Business context and reporting period
ShotSpotter, Inc. (the registrant named in this filing) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The company sells gunshot-detection and security solutions primarily through SaaS subscriptions. Its public-safety product, ShotSpotter Flex, accounted for approximately 96% of revenue in the periods reported. At quarter-end, it had 75 public-safety customers covering about 480 square miles in 90 U.S. cities and municipalities, and six security customers covering seven campuses.
Financial results and liquidity
Dollar amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2016 | Q2 2017 | Six months 2016 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $3.94 | $5.84 | $6.98 | $10.40 |
| Gross profit / margin | $1.50 / 38% | $3.15 / 54% | $2.35 / 34% | $5.04 / 48% |
| Operating loss | $(1.43) | $(0.12) | $(3.28) | $(1.30) |
| Net loss | $(2.30) | $(4.31) | $(4.46) | $(5.87) |
| Net loss per share | $(1.44) | $(1.16) | $(2.79) | $(2.19) |
- Revenue increased 48% year over year in Q2 and 49% for the first half. Management attributed first-half growth mainly to new customers and expansions; Q2 also included $0.3 million of non-recurring engineering revenue.
- Gross margin improved as revenue grew faster than costs, which include fixed components. Operating expenses were $3.27 million in Q2 and $6.34 million for the first half.
- Cash and cash equivalents were $35.1 million at June 30, versus $3.9 million at December 31, 2016. Current assets were $39.1 million and current liabilities $21.1 million.
- Operating cash flow was $1.1 million for the first half, compared with cash use of $0.7 million in 2016; investing cash use was $2.9 million. Operating cash flow included $3.7 million of noncash warrant remeasurement expense and a $3.0 million increase in deferred revenue.
- Debt was $13.5 million gross at June 30 (approximately $13.1 million net of issuance costs), secured by substantially all company assets. The term note carried a weighted-average rate of 11.5% in the first half.
- The June IPO raised $32.4 million net. Preferred shares converted into common stock at closing; the company reported 9.6 million common shares outstanding as of August 11, 2017.
Material changes versus the prior comparable period
- Q2 operating loss narrowed substantially, but net loss increased because of a $3.7 million final remeasurement charge on preferred-stock warrants before the IPO, as well as higher interest expense. The warrant liability was reclassified to additional paid-in capital upon the IPO and will no longer be remeasured.
- First-half net loss rose to $5.9 million from $4.5 million, despite improved operating results, chiefly due to the warrant remeasurement charge.
- First-half net new “go-live” coverage rose to 74 square miles from 61; Q2 additions were 44 square miles versus 35.
- The IPO substantially increased cash and stockholders’ equity; preferred stock and the related warrant liability were eliminated through conversion or reclassification.
Outlook, risks and unusual items
- Management said existing cash and expected operating cash flow should meet working-capital and capital-expenditure needs for at least 12 months. It expected near-term losses and higher operating expenses as it invests in sales, R&D, public-company costs, international expansion, and security products. No numerical revenue or earnings guidance was provided.
- The company intended to use $13.6 million of IPO proceeds, including early-termination fees, to repay its term debt during the quarter ending September 30, 2017. The timing was intended to reduce prepayment penalties.
- Key risks include dependence on government budgets and lengthy procurement cycles; customer and revenue concentration (one customer contributed 17% of Q2 and first-half 2017 revenue); execution of customer renewals and deployments; reliance on a single sensor manufacturer and wireless carriers; potential 3G network retirement requiring sensor upgrades; service, accuracy, privacy, cybersecurity, and liability risks; and the company’s history of losses.
- Management reported no legal proceedings expected to have a material adverse effect and no material change in contractual commitments. It stated disclosure controls were effective as of June 30, 2017. The company had not achieved profitability and reported an accumulated deficit of $93.5 million.
Important facts for investors to verify
- Confirm the filing identity: the supplied 10-Q names ShotSpotter, Inc., while the request metadata names SOUNDTHINKING, INC.
- Track whether the planned $13.6 million debt repayment occurred, and assess the resulting cash balance, interest savings, and covenant implications.
- Separate recurring subscription growth from the $0.3 million non-recurring engineering revenue; monitor renewals, customer concentration, and expansion of live coverage.
- Evaluate cash generation excluding noncash warrant remeasurement and considering capital spending needed for deployments and future sensor upgrades.
- Assess progress toward profitability against management’s expected spending increases and the risks to government-funded sales and deployment timelines.