SoundThinking, Inc. (then ShotSpotter, Inc.) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The filing was submitted under the name ShotSpotter, Inc. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
The company sells cloud-based gunshot detection services, primarily through recurring subscriptions to government and public-safety customers. At quarter-end, coverage totaled more than 630 square miles across 91 cities and 10 campuses or sites in the United States and South Africa; 583 square miles were live. ShotSpotter Flex generated approximately 98% of revenue in both the quarter and first half.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $8.927 | $5.836 | $15.834 | $10.398 |
| Gross profit | $4.977 | $3.149 | $8.576 | $5.036 |
| Gross margin | 55.8% | 54.0% | 54.2% | 48.4% |
| Operating loss | $(0.297) | $(0.119) | $(1.516) | $(1.304) |
| Net loss | $(0.369) | $(4.306) | $(1.586) | $(5.867) |
| Net loss per share | $(0.03) | $(1.16) | $(0.15) | $(2.19) |
- Growth and margins: Revenue increased 53% in Q2 and 52% in the first half, primarily from expanded coverage with existing customers and new customers. Gross margin rose about 2 percentage points in Q2 and 6 points year to date, as revenue grew faster than certain relatively fixed costs.
- Operating costs: Q2 sales and marketing, research and development, and general and administrative expenses increased 60%, 35%, and 88%, respectively. Higher public-company, legal, and litigation costs contributed to G&A growth. A $0.361 million impairment charge for indoor sensor networks was recorded in Q2.
- Cash flow: First-half operating cash use was $0.836 million, versus $1.084 million provided in the prior-year period. Investing cash use was $5.669 million, mainly for deployment equipment, versus $2.894 million. Financing provided $1.860 million, including warrant and stock-option exercises; the prior-year period included IPO proceeds.
- Liquidity and debt: Cash and cash equivalents were $14.811 million at June 30, 2018, down from $19.567 million at year-end 2017; cash, cash equivalents, and restricted cash totaled $14.871 million. Current assets were $22.934 million and current liabilities $22.089 million. The company reported no outstanding debt; it had repaid its term note in 2017.
- Other balance-sheet items: Deferred revenue was $17.442 million ($16.230 million short-term and $1.212 million long-term). Accounts receivable and unbilled revenue increased to $6.359 million from $3.928 million at year-end. Two customers represented 56% of receivables at quarter-end.
Changes, accounting, and outlook
- Net loss was substantially lower than in 2017, primarily because the prior-year period included a $3.725 million noncash loss from remeasuring preferred-stock warrants and higher interest expense. Operating loss increased in Q2 and in the first half despite higher revenue, as operating expenses grew.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption reduced opening accumulated deficit by $3.0 million, reduced deferred revenue by $1.2 million, and resulted in $1.8 million of capitalized commissions. ASC 606 increased reported revenue by $0.069 million in Q2 and $0.122 million year to date versus amounts without adoption, and reduced reported net loss by $0.185 million and $0.379 million, respectively.
- Net new go-live coverage was 61 square miles in Q2 versus 44 a year earlier, and 108 square miles in the first half versus 74. Contractually committed revenue remaining at June 30 was estimated at $47.8 million through 2024; the timing estimate includes projected go-live dates for deployments not yet live.
- No formal financial guidance was provided. Management said existing cash and expected operating cash flow should fund working capital and capital expenditures for at least 12 months. It expects near-term losses and higher absolute operating expenses as it invests in sales, R&D, and public-company operations; profitability timing is uncertain.
- Management is prioritizing outdoor coverage and has stopped including indoor coverage in its service offering, while evaluating how to use its indoor-sensor patent. Management also cited potential growth through coverage expansion, security products, international markets, and partnerships.
Risks, contingencies, and unusual items
- Customer and funding concentration is material: Chicago and New York accounted for 24% and 14% of Q2 revenue, respectively; two customers accounted for 40% of first-half revenue. Sales depend heavily on government budgets, funding, procurement, renewals, and often lengthy sales cycles.
- A lawsuit brought by three former contractors alleges entitlement to options for more than 250,000 shares and includes contract, securities, and other claims. The plaintiffs initially sought approximately $6.5 million; the amended complaint also seeks punitive damages and costs. The company disputes the claims and agreed to private mediation. It stated that possible losses could not be reasonably estimated; no clear loss accrual value is provided in the filing.
- Other principal risks include reliance on a single sensor manufacturer and limited suppliers, wireless carriers and third-party hosting, service interruption or detection errors, cybersecurity and privacy concerns, natural disasters, international expansion, and continued operating losses. The company also disclosed future sensor upgrade costs as carriers discontinue 3G service; timing and cost are not quantified here.
- Hurricanes in Puerto Rico and the U.S. Virgin Islands led the company to discontinue service in September 2017. The filing also reports a prior-year $0.8 million equipment impairment and $0.9 million of accelerated setup-fee revenue related to those locations.
Most important facts for investors to verify
- Whether revenue growth and new live coverage continue, and whether booked deployments convert to go-live service on schedule.
- Whether customer renewals, government funding, and the concentration in major customers remain stable.
- Whether operating expense growth, especially G&A and litigation costs, can be managed while improving operating performance and cash generation.
- Whether the $14.8 million cash balance and stated 12-month liquidity expectation remain adequate given deployment investment and operating cash use.
- Updates on the contractors’ lawsuit, including any settlement, estimated exposure, or financial-statement impact.
- Actual capital and timing requirements for replacing 3G sensors, and any supply, carrier, service reliability, or security issues.