ShotSpotter, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The filing is by ShotSpotter, Inc. (the company now known as SoundThinking, Inc.). Amounts below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Business context
ShotSpotter sells gunshot-detection and related public-safety services primarily through SaaS subscriptions. Its main product, ShotSpotter Flex, represented about 95% of Q3 revenue and 96% of nine-month revenue. At quarter-end, contracts covered approximately 650 square miles across 95 cities and 10 campuses or sites; 619 miles were live. The company added 36 net live miles in Q3 and 144 in the first nine months.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $9.211 | $6.846 | $25.045 | $17.244 |
| Gross profit | $5.042 | $3.389 | $13.618 | $8.424 |
| Gross margin | 55% | 50% | 54% | 49% |
| Operating loss | $(1.519) | $(0.771) | $(3.035) | $(2.075) |
| Net loss | $(1.441) | $(1.611) | $(3.027) | $(7.477) |
| Basic and diluted loss per share | $(0.13) | $(0.17) | $(0.29) | $(1.49) |
Revenue grew 35% year over year in Q3 and 45% year to date, primarily from customer additions and expanded coverage. Gross margin improved as revenue grew faster than certain relatively fixed costs. Operating losses nevertheless increased, reflecting higher operating expenses, particularly general and administrative costs. The smaller year-to-date net loss compared with 2017 largely reflects the absence of the prior-year preferred-stock warrant remeasurement charge and debt-related expenses.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $2.515 million, versus $1.560 million in 2017. Investing used $7.462 million, chiefly for deployment-related property and equipment; financing provided $1.922 million. Cash, cash equivalents and restricted cash ended at $16.408 million.
- Balance-sheet cash and cash equivalents were $16.348 million; restricted cash was $0.060 million. Current assets were $25.406 million and current liabilities $26.203 million. Current liabilities include substantial deferred revenue.
- The company had no borrowings at September 30. A new Umpqua Bank revolving facility permits up to $10 million of borrowing, secured by substantially all company assets, and matures September 27, 2020. It includes financial and other covenants; letters of credit can reduce borrowing availability.
- Management said existing cash and expected operating cash flow should fund working capital and capital expenditures for at least the next 12 months. Capital spending and acquisition needs could change requirements.
Material changes, outlook and notable items
- Sales and marketing expense rose 37% in Q3 and 45% year to date; R&D rose 13% and 22%. G&A increased 123% in Q3 and 111% year to date, with management citing legal, accounting, public-company and personnel costs. The company recorded a settlement payment in G&A for a contractor dispute; the filing does not provide a clear amount.
- In October 2018, the company acquired HunchLab technology and related assets for $1.7 million cash, with a possible cash earnout of up to $0.75 million over three years. It also incurred $0.2 million of acquisition-related expenses. This occurred after quarter-end.
- Management expects cost of revenue to rise in absolute dollars as deployments expand, but potentially decline as a share of revenue; it expects operating expenses to rise in the near term as it invests in growth and public-company requirements. The filing provides no quantified revenue, earnings or margin guidance.
- Estimated remaining contractually committed revenue was $71.6 million: $9.0 million for the remainder of 2018, $27.0 million in 2019, $20.8 million in 2020, $14.2 million in 2021 and $0.6 million in 2022–2024. Timing includes estimated go-live dates for contracts not yet live.
- The company adopted Topic 606 from January 1, 2018. Adoption increased reported revenue by $0.174 million in Q3 and $0.296 million year to date versus the prior method, and reduced sales and marketing expense by $0.200 million and $0.457 million, respectively. The opening adoption adjustment reduced accumulated deficit by $3.0 million and deferred revenue by $1.2 million, and capitalized $1.8 million of commissions.
- The company discontinued indoor coverage as a service offering, citing greater opportunity in outdoor coverage, while evaluating ways to use its indoor-technology patent. It also warned that sensor upgrades may be required as wireless carriers discontinue 3G service.
Risks and contingencies
Key disclosed risks include dependence on government customers and their funding, lengthy procurement and renewal cycles, and customer concentration: two customers represented 38% of Q3 revenue, while one customer represented 58% of accounts receivable at quarter-end. The company also relies on a single contract manufacturer for proprietary sensors and faces deployment, service continuity, cybersecurity, privacy, false-alert and missed-alert risks. A civil-rights lawsuit alleges that the company helped fabricate gunshot-alert evidence; the company disputes the claims. The contractor dispute was settled after quarter-end, with the settlement expense recognized in Q3. Management stated disclosure controls were effective at September 30, 2018.
Important facts for investors to verify
- Whether coverage expansion and revenue growth continue, and how much committed revenue converts to live subscriptions and recognized revenue.
- Customer concentration, receivable collection and renewal/funding risks, particularly given one customer’s 58% share of receivables.
- Cash needs for deployment, 3G-related sensor replacement and the HunchLab acquisition; also monitor use and covenant compliance of the secured credit facility.
- Future G&A and legal costs, including the contractor settlement amount and the potential outcome or financial exposure of the Rochester litigation.
- How Topic 606, the HunchLab integration and the decision to exit indoor service affect reported growth, margins and future performance.