Agreement resulting in the recognition of interest expense in the amount of $35,736 during the year ended December 31, 2018.

 

Common Stock Reserved for Future Issuance

 

Shares of common stock reserved for future issuance relate to outstanding preferred stock, warrants and stock options as follows:

 

  

December 31,
2018 

 
Series A Preferred Stock   8,936,015 
Series B Preferred Stock   4,653,583 
Series m Preferred Stock   5,339,215 
Series m-2 Preferred Stock   1,660,756 
Series m-3 Preferred Stock   1,449,543 
Series S Preferred Stock   348,637 
Stock options to purchase common stock   4,167,924 
Warrants outstanding for future issuance of convertible preferred stock and common stock   1,892,335 
Stock options available for future issuance   4,861,890 
      
Total shares of common stock reserved   33,309,898 

 

NOTE 5. Share-Based Compensation 

 

Equity Incentive Plans

 

In April 2014, the Board of Directors adopted the 2014 Equity Incentive Plan (the “2014 Plan”) allowing for the issuance of up to 2,000,000 shares of common stock through grants of options, stock appreciation rights, restricted stock or restricted stock units. In December 2016, the 2014 Plan was terminated, and the Company’s Board of Directors adopted a new equity incentive plan defined as the 2016 Equity Incentive Plan (the “2016 Plan”) in which the remaining 1,936,014 shares available for issuance under the 2014 Plan at that time were transferred to the Company’s 2016 Plan. Awards outstanding under the 2014 Plan at the time of the 2014 Plan’s termination will continue to be governed by their existing terms. The shares underlying any awards that are forfeited, canceled, repurchased or are otherwise terminated by the Company under the 2014 Plan will be added back to the shares of common stock available for issuance under the Company’s 2016 Plan. The 2016 Plan provides for the granting of stock awards such as incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock or restricted stock units to employees, directors and outside consultants as determined by the Board of Directors. Upon the termination of the 2014 Plan, all shares granted revert to the 2016 Plan. As of December 31, 2018, 4,861,890 shares were available for future grants under the 2016 Plan.

 

 69 

 

 

NOTE 5. Share-Based Compensation (Continue)

 

The Board may grant stock options under the 2016 Plan at a price of not less than 100% of the fair market value of the Company’s common stock on the date the option is granted. The option exercise price generally may not be less than the underlying stock’s fair market value at the date of grant and generally have a term of ten years. Incentive stock options granted to employees who, on the date of grant, own stock representing more than 10% of the voting power of all of the Company’s classes of stock, are granted at an exercise price of not less than 110% of the fair market value of the Company’s common stock. The maximum term of incentive stock options granted to employees who, on the date of grant, own stock having more than 10% of the voting power of all the Company’s classes of stock, may not exceed five years. The Board of Directors also determines the terms and conditions of awards, including the vesting schedule and any forfeiture provisions. Options granted under the 2016 Plan may vest upon the passage of time, generally four years, or upon the attainment of certain performance criteria established by the Board of Directors. The Company may from time to time grant options to purchase common stock to nonemployees for advisory and consulting services. At each measurement date, the Company will remeasure the fair value of these stock options using the Black-Scholes option pricing model and recognize the expense ratably over the vesting period of each stock option award. The amounts granted each calendar year to an employee or non-employee is limited depending on the type of award. Stock options comprise all of the awards granted since the Plan’s inception.

 

Stock option activity under all of the Company’s equity incentive plans as of December 31, 2018 is as follows:

 

   Shares
Available
for Grant
   Number
of Shares
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Life (Years)
   Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2017   1,936,014    2,693,800   $0.401    8.36     
Authorized   1,748,814    -    -           
Granted   -    -    -           
Forfeited   352,917    (352,917)   0.559           
Outstanding at December 31, 2017   2,288,931    2,340,883    0.378    6.88      
Authorized   4,400,000    -                
Granted   (2,096,000)   2,096,000    1.260           
Forfeited   268,959    (268,959)   1.000           
Outstanding at December 31, 2018   4,861,890    4,167,924   $0.780    6.61   $1,911,709 
                          
Vested and exercisable at December 31, 2018        2,301,135   $0.470    4.54      

 

The weighted average grant date fair value of options granted during the year ended December 31, 2018 was $0.62 per share. No options were granted during the year ended December 31, 2017. There were no option exercises during the year ended December 31, 2018. The fair value of the shares subject to stock options that were vested at December 31, 2018 and 2017 was $507,842 and $130,517, respectively. As of December 31, 2018, the Company had unamortized stock-based compensation expense of $1,005,558 that will be recognized over the average remaining vesting term of options of 2.94 years.

 

The assumptions utilized for option grants during the years ended December 31, 2018 and 2017 are as follows:

 

   December 31, 
   2018   2017 
         
Risk-free interest rate   2.79-2.86%   -%
Expected dividend yield   -%   -%
Expected volatility   48.27%   -%
Expected term (in years)   6    - 

 

 70 

 

 

NOTE 5. Share-Based Compensation (Continue)

 

A summary of stock-based compensation expense recognized in the Company’s statements of operations is as follows:

 

   Year ended December 31, 
   2018   2017 
         
Cost of services  $34,184   $40,247 
Research and development   215,061    18,238 
Sales and marketing   25,501    1,961 
General and administrative   63,769    28,273 
Total  $338,515   $88,719 

 

NOTE 6: Employee Benefit Plan

 

The Company administers a 401(K) retirement plan (the “401(K) Plan”) in which all employees are eligible to participate. Each eligible employee may elect to contribute to the 401(K) Plan. During the years ended December 31, 2018 and 2017, the Company has made no matching contributions.

 

NOTE 7:  Income Taxes 

 

The provision for income taxes consisted of the following:

 

   Years Ended December 31, 
   2018   2017 
Current:          
Federal  $-   $- 
State   800    800 
Total   800    800 
           
Deferred:          
Federal   -    - 
State   -    - 
    -    - 
Total provision for income taxes  $800   $800 

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table presents the significant components of the Company’s deferred tax assets and liabilities for the periods presented:

 

   December 31, 
   2018   2017 
Deferred tax assets:          
Net operating loss carryforwards  $9,769,961   $6,064,041 
Research and development credit carryforwards   725,739    535,797 
Accruals and other   158,714    60,560 
Amortization   46,033    45,055 
Total deferred tax assets   10,700,447    6,705,553 
Valuation allowance   (10,612,948)   (6,674,328)
Deferred tax assets After Valuation Allowance   87,500    31,225 
           
Depreciation   (87,500)   (31,225)
Total deferred tax liabilities   (87,500)   (31,225)
Net deferred tax asset/(liability)  $-   $- 

 

 71 

 

 

NOTE 7:  Income Taxes (Continue)

 

The Company considers all available evidence, both positive and negative, including historical levels of taxable income, expectations and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. At December 31, 2018 and 2017, based on the Company’s analysis of all available evidence, both positive and negative, it was considered more likely than not that the Company’s deferred tax assets would not be realized and, as a result, the Company recorded a full valuation allowance for its deferred tax assets. The valuation allowance increased $3,938,620 and $2,124,624 during the years ended December 31, 2018 and 2017, respectively.

 

As of December 31, 2018, the Company had U.S. federal net operating loss carryforwards amounts of approximately $36,640,000 which begin to expire in 2033. As of December 31, 2018, the Company had federal research and development tax credits of approximately $285,000 which begin to expire in 2033.

 

As of December 31, 2018, the Company had state net operating loss carryforwards amounts of approximately $26,310,000 which begin to expire in 2023. As of December 31, 2018, the Company had state research and development tax credits of approximately $757,000 which do not expire.

 

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. Among other changes is a permanent reduction in the federal corporate income tax rate from 35% to 21% effective January 1, 2018. This change in tax rate resulted in a reduction in our net U.S. deferred tax assets before valuation allowance by $3.0 million, which was fully offset by our valuation allowance.

 

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company’s accounting for the Tax Act is complete and the Company did not have any significant adjustments to provisional amounts recorded as of December 31, 2017.

 

Utilization of the federal and state net operating loss and federal and state research and development tax credit carryforwards may be subject to annual limitations due to the ownership percentage change provisions of the Internal Revenue Code Section 382 and similar state provisions. The annual limitations may result in the inability to fully offset future annual taxable income and could result in the expiration of the net operating loss carry forwards before utilization.

 

The Company’s unrecognized tax benefits at December 31, 2018 relate entirely to research and development credits. The total amount of unrecognized tax benefits at December 31, 2018 is $181,124. If recognized, none of the unrecognized tax benefits would impact the effective tax rate because of the valuation allowance. The Company’s policy is to recognize interest and penalties to income taxes as components of interest expense and other expense, respectively. The Company did not accrue interest or penalties related to unrecognized tax benefits as of December 31, 2018. The Company does not anticipate any significant change within twelve months of this reporting date.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Due to the Company’s net operating loss carryforwards, all tax years since inception remain subject to examination by federal and California tax authorities. The Company is not currently under audit in any major tax jurisdiction.

 

NOTE 8: Related parties and related party transactions

 

One of the Company’s vendors, Konica Minolta, Inc. (“Konica Minolta”), is a stockholder of the Company. Konica Minolta provides the Company with repair services to its ADMs. The Company has paid to Konica Minolta $519,944 and $142,092 in service fees for the years ended December 31, 2018 and 2017, respectively. The Company had payables of $44,638 and $55,050 owed to Konica Minolta as of December 31, 2018 and 2017, respectively.

 

 72 

 

 

NOTE 9: Commitments and contingencies

 

Leases

 

The Company leases facilities for office space under non-cancelable operating lease agreements. The Company leases space for its corporate headquarters in Mountain View, California through August 2023.

 

The following are the future minimum lease obligations on the Company’s lease agreements as of December 31, 2018:

 

December 31,  Lease
Obligations
 
     
2019  $675,080 
2020   717,640 
2021   733,600 
2022   749,560 
2023   506,800 
   $3,382,680 

 

Rent expense totaled $721,874 and $593,224 for the years ended December 31, 2018 and 2017, respectively, included in the Company’s statements of operations. Rent expenses for the year ended December 31, 2018 included $112,017 rent expenses related to the Company’s New York showroom.

 

Legal Matters

 

The Company may be subject to pending legal proceedings and regulatory actions in the ordinary course of business, however no such claims have been identified as of December 31, 2018 that would have a material adverse effect on the Company’s financial position, results of operations or cash flows.

 

The Company from time to time enters into contracts that contingently require the Company to indemnify parties against third party claims. These contracts primarily relate to: (i) arrangements with customers which generally include certain provisions for indemnifying customers against liabilities if the services infringe a third party’s intellectual property rights, (ii) the Regulation A Issuer Agreement where the Company may be required to indemnify the placement agent for any loss, damage, expense or liability incurred by the other party in any claim arising out of a material breach (or alleged breach) as a result of any potential violation of any law or regulation, or any third party claim arising out of any investment or potential investment in the offering, and (iii) agreements with the Company’s officers and directors, under which the Company may be required to indemnify such persons from certain liabilities arising out of such persons’ relationships with the Company. The Company has not incurred any material costs as a result of such obligations and has not accrued any liabilities related to such obligations in the financial statements at December 31, 2018 and 2017. 

 

Sales Tax Contingencies

 

The Company has historically not collected state sales tax on the sale of its Machine-as-a-Service product offering but has paid sales tax and use tax on all purchases of raw materials. The Company’s Machine-as-a-Service product offering may be subject to sales tax in certain jurisdictions. If a taxing authority were to successfully assert that the Company has not properly collected sales or other transaction taxes, or if sales or other transaction tax laws or the interpretation thereof were to change, and the Company was unable to enforce the terms of their contracts with customers that give the right to reimbursement for the assessed sales taxes, tax liabilities in amounts that could be material may be incurred. Based on the Company’s assessment, the Company has recorded a sales tax liability of $206,766 and $80,095 at December 31, 2018 and 2017, respectively, which has been included on other current liabilities on the accompanying balance sheets. The Company continues to analyze possible sales tax exposure, but does not currently believe that any individual claim or aggregate claims that might arise will ultimately have a material effect on its results of operations, financial position or cash flows.

   

 73 

 

 

NOTE 10: Subsequent Events

 

On February 28, 2019 the Company paid in full the outstanding loan with Silicon Valley Bank.

 

On February 28, 2019 the Company entered into a financing arrangement with Farnam Street Financial (“Farnam”) for $3,000,000 (“Financing Arrangement”). Under this Financing Arrangement, the Company collateralized fifty (50) ADMs and have an initial repayment period of two years for a monthly fee of $121,129 per month plus tax and an option to purchase these ADMs back for $1,350,000 plus tax or, at the end of the two year period (March 2021) the Company can elect to extend the repayment period for additional year at a monthly fee of $66,621 per month plus tax with an final payment of $600,000 plus tax at the end of the additional year. The effective interest rate under the two and or three-year repayment periods is 35% and 31%, respectively.

 

Management has evaluated subsequent events through April 29, 2019, the date the financial statements were available to be issued. Based on this evaluation, no additional material events were identified which require adjustment or disclosure in these financial statements.

 

Subsequent events after the issuance of the audit report (unaudited)

 

On April 30, 2019 the Company signed a Note and Warrant Purchase Agreement under the form of which the Company can issue up to $15,000,000 of convertible promissory notes and warrants to purchase up to 3,000,000 shares of Series S Preferred Stock (20% warrant coverage) (the “Convertible Note Financing”).

 

Warrants to purchase shares of Series S Preferred Stock of the Company were also issued to investors who invested in the Convertible Note Financing. The warrants to purchase shares of Series S Preferred Stock have an exercise price of $4.50 per share and expire on the earlier of December 31, 2021 or 18 months after the closing of the Company’s first firm commitment underwritten initial public offering of the Company’s common stock pursuant to a registration statement filed under the Securities Act. The convertible promissory notes have a maturity date of January 1, 2022, provide for payment in kind (PIK) interest at a rate of 12% per annum, are generally the most senior company security (subject to limited subordination carve-outs) and provide for significant discounts upon a qualified financing or an initial public offering, and for a premium upon a change of control. As of July 11, 2019, the Company has issued convertible notes in the aggregate principal amount of $1,372,000 and warrants to purchase up to 274,400 shares of Series S Preferred Stock.

 

In connection with the Convertible Note Financing, on May 17, 2019, the Company has amended its certificate of incorporation to (i) increase the number of authorized shares of Class A Common Stock, par value $0.001 per share, to a total of 114,000,000 shares, (ii) increase the number of authorized shares of Preferred Stock, par value $0.001 per share, to a total of 43,405,324 shares (the “Preferred Stock”), (iii) increase the number of authorized shares of Series S Preferred Stock, par value $0.001 per share, to a total of 13,108,333 shares, (iv) create a new series of Preferred Stock, designated Series m-4 Preferred Stock, par value $0.001 per share, consisting of 4,502,061 authorized shares, (v) establish the rights, preferences, privileges and restrictions of the Common Stock and the Preferred Stock, (vi) provide for payment of a PIK Dividend (as defined in the amended and restated certificate of incorporation) on the Series m-4 Preferred Stock, and (vii) make certain other changes, all as set forth in the Amended and Restated Certificate of Incorporation in the form approved by the Company’s board and stockholders.

 

The issuance of the warrants to purchase Series S Preferred Stock is expected to trigger an anti-dilution adjustment to the conversion ratio of the Series S Preferred Stock to Common Stock. Pursuant to the terms of the Convertible Note Financing, the Company has become obligated to exchange all or a portion of its outstanding shares of Series m-3 Preferred Stock for the newly authorized shares of Series m-4 Preferred Stock and on June 10, 2019, the Company issued 1,432,786 shares of its Series m-4 Preferred Stock in exchange for 1,432,786 shares of its shares of Series m-3 Preferred Stock. The Series m-4 Preferred Stock has a senior liquidation preference to all other Preferred Stock and Common Stock of the Company, has an accruing payment in kind (PIK) dividend of 12%, and has certain other preferential rights, including voting rights, as further explain in the Company’s amended and restated certificate of incorporation.

  

In connection with the Convertible Note Financing, William Santana Li, the Chief Executive Officer and sole director of the Company, was granted a voting proxy to vote substantially all of the shares of the Company’s Series m-4 Preferred Stock, and the stock issued upon the conversion of warrants to purchase all of the shares of the Company’s Series m-3 Preferred stock and upon the conversion of warrants to purchase shares of the Company’s Series S Preferred stock, and the stock issuable upon conversion of the convertible promissory notes issued as part of the Convertible Note Financing, in each case to the extent that such shares are held by participants in the Convertible Note Financing.

 

On June 28, 2019 and July 9, 2019, the Company held closings of its Regulation D offering pursuant to which it sold 29,092 shares of Series S Preferred Stock in the aggregate at $8 per share, for aggregate gross proceeds of $232,736.

 

 74 

 

  

PART III

INDEX TO EXHIBITS

 

Item 8. Exhibits.

 

The documents listed in the Exhibit Index of this report are incorporated by reference, as indicated below.

 

Exhibit
Number
  Description   Filed/Furnished/
Incorporated by
Reference from Form
  Incorporated by
Reference from
Exhibit No.
  Date Filed
1.1   Engagement Letter with Maxim Group, LLC dated March 12, 2019 (“Maxim Engagement Letter”)   Filed        
1.2   Amendment to Maxim Engagement Letter dated April 4, 2019   Filed        
1.3   Second Amendment to Maxim Engagement Letter dated May 20, 2019   Filed        
1.4   Third Amendment to Maxim Engagement Letter dated June 19, 2019   Filed        
1.5   Fourth Amendment to Maxim Engagement Letter dated June 24, 2019   Filed        
1.6   Fifth Amendment to Maxim Engagement Letter dated July 5, 2019   Filed        
1.7   Services Agreement with StartEngine CrowdFunding, Inc. dated July 6, 2019   Filed        
2.1   Amended and Restated Certificate of Incorporation   Filed        
2.2   Bylaws   Incorporated by reference from Form 1-A/A   2.2   December 7, 2016
3.1   Note and Warrant Purchase Agreement   Filed        
3.2   Convertible Promissory Note   Filed        
3.3   Warrant to Purchase Series S Preferred Stock   Filed        
3.4   Lease Agreement with Farnam Street Financial, Inc. dated February 8, 2019 (the “Farnam Agreement”)   Filed        
3.5   Exhibits and Schedules to the Farnam Agreement   Filed        
3.6   Form of Exchange Agreement for purchasers of Series m-4 Preferred Stock   Filed        
3.7   Form of Voting Proxy   Filed        
4.1   Form of Subscription Agreement for existing holders of Series S Preferred Stock   Filed        
4.2   Form of Subscription Agreement for purchasers of Series S Preferred Stock under Regulation A   Filed        
6.1   2014 Equity Incentive Plan   Incorporated by reference from Form 1-A/A   6.1   December 7, 2016
6.2   2016 Equity Incentive Plan   Incorporated by reference from Form 1-A/A   6.2   December 7, 2016
6.3   Loan and Security Agreement dated as of May 23, 2018, as amended   Incorporated by reference from Form 1-U   6.1   June 4, 2018
6.4   Lease Agreement dated April 1, 2017 between Terra Bella Partners LLC and the Company   Incorporated by reference from Form 1-SA   6.4   September 29, 2017
6.5   Lease Agreement dated January 14, 2018 between Terra Bella Partners LLC and the Company, as amended February 6, 2018   Incorporated by reference from Form 1-K   6.5   April 30, 2018
8.1 Escrow Services Agreement among Prime Trust, LLC, the Company and Maxim Group LLC dated as of July 17, 2019   Filed        
11.1   Independent Auditor’s Consent   Filed        
12.1   Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation as to the legality of the securities being qualified   Filed        

 

 75 

 

 

SIGNATURES

 

Pursuant to the requirements of Regulation A, the issuer certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 1-A and has duly caused this Offering Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Mountain View, California, on July 18, 2019.

 

  Knightscope, Inc.
   
  /s/ William Santana Li
  By William Santana Li, Chief Executive Officer

 

This Offering Statement has been signed by the following person in the capacities and on the date indicated.

 

/s/ William Santana Li  

By William Santana Li, as Chief Executive Officer and Sole Director

Date:  

 

/s/ Marina Hardof

By Marina Hardof, as Chief Financial Officer and Principal Accounting Officer

Date:  

 

 76 

 

Exhibit 1.1

 

 

 

DRAFT; SUBJECT TO MAXIM GROUP COMMITMENT COMMITTEE APPROVAL

 

CONFIDENTIAL

 

March 12, 2019

 

William Santana Li

Chairman and CEO

Knightscope, Inc.

1070 Terra Bella Avenue

Mountain View, CA 94043

 

RE: Rule 506(c) Private Placement

 

Dear Mr. Li:

 

This letter confirms our agreement that Knightscope, Inc., a Delaware corporation (collectively with its owned or controlled subsidiaries, the “Company”) has engaged Maxim Group LLC (together with its owned or controlled subsidiaries, the “Placement Agent”) to act as the Company’s exclusive Placement Agent for all online retail investor transactions within the United States in accordance with Regulation D of the Act (as defined below), as set forth herein in connection with the Company’s proposed private placement (the “Offering”) of Series S Preferred Stock (the “Securities”) of the Company.

 

Upon acceptance (indicated by your signature below), this letter agreement (the “Agreement”) will confirm the terms of the engagement between the Placement Agent and the Company on the terms and conditions set forth herein.

 

1.           Appointment. Subject to the terms and conditions of this Agreement, the Company hereby retains the Placement Agent, and the Placement Agent hereby agrees to act, as the Company’s exclusive Placement Agent of the Securities within the United States in accordance with Regulation D of the Act, in connection with the Offering to online retail investors (which, for the sake of clarify, does not include any entity, corporate or institutional investors), including but not limited to investor leads generated through online sources such as the Company website or M-Vest LLC. As Placement Agent for the Offering, the Placement Agent will advise and assist the Company in identifying one or more investors that are “accredited” within the meaning of the U.S. federal securities laws (“Investors”) to participate in the Offering, which process may include general solicitation and will include the verification of Investors’ “accredited” status pursuant to Rule 506(c) of Regulation D. The Company acknowledges and agrees that the Placement Agent is only required to use its “commercially reasonable efforts” in connection with its activities hereunder and that this Agreement does not constitute a legal or binding commitment by the Placement Agent to purchase the Securities or introduce the Company to Investors, nor does this Agreement constitute a representation or warranty on the part of the Placement Agent that any Offering will be consummated. The Company retains the right to determine all of the terms and conditions of the Offering and to accept or reject any proposals submitted to it by the Placement Agent in its sole and absolute discretion.

 

Members FINRA & SIPC

405 Lexington Ave. * New York, NY 10174 * tel: (212) 895-3500 * (800) 724-0761 * fax: (212) 895-3783 * www.maximgrp.com

New York, NY * Long Island, NY * Red Bank, NJ

 

 

 

 

Knightscope, Inc.  
Page 2

 

2.           Information.

 

(a)           The Company recognizes that, in completing its engagement hereunder, the Placement Agent will be using and relying on both publicly available information and on data, material and other information (including non-public information) furnished to Placement Agent by the Company or its Representatives. The Company will use commercially reasonable effort to cooperate with the Placement Agent and furnish, and cause to be furnished, to the Placement Agent, any and all information and data concerning the Company, its business, financial condition and plans for the Offering that the Placement Agent deems appropriate (including, without limitation, the Company’s strategic, business, growth, acquisition and/or merger plans and plans for raising capital or additional financing) that is reasonably requested by the Placement Agent and reasonably available to the Company (the “Information”), including a Private Placement Memorandum to be used in connection with the Offering, if deemed appropriate by the Placement Agent and the Company (collectively, the “Private Placement Materials”). Any Information and Private Placement Materials forwarded to prospective Investors will be in form acceptable to the Company and its counsel and Placement Agent and its counsel. It is understood that, subject to Placement Agent’s legal review, the parties do not anticipate the need for additional material Private Placement Materials beyond the current versions of such documents as prepared for the Offering. The Company represents and warrants that all Information furnished by the Company or its Representatives and Private Placement Materials, including, but not limited to, the Company’s financial statements, will be complete and correct in all material respects and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading.

 

(b)           It is further agreed that the Placement Agent will conduct a due diligence investigation of the Company and the Company will cooperate with such investigation as a condition of the Placement Agent’s participation in the Offering. The Company recognizes and confirms that the Placement Agent: (i) will use and rely primarily on the Information, the Private Placement Materials and information available from generally recognized public sources in performing the services contemplated by this letter without having independently verified the same; (ii) is authorized as the Placement Agent to transmit to any prospective investors a copy or copies of the Private Placement Materials, forms of subscription documents and any other legal documentation supplied to the Placement Agent for transmission to any prospective investors by or on behalf of the Company or by any of the Company’s officers, representatives or agents, in connection with the performance of the Placement Agent’s services hereunder or any transaction contemplated hereby; (iii) does not assume responsibility for the accuracy or completeness of the Information or the Private Placement Materials and such other information, if any provided to the Investors; (iv) will not make an appraisal of any assets of the Company or the Company generally; and (v) retains the right to continue to perform due diligence of the Company, its business and its officers and directors during the course of the engagement.

 

(c)           Until the date that is five (5) years from the date hereof, the Placement Agent will keep all information obtained from the Company confidential except: (i) Information which is otherwise publicly available, or previously known to or obtained by, the Placement Agent independently of the Company and without breach of any of the Placement Agent’s agreements with the Company; (ii) the Placement Agent may disclose such information to its officers, directors, employees, agents and representatives, and to its other advisors and financial sources on a need to know basis only and will ensure that all such persons will keep such information strictly confidential. No such obligation of confidentiality shall apply to information that: (i) is in the public domain as of the date hereof or hereafter enters the public domain without a breach by the Placement Agent, (ii) was known or became known by the Placement Agent prior to the Company’s disclosure thereof to the Placement Agent, (iii) becomes known to the Placement Agent from a source other than the Company, and other than by the breach of an obligation of confidentiality owed to the Company, (iv) is disclosed by the Company to a third party without restrictions on its disclosure, (v) is independently developed by the Placement Agent or (vi) is required to be disclosed by the Placement Agent or its officers, directors, employees, agents, attorneys and to its other advisors and financial sources, pursuant to any order of a court of competent jurisdiction or other governmental body or as may otherwise be required by law.

 

Members FINRA & SIPC

405 Lexington Ave. * New York, NY 10174 * tel: (212) 895-3500 * (800) 724-0761 * fax: (212) 895-3783 * www.maximgrp.com

New York, NY * Long Island, NY * Red Bank, NJ

 

 

 

 

Knightscope, Inc.  
Page 3

 

(d)           The Company recognizes that in order for the Placement Agent to perform properly its obligations in a professional manner, the Company to the extent practicable will keep the Placement Agent informed of and permit the Placement Agent to participate in meetings and discussions between the Company and any third party relating to the Offering of Securities covered by the terms of the Placement Agent’s engagement. If at any time during the course of the Placement Agent’s engagement, the Company becomes aware of any material change in any of the information previously furnished to the Placement Agent, it will promptly advise the Placement Agent of the change.

 

(e)           The Offering shall be conditioned upon, among other things, the following:

 

(i)            Satisfactory completion by the Placement Agent of its due diligence investigation and analysis of: (a) the Company’s arrangements with its officers, directors, employees, affiliates, customers and suppliers, (b) the audited historical financial statements of the Company, and (c) the Company’s projected financial results for the fiscal years ending December 31, 2018 through 2020;

 

(ii)           The Company continuing to retain Ernst & Young as its accountants (or such other accountants acceptable to the Placement Agent), which will perform the audit of the financial statements and the financial exhibits, if any, to be included in the Private Placement Materials, and will continue to engage accountants of comparable quality (as may be determined by the Company’s Board of Directors or audit committee) for a period of at least three (3) years after the initial Closing (as defined below);

 

(iii)          The Company retaining a transfer agent for the Company’s common equity reasonably acceptable to the Placement Agent and continuing to retain a competent transfer agent for a period of three (3) years after the initial Closing; and

 

(iv)          Upon the execution of the engagement letter, the Company at its own expense will conduct background checks, by a background search firm acceptable to the Placement Agent, for the Company’s senior management.

 

3.           Compensation. As compensation for services rendered and to be rendered hereunder by Placement Agent, the Company agrees to provide the Placement Agent with the following:

 

The Company agrees to pay the Placement Agent a cash fee payable upon each Closing (as defined below) occurring during the term of this Agreement equal to six and one-half percent (6.5%) of the gross proceeds actually received by the Company at each Closing (the “Placement Fee”). A “Closing” means closing of the sale of Securities and the receipt of proceeds by the Company from the sale of such Securities to a Maxim Investor (as defined below). A “Maxim Investor” is a retail investor (which, for the sake of clarify, does not include any entity, corporate or institutional investors) that consummates an online transaction through the M-Vest online platform managed by Maxim inclusive of any and all traffic driven by the Company to said platform. Additionally, at the discretion of Maxim, an offline non-retail investor may be submitted by Maxim to the Company for pre-approval to be considered a Maxim Investor.

 

4.           Term of Engagement.

 

(a)           This Agreement will remain in effect for twelve (12) months, after which either party shall have the right to terminate it on thirty (30) days prior written notice to the other. The date of termination of this Agreement is referred to herein from time to time as the “Termination Date.” The period of time during which this Agreement remains in effect is referred to herein from time to time as the “Term.” In the event, however in the course of the Placement Agent’s performance of due diligence it deems it necessary to terminate the engagement, the Placement Agent may do so at any time upon immediate written notice.

 

Members FINRA & SIPC

405 Lexington Ave. * New York, NY 10174 * tel: (212) 895-3500 * (800) 724-0761 * fax: (212) 895-3783 * www.maximgrp.com

New York, NY * Long Island, NY * Red Bank, NJ

 

 

 

 

Knightscope, Inc.  
Page 4

 

(b)           Notwithstanding anything herein to the contrary, subject to the twelve months limitation described in Section 4(a) above, the obligation to pay the compensation described in Section 3, this Section 4, Sections 6 and 8-17 and all of Exhibit A attached, hereto (the terms of which are incorporated by reference hereto), will survive any termination or expiration of this Agreement. The termination of this Agreement shall not affect the Company’s obligation to pay fees to the extent provided for in Section 3 herein. All such fees due shall be paid to the Placement Agent on or before the Termination Date (in the event such fees and reimbursements are earned or owed as of the Termination Date) or upon the Closing of the Offering or any applicable portion thereof (in the event such fees are due pursuant to the terms of Section 3 hereof).

 

5.           Certain Placement Procedures. The Company and the Placement Agent each represents to the other that it has not taken, and the Company and the Placement Agent each agrees with the other that it will not take any action, directly or indirectly, so as to cause the Offering to fail to be entitled to rely upon the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the “Act”). In effecting the Offering, the Company and the Placement Agent each agrees to comply in all material respects with applicable provisions of the Act and any regulations thereunder and any applicable laws, rules, regulations and requirements (including, without limitation, all U.S. state law and all national, provincial, city or other legal requirements). The Company agrees and acknowledges that the Offering shall be conducted in compliance with Rule 506(c), which among other things permits the Company and Placement Agent to engage in general solicitation so long as all investors in the Offering are “accredited investors” and the Placement Agent has taken reasonable steps to verify that all such investors are accredited investors.” Those steps may include but are not limited to reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, etc. The Company agrees that any representations and warranties made by it to any Investor in the Offering shall be deemed also to be made to the Placement Agent for its benefit.

 

6.           Indemnification. The Company agrees to indemnify Placement Agent in accordance with the indemnification and other provisions attached to the Agreement as Exhibit A (the “Indemnification Provisions”), which provisions are incorporated herein by reference and shall survive the termination or expiration of the Agreement.

 

7.           Other Activities. The Company acknowledges that the Placement Agent has been, and may in the future be, engaged to provide services as an underwriter, placement agent, finder, advisor and investment banker to other companies in the industry in which the Company is involved. Subject to the confidentiality provisions of the Placement Agent contained in Section 2 hereof, the Company acknowledges and agrees that nothing contained in this Agreement shall limit or restrict the right of the Placement Agent or of any member, manager, officer, employee, agent or representative of the Placement Agent, to be a member, manager, partner, officer, director, employee, agent or representative of, investor in, or to engage in, any other business, whether or not of a similar nature to the Company’s business, nor to limit or restrict the right of the Placement Agent to render services of any kind to any other corporation, firm, individual or association; provided that the Placement Agent and any of its member, manager, officer, employee, agent or representative shall not use the Information to the detriment of the Company.

 

Members FINRA & SIPC

405 Lexington Ave. * New York, NY 10174 * tel: (212) 895-3500 * (800) 724-0761 * fax: (212) 895-3783 * www.maximgrp.com

New York, NY * Long Island, NY * Red Bank, NJ

 

 

 

 

Knightscope, Inc.  
Page 5

 

8.           Intentionally Blank.

 

9.           Governing Law; Jurisdiction; Waiver of Jury Trial. This Agreement will be governed as to validity, interpretation, construction, effect and in all other respects by the internal law of the State of New York. The Company and the Placement Agent each (i) agree that any legal suit, action or proceeding arising out of or relating to this Agreement shall be instituted exclusively in the New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, (ii) waives any objection to the venue of any such suit, action or proceeding, and the right to assert that such forum is an inconvenient forum, and (iii) irrevocably consents to the jurisdiction of the New York State Supreme Court, County of New York, and the United States District Court for the Southern District of New York in any such suit, action or proceeding. Each of the Company and the Placement Agent further agrees to accept and acknowledge service of any and all process that may be served in any such suit, action or proceeding in the New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York and agree that service of process upon it sent by certified mail or private carrier (Federal Express, UPS or equivalent) to its address shall be deemed in every respect effective service of process in any such suit, action or proceeding. The parties hereby expressly waive all rights to trial by jury in any suit, action or proceeding arising under this Agreement.

 

10.         Securities and Other Law Compliance. The Company, at its own expense, will use its best efforts to obtain any registration, qualification or approval required to sell any Securities under the laws (including U.S. state “blue sky” laws) of any applicable jurisdictions.

 

11.         Representations and Warranties. The Company and the Placement Agent each respectively represent and warrant that: (a) it has full right, power and authority to enter into this Agreement and to perform all of its obligations hereunder; (b) this Agreement has been duly authorized and executed and constitutes a legal, valid and binding agreement of such party enforceable in accordance with its terms; and (c) the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby does not conflict with or result in a breach of (i) such party’s certificate of incorporation or by-laws or (ii) any agreement to which such party is a party or by which any of its property or assets is bound.

 

12.         Parties; Assignment; Independent Contractor; No Tax Advice.  This Agreement has been and is made solely for the benefit of the Placement Agent and the Company and each of the persons, agents, employees, officers, directors and controlling persons referred to in Exhibit A and their respective heirs, executors, personal representatives, successors and assigns, and nothing contained in this Agreement will confer any rights upon, nor will this Agreement be construed to create any rights in, any person who is not party to such Agreement, other than as set forth in this section. The rights and obligations of either party under this Agreement may not be assigned without the prior written consent of the other party hereto and any other purported assignment will be null and void. The Placement Agent has been retained under this Agreement as an independent contractor, and it is understood and agreed that this Agreement does not create a fiduciary relationship between the Placement Agent and the Company or their respective Boards of Directors. The Placement Agent shall not be considered to be the agent of the Company for any purpose whatsoever and the Placement Agent is not granted any right or authority to assume or create any obligation or liability, express or implied, on the Company’s behalf, or to bind the Company in any manner whatsoever. The Company acknowledges that the Placement Agent does not provide accounting, tax or legal advice. The Company is authorized, however, subject to applicable law, to disclose any and all aspects of the Offering that are necessary to support any U.S. federal income tax benefits expected to be claimed with respect to such transaction, and all materials of any kind (including tax opinions and other tax analyses) related to those benefits.

 

13.         Corporate Services. Company represents that it will consider using Maxim’s Corporate Services Department with respect to the Company’s stock option incentive program.

 

Members FINRA & SIPC

405 Lexington Ave. * New York, NY 10174 * tel: (212) 895-3500 * (800) 724-0761 * fax: (212) 895-3783 * www.maximgrp.com

New York, NY * Long Island, NY * Red Bank, NJ

 

 

 

 

Knightscope, Inc.  
Page 6

 

14.         Validity. In case any term of this Agreement will be held invalid, illegal or unenforceable, in whole or in part, the validity of any of the other terms of this Agreement will not in any way be affected thereby.

 

15.         Counterparts. This Agreement may be executed in counterparts and each of such counterparts will for all purposes be deemed to be an original, and such counterparts will together constitute one and the same instrument.

 

16.         Notices. All notices will be in writing and will be effective when delivered in person, sent by certified mail or by private carrier (Federal Express, UPS or equivalent), or sent via facsimile and confirmed by letter, to the party to whom it is addressed at the following addresses or such other address as such party may advise the other in writing:

 

To the Company: William Santana Li
  Chairman and CEO
  Knightscope, Inc.
  1070 Terra Bella Avenue
  Mountain View, CA 94043

 

To the Placement Agent Maxim Group LLC
  405 Lexington Avenue
  New York, NY 10174
  Attention: Clifford A. Teller and James Siegel, Esq.
  Telephone:  (212) 895-3500
  Facsimile:  (212) 895-3783 and (212) 895-3860

 

17.         Press Announcements. The Company agrees that the Placement Agent shall, from and after any Closing, have the right to reference the Offering and the Placement Agent’s role in connection therewith in the Placement Agent’s marketing materials and on its website and to place advertisements in financial and other newspapers and journals, in each case at its own expense, subject to the reasonable approval of the Company prior to such release.

 

(Signature Page Follows)

 

Members FINRA & SIPC

405 Lexington Ave. * New York, NY 10174 * tel: (212) 895-3500 * (800) 724-0761 * fax: (212) 895-3783 * www.maximgrp.com

New York, NY * Long Island, NY * Red Bank, NJ

 

 

 

 

Knightscope, Inc.  
Page 7

 

We are delighted at the prospect of working with you and look forward to proceeding with the Offering. If you are in agreement with the foregoing, please execute and return two copies of this engagement letter to the undersigned together. This Agreement may be executed in counterparts, electronic mail and by facsimile transmission.

 

  Very truly yours,
   
  Maxim Group LLC
   
  /s/ Ritesh Veera
  Name: Ritesh Veera
  Title: Senior Managing Director, Investment Banking
   
  /s/ Clifford A. Teller
  Name: Clifford A. Teller
  Title: Executive Managing Director of Investment Banking

 

Agreed to and accepted this 12th day of March, 2019.

 

Knightscope, Inc.  
   
/s/ William Santana Li  
Name: William Santana Li  
Title: Chairman and CEO  

 

Members FINRA & SIPC

405 Lexington Ave. * New York, NY 10174 * tel: (212) 895-3500 * (800) 724-0761 * fax: (212) 895-3783 * www.maximgrp.com

New York, NY * Long Island, NY * Red Bank, NJ

 

 

 

 

Knightscope, Inc.  
Page 8

 

Exhibit A

 

INDEMNIFICATION PROVISIONS

 

Capitalized terms used in this Exhibit shall have the meanings ascribed to such terms in the Agreement to which this Exhibit is attached.

 

In addition to and without limiting any other right or remedy available to the Placement Agent and the Indemnified Parties (as hereinafter defined), the Company agrees to indemnify and hold harmless Placement Agent and each of the other Indemnified Parties from and against any and all losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs, expenses and disbursements, and any and all actions, suits, proceedings and investigations in respect thereof and any and all legal and other costs, expenses and disbursements in giving testimony or furnishing documents in response to a subpoena or otherwise (including, without limitation, the costs, expenses and disbursements, as and when incurred, of investigating, preparing, pursing or defending any such action, suit, proceeding or investigation (whether or not in connection with litigation in which any Indemnified Party is a party)) (collectively, “Losses”), directly or indirectly, caused by, relating to, based upon, arising out of, or in connection with, Placement Agent’s acting for the Company, including, without limitation, any act or omission by Placement Agent in connection with its acceptance of or the performance or non-performance of its obligations under the Agreement between the Company and Placement Agent to which these indemnification provisions are attached and form a part, any breach by the Company of any representation, warranty, covenant or agreement contained in the Agreement (or in any instrument, document or agreement relating thereto, including any agency agreement), or the enforcement by Placement Agent of its rights under the Agreement or these indemnification provisions, except to the extent that any such Losses are found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily and directly from the gross negligence or willful misconduct of the Indemnified Party seeking indemnification hereunder.

 

The Company also agrees that no Indemnified Party shall have any liability (whether direct or indirect, in contract or tort or otherwise) to the Company for or in connection with the engagement of Placement Agent by the Company or for any other reason, except to the extent that any such liability is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily and directly from such Indemnified Party’s gross negligence or willful misconduct.

 

These Indemnification Provisions shall extend to the following persons (collectively, the “Indemnified Parties”): Placement Agent, its present and former affiliated entities, managers, members, officers, employees, legal counsel, agents and controlling persons (within the meaning of the federal securities laws), and the officers, directors, partners, stockholders, members, managers, employees, legal counsel, agents and controlling persons of any of them. These indemnification provisions shall be in addition to any liability, which the Company may otherwise have to any Indemnified Party.

 

If any action, suit, proceeding or investigation is commenced, as to which an Indemnified Party proposes to demand indemnification, it shall notify the Company with reasonable promptness; provided, however, that any failure by an Indemnified Party to notify the Company shall not relieve the Company from its obligations hereunder. An Indemnified Party shall have the right to retain counsel of its own choice to represent it, and the fees, expenses and disbursements of such counsel shall be borne by the Company. Any such counsel shall, to the extent consistent with its professional responsibilities, cooperate with the Company and any counsel designated by the Company. The Company shall be liable for any settlement of any claim against any Indemnified Party made with the Company’s written consent. The Company shall not, without the prior written consent of Placement Agent, settle or compromise any claim, or permit a default or consent to the entry of any judgment in respect thereof, unless such settlement, compromise or consent (i) includes, as an unconditional term thereof, the giving by the claimant to all of the Indemnified Parties of an unconditional release from all liability in respect of such claim, and (ii) does not contain any factual or legal admission by or with respect to an Indemnified Party or an adverse statement with respect to the character, professionalism, expertise or reputation of any Indemnified Party or any action or inaction of any Indemnified Party.

 

Members FINRA & SIPC

405 Lexington Ave. * New York, NY 10174 * tel: (212) 895-3500 * (800) 724-0761 * fax: (212) 895-3783 * www.maximgrp.com

New York, NY * Long Island, NY * Red Bank, NJ

 

 

 

 

Knightscope, Inc.  
Page 9

 

In order to provide for just and equitable contribution, if a claim for indemnification pursuant to these indemnification provisions is made but it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) that such indemnification may not be enforced in such case, even though the express provisions hereof provide for indemnification in such case, then the Company shall contribute to the Losses to which any Indemnified Party may be subject (i) in accordance with the relative benefits received by the Company and its stockholders, subsidiaries and affiliates, on the one hand, and the Indemnified Party, on the other hand, and (ii) if (and only if) the allocation provided in clause (i) of this sentence is not permitted by applicable law, in such proportion as to reflect not only the relative benefits, but also the relative fault of the Company, on the one hand, and the Indemnified Party, on the other hand, in connection with the statements, acts or omissions which resulted in such Losses as well as any relevant equitable considerations. No person found liable for a fraudulent misrepresentation shall be entitled to contribution from any person who is not also found liable for fraudulent misrepresentation. The relative benefits received (or anticipated to be received) by the Company and it stockholders, subsidiaries and affiliates shall be deemed to be equal to the aggregate consideration payable or receivable by such parties in connection with the transaction or transactions to which the Agreement relates relative to the amount of fees actually received by Placement Agent in connection with such transaction or transactions. Notwithstanding the foregoing, in no event shall the amount contributed by all Indemnified Parties exceed the amount of fees previously received by Placement Agent pursuant to the Agreement.

 

Neither termination nor completion of the Agreement shall affect these Indemnification Provisions which shall remain operative and in full force and effect. The Indemnification Provisions shall be binding upon the Company and its successors and assigns and shall inure to the benefit of the Indemnified Parties and their respective successors, assigns, heirs and personal representatives.

 

Members FINRA & SIPC

405 Lexington Ave. * New York, NY 10174 * tel: (212) 895-3500 * (800) 724-0761 * fax: (212) 895-3783 * www.maximgrp.com

New York, NY * Long Island, NY * Red Bank, NJ

 

 

 

Exhibit 1.2

 

AMENDMENT TO THE LETTER AGREEMENT

 

This AMENDMENT, dated April 4, 2019, (the "Amendment") is an amendment to the Letter Agreement (the "Agreement"), dated as of March 12, 2019, by and between Knightscope, Inc. (the “Company”) and Maxim Group LLC (together with its owned or controlled subsidiaries, the “Placement Agent”).

 

WHEREAS, the Company and the Placement Agent shall collectively be referred to as the "Parties";

 

WHEREAS, the Parties wish to provide for certain amendments to the terms of the Agreement;

 

NOW, THEREFORE, the Parties hereby amend the Agreement, and agree as follows:

 

Section 2. Information

 

2.           Amendment to Information. Section 2(e) of the Agreement shall be deleted and restated as follows:

 

(e)           The Offering shall be conditioned upon, among other things, the following:

 

(i)            Satisfactory completion by the Placement Agent of its due diligence investigation and analysis of: (a) the Company’s arrangements with its officers, directors, employees, affiliates, customers and suppliers, (b) the audited financial statements of the Company, and (c) the Company’s projected financial results for the fiscal years ending December 31, 2018 through 2020;

 

(ii)           The Company continuing to retain Ernst & Young as its accountants (or such other accountants acceptable to the Placement Agent), which will perform the audit of the financial statements and the financial exhibits, if any, to be included in the Private Placement Materials, and will continue to engage accountants of comparable quality (as may be determined by the Company’s Board of Directors or audit committee) for a period of at least three (3) years after the initial Closing;

 

(iii)          The Company retaining a transfer agent for the Company’s common equity reasonably acceptable to the Placement Agent and continuing to retain a competent transfer agent for a period of three (3) years after the initial Closing;

 

(iv)          Upon the execution of the engagement letter, the Company at its own expense will conduct background checks, by a background search firm acceptable to the Placement Agent, for the Company’s senior management;

 

(v)           The Placement Agent shall have completed its due diligence investigation of the Company to the satisfaction of the Placement Agent and its counsel;

 

(vi)          The Placement Agent shall have received as of each Closing the corporate opinion of legal counsel to the Company dated as of each Closing, addressed to the Placement Agent in form and substance reasonably satisfactory to the Placement Agent and agreed to by the Company and its counsel;

 

 1 

 

 

(vii)         On each Closing Date, Placement Agent shall have received a certificate of the chief executive officer of the Company, dated, as applicable, as of the date of such Closing, to the effect that, as of the date of this Agreement and as of the applicable date, the representations and warranties of the Company contained herein and in the share purchase agreement by and among the Company and the purchasers were and are accurate in all material respects, except for such changes as are contemplated by this Agreement and except as to representations and warranties that were expressly limited to a state of facts existing at a time prior to the applicable Closing, and that, as of the applicable date, the obligations to be performed by the Company hereunder on or prior thereto have been fully performed in all material respects; and

 

(viii)        On each Closing, Placement Agent shall have received a certificate of the Secretary of the Company, dated, as applicable, as of the date of such Closing, certifying to the organizational documents, good standing in the state of incorporation of the Company and each subsidiary and board resolutions relating to the offering of shares from the Company.

 

Section 11. Representations and Warranties

 

11.         Amendment to Representations and Warranties. Section 11 of the Agreement shall be deleted and restated as follows:

 

11.           Representations and Warranties. The Company and the Placement Agent each respectively represent and warrant that (a) has full right, power and authority to enter into this Agreement and to perform all of its obligations hereunder; (b) this Agreement has been duly authorized and executed and constitutes a legal, valid and binding agreement of such party enforceable in accordance with its terms; (c) the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby does not conflict with or result in a breach of (i) such party’s certificate of incorporation or by-laws or (ii) any other agreement to which such party is a party of by which any of its property or assets is bound and (d) the Placement Agent shall be fully authorized to rely upon the Company’s representations made in connection with the share purchase agreement by and among the Company and the purchasers.

 

Section 17. Press Announcements

 

11.         Amendment to Press Announcements. Section 17 of the Agreement shall be deleted and restated as follows:

 

17.           Press Announcements. (a) The Company agrees that the Placement Agent shall have the right to reference the Offering and the Placement Agent’s role in connection therewith in the Placement Agent’s non-public marketing materials and after at least $25 million worth of Series S Preferred Stock has been sold pursuant to the Offering, the Placement Agent shall have the right to reference the Offering on its website and to place advertisements in financial and other newspapers and journals, in case at its own expense, and in each case subject to the reasonable approval of the Company to such release and (b) the Company agrees that, while the Offering is ongoing, unless approved by the Placement Agent in advance, the Company will not make any public announcement or issue any press release concerning the Offering.

 

(Signature Pages Follow)

 

 2 

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to the Letter Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  Very truly yours,
   
  Maxim GROUP LLC
   
  By:  /s/ Clifford A. Teller
    Name: Clifford A. Teller
    Title: Executive Managing Director, IB
   
  Address for notice:
  405 Lexington Avenue
  New York, NY 10174
  Attention: James Siegel, General Counsel
  Email: jsiegel@maximgrp.com

 

Accepted and Agreed to as of

the date first written above:

 

KNIGHTSCOPE, INC.  
   
By:  /s/ William Santana Li  
  Name: William Santana le  
  Title:   Chairman and CEO  

 

Address for notice:

Knightscope, Inc.

1070 Terra Bella Avenue

Mountain View, CA 94043

Attention: CEO

Email: wsl@knightscope.com

 

 3 

Exhibit 1.3

  

SECOND AMENDMENT TO THE LETTER AGREEMENT

 

This SECOND AMENDMENT TO THE LETTER AGREEMENT is dated as of May 20, 2019 (the "Amendment") is an amendment to the Letter Agreement dated as of March 12, 2019, as amended by the first amendment to the Agreement on April 4, 2019 (the letter together with all amendments, the "Agreement"), by and between Knightscope, Inc. (the “Company”) and Maxim Group LLC (together with its owned or controlled subsidiaries, “Maxim” or the “Placement Agent”).

 

WHEREAS, the Parties wish to provide for certain amendments to the terms of the Agreement in order to provide for Maxim to act as the Company’s placement agent in connection with the offering of the Company’s Series S Preferred Stock pursuant to Regulation A under the Securities Act of 1933, as amended (the “Regulation A Offering”), in addition to the pre-existing offering of the Company’s Series S Preferred Stock conducted in accordance with Rule 506(c) of Regulation D of the Securities Act of 1933, as amended (the "Regulation D Offering” and together with the “Regulation A Offering,” the “Regulation A and Regulation D Offerings”).

 

NOW, THEREFORE, the parties hereby amend the Agreement, and agree as follows:

 

1.Regulation A Offering. Maxim hereby agrees to act as the Company’s placement agent in connection with the Regulation A Offering pursuant to the terms of the Agreement; and all references to the Regulation D Offering are hereby amended to refer to the Regulation A and the Regulation D Offerings, such that all terms that apply to the Regulation D Offering also apply to the Regulation A Offering.

 

2.No Other Amendments. Except as expressly amended by this Amendment, the Agreement remains in full force and effect.

 

3.Governing Law. All rights and obligations hereunder will be governed by the laws of the State of New York, without regard to the conflicts of law provisions of such jurisdiction.

 

4.Modification. Any provision of this Amendment may be amended, waived or modified only upon the written consent of the Company and the Placement Agent.

 

5.Counterparts. This Amendment may be executed in counterparts, each of which shall be declared an original, but all of which together shall constitute one and the same instrument.

 

(Signature Pages Follow)

 

   1

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized signatories as of the date first indicated above.

 

 

  Very truly yours,  
     
  Maxim GROUP LLC  
     
     
  By:  /s/ Clifford A. Teller  
    Name: Clifford A. Teller  
    Title: Executive Managing Director, IB  
     
  Address for notice:  
  405 Lexington Avenue  
  New York, NY 10174  
 

Attention: James Siegel, General Counsel

Email: jsiegel@maximgrp.com

 

 

 

Accepted and Agreed to as of

the date first written above:

 

KNIGHTSCOPE, INC.

 

By:  /s/ William Santana Li    
  Name: William Santana Li    
  Title:   CEO    

 

Address for notice:

Knightscope, Inc.

1070 Terra Bella Avenue

Mountain View, CA 94043

Attention: William Santana Li

Email: wsl@knightscope.com

 

   2

 

Exhibit 1.4

 

THIRD AMENDMENT TO THE LETTER AGREEMENT

 

This THIRD AMENDMENT TO THE LETTER AGREEMENT is dated as of June 19, 2019 (the “Amendment”) is an amendment to the Letter Agreement dated as of March 12, 2019, as amended by the first amendment to the Agreement on April 4, 2019 and the second amendment to the Agreement on May 20, 2019 (the letter together with all amendments, the “Agreement”), by and between Knightscope, Inc. (the “Company”) and Maxim Group LLC (together with its owned or controlled subsidiaries, “Maxim” or the “Placement Agent”), collectively the “Parties”.

 

WHEREAS, the Parties wish to provide for certain amendments to the terms of the Agreement in order to provide for Maxim’s right to participate in the Company’s initial public offering and the payment of legal fees to Ellenoff Grossman & Schole LLP, counsel to Maxim (“EGS”), each in connection with the offering of the Company’s Series S Preferred Stock pursuant to Regulation A under the Securities Act of 1933, as amended (the “Regulation A Offering”), in addition to the pre-existing offering of the Company’s Series S Preferred Stock conducted in accordance with Rule 506(c) of Regulation D of the Securities Act of 1933, as amended (the "Regulation D Offering” and together with the “Regulation A Offering,” the “Regulation A and Regulation D Offerings”) as well as provide for the Company’s right to add another selling group participant, subsequent to receipt of Maxim’s written consent, which shall not be unreasonably withheld.

 

NOW, THEREFORE, the parties hereby amend the Agreement, and agree as follows:

 

1.Legal Fees. The Company hereby agrees to pay EGS (i) $30,000 upon Maxim raising an aggregate of $3,000,000 in the Regulation A and Regulation D Offerings, and (ii) an additional $30,000 upon Maxim raising an aggregate of $6,000,000 in the Regulation A and Regulation D Offerings.

 

2.Participation in Form S-1 Transaction. Upon Maxim raising an aggregate of $10,000,000 in the Regulation A and Regulation D Offerings, Maxim shall have a right to participate as an underwriter with at least 25% of the economics in the Company’s initial public offering pursuant to a Form S-1 filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended.

 

3.Selling Group. Maxim hereby agrees that the Company shall be entitled to request the addition of an additional selling group participant(s) in connection with the Offering, and upon Maxim’s written consent (which shall not be unreasonably withheld), such selling group participant shall be entitled to contribute to Knightscope’s Regulation A and Regulation D Offerings.

 

4.No Other Amendments. Except as expressly amended by this Amendment, the Agreement remains in full force and effect.

 

5.Governing Law. All rights and obligations hereunder will be governed by the laws of the State of New York, without regard to the conflicts of law provisions of such jurisdiction.

 

6.Modification. Any provision of this Amendment may be amended, waived or modified only upon the written consent of the Company and the Placement Agent.

 

7.Counterparts. This Amendment may be executed in counterparts, each of which shall be declared an original, but all of which together shall constitute one and the same instrument.

 

(Signature Pages Follow)

 

 1 

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized signatories as of the date first indicated above. 

 

  Very truly yours,
   
  Maxim GROUP LLC

 

  By:  /s/ Clifford A. Teller
    Name: Clifford A. Teller
    Title: Executive Managing Director, IB

 

  Address for notice:
  405 Lexington Avenue
  New York, NY 10174
 

Attention: James Siegel, General Counsel

Email: jsiegel@maximgrp.com

 

Accepted and Agreed to as of

the date first written above:

 

KNIGHTSCOPE, INC.

 

By:  /s/ William Santana Li    
  Name: William Santana Li    
  Title:   CEO    

 

Address for notice:

Knightscope, Inc.

1070 Terra Bella Avenue

Mountain View, CA 94043

Attention: William Santana Li

Email: wsl@knightscope.com

 

 2 

 

Exhibit 1.5

 

FOURTH AMENDMENT TO THE LETTER AGREEMENT

 

This FOURTH AMENDMENT TO THE LETTER AGREEMENT is dated as of June 24, 2019 (the “Amendment”) is an amendment to the Letter Agreement dated as of March 12, 2019, as amended by the first amendment to the Agreement on April 4, 2019, the second amendment to the Agreement on May 20, 2019, and the third amendment to the Agreement on June 19, 2019 (the letter together with all amendments, the “Agreement”), by and between Knightscope, Inc. (the “Company”) and Maxim Group LLC (together with its owned or controlled subsidiaries, “Maxim” or the “Placement Agent”), collectively the “Parties”.

 

WHEREAS, the Parties wish to provide for certain amendments to the terms of the Agreement in order to provide that the indemnification obligations of the Company be extended to the “selling group participant(s)” referred to in the Agreement.

 

NOW, THEREFORE, the parties hereby amend the Agreement, and agree as follows:

 

1.Indemnification. The Company agrees that the indemnification provisions set forth in Section 6 and Exhibit A of the Agreement shall also be apply to any selling group participant retained in connection with the Offering, including but not limited to StartEngine.

 

2.No Other Amendments. Except as expressly amended by this Amendment, the Agreement remains in full force and effect.

 

3.Governing Law. All rights and obligations hereunder will be governed by the laws of the State of New York, without regard to the conflicts of law provisions of such jurisdiction.

 

4.Modification. Any provision of this Amendment may be amended, waived or modified only upon the written consent of the Company and the Placement Agent.

 

5.Counterparts. This Amendment may be executed in counterparts, each of which shall be declared an original, but all of which together shall constitute one and the same instrument.

 

(Signature Pages Follow)

 

 1 

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  Very truly yours,
   
  Maxim GROUP LLC

 

  By: /s/ Clifford A. Teller
    Name: Clifford A. Teller
    Title: Executive Managing Director, IB

 

  Address for notice:
  405 Lexington Avenue
  New York, NY 10174
 

Attention: James Siegel, General Counsel

Email: jsiegel@maximgrp.com

 

Accepted and Agreed to as of

the date first written above:

 

KNIGHTSCOPE, INC.

 

By:  /s/ William Santana Li    
  Name: William Santana Li    
  Title:   CEO    

 

Address for notice:

Knightscope, Inc.

1070 Terra Bella Avenue

Mountain View, CA 94043

Attention: William Santana Li

Email: wsl@knightscope.com

 

 2 

 

Exhibit 1.6

 

FIFTH AMENDMENT TO THE LETTER AGREEMENT

 

This FIFTH AMENDMENT TO THE LETTER AGREEMENT is dated as of July 5, 2019 (the “Amendment”) is an amendment to the Letter Agreement dated as of March 12, 2019, as amended by the first amendment to the Agreement on April 4, 2019, the second amendment to the Agreement on May 20, 2019, the third amendment to the Agreement on June 19, 2019, and the fourth amendment to the Agreement dated June 24, 2019 (the letter together with all amendments, the “Agreement”), by and between Knightscope, Inc. (the “Company”) and Maxim Group LLC (together with its owned or controlled subsidiaries, “Maxim” or the “Placement Agent”), collectively the “Parties”.

 

For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Maxim agree as follows:

 

Section 2 of the Third Amendment to the Agreement is hereby deleted and replaced in its entirety with the following Section 2:

 

“2. Participation in Form S-1 Transaction. Upon Maxim raising an aggregate of $10,000,000 in the Regulation A and Regulation D Offerings, Maxim shall have a right to participate as an underwriter with at least 25% of the economics in the Company's initial public offering pursuant to a Form S-1 filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended; such right of participation shall termination on the third anniversary of the commencement of sales of the Offering.”

 

Except as specifically amended hereby, the Agreement and all amendments thereto shall remain in full force and effect and all other terms of the Agreement and all other amendments thereto remain unchanged. To the extent any provision of the Agreement is inconsistent with this letter agreement, this letter agreement shall control.

 

 

(Signature Page Follows)

 

 

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to the Letter Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.

 

  Very truly yours,
   
  Maxim GROUP LLC
   
  By:  /s/ Clifford A. Teller  
    Name: Clifford A. Teller
    Title: Executive Managing Director, IB
   
  Address for notice:
  405 Lexington Avenue
  New York, NY 10174
 

Attention: James Siegel, General Counsel

Email: jsiegel@maximgrp.com

 

Accepted and Agreed to as of

the date first written above:

 

KNIGHTSCOPE, INC.

 

By:  /s/ William Santana Li    
  Name: William Santana Li    
  Title:   CEO    

 

Address for notice:

Knightscope, Inc.

1070 Terra Bella Avenue

Mountain View, CA 94043

Attention: William Santana Li

Email: wsl@knightscope.com

 

 

 

Exhibit 1.7

 

SERVICES AGREEMENT

 

This Services Agreement (“Services Agreement” or “Agreement”) is entered into as of the date noted below (the “Effective Date”) between StartEngine Crowdfunding, Inc., a Delaware corporation (“Company”), and Knightscope, Inc. a Delaware corporation (“Customer” or “you”).

 

1.Services

 

Company agrees to make available to Customer the ability to present information with respect to its securities offering (the “Offering”) to Users, and to permit Users to create and manage online accounts, view information regarding the Customer, indicate interest in the Offering, and to subscribe to the Offering by signing a subscription agreement or similar instrument and transmitting payment instructions (together, the “Services”). A “User” means a natural person, corporation or other entity that has established an account on the Company’s website.

 

2.Fees and expenses

 

a) Generally

In exchange for the Services, you shall pay the Company the then applicable fees and expenses set out below. The Company reserves the right to change the applicable charges and to institute new charges and fees at the end of the Initial Term (as defined below) or then current renewal term, upon 30 days prior notice to you. If you believe that the Company has billed you incorrectly, you must contact Company no later than 60 days after the closing date on the first billing statement in which the error or problem appeared, in order to receive an adjustment or credit. Inquiries should be directed to contact@startengine.com.

 

b) Monthly Fees and Billing

The Company will bill you monthly for the Services. You authorize the Company to instruct Prime Trust or any escrow agent used by Company to deduct such fees, debts and any other amounts liabilities incurred under this Service Agreement, prior to releasing any amounts due to you or to any other person (including another escrow agent) from escrow. Amounts which remain unpaid for 30 days are subject to a finance charge of 1.5% per month on any outstanding balance, or the maximum permitted by law, whichever is lower, plus all expenses of collection and may result in immediate termination of Service. You shall be responsible for all taxes associated with Services other than U.S. taxes based on the Company’s net income.

 

c) Transaction Fees

Company’s transaction fees depend on the method of payment (e.g. ACH-US or WIRE-US).

 

ACH transaction: $1

Wire: $15

 

d) AML Fees

AML fees are charged per User per initial transaction.

 

AML: $2

AML UK: $5

 

e) Reimbursable expenses

You shall reimburse the Company for the following expenses:

 

(i) All Transaction and AML Fees, as listed above, charged to the Company or its affiliates by its third-party transaction processor.

(ii) Return fees as set out in Section 4 (Returns, Reversals, Disputes and Reserves) below.

 

 

 

 

3.Customer Representations and Warranties

 

Customer represents and warrants to the Company that then executed and delivered by Customer, this Service Agreement will constitute the legal, valid, and binding obligation of Customer, enforceable in accordance with its terms.

 

4.Returns and Reversals

 

a) Returns and Reversals

User transactions debited from bank accounts via ACH are subject to returns (e.g., non-sufficient funds) and reversals from chargebacks (e.g., unauthorized activity) per the Electronic Fund Transfer Act (15 U.S.C. 1693 et seq. as may be amended), Regulation E, and NACHA guidelines (collectively, such returns and reversals are “Reversals”). The Company will work to protect Customer and the receiving Users from unwarranted Reversals; however, Customer acknowledges and agrees that:

 

i) Customer is liable for all User Activity and Reversals associated with User Activity;

 

ii) If Company’s agent receives a Reversal, the Company may in its sole discretion charge Customer the full amount of the Reversal (“Reversed Payment”) plus an additional $7 reversal fee (“Reversal Fee” and collectively the “Reversal Liability”);

 

iii) The Company has sole discretion to determine who is at fault and liable for the Reversed Payment and Reversal Fee;

 

iv) Customer authorizes the Company to take any of the following actions (in any particular order): (i) collect the unpaid portion of the Reversal Liability from funds sent to your third party escrow account; (ii) debit your bank account in the amount of the unpaid portion of the Reversal Liability; (iv) engage in collection efforts to recover the unpaid portion of the Reversal Liability and/or (v) take legal action or any other action under this Service Agreement.

 

5.Term and Survival

 

a) Subject to earlier termination as provided below, this Service Agreement is for the total duration of the Company’s Offering (the “Initial Term”) unless either party requests termination at least 30 days prior to the end of the then-current term.

 

b) Additionally, either party may terminate this Service Agreement in the event:

 

i) The other party’s material breach that remains not cured and continues for a period of (A) in the

case of a failure involving the payment of any undisputed amount due hereunder, 15 days and (B) in the case of any other failure, 30 days after the non performing party receives notice from the terminating party specifying such failure;

 

ii) Any statement, representation or warranty of the other party is untrue or misleading in any material respect or omits material information;

 

 

 

 

iii) The other party (A) voluntarily or involuntarily is subject to bankruptcy proceedings, (B) applies for or consents to the appointment of a receiver, trustee, custodian, sequestrator, or similar official, (C) makes a general assignment to creditors, (D) commences winding down or liquidation of its business affairs, (E) otherwise takes corporate action for the purpose of effecting any of the foregoing, or (F) ceases operating in the normal course of business;

 

iv) If any change to, enactment of, or change in interpretation or enforcement of any law occurs that would have a material adverse effect upon a party’s ability to perform its obligations under this Service Agreement or a party’s costs/revenues with respect to the services under this Service Agreement;

 

v) Upon direction to a party from any regulatory authority or National Automated Clearing House Association to cease or materially limit the exercise or performance of such party’s rights or obligations under this Service Agreement;

 

vi) If there shall have occurred a material adverse change in the financial condition of the other party; or

 

vii) Upon a force majeure event that materially prevents or impedes a party from performing its obligations hereunder for a period of more than 10 business days.

 

 

 StartEngine Crowdfunding, Inc.   Knightscope, Inc.    
       
       
By: /s/ Authorized Signatory   By: /s/ William Santana Li  
       
Date: 06 July 2019                                                                

 

 

 

 

 

Exhibit 2.1

 

AMENDED AND RESTATED

 

CERTIFICATE OF INCORPORATION OF

 

KNIGHTSCOPE, INC.

 

Knightscope, Inc., a corporation organized and existing under the laws of the State of Delaware (the “Corporation”), certifies that:

 

1.           The name of the Corporation is Knightscope, Inc. The Corporation’s original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on April 4, 2013.

 

2.           This Amended and Restated Certificate of Incorporation was duly adopted in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware, and has been duly approved by the written consent of the stockholders of the Corporation in accordance with Section 228 of the General Corporation Law of the State of Delaware.

 

3.           The text of the Certificate of Incorporation is amended and restated to read as set forth in EXHIBIT A attached hereto.

 

IN WITNESS WHEREOF, Knightscope, Inc. has caused this Amended and Restated Certificate of Incorporation to be signed by William Santana Li, a duly authorized officer of the Corporation, on May 17, 2019.

 

  /s/ William Santana Li
  William Santana Li
  President

 

 -1- 

 

 

EXHIBIT A

 

ARTICLE I

 

The name of the Corporation is Knightscope, Inc.

 

ARTICLE II

 

The purpose of this corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.

 

ARTICLE III

 

The address of the Company’s registered office in the State of Delaware is 251 Little Falls Drive, Wilmington, County of New Castle, Delaware 19808. The name of the registered agent at such address is Corporation Service Company.

 

ARTICLE IV

 

The Corporation is authorized to issue three classes of stock which shall be designated, respectively, “Class A Common Stock,” “Class B Common Stock” and “Preferred Stock.” The total number of shares of stock that the corporation shall have authority to issue is 187,405,324 shares, consisting of 114,000,000 shares of Class A Common Stock, $0.001 par value per share, 30,000,000 shares of Class B Common Stock, $0.001 par value per share, and 43,405,324 shares of Preferred Stock, $0.001 par value per share. The first Series of Preferred Stock shall be designated “Series A Preferred Stock” and shall consist of 8,936,015 shares. The second Series of Preferred Stock shall be designated “Series B Preferred Stock” and shall consist of 4,707,501 shares. The third Series of Preferred Stock shall be designated “Series m Preferred Stock” and shall consist of 6,666,666 shares. The fourth Series of Preferred Stock shall be designated “Series m-1 Preferred Stock” and shall consist of 333,334 shares. The fifth Series of Preferred Stock shall be designated “Series m-2 Preferred Stock” and shall consist of 1,660,756 shares. The sixth Series of Preferred Stock shall be designated “Series m-3 Preferred Stock” and shall consist of 3,490,658 shares. The seventh Series of Preferred Stock shall be designated “Series S Preferred Stock” and shall consist of 13,108,333 shares. The eighth Series of Preferred Stock shall be designated “Series m-4 Preferred Stock” and shall consist of 4,502,061 shares. The Corporation will not authorize any series of preferred or other capital stock whose right to receive Distributions or distributions with respect to a Liquidation Event from the Corporation is senior in right to the Series m-4 Preferred Stock without the prior vote or consent of the holders of a majority of the outstanding shares of Series m-4 Preferred Stock.

 

ARTICLE V

 

The terms and provisions of the Common Stock and Preferred Stock are as follows:

 

1.           Definitions. For purposes of this ARTICLE V, the following definitions shall apply:

 

(a)           “Change of Control” means (i) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions to which the Corporation is party (including, without limitation, any stock acquisition, reorganization, merger or consolidation but excluding any sale of stock for capital raising purposes) other than a transaction or series of related transactions in which the holders of the voting securities of the Corporation outstanding immediately prior to such transaction or series of related transactions retain, immediately after such transaction or series of related transactions, as a result of shares in the Corporation held by such holders prior to such transaction or series of related transactions, at least a majority of the total voting power represented by the outstanding voting securities of the Corporation or such other surviving or resulting entity (or if the Corporation or such other surviving or resulting entity is a wholly-owned subsidiary immediately following such acquisition, its parent); or (ii) a sale, lease or other disposition of all or substantially all of the assets of the Corporation and its subsidiaries taken as a whole by means of any transaction or series of related transactions, except where such sale, lease or other disposition is to a wholly-owned subsidiary of the Corporation. The treatment of any transaction or series of related transactions as a Change of Control may be waived by the consent or vote of a majority of the outstanding Preferred Stock (voting as a single class and on an as-converted basis); provided, however, that the treatment of any transaction or series of related transactions as a Change of Control for the Series m-4 Preferred Stock may only be waived by the consent or vote of a majority of the outstanding Series m-4 Preferred Stock (voting on an as-converted basis).

 

 -2- 

 

 

(b)           “Class B Common Stockholder” means (i) the registered holder of a share of Class B Common Stock at the Effective Time, (ii) the initial registered holder of any shares of Class B Common Stock that are originally issued by the Corporation after the Effective Time pursuant to the exercise of, conversion of or settlement of Convertible Securities issued prior to the Effective Time and (iii) each natural person who Transferred shares of Class B Common Stock or Convertible Securities prior to the Effective Time to a Permitted Entity that, as of the Effective Time, complies with the applicable exception for such Permitted Entity in Section 5(b).

 

(c)           “Common Stock” shall mean the Class A Common Stock and Class B Common Stock, collectively.

 

(d)           “Conversion Price” shall mean $0.8932 per share for the Series A Preferred Stock, $2.0401 per share for the Series B Preferred Stock, $3.00 per share for the Series m Preferred Stock, $3.00 per share for the Series m-1 Preferred Stock, $3.00 per share for the Series m-2 Preferred Stock, $3.50 per share for the Series m-3 Preferred Stock, $8.00 per share for the Series S Preferred Stock, and $3.50 per share for the Series m-4 Preferred Stock (in each case subject to adjustment from time to time for Recapitalizations and as otherwise set forth elsewhere herein, if applicable).

 

(e)           “Convertible Securities” shall mean any evidences of indebtedness, shares or other securities convertible into or exchangeable for Common Stock.

 

(f)            “Corporation” shall mean Knightscope, Inc.

 

(g)           “Distribution” shall mean either (i) the transfer of cash or other property without consideration whether by way of dividend or otherwise, other than dividends on Common Stock payable in Common Stock; or (ii) the purchase or redemption of shares of the Corporation by the Corporation or its subsidiaries for cash or property other than, in each case (A) repurchases of Common Stock issued to or held by employees, officers, directors or consultants of the Corporation or its subsidiaries upon termination of their employment or services pursuant to agreements providing for the right of said repurchase; (B) repurchases of Common Stock issued to or held by employees, officers, directors or consultants of the Corporation or its subsidiaries pursuant to rights of first refusal contained in agreements providing for such right; (C) repurchase of capital stock of the Corporation in connection with the settlement of disputes with any stockholder; and (D) any other repurchase or redemption of capital stock of the Corporation approved by the holders of the Common Stock and Preferred Stock of the Corporation voting as a separate class, provided, however, that any such other repurchase or redemption of Series m-4 Preferred Stock requires the consent or vote of a majority of the outstanding Series m-4 Preferred Stock (voting on an as-converted basis).

 

 -3- 

 

 

(h)           “Dividend Rate” shall mean an annual rate of $0.0536 per share for the Series A Preferred Stock, $0.1224 per share for the Series B Preferred Stock, $0.18 per share for the Series m Preferred Stock, $0.18 per share for the Series m-1 Preferred Stock, $0.18 per share for the Series m-2 Preferred Stock, $0.21 per share for the Series m-3 Preferred Stock, $0.48 per share for the Series S Preferred Stock, and $0.42 per share for the Series m-4 Preferred Stock (in each case subject to adjustment from time to time for Recapitalizations and as otherwise set forth elsewhere herein, if applicable).

 

(i)            “Effective Time” shall mean the date and the time at which this Amended and Restated Certificate of Incorporation is filed with the Secretary of State of Delaware.

 

(j)            “IPO” shall mean a firm commitment underwritten initial public offering of the Company’s Common Stock pursuant to an effective registration statement filed under the Securities Act of 1933, as amended.

 

(k)           “Liquidation Preference” shall mean $0.8932 per share for the Series A Preferred Stock, $2.0401 per share for the Series B Preferred Stock, $3.00 per share for the Series m Preferred Stock, $3.00 per share for the Series m-1 Preferred Stock, $3.00 per share for the Series m-2 Preferred Stock, $3.50 per share for the Series m-3 Preferred Stock, $8.00 per share for the Series S Preferred Stock, and $7.00 per share for the Series m-4 Preferred Stock (in each case subject to adjustment from time to time for Recapitalizations as set forth elsewhere herein, if applicable).

 

(l)            “Liquidation Event” shall mean (i) a Change of Control; or (ii) any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary.

 

(m)          “Options” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities.

 

(n)           “Ordinary Preferred Stock” shall mean the Series m Preferred Stock, the Series m-1 Preferred Stock, the Series m-3 Preferred Stock, the Series m-4 Preferred Stock and the Series S Preferred Stock, collectively.

 

(o)           “Original Issue Price” shall mean $0.8932 per share for the Series A Preferred Stock, $2.0401 for the Series B Preferred Stock and $3.00 for the Series m Preferred Stock, Series m-1 Preferred Stock and Series m-2 Preferred Stock, $3.50 for the Series m-3 Preferred Stock, $8.00 per share for the Series S Preferred Stock, and $3.50 per share for the Series m-4 Preferred Stock (subject to adjustment from time to time for Recapitalizations as set forth elsewhere herein).

 

(p)           “Permitted Entity” shall mean with respect to any Class B Common Stockholder, any trust, account, plan, corporation, partnership, or limited liability company specified in Section 5(b) established by or for such Class B Common Stockholder, so long as such entity meets the requirements set forth in Section 5(b).

 

(q)           “Preferred Stock” shall mean the Series A Preferred Stock, the Series B Preferred Stock, the Series m Preferred Stock, the Series m-1 Preferred Stock, the Series m-2 Preferred Stock, the Series m-3 Preferred Stock, the Series S Preferred Stock, and the Series m-4 Preferred Stock, collectively.

 

(r)            “Super Voting Preferred Stock” shall mean the Series A Preferred Stock, the Series B Preferred Stock and the Series m-2 Preferred Stock, collectively.

 

(s)           “Recapitalization” shall mean any stock dividend, stock split, combination of shares, reorganization, recapitalization, reclassification or other similar event.

 

 -4- 

 

 

(t)            “Transfer” of a share of Class B Common Stock shall mean any sale, assignment, transfer, conveyance, hypothecation or other transfer or disposition of such share or any legal or beneficial interest in such share, whether or not for value and whether voluntary or involuntary or by operation of law. A “Transfer” shall also include, without limitation, (i) a transfer of a share of Class B Common Stock to a broker or other nominee (regardless of whether or not there is a corresponding change in beneficial ownership), (ii) the transfer of, or entering into a binding agreement with respect to, Voting Control over a share of Class B Common Stock by proxy or otherwise, (iii) any Transfer in connection with a divorce proceeding, domestic relations order or similar legal requirement; provided, however, that the following shall not be considered a “Transfer” within the meaning of Section 1(t):

 

(i)the granting of a proxy to officers or directors of the Corporation at the request of the Board of Directors of the Corporation in connection with actions to be taken at an annual or special meeting of stockholders;

 

</