Business context and reporting period
ShotSpotter, Inc. (now identified in the request as SoundThinking, Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The company sells gunshot-detection solutions, primarily through SaaS subscriptions to government customers. Its public-safety product generated about 99% of third-quarter revenue; it reported 74 public-safety customers covering approximately 490 square miles and six security customers as of quarter-end.
Financial performance and position
Dollar amounts below are in millions except per-share data. Comparisons are with the corresponding 2016 period.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $6.846 | $3.977 | $17.244 | $10.956 |
| Gross profit | $3.389 | $1.577 | $8.424 | $3.925 |
| Gross margin | 49.5% | 39.7% | 48.9% | 35.8% |
| Operating loss | $(0.771) | $(1.096) | $(2.075) | $(4.376) |
| Net loss | $(1.611) | $(1.539) | $(7.477) | $(5.996) |
| Net loss per share | $(0.17) | $(0.96) | $(1.49) | $(3.75) |
- Q3 revenue increased 72%; nine-month revenue increased 57%. Operating loss narrowed, but net loss increased for both the quarter and year-to-date period, reflecting higher other expense.
- Cash and cash equivalents were $19.255 million at September 30, 2017, up from $3.865 million at December 31, 2016. Current assets were $26.131 million and current liabilities $20.462 million.
- Nine-month operating cash flow was $1.560 million; investing cash outflow was $4.602 million, primarily property and equipment purchases. Financing provided $18.430 million, including $32.426 million net IPO proceeds and $13.500 million of debt repayments.
- The company repaid all term-note borrowings in September; no notes payable remained at quarter-end. The repayment included prepayment and other fees and a write-off of unamortized debt costs. Management said existing cash and operating cash flow should cover working capital and capital expenditures for at least 12 months.
- Accumulated deficit was $95.092 million. The company reported no profitability and expected continued near-term losses.
Material changes versus the prior comparable period
- Growth in revenue reflected new customers and expanded coverage, as well as $0.9 million of accelerated recognition of deferred setup fees tied to Puerto Rico and U.S. Virgin Islands contracts.
- Gross margin improved as revenue grew faster than largely fixed costs, despite a $0.666 million impairment charge for deployed equipment presumed destroyed by September hurricanes.
- Nine-month other expense rose to $5.402 million, mainly because of a $3.725 million final remeasurement loss on preferred-stock warrants before the IPO, plus debt-extinguishment costs and higher interest expense. The warrant liability was reclassified to equity at the IPO and is no longer remeasured.
- The June 2017 IPO raised $32.4 million net. Preferred stock converted into common stock, and the IPO materially increased shares outstanding. The company added 91 net new go-live square miles in the first nine months, including a 33-mile reduction from ceased Puerto Rico and U.S. Virgin Islands service.
Outlook, risks, contingencies and unusual items
- No specific financial guidance was provided. Management expected operating expenses to rise in absolute dollars as it expanded sales and marketing, R&D, and public-company functions; it also expected continued near-term losses.
- Management cited growth opportunities in existing public-safety deployments, security solutions, and international markets, while noting dependence on customer funding, lengthy government sales cycles, and market acceptance.
- Key disclosed risks include reliance on government budgets and renewals, customer and revenue concentration, natural-disaster disruptions, a sole sensor manufacturer and limited suppliers, wireless-carrier dependence and planned 3G sensor upgrades, service reliability and cybersecurity, and inability to achieve profitability.
- Three former contractors sued on November 6, 2017, claiming entitlement to options for 350,000 shares and seeking approximately $6.5 million in damages and costs. The company said it would contest the claims; the ultimate outcome and any loss were not estimable in the filing.
- The company accelerated setup-fee revenue after classifying affected hurricane-disrupted contracts as expired, while ceasing service and recording an equipment impairment. It could not say when or whether those customers would resume operations.
- Revenue standard Topic 606 was scheduled to take effect January 1, 2018; the company anticipated modified-retrospective adoption and was assessing impacts, including capitalization of sales commissions and possible interest expense for significant financing components.
Important facts for investors to verify
- Confirm the issuer identity: this 2017 filing is for ShotSpotter, Inc., notwithstanding the SoundThinking, Inc. request metadata.
- Assess the sustainability of revenue growth and gross-margin improvement, including the effect of one-time accelerated setup-fee revenue and hurricane-related service losses.
- Review customer concentration and renewal exposure: two customers represented 17% and 14% of Q3 revenue; the filing identifies Puerto Rico and the U.S. Virgin Islands as disrupted markets.
- Monitor cash conversion and deployment spending: receivables rose to $5.987 million and property and equipment purchases were $4.547 million for the nine-month period.
- Track the contractors’ lawsuit, post-IPO share supply and dilution from equity awards and warrants, and the company’s progress toward profitability.