UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended  June 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to

Commission File Number: 001-38107

 

ShotSpotter, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

47-0949915

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

7979 Gateway Blvd., Suite 210

Newark, California

94560

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (510) 794-3100

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of August 11, 2017, the registrant had 9,604,957 shares of common stock, $0.005 par value per share, outstanding.

 

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

2

 

Condensed Consolidated Balance Sheets as of December 31, 2016 and June 30, 2017

2

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2017

3

 

Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2016 and 2017

4

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2017

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.

Qualitative and Quantitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

25

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 6.

Exhibits

47

Signatures

48

Exhibit Index

49

 

 

 

i


 

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

ShotSpotter, Inc.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

 

 

December 31,

 

 

June 30,

 

 

 

2016

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,865

 

 

$

35,120

 

Accounts receivable

 

 

2,410

 

 

 

3,082

 

Prepaid expenses and other current assets

 

 

567

 

 

 

882

 

Restricted cash

 

 

30

 

 

 

30

 

Total current assets

 

 

6,872

 

 

 

39,114

 

Property and equipment, net

 

 

8,959

 

 

 

10,478

 

Intangible assets, net

 

 

66

 

 

 

68

 

Other assets

 

 

220

 

 

 

164

 

Total assets

 

$

16,117

 

 

$

49,824

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' (Deficit) Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,336

 

 

$

1,710

 

Deferred revenue, short-term

 

 

10,863

 

 

 

13,933

 

Accrued expenses and other current liabilities

 

 

2,359

 

 

 

2,490

 

Notes payable, net of current maturities

 

 

667

 

 

 

3,000

 

Total current liabilities

 

 

15,225

 

 

 

21,133

 

Notes payable, net of current maturities and unamortized debt issuance costs

 

 

11,012

 

 

 

10,122

 

Convertible preferred stock warrant liability

 

 

1,875

 

 

-

 

Deferred revenue, long-term

 

 

3,112

 

 

 

3,127

 

Other liabilities

 

 

24

 

 

 

68

 

Total liabilities

 

 

31,248

 

 

 

34,450

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series B-1 convertible preferred stock

 

 

22,075

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Series A-2 convertible preferred stock

 

 

20,000

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Stockholders' (deficit) equity:

 

 

 

 

 

 

 

 

Common stock

 

 

8

 

 

 

48

 

Additional paid-in capital

 

 

30,403

 

 

 

108,829

 

Accumulated deficit

 

 

(87,615

)

 

 

(93,482

)

Accumulated other comprehensive loss

 

 

(2

)

 

 

(21

)

Total stockholders' (deficit) equity

 

 

(57,206

)

 

 

15,374

 

Total liabilities and stockholders' (deficit) equity

 

$

16,117

 

 

$

49,824

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

2


 

ShotSpotter, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

Revenues

 

$

3,935

 

 

$

5,836

 

 

$

6,979

 

 

$

10,398

 

Cost of revenues

 

 

2,434

 

 

 

2,687

 

 

 

4,631

 

 

 

5,362

 

Gross profit

 

 

1,501

 

 

 

3,149

 

 

 

2,348

 

 

 

5,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

1,335

 

 

 

1,369

 

 

 

2,336

 

 

 

2,477

 

Research and development

 

 

1,038

 

 

 

928

 

 

 

2,186

 

 

 

1,962

 

General and administrative

 

 

558

 

 

 

971

 

 

 

1,106

 

 

 

1,901

 

Total operating expenses

 

 

2,931

 

 

 

3,268

 

 

 

5,628

 

 

 

6,340

 

Operating loss

 

 

(1,430

)

 

 

(119

)

 

 

(3,280

)

 

 

(1,304

)

Other expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remeasurement of convertible preferred stock warrant

   liability

 

 

(551

)

 

 

(3,725

)

 

 

(551

)

 

(3,725)

 

Interest expense, net

 

 

(310

)

 

 

(445

)

 

 

(611

)

 

(810)

 

Other expense, net

 

 

(7

)

 

 

(17

)

 

 

(15

)

 

 

(28

)

   Total expense, net

 

 

(868

)

 

 

(4,187

)

 

 

(1,177

)

 

 

(4,563

)

Net loss

 

$

(2,298

)

 

$

(4,306

)

 

$

(4,457

)

 

$

(5,867

)

Net loss per share, basic and diluted

 

$

(1.44

)

 

$

(1.16

)

 

$

(2.79

)

 

$

(2.19

)

Weighted average shares used in computing net loss per

   share, basic and diluted

 

 

1,601,005

 

 

 

3,724,760

 

 

 

1,596,279

 

 

 

2,678,787

 

 

See accompanying notes to condensed consolidated financial statements.

3


ShotSpotter, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

Net loss

 

$

(2,298

)

 

$

(4,306

)

 

$

(4,457

)

 

$

(5,867

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

-

 

 

 

(6

)

 

 

-

 

 

 

(19

)

Comprehensive loss

 

$

(2,298

)

 

$

(4,312

)

 

$

(4,457

)

 

$

(5,886

)

 

See accompanying notes to condensed consolidated financial statements.

4


ShotSpotter, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2016

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(4,457

)

 

$

(5,867

)

Adjustments to reconcile net loss to net cash (used in) provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,216

 

 

 

1,408

 

Stock-based compensation

 

 

34

 

 

 

75

 

Amortization of debt issuance costs

 

 

64

 

 

 

84

 

Remeasurement of convertible preferred stock warrant liability

 

 

551

 

 

 

3,725

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,417

)

 

 

(666

)

Prepaid expenses and other assets

 

 

4

 

 

 

(201

)

Accounts payable

 

 

469

 

 

 

(307

)

Accrued expenses and other current liabilities

 

 

763

 

 

 

(216

)

Deferred revenue

 

 

3,122

 

 

 

3,049

 

Net cash (used in) provided by operating activities

 

 

(651

)

 

 

1,084

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(2,149

)

 

 

(2,870

)

Investment in intangible and other assets

 

 

(19

)

 

 

(24

)

Net cash used in investing activities

 

 

(2,168

)

 

 

(2,894

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from initial public offering, net of commissions and discounts

 

 

 

 

 

32,426

 

Proceeds from notes payable

 

 

 

 

 

1,500

 

Payment of debt issuance costs

 

 

 

 

 

(30

)

Payments of offering costs

 

 

 

 

 

(846

)

Proceeds from exercise of stock options

 

 

12

 

 

 

10

 

Net cash provided by financing activities

 

 

12

 

 

 

33,060

 

Increase (decrease) in cash and cash equivalents

 

 

(2,807

)

 

 

31,250

 

Effect of exchange rate on cash and cash equivalents

 

 

 

 

 

5

 

Cash and cash equivalents at beginning of year

 

 

4,124

 

 

 

3,865

 

Cash and cash equivalents at end of year

 

$

1,317

 

 

$

35,120

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

487

 

 

$

721

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

 

 

 

Conversion of convertible preferred stock into common stock

 

$

 

 

$

42,075

 

Reclassification of convertible preferred stock warrant liability into additional paid-in capital

 

$

 

 

$

5,711

 

Issuance of warrants in connection with the issuance of notes payable to a financial institution

 

$

 

 

$

111

 

Deferred offering costs included in accounts payable and accruals

 

$

 

 

$

986

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

5


ShotSpotter, Inc.

Notes to Condensed Consolidated Financial Statements

Note 1. Organization and Description of Business

ShotSpotter, Inc. (the "Company") provides gunshot detection solutions that help law enforcement officials and security personnel identify, locate and deter gun violence. The Company offers its software solutions on a SaaS-based subscription model to its customers.

The Company's principal executive offices are located in Newark, California. The Company has one subsidiary, ShotSpotter (Pty) Ltd. formed in South Africa.

Note 2. Initial Public Offering

In June 2017, the Company completed its initial public offering (“IPO”) in which the Company sold 3,220,000 shares of its common stock at an IPO price of $11.00 per share, which includes the sale of  420,000 shares of common stock upon the full exercise of the underwriters’ over-allotment option. The Company received net proceeds of $32.4 million, excluding underwriting discounts and commissions, which was recorded to additional paid-in capital. The Company’s common stock commenced trading on the NASDAQ Capital Market on June 7, 2017 under the trading symbol “SSTI.”

 

Immediately prior to the IPO, all outstanding Series B-1 convertible preferred stock warrants  were remeasured at fair value using the Black-Scholes model, resulting in a loss of $3.7 million which was recorded in other expense, net.

 

Upon the closing of the IPO, the entire balance of $5.7 million in convertible preferred stock warrant liability was reclassified to additional paid-in capital.  All preferred stock warrants were converted into common stock warrants. In addition, the Company issued to the lead underwriter in the IPO a warrant to purchase up to 84,000 shares of its common stock. See Note 10, Convertible Preferred Stock Warrants and Common Stock Warrants, for further details regarding the warrants.

 

Upon the closing of the IPO, all shares of the then-outstanding convertible preferred stock were converted into 4,689,753 shares of common stock. This resulted in a reclassification of $42.1 million to additional paid-in capital.

 

Offering costs incurred by the Company were approximately $1.8 million, excluding underwriting  commissions and discounts, which was recorded to additional paid-in capital.

Note 3. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the final prospectus filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, on June 8, 2017 (the “Prospectus”).

The condensed consolidated balance sheet as of December 31, 2016, included herein, was derived from the audited financial statements as of that date, but does not include all disclosures including certain notes required by U.S. GAAP on an annual reporting basis.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2017 or any future period.

6


 

June 2017 Amended and Restated Certificate of Incorporation

 

Prior to the IPO, the Company’s Board of Directors (the “Board”) and stockholders approved an amendment (the “Charter Amendment”) to the Pre-IPO Certificate and an amended and restated certificate of incorporation (“Post-IPO Certificate”) that became effective on June 12, 2017. The Charter Amendment increased the number of authorized shares of common stock from 8,600,000 to 500,000,000. Under the Post-IPO Certificate, the Company is authorized to issue two classes of stock to be designated Common Stock and Preferred Stock. See Note 8, Capital Stock, for further details regarding these classes of stock.

 

March 2017 Amendment and Restatement of Certificate of Incorporation

On March 27, 2017, the Company's Board and stockholders approved an amendment and restatement of the Company’s then-existing certificate of incorporation (the “Pre-IPO Certificate”) to provide, among other changes, that each share of Series A-2 convertible preferred stock would automatically convert into 0.715548 shares of common stock upon the consummation of an initial public offering of the Company’s capital stock. All share and per share data related to balance sheet and net loss information in the accompanying condensed consolidated financial statements and their related notes have been retroactively adjusted to give effect to the application of this conversion feature when presenting the Series A-2 convertible preferred stock on an as-converted basis.

The Pre-IPO Certificate also provided for (1) an increase in the total number of authorized shares to 14,550,000 and (2) an increase in the number of authorized shares of common stock to 8,600,000, in each case to accommodate the new conversion feature for the outstanding shares of Series A-2 convertible preferred stock.

Reverse Stock Split and Amendment to Certificate of Incorporation

 

In December 2016, the Board and stockholders approved an amendment and restatement of the Company's then amended and restated certificate of incorporation to effect a one-for-17 reverse stock split of the outstanding shares of the Company's capital stock, such that each 17 shares of capital stock issued and outstanding, automatically and without any action on the part of the respective holders thereof, combined into one share of the same class and series of capital stock.

 

All share and per share data in the accompanying condensed consolidated financial statements and their related notes for all periods presented have been retroactively adjusted to give effect to the reverse stock split.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its significant estimates including the valuation of accounts receivable, the lives of tangible and intangible assets, stock-based compensation expense, preferred stock warrant liabilities, and accounting for income taxes. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions it believes to be reasonable under the circumstances. Actual results could differ from those estimates and such differences could be material to the Company's financial position and results of operations.

Significant Accounting Policies

Except for the changes described below, there have been no changes in the Company’s significant accounting policies for the three and six months ended June 30, 2017 as compared to the significant accounting policies described in the Prospectus.

Concentrations of Risk

Concentration of Accounts Receivable –At December 31, 2016, three customers accounted for 27%, 16% and 11% of the Company's accounts receivable. Fluctuations in accounts receivable result from timing of the

7


Company's execution of contracts and collection of related payments. At June 30, 2017, two customers accounted for 15% and 23% of the Company's accounts receivable.

Concentration of Revenues –For the  three months ended June 30, 2016, two customers accounted for 13% and 15% of the Company's total revenues. For the six months ended June 30, 2016, two customers each accounted for 12% of the Company’s total revenues. One customer accounted for 17% of the Company's total revenues for each of the three and six months ended June 30, 2017.

Accounting Pronouncements Recently Adopted

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires all excess tax benefits and tax deficiencies associated with share-based payments to be recognized as income tax expense or income tax benefit, respectively, rather than as additional paid-in capital. The amendments also increase the amount an employer can withhold in order to cover income taxes on awards, allow companies to recognize forfeitures of awards as they occur and require companies to present excess tax benefits from stock-based compensation as an operating activity in the statement of cash flows rather than as a financing activity. The method of adoption varies with the different aspects of the ASU. The Company adopted this as of January 1, 2017. The adoption of this ASU did not have any impact on the Company's condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Effective

In May 2014, the FASB issued ASC Topic 606, Revenue from Contracts with Customers. This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The standard will replace most existing revenue recognition guidance under U.S. GAAP. Topic 606 is effective for the Company as of January 1, 2018, and permits the use of either a retrospective or cumulative effect transition method.

The Company's preliminary assessment is that there are no material changes in the timing and amount of the recognition of revenue for our service arrangements. This preliminary assessment is based on analysis that the subscription and setup services included in the contractual arrangements are not distinct in the context of the subscription contract as they are considered highly interrelated and represent a single combined performance obligation that should be recognized ratably over time. The actual revenue recognition treatment required under the new standard for these arrangements may be dependent on contract-specific terms which could vary in some instances. While the Company continues to assess all potential impacts of the new standard, the Company believes the most significant impact relates to the capitalization of sales commissions. Under the new standard, costs incremental to obtaining a contract with a customer, such as sales commissions, are capitalized as assets and amortized. The Company believes it is following an appropriate timeline for adoption of the new standard.

In January 2016 the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides targeted improvements to the recognition, measurement, presentation and disclosure of financial assets and financial liabilities. Specific accounting areas addressed include equity investments and financial liabilities reported under the fair value option and valuation allowance assessment resulting from unrealized losses on available-for-sale securities. The ASU also changes certain presentation and disclosure requirements for financial instruments. The ASU is to be applied by means of a cumulative effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. This ASU is effective for the Company as of January 1, 2018. Early adoption, with certain exceptions, is not permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize right-of-use assets and corresponding liabilities for all leases with an initial term in excess of twelve months. The ASU is to be adopted using a modified retrospective approach, including a number of practical expedients, that requires leases to be measured and recognized under the new guidance at the beginning of the earliest period presented. This ASU is effective for the Company as of January 1, 2019. Early adoption is permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, addressing eight specific cash flow issues in an effort to reduce diversity in practice.

8


The ASU is effective for the Company as of January 1, 2018. Early adoption is permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Inter-Entity Transfers of Assets Other Than Inventory. The guidance requires entities to recognize the income tax impact of an inter-entity sale or transfer of an asset other than inventory when the sale or transfer occurs, rather than when the asset has been sold to an outside party. The guidance will require a modified retrospective application with a cumulative catch-up adjustment to opening retained earnings. The ASU is effective for the Company as of January 1, 2018. Early adoption is permitted. The Company does not expect adoption of this ASU to have any impact on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for the Company as of January 1, 2018. Early adoption is permitted, including adoption in an interim period as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued or made available for issuance. The Company does not expect adoption of this ASU to have any impact on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718, Compensation – Stock Compensation. This ASU is effective for the Company as of January 1, 2018. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this ASU change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. The amendments in Part I of this ASU are effective for the Company as of January 1, 2019.  The amendments in Part II of this ASU replace the indefinite deferral of certain guidance in Topic 480 with a scope exception. The amendments in Part II of this ASU do not require any transition guidance. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements.

Note 4. Fair Value Measurements

Prior to the IPO, the Company's convertible preferred stock warrant liability was measured on a recurring basis and was classified within Level III of the fair value hierarchy because some of the inputs used in its measurement were neither directly or indirectly observable. The valuation methodology and underlying assumptions in the fair value determination are discussed in Note 3, Summary of Significant Accounting Policies, and Note 11, Convertible Preferred Stock Warrants, to the consolidated financial statements included in the Prospectus.  

Immediately prior to the IPO, the convertible preferred stock warrant liability was remeasured to fair value, resulting in a loss of $3.7 million which was recorded in other expense, net. Upon the closing of the IPO, the entire balance of $5.7 million in convertible preferred stock warrant liability was reclassified to additional paid-in capital.

9


There were no transfers into or out of Level III during the three and six months ended June 30, 2017. The changes in the fair value of the convertible preferred stock warrant liability are summarized below (in thousands)

 

 

 

Fair Value

Measurements at

Reporting Date

Using Level III Inputs

 

Fair value at December 31, 2016

 

$

1,875

 

Issuance of convertible preferred stock warrants

 

 

111

 

Change in fair value recorded in other expense, net

 

 

3,725

 

Reclassification of unexercised warrant into

   additional paid-in capital upon the IPO

 

 

(5,711

)

Fair value at June 30, 2017

 

$

 

 

Note 5. Intangible Assets, net

Intangible assets, net, consisted of the following (in thousands):

 

 

 

December 31, 2016

 

 

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

Patents

 

$

873

 

 

$

(807

)

 

$

66

 

 

 

 

June 30, 2017

 

 

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

$

897

 

 

$

(829

)

 

$

68

 

 

Amortization expense was $8,000 and $11,000 for the three months ended June 30, 2016 and 2017, respectively, and $17,000 and $22,000 for the six months ended June 30, 2016 and 2017, respectively.

 

Note 6. Details of Certain Condensed Consolidated Balance Sheet Accounts

 

Prepaid expenses and other current assets (in thousands):

 

 

 

December 31,

 

 

June 30,

 

 

 

2016

 

 

2017

 

 

 

 

 

 

 

 

 

 

Prepaid software and licenses

 

$

286

 

 

$

220

 

Prepaid insurance

 

 

25

 

 

 

447

 

Other prepaid expenses

 

 

171

 

 

 

127

 

Other

 

 

85

 

 

 

88

 

 

 

$

567

 

 

$

882

 

 

Accrued expenses and other current liabilities (in thousands):

10


 

 

 

December 31,

 

 

June 30,

 

 

 

2016

 

 

2017

 

 

 

 

 

 

 

 

 

 

Payroll liabilities

 

$

1,146

 

 

$

947

 

Accrued employee paid time off

 

 

372

 

 

 

453

 

Accrued commissions

 

 

51

 

 

 

40

 

Accrued interest

 

 

123

 

 

 

132

 

Royalties payable

 

 

225

 

 

 

83

 

Accrued offering costs

 

 

-

 

 

 

305

 

Other

 

 

442

 

 

 

530

 

 

 

$

2,359

 

 

$

2,490

 

 

Note 7. Financing Arrangements

Notes Payable

2015 Term Note 

At December 31, 2016 and June 30, 2017, outstanding borrowings under the 2015 Term Note were $11.7 million and $13.1 million, respectively, net of unamortized debt issuance costs.

Borrowings under the 2015 Term Note bear interest at the greater of: (i) the average prime rate in effect during each month or (ii) the average three-month LIBOR rate during such month, plus 2.5% per annum, plus 7.5% with a minimum rate of 11%, with interest only payments through October 2017, followed by 36 equal monthly installments of principal and interest through October 2020, the maturity date. The weighted average interest rate during the three and six months ended June 30, 2016 was 11.00% for both periods. The weighted average interest rate during the three and six months ended June 30, 2017 was 11.42% and 11.50%, respectively.

For the three and six months ended June 30, 2016, the Company recognized interest expense of $0.2 million and $0.5 million, respectively, based on the outstanding balance during the respective periods. For the three and six months ended June 30, 2017, the Company recognized interest expense of $0.4 million and $0.7 million, respectively, based on the outstanding balance during the respective periods.

During the three and six months ended June 30, 2016, amortization of debt issuance costs was $32,000 and $64,000, respectively. During the three and six months ended June 30, 2017, amortization of debt issuance costs was $50,000 and $84,000, respectively.

Borrowings under the 2015 Term Note are secured by substantially all of the assets of the Company. Additionally, the terms of the 2015 Term Note contain certain financial covenants and various negative covenants.

In March 2017, the Company amended the 2015 Term Note. In connection with the amendment of the 2015 Term Note, the Company issued a warrant to purchase 76,704 shares of Series B-1 preferred stock at an exercise price of $5.8667 per share;  however, the terms of the warrant provided that upon the completion of a public offering in which the Company raises at least $25.0 million in net proceeds, the number of shares underlying the warrant would be reduced to 61,363 shares. Consistent with these terms, upon the closing of the IPO, the number of shares underlying this warrant was reduced to 61,363 shares, and the warrant became exercisable for common stock.

For further details regarding the 2015 Term Note, refer to Note 7, Financing Arrangements, to the notes to the consolidated financial statements included in the Prospectus.

Notes payable consisted of the following (in thousands):

11


 

 

December 31,

 

 

June 30,

 

 

 

2016

 

 

2017

 

 

 

 

 

 

 

(unaudited)

 

Notes payable

 

$

12,000

 

 

$

13,500

 

Unamortized debt issuance costs

 

 

(321

)

 

 

(378

)

Current maturities of term note

 

 

(667

)

 

 

(3,000

)

Total notes payable, net of current maturities

 

$

11,012

 

 

$

10,122

 

 

Note 8. Capital Stock

Convertible Preferred Stock

Immediately prior to the IPO, the Company had the following outstanding convertible preferred stock:

 

 

 

Shares

Authorized

 

 

Shares

Issued and

Outstanding

 

 

Aggregate

Liquidation

Preference

(in thousands)

 

Series B-1

 

 

4,773,000

 

 

 

3,848,023

 

 

$

22,075

 

Series A-2

 

 

1,177,000

 

 

 

1,176,423

 

 

 

20,000

 

 

 

 

 

 

 

 

 

 

 

$

42,075

 

 

Upon the closing of the IPO, all shares of convertible preferred stock then outstanding were automatically converted into an aggregate of 4,689,753 shares of common stock, resulting in the reclassification of the related redeemable convertible preferred stock into $25,000 of common stock and $42.1 million into additional paid-in capital.  

 

As of June 30, 2017, there were no shares of convertible preferred stock outstanding.

Common Stock

All of the shares offered and sold by the Company in the IPO were common stock. The Company is authorized to issue 500,000,000 shares of common stock, with a par value of $0.005 and each outstanding share of common stock is entitled to one vote, as provided in the Post-IPO Certificate.

At December 31, 2016 there were 1,616,996 shares of common stock issued and outstanding. At June 30, 2017, there were 9,593,192 shares of common stock issued and outstanding.

Preferred Stock

The Company is authorized to issue 20,000,000 shares of preferred stock, with a par value of $0.005, as provided in the Post-IPO Certificate. As of June 30, 2017, there were no shares of preferred stock issued and outstanding.

Note 9. Net Loss per Share

The following table summarizes the computation of basic and diluted net loss per share (in thousands, except share and per share data):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,298

)

 

$

(4,306

)

 

$

(4,457

)

 

$

(5,867

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding, basic and

   diluted

 

 

1,601,005

 

 

 

3,724,760

 

 

 

1,596,279

 

 

 

2,678,787

 

Net loss per share

 

$

(1.44

)

 

$

(1.16

)

 

$

(2.79

)

 

$

(2.19

)

 

12


The following potentially dilutive shares outstanding at the end of the periods presented were excluded in the calculation of diluted net loss per share as the effect would have been anti-dilutive:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

Options to purchase common stock

 

 

1,064,831

 

 

 

1,303,336

 

 

 

1,064,831

 

 

 

1,303,336

 

Warrants to purchase Series B-1 convertible

   preferred stock

 

 

680,027

 

 

 

714,596

 

 

 

680,027

 

 

 

714,596

 

Series B-1 convertible preferred stock (as-converted)

 

 

3,848,023

 

 

 

-

 

 

 

3,848,023

 

 

 

-

 

Series A-2 convertible preferred stock (as-converted)

 

 

841,730

 

 

 

-

 

 

 

841,730

 

 

 

-

 

Total

 

 

6,434,611

 

 

 

2,017,932

 

 

 

6,434,611

 

 

 

2,017,932

 

 

Note 10. Convertible Preferred Stock Warrants and Common Stock Warrants

Immediately prior to the Company’s IPO, all outstanding Series B-1 convertible preferred stock warrants were remeasured to their fair value, using the Black-Scholes model. Refer to Note 3, Summary of Significant Accounting Policies, to the notes to the consolidated financial statement included in the Prospectus for a description of the valuation method. The final remeasurement of the convertible preferred stock warrant liability resulted in a $3.7 million loss which was recorded to other expense, net.

Upon the closing of the IPO, the entire balance of $5.7 million in convertible preferred stock warrant liability was reclassified to additional paid-in capital. All convertible preferred stock warrants were converted into common stock warrants.  In addition, the Company issued to the lead underwriter in the IPO a warrant to purchase up to 84,000 shares of its common stock.

In June 2017, the June 2012 warrant and a portion of the August 2012 warrant were converted into 15,136 shares and 39,771 shares of common stock, respectively, in a cashless exercise,

At June 30, 2017, the Company had the following common stock warrants issued and outstanding (in thousands, except share and per share data):

 

Warrant Class

 

Shares

 

 

Issuance

Date

 

Price

per Share

 

 

Expiration

Date

Common stock warrant

 

 

167,428

 

 

July 2012

 

$

5.8667

 

 

July 2019

Common stock warrant

 

 

60,575

 

 

August 2012

 

$

5.8667

 

 

August 2019

Common stock warrant

 

 

10,517

 

 

November 2012

 

$

5.8667

 

 

November 2022

Common stock warrant

 

 

156,851

 

 

February 2014

 

$

0.1700

 

 

February 2021

Common stock warrant

 

 

173,862

 

 

September 2015

 

$

5.8667

 

 

September 2025

Common stock warrant (1)

 

 

61,363

 

 

March 2017

 

$

5.8667

 

 

September 2025

Common stock warrant (2)

 

 

84,000

 

 

June 2017

 

$

13.2000

 

 

June 2020

 

 

 

714,596

 

 

 

 

 

 

 

 

 

 

 

 

(1)

This warrant was issued in connection with the amended 2015 Term Note. The number of shares underlying the warrant issued in March 2017 was originally 76,704 and, pursuant to its terms, was reduced to 61,363 shares upon the closing of the Company’s IPO. See Note 7, Financing Arrangements, for further details regarding this warrant.  

 

(2)

This warrant was issued to the Company’s lead underwriter in connection with the IPO.    

13


Note 11. Equity Incentive Plans

2017 Equity Incentive Plan

In May 2017, the Board and the Company’s stockholders approved the 2017 Equity Incentive Plan (the “2017 Plan”), which became effective in connection with the IPO. The 2017 Plan provides for the issuance of stock options, restricted stock units and other awards to employees, directors and consultants of the Company. A total of 2,413,659 shares of the Company’s common stock were initially reserved for issuance under the 2017 Plan, which is the sum of (1) 900,000 shares, (2) the number of shares reserved for issuance under the 2005 Plan at the time the 2017 Plan became effective and (3) shares subject to stock options or other stock awards under the 2005 Plan that would have otherwise been returned to the 2005 Plan (up to a maximum of 1,314,752 shares). The number of shares of common stock reserved for issuance under the 2017 Plan will automatically increase on January 1 of each year, beginning on January 1, 2018 by the lesser of (1) 5% of the number of shares of the Company’s capital stock outstanding on December 31 of the preceding calendar year or (2) such number of shares as determined by the Board. As a result of the adoption of the 2017 Plan, no further grants may be made under the 2005 Plan.

 

2005 Plan

In February 2005, the Company adopted the 2005 Stock Plan, as amended in January 2010 and November 2012 (the "2005 Plan"). Under the 2005 Plan provisions, the Company was authorized to grant incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units, and shares of restricted stock. For further details regarding the 2005 Plan, refer to Note 12, Equity Incentive Plan, to the notes to the consolidated financial statements included in the Prospectus.

Following the effectiveness of the 2017 Plan in connection with the IPO, no further grants will be made under the 2005 Plan.  

A summary of activities under the 2005 Plan and 2017 Plan during the six months ended June 30, 2017 is as follows:

 

 

 

Options

Available

for Grant

 

 

Number

of Shares

Outstanding

 

 

Weighted

Average

Exercise

Price

 

Outstanding at December 31, 2016

 

 

390,164

 

 

 

1,130,141

 

 

$

0.86

 

Authorized

 

 

900,000

 

 

 

 

 

Granted

 

 

(202,083

)

 

 

202,083

 

 

$

3.06

 

Exercised

 

 

-

 

 

 

(11,536

)

 

$

0.80

 

Canceled

 

 

17,352

 

 

 

(17,352

)

 

$

1.11

 

Outstanding at June 30, 2017

 

 

1,105,433

 

 

 

1,303,336

 

 

$

1.20

 

 

2017 Employee Stock Purchase Plan

In May 2017, the Board and the Company’s stockholders adopted the 2017 Employee Stock Purchase Plan (“2017 ESPP”), which became effective in connection with the Company’s IPO. The 2017 ESPP allows eligible employees to purchase shares of the Company’s common stock in an offering at a discount of the then-current trading price, up to the lesser of (1) 85% of the fair market value of the common stock on the first day of the IPO or (2) 85% of the fair market value of the common stock on the purchase date. The 2017 ESPP permits the maximum discounted purchase price permitted under U.S. tax rules, including a “lookback.”

The 2017 ESPP initial offering period runs for approximately 24 months in length, and contains four 6-month purchase periods. An employee’s purchase rights terminate immediately upon termination of employment or other withdrawal from the 2017 ESPP. No participant will have the right to purchase shares of common stock in an amount that has a fair market value of more than $25,000 determined as of the first day of the applicable purchase period, for each calendar year.

14


There are 200,000 shares of common stock reserved for issuance under the 2017 ESPP. In addition, the 2017 ESPP contains a provision which provides for an automatic annual share increase on January 1 of each year, in an amount equal to the lesser of (1) 2% of the total number of shares of common stock outstanding on December 31st of the preceding calendar year, (2) 150,000 shares or (3) such number of shares as determined by the Board.

The Company accounts for employee stock purchases made under its 2017 ESPP using the estimate grant date fair value of accounting in accordance with ASC 718, Stock Compensation. The Company values ESPP shares using the Black-Scholes model.

There were no shares issued under the 2017 ESPP during the three and six months ended June 30, 2017.

Total stock-based compensation expense associated with the 2005 Plan, 2017 Plan and 2017 ESPP is recorded in the condensed consolidated statements of operations and was allocated as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

Cost of revenue

 

$

3

 

 

$

9

 

 

$

6

 

 

$

10

 

Sales and marketing

 

 

1

 

 

 

15

 

 

 

3

 

 

 

20

 

Research and development

 

 

5

 

 

 

9

 

 

 

9

 

 

 

16

 

General and administrative

 

 

8

 

 

 

19

 

 

 

16

 

 

 

29

 

Total

 

$

17

 

 

 

52

 

 

$

34

 

 

 

75

 

 

Note 12. Commitments and Contingencies

Operating Lease

The Company leases its principal executive offices in Newark, California, under a non-cancelable operating lease which expires in 2021. The Company recognizes rent expense on a straight-line basis over the expected lease term. The difference between cash payments required and rent expense is recorded as deferred rent. Rent expense for the Company's facilities was $0.1 million for each of the three and six months ended June 30, 2016.  Rent expense for the Company’s facilities was $0.1 million and $0.2 million for the three and six months ended June 30, 2017, respectively.  

The following is a schedule of future minimum lease payments under the non-cancelable operating lease at June 30, 2017 (in thousands):

 

2017 (remainder of year)

 

$

140

 

2018

 

 

336

 

2019

 

 

346

 

2020

 

 

357

 

2021

 

 

305

 

Total

 

$

1,484

 

 

Contingencies

In the normal course of business, the Company may receive inquiries or become involved in legal disputes regarding various litigation matters. In the opinion of management, any potential liabilities resulting from such claims would not have a material adverse effect on the Company's financial position or results of operations.

 

 

15


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and accompanying notes and other financial information in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the final prospectus filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, on June 8, 2017 (the “Prospectus”). This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors”, set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are the leader in gunshot detection solutions that help law enforcement officials and security personnel deter and prevent gun violence. We offer our software solutions on a SaaS-based subscription model to customers around the world with current customers located in the United States, Puerto Rico, the U.S. Virgin Islands and South Africa. Our public safety solution, ShotSpotter Flex, is deployed in urban, high-crime areas to help deter gun violence by accurately detecting and locating gunshots and sending near real-time alerts to law enforcement. Our security solutions, SST SecureCampus and ShotSpotter SiteSecure, are designed to help law enforcement and security personnel serving universities, corporate campuses and key infrastructure or transportation centers mitigate risk and enhance security by notifying authorities and first responders of an active-shooter event almost immediately.

Our solutions consist of our highly-specialized, cloud-based software integrated with proprietary, internet-enabled sensors and communication networks. The speed and accuracy of our solutions enable rapid response by law enforcement and security personnel, increase the chances of apprehending the shooter, aid in evidentiary collection and can serve as an overall deterrent. When a potential gunfire incident is detected by our sensors, our software precisely locates where the incident occurred. An alert containing critical information about the incident is transmitted directly to law enforcement or security personnel through any computer and to iPhone® or Android mobile devices.

We generate annual subscription revenues from the deployment of our public safety solution on a per-square-mile basis. As of June 30, 2017, we had 75 public safety customers with coverage areas of approximately 480 square miles in 90 cities and municipalities across the United States, including four of the ten largest cities. As of June 30, 2017, we had six security customers covering seven higher-education campuses, of which five had their solutions fully deployed.

We enter into subscription agreements on a term basis that typically range from one to five years in duration, with the majority having a contract term of one year. Substantially all of our sales are to governmental agencies and universities which often undertake a prolonged contract evaluation process that affects the size or the timing of our sales contracts and may likewise increase our customer acquisition costs. For a discussion of the risks associated with our sales cycle, see risks entitled "Our sales cycle can be unpredictable, time-consuming and costly, and our inability to successfully complete sales could harm our business" and "Because we generally recognize our subscription revenues ratably over the term of our contract with a customer, fluctuations in sales will not be fully reflected in our operating results until future periods" in  Item 1A, Risk Factors, included in this Quarterly Report on Form 10-Q.

We rely on a limited number of suppliers and contract manufacturers to produce components of our solutions. We have no long-term contracts with these manufacturers and purchase from them on a purchase-order basis. Although we use a limited number of suppliers and contract manufacturers, we believe that we could find alternate suppliers or

16


manufacturers if circumstances required us to do so, in part because a significant portion of the components required by our solutions is available off the shelf. For a discussion of the risks associated with our limited number of suppliers, see risk entitled "We rely on a limited number of suppliers and contract manufacturers, and our proprietary ShotSpotter sensors are manufactured by a single contract manufacturer" in Item 1A, Risk Factors, included in this Quarterly Report on Form 10-Q.

We generated revenues of $3.9 million and $5.8 million for the three months ended June 30, 2016 and 2017, respectively, a year-over-year increase of 48%. Revenues from our ShotSpotter Flex public safety solution during the three months ended June 30, 2016 and 2017 represented approximately 99% and 96%, respectively, of total revenues. Two of our largest customers, City of New York and Puerto Rico Housing Administration, accounted for 13% and 15%, respectively, of our total revenues for the three months ended June 30, 2016. One customer, City of New York, accounted for 17% of our total revenues for the three months ended June 30, 2017. All of our revenues for the three months ended June 30, 2016 were derived from customers within the United States (including Puerto Rico and the U.S. Virgin Islands). A substantial majority of our revenues for the three months ended June 30, 2017 was derived from customers within the United States (including Puerto Rico and the U.S. Virgin Islands), and a small portion was derived from our customer in South Africa.

We generated revenues of $7.0 million and $10.4 million for the six months ended June 30, 2016 and 2017, respectively, a year-over-year increase of  49%. Revenues from our ShotSpotter Flex public safety solution during the six months ended June 30, 2016 and 2017 represented approximately 99% and 96%, respectively, of total revenues. Two of our largest customers, City of New York and Puerto Rico Housing Administration, each accounted for 12% of our total revenues for the six months ended June 30, 2016. One customer, City of New York, accounted for 17% of our total revenues for the six months ended June 30, 2017. All of our revenues for the six months ended June 30, 2016 were derived from customers within the United States (including Puerto Rico and the U.S. Virgin Islands). A substantial majority of our revenues for the six months ended June 30, 2017 was derived from customers within the United States (including Puerto Rico and the U.S. Virgin Islands), and a small portion was derived from our customer in South Africa.

While we intend to continue to devote resources to increase sales of our SST SecureCampus and ShotSpotter SiteSecure Solutions, we expect that revenues from our ShotSpotter Flex solution will continue to comprise a majority of our revenues going forward.

We have not yet achieved profitability and had net losses of $4.3 million and $5.9 million for the three and six months ended June 30, 2017, respectively. Our accumulated deficit was $87.6 million and $93.5 million as of December 31, 2016 and June 30, 2017, respectively.

During the three and six months ending June 30, 2017, we went “live” on 44 and 74 new square miles of coverage, respectively. This increase in coverage in both periods was achieved through a combination of new customers and expansions with existing customers.

We have focused on rapidly growing our business and believe that its future growth is dependent on many factors, including our ability to increase our customer base, expand the coverage of our solutions among our existing customers, increase sales of our security solutions, and expand our international presence. Our future growth will primarily depend on the market acceptance for gunshot detection solutions. Challenges we face in this regard include our target customers not having access to adequate funding sources, the fact that contracting with government entities can be complex, expensive, time-consuming and the fact that our typical sales cycle is often very long and can be costly. To combat these challenges, we intend to continue to maintain our position as a market leader, invest in research and development, increase awareness of our solutions, and hire additional sales representatives to drive sales. In addition, we believe that entering into strategic partnerships with other service providers to cities and municipalities offers another potential avenue for expansion, particularly for our ShotSpotter Flex solution.

We will also focus on expanding our business by increasing sales of our security solutions. By developing additional solutions through SST SecureCampus and ShotSpotter SiteSecure, we believe that our potential for growth has increased and that we are still in the early stages of penetrating the market for our security solutions. Our ability to penetrate these new markets will depend on the quality of our solutions and their perceived value as a risk management tool, as well as our ability to design our solutions to meet the demands of these customers. If these security solution markets do not develop as we expect, our revenues may not grow at the rate we expect.

17


With respect to international sales, we believe that we have the potential to expand our coverage within South Africa and to pursue opportunities in Europe, South America and other regions of the world. By adding additional sales resources in strategic locations, we believe we will be better positioned to reach these markets. However, we recognize that we have limited international operational experience and currently operate only in three regions outside of the continental United States: Puerto Rico, the U.S. Virgin Islands and South Africa. Operating successfully in international markets will require significant resources and management attention and will subject us to additional regulatory, economic and political risks. Moreover, we anticipate that different political and regulatory considerations that vary across different jurisdictions could extend what is already a lengthy sales cycle.

Given the importance of these strategies and challenges we face, we expect to continue to incur losses in the near term and, if we are unable to achieve our growth objectives, we may not be able to achieve profitability.

Key Quarterly Business Metric

 

We focus on one key quarterly metric in order to measure our operational performance and inform strategic decisions. The key business metric presented below is calculated on a quarterly basis using internal data and may be calculated in a manner different than similar metrics used by other companies.

Net New “Go-Live” Square Miles Added

 

 

 

Three Months Ended

 

Three Months Ended

 

Six Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

 

2016

 

2017

 

2016

 

2017

Net new "go-live" square miles added

 

35

 

44

 

61

 

74

Net new “go-live” square miles represent the square miles covered by deployments that were approved by customers during the quarter, both from initial and expanded customer deployments, net of square miles that ceased to be “live” during the quarter. New square miles include deployed square miles that may have been sold, or booked, in prior quarters.

Components of Results of Operations

Presentation of Financial Statements

Our consolidated financial statements include the accounts of our wholly-owned South African subsidiary, ShotSpotter (Pty) Ltd. All intercompany balances and transactions have been eliminated in consolidation.

Revenues

We derive substantially all of our revenues from subscription services. We recognize subscription fees ratably, on a straight-line basis, over the term of the subscription, which for new customers is typically initially one to five years in length. Customer contracts include one-time set-up fees for the set-up of our sensors in the customer’s coverage areas, training and third-party integration licenses. These set-up fees are recognized ratably, on a straight-line basis, over the estimated customer life of five years.

We generally invoice customers for 50% of the total contract value when the contract is fully executed and for the remaining 50% when the subscription service is operational and ready to go live – that is, when the customer has acknowledged the completion of all the deliverables in the signed customer acceptance form. All fees billed in advance of services being delivered are recorded as deferred revenue. For our public safety solution, our pricing model is based on a per-square-mile basis. For our security solutions, our pricing model is on a customized-site basis. As a result of our process for invoicing contracts and renewals upon execution, our cash flow from operations and accounts receivable can fluctuate due to timing of contract execution and timing of deployment.

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We generally invoice subscription service renewals for 100% of the total contract value when the renewal contract is executed. Renewal fees are recognized ratably over the term of the renewal, which is typically one year. While most of our customers elect to renew their agreements, in some cases, they may not be able to obtain the proper approvals or funding to complete the renewal prior to expiration. For these customers, we stop recognizing subscription revenues at the end of the current contract term, even though we may continue to provide services for a period of time until the renewal process is completed. Once the renewal is complete, we then recognize subscription revenues for the period between the expiration of the term of the agreement and the completion of the renewal process in the month in which the renewal is executed.

Cost of Revenues

Cost of revenues primarily includes depreciation expense associated with capitalized customer acoustic sensor networks, communication expenses, costs related to hosting our service application, costs related to operating our Incident Review Center or IRC, providing remote and on-site customer support and maintenance and forensic services, certain personnel and related costs of operations, stock-based compensation and allocated overhead, which includes IT, facility and equipment depreciation costs.

In the near term, we expect our cost of revenues to increase in absolute dollars to the extent our installed base increases, but decrease as a percentage of revenues because certain of our costs of revenues are fixed and do not need to increase commensurate with increases in revenues. In addition, depreciation expense associated with deployed equipment is recognized only over the first five years of a customer contract.

Operating Expenses

Operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Salaries, bonuses, stock-based compensation expense and other personnel costs are the most significant components of each of these expense categories. We include stock-based compensation expense incurred in connection with the grant of stock options to the applicable operating expense category based on the equity award recipient’s functional area.

We are focused on executing on our growth strategy. As a result, in the near term we expect our total operating expenses to increase in absolute dollars as we incur additional expenses due to growth and as a result of operating as a public company. Although our operating expenses will fluctuate, we expect that over time, they will generally decrease as a percentage of revenues.

Sales and Marketing

Sales and marketing expenses primarily consist of personnel-related costs attributable to our sales and marketing personnel, commissions earned by our sales personnel, marketing expenses for trade shows, conferences and conventions, consulting fees, travel and facility-related costs and allocated overhead.

In the near term, we expect our sales and marketing expenses to increase in absolute dollars primarily due to planned growth in our sales and marketing organization. This growth will include adding sales and marketing personnel and expanding our marketing activities to continue to generate additional leads. Sales and marketing expense may fluctuate from quarter to quarter based on the timing of commission expense, marketing campaigns and tradeshows.

Research and Development

Research and development expenses primarily consist of personnel-related costs attributable to our research and development personnel, consulting fees and allocated overhead. We have devoted our product development efforts primarily to develop new lower-cost sensor hardware, develop new features including a mobile application, improve functionality of our solutions and adapt to new technologies or changes to existing technologies.

In the near term, we expect our research and development expenses to increase in absolute dollars as we increase our research and development headcount to further strengthen our software and invest in the development of our service.

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General and Administrative

General and administrative expenses primarily consist of personnel-related costs attributable to our executive, finance, and administrative personnel, legal, accounting and other professional services fees, other corporate expenses and allocated overhead. We have recently incurred additional expenses in expanding our operations and for our IPO, and will continue to incur additional expenses as a public company, including increased personnel, legal, insurance and accounting expenses, and the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act and other regulations.

In the near term, we expect our general and administrative expenses to increase significantly in absolute dollars as we grow our business, support our operations as a public company and increase our headcount.

Other Expense, Net

Other expense, net, consists primarily of interest expense on our outstanding debt, and losses from the remeasurement of our convertible preferred stock warrant liability. The convertible preferred stock warrant liability was reclassified into additional paid-in capital upon our IPO and will no longer be remeasured at each balance sheet date.

Results of Operations

Comparison of Three Months Ended June 30, 2016 and 2017

The following table sets forth our selected consolidated statements of operations data for the three months ended June 30, 2016 and 2017 (in thousands):

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As a % of

 

 

 

 

 

 

As a % of

 

 

Change

 

 

 

2016

 

 

Revenues

 

 

2017

 

 

Revenues

 

 

$

 

 

%

 

Revenues

 

$

3,935

 

 

 

100

%

 

$

5,836

 

 

 

100

%

 

$

1,901

 

 

 

48

%

Cost of revenues

 

 

2,434

 

 

 

62

%

 

 

2,687

 

 

 

46

%

 

 

253

 

 

 

10

%

Gross profit

 

 

1,501

 

 

 

38

%

 

 

3,149

 

 

 

54

%

 

 

1,648

 

 

 

110

%

Operating expenses: