Well, the wording of the spell is rather quirky...firstly, I understand that since you do not threaten an enemy from range, the knife would be unable to set up a flank with you unless you had reach and were within reach range.
On the other hand, the spell also does not say that it has to be flanking with YOU. If you fire a bow at someone who is in melee with an ally, it might be able to get into a flanking position with your ally?
There is the issue of the knife's move-speed, though. From the looks of it, it might be able to travel any distance in a round as long as it remains within range.
Still, I'm not so sure how effective this spell is...it is decent as an auto-flanker, but allies fit that bill as well. It's reliant on BAB, making it probably best suited to eldritch knights...but in that case the damage is somewhat lacklustre. Rogue-arcanists get somewhat more mileage since it sets up sneak attacks, but then the knife would have trouble hitting.
However, it seems that it's a spell effect rather than a target-specific spell, so you can summon them en masse. So an eldritch knight using spell perfection might get some good mileage out of it by spamming quickened versions of it every round...