SoundThinking, Inc. (then ShotSpotter, Inc.) — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter report. The filing was made under the name ShotSpotter, Inc.
Business context
The company sells subscription-based gunshot detection services using proprietary sensors, cloud software and a 24/7 incident review center. ShotSpotter Flex public-safety subscriptions generated approximately 98% of FY 2017 revenue. At year-end, the company reported 77 public-safety customers and about 510 covered square miles, plus seven security customers across eight campuses. Substantially all revenue came from the United States.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $23.763 million | $15.507 million |
| Gross profit / margin | $11.600 million / 49% | $5.958 million / 38% |
| Operating loss | $(4.333) million | $(4.972) million |
| Net loss | $(9.980) million | $(6.860) million |
| Net cash from operating activities | $3.387 million | $2.257 million |
| Capital expenditures and investing cash use | $(6.506) million | $(4.554) million |
| Cash and cash equivalents at year-end | $19.567 million | $3.865 million |
| Notes payable at year-end | None | $11.679 million, net |
Revenue grew 53%, driven mainly by new customers, coverage expansions and a full year of revenue from 2016 deployments. Gross margin improved by 11 percentage points, though FY 2017 included a $0.793 million impairment charge for equipment presumed destroyed by hurricanes. Operating expenses rose 46%, including higher sales and marketing costs and a substantial increase in public-company, legal, listing and accounting expenses. Net loss widened partly because of a $3.725 million preferred-stock warrant remeasurement expense and debt-extinguishment costs.
Operating cash flow was positive despite the net loss, with deferred revenue and other working-capital changes contributing. Investing cash use primarily funded customer-area deployments. The June 2017 IPO generated $32.4 million net proceeds; the company used $13.7 million to repay all outstanding debt, including prepayment costs. Year-end working capital was $3.142 million. Management said cash, cash equivalents and expected operating cash flow should fund working capital and capital expenditure needs for at least the next 12 months.
Material changes and notable items
- Revenue retention rate increased to 141% from 127%; net new go-live coverage rose to 114 square miles from 72.
- Revenue concentration increased: New York City represented 18% of FY 2017 revenue; Puerto Rico Housing Administration represented 7%. Hurricane damage led to discontinued service in Puerto Rico and the U.S. Virgin Islands, a 33-square-mile coverage reduction, a $0.793 million equipment impairment and accelerated recognition of approximately $0.9 million of setup-fee revenue.
- The company completed its IPO, converted preferred stock into common stock and ended the year with no notes payable.
- The company adopted ASC 606 effective January 1, 2018. Management expected changes to the timing of setup-fee and sales-commission recognition; the filing does not quantify the total financial-statement impact.
Outlook, risks and contingencies
No numerical revenue or earnings guidance is provided. Management expects Flex to remain the substantial majority of revenue, intends to invest in sales, marketing, research and development and international expansion, and expects near-term losses and higher operating expenses. It is evaluating whether to discontinue or partner for indoor gunshot detection, where customer interest has been limited. The company also voluntarily raised new and renewing contract service-level standards from 80% to 90%.
Key risks include dependence on government budgets, grants and lengthy procurement cycles; customer and geographic concentration; the uncertain recovery of hurricane-affected customers; unprofitability and continued cash investment needs; potential system outages, false alerts or missed gunfire; reliance on wireless carriers and a single sensor manufacturer; cybersecurity and privacy concerns; and competition for limited customer funding. A lawsuit by three former contractors seeks options tied to 350,000 shares and “millions of dollars” in damages and expenses. The company disputes the claims; the outcome and potential loss could not be estimated. The Tax Act accounting remained subject to measurement-period review, although management said any adjustment would not affect the income statement because of its valuation allowance.
The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls were effective; the filing did not include an auditor attestation on internal control over financial reporting under the transition rules for newly public companies.
Investor facts to verify
- Whether the 141% retention rate and coverage growth continue, and whether the reported 18% New York City revenue concentration declines.
- Whether Puerto Rico and U.S. Virgin Islands customers resume service, and the effect of any further natural disasters or coverage reductions.
- How ASC 606 adoption affects revenue timing, deferred revenue and commission expense in subsequent reports.
- Whether operating cash flow remains positive after deployment spending and ongoing losses, and whether liquidity remains adequate.
- Developments and any financial exposure in the former-contractors lawsuit.
- Whether the company can meet its higher service-level standards while maintaining detection performance, customer renewals and margins.