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 September 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 smaller 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 November 10, 2017, the registrant had 9,646,416 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 September 30, 2017

2

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2017

3

 

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

4

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 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

18

Item 3.

Qualitative and Quantitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

29

Item 2.

Use of Proceeds

51

Item 5.

Other Information

51

Item 6.

Exhibits

51

Exhibit Index

52

Signatures

53

 

 

 

i


 

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

ShotSpotter, Inc.

Condensed Consolidated Balance Sheets

(In thousands)

 

 

 

December 31,

 

 

September 30,

 

 

 

2016

 

 

2017

 

 

 

 

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,865

 

 

$

19,255

 

Accounts receivable

 

 

2,410

 

 

 

5,987

 

Prepaid expenses and other current assets

 

 

567

 

 

 

859

 

Restricted cash

 

 

30

 

 

 

30

 

Total current assets

 

 

6,872

 

 

 

26,131

 

Property and equipment, net

 

 

8,959

 

 

 

10,640

 

Intangible assets, net

 

 

66

 

 

 

88

 

Other assets

 

 

220

 

 

 

151

 

Total assets

 

$

16,117

 

 

$

37,010

 

Liabilities and Stockholders' (Deficit) Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,336

 

 

$

1,765

 

Deferred revenue, short-term

 

 

10,863

 

 

 

15,902

 

Accrued expenses and other current liabilities

 

 

2,359

 

 

 

2,795

 

Notes payable, net of current maturities

 

 

667

 

 

 

 

Total current liabilities

 

 

15,225

 

 

 

20,462

 

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

 

 

11,012

 

 

 

 

Convertible preferred stock warrant liability

 

 

1,875

 

 

 

 

Deferred revenue, long-term

 

 

3,112

 

 

 

2,477

 

Other liabilities

 

 

24

 

 

 

85

 

Total liabilities

 

 

31,248

 

 

 

23,024

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Series B-1 convertible preferred stock

 

 

22,075

 

 

 

 

Series A-2 convertible preferred stock

 

 

20,000

 

 

 

 

Stockholders' (deficit) equity:

 

 

 

 

 

 

 

 

Common stock

 

 

8

 

 

 

47

 

Additional paid-in capital

 

 

30,403

 

 

 

109,054

 

Accumulated deficit

 

 

(87,615

)

 

 

(95,092

)

Accumulated other comprehensive loss

 

 

(2

)

 

 

(23

)

Total stockholders' (deficit) equity

 

 

(57,206

)

 

 

13,986

 

Total liabilities and stockholders' (deficit) equity

 

$

16,117

 

 

$

37,010

 

 

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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

Revenues

 

$

3,977

 

 

$

6,846

 

 

$

10,956

 

 

$

17,244

 

Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

2,400

 

 

 

2,791

 

 

 

7,031

 

 

 

8,154

 

Impairment of property and equipment

 

 

 

 

 

666

 

 

 

 

 

 

666

 

Total costs

 

 

2,400

 

 

 

3,457

 

 

 

7,031

 

 

 

8,820

 

Gross profit

 

 

1,577

 

 

 

3,389

 

 

 

3,925

 

 

 

8,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

1,098

 

 

 

1,792

 

 

 

3,434

 

 

 

4,269

 

Research and development

 

 

1,007

 

 

 

1,063

 

 

 

3,193

 

 

 

3,024

 

General and administrative

 

 

568

 

 

 

1,305

 

 

 

1,674

 

 

 

3,206

 

Total operating expenses

 

 

2,673

 

 

 

4,160

 

 

 

8,301

 

 

 

10,499

 

Operating loss

 

 

(1,096

)

 

 

(771

)

 

 

(4,376

)

 

 

(2,075

)

Other expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remeasurement of convertible preferred stock warrant

   liability

 

 

(98

)

 

 

 

 

 

(649

)

 

 

(3,725

)

Loss on early extinguishment of debt

 

 

 

 

 

(479

)

 

 

 

 

 

(479

)

Interest expense, net

 

 

(345

)

 

 

(358

)

 

 

(955

)

 

 

(1,167

)

Other expense, net

 

 

 

 

 

(3

)

 

 

(16

)

 

 

(31

)

   Total other expense, net

 

 

(443

)

 

 

(840

)

 

 

(1,620

)

 

 

(5,402

)

Net loss

 

$

(1,539

)

 

$

(1,611

)

 

$

(5,996

)

 

$

(7,477

)

Net loss per share, basic and diluted

 

$

(0.96

)

 

$

(0.17

)

 

$

(3.75

)

 

$

(1.49

)

Weighted average shares used in computing net loss per

   share, basic and diluted

 

 

1,602,254

 

 

 

9,619,659

 

 

 

1,598,285

 

 

 

5,016,825

 

 

See accompanying notes to condensed consolidated financial statements.

3


ShotSpotter, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

Net loss

 

$

(1,539

)

 

$

(1,611

)

 

$

(5,996

)

 

$

(7,477

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

(2

)

 

 

(2

)

 

 

(2

)

 

 

(21

)

Comprehensive loss

 

$

(1,541

)

 

$

(1,613

)

 

$

(5,998

)

 

$

(7,498

)

 

See accompanying notes to condensed consolidated financial statements.

4


ShotSpotter, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(5,996

)

 

$

(7,477

)

Adjustments to reconcile net loss to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,876

 

 

 

2,274

 

Impairment of property and equipment

 

 

 

 

 

666

 

Stock-based compensation

 

 

57

 

 

 

306

 

Amortization of debt issuance costs

 

 

97

 

 

 

132

 

Remeasurement of convertible preferred stock warrant liability

 

 

649

 

 

 

3,725

 

Loss on early extinguishment of debt

 

 

 

 

 

479

 

Provision for doubtful accounts

 

 

 

 

 

140

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,016

)

 

 

(3,735

)

Prepaid expenses and other assets

 

 

(84

)

 

 

(263

)

Accounts payable

 

 

148

 

 

 

429

 

Accrued expenses and other current liabilities

 

 

860

 

 

 

486

 

Deferred revenue

 

 

5,152

 

 

 

4,398

 

Net cash provided by operating activities

 

 

1,743

 

 

 

1,560

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(3,112

)

 

 

(4,547

)

Investment in intangible and other assets

 

 

(43

)

 

 

(55

)

Net cash used in investing activities

 

 

(3,155

)

 

 

(4,602

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from initial public offering, net of commissions and discounts

 

 

 

 

 

32,426

 

Proceeds from notes payable

 

 

2,000

 

 

 

1,500

 

Repayment of notes payable

 

 

 

 

 

(13,500

)

Payment of debt issuance costs

 

 

(17

)

 

 

(30

)

Payment of debt extinguishment costs

 

 

 

 

 

(149

)

Payments of offering costs

 

 

 

 

 

(1,858

)

Proceeds from exercise of stock options

 

 

21

 

 

 

41

 

Net cash provided by financing activities

 

 

2,004

 

 

 

18,430

 

Increase in cash and cash equivalents

 

 

592

 

 

 

15,388

 

Effect of exchange rate on cash and cash equivalents

 

 

22

 

 

 

2

 

Cash and cash equivalents at beginning of year

 

 

4,124

 

 

 

3,865

 

Cash and cash equivalents at end of period

 

$

4,738

 

 

$

19,255

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

853

 

 

$

1,235

 

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

 

$

 

 

$

13

 

 

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 a price of $11.00 per share. 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 11, 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 $1.9 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 (as defined below) 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 9, 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 (as so amended and restated, 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 nine months ended September 30, 2017 as compared to the significant accounting policies described in the Prospectus.

Accounts receivable consist of trade accounts receivables from the Company’s customers, net of allowance for doubtful accounts if deemed necessary. Accounts receivables are recorded at the invoiced amount. The Company does not require collateral or other security for accounts receivable. The Company periodically evaluates the collectability of its accounts receivable and provides an allowance for potential credit losses based on the historical experience. At

7


December 31, 2015 and 2016 the Company did not have an allowance for potential credit losses as there were no estimated credit losses. As of September 30, 2017 the allowance for doubtful accounts was $0.1 million.

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 Company’s execution of contracts and collection of related payments. At September 30, 2017, three customers accounted for 24%, 12% and 11% of the Company’s accounts receivable.

Concentration of Revenues –For the three months ended September 30, 2016, two customers accounted for 13% and 12% of the Company’s total revenues. For the nine months ended September 30, 2016, two customers each accounted for 12% of the Company’s total revenues. For the three months ended September 30, 2017, two customers accounted for 17% and 14% of the Company’s total revenues.  For the nine months ended September 30, 2017, two customers accounted for 18% and 10% of the Company’s total revenues.  

Accounting Pronouncements Recently Adopted

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 this ASU. The Company adopted this ASU 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 Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”). 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 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 a modified retrospective method. The company currently anticipates using the modified retrospective method.

Topic 606 requires the Company to assess whether the subscription and setup services included in the contractual arrangements are distinct in the context of the subscription contract or whether 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 significant impacts will relate to the capitalization of sales commissions and the recognition of interest expense when there is a significant financing component in a contract. Under the new standard, costs incremental to obtaining a contract with a customer, such as sales commissions, are capitalized as assets and amortized. When there is a significant financing component in a contract, the transaction price to account is adjusted for the time value of money. The objective when adjusting the transaction price for a significant financing component is to recognize revenue at an amount that reflect what the cash selling price of the promised good or service would have been if the customer had paid cash at the same time as control of that good or service transferred to the customer. The Company will continue to assess the impact of Topic 606 on its condensed consolidated financial statements.

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. This ASU also changes certain presentation and disclosure requirements for financial instruments. This ASU is to be applied by means of a cumulative effect adjustment to the

8


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 does not expect adoption of this ASU to have any impact on its condensed 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 12 months. This 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 condensed consolidated financial statements and related disclosures.  The Company expects the asset leased under its headquarters office operating lease will be capitalized on the balance sheet upon adoption of ASU.

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. This ASU is effective for the Company as of January 1, 2018. Early adoption is permitted. The Company does not expect adoption to have a material impact on its condensed consolidated statements of cash flows.

In October 2016, the FASB issued ASU 2016-16, Intra-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. This 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 condensed 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 condensed 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 does not expect adoption of this ASU to have any impact on its condensed 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 condensed 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

9


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.

There were no transfers into or out of Level III during the three and nine months ended September 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 September 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

 

 

 

 

September 30, 2017

 

 

 

Gross

 

 

Accumulated

Amortization

 

 

Net

 

Patents

 

$

929

 

 

$

(841

)

 

$

88

 

 

Amortization expense was $10,000 and $12,000 for the three months ended September 30, 2016 and 2017, respectively, and $27,000 and $34,000 for the nine months ended September 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,

 

 

September 30,

 

 

 

2016

 

 

2017

 

Prepaid software and licenses

 

$

286

 

 

$

246

 

Prepaid insurance

 

 

25

 

 

 

333

 

Other prepaid expenses

 

 

171

 

 

 

193

 

Other

 

 

85

 

 

 

87

 

 

 

$

567

 

 

$

859

 

 

10


Accrued expenses and other current liabilities (in thousands):

 

 

 

December 31,

 

 

September 30,

 

 

 

2016

 

 

2017

 

Payroll liabilities

 

$

1,146

 

 

$

1,463

 

Accrued employee paid time off

 

 

372

 

 

 

469

 

Accrued commissions

 

 

51

 

 

 

249

 

Accrued interest

 

 

123

 

 

 

 

Royalties payable

 

 

225

 

 

 

101

 

Other

 

 

442

 

 

 

513

 

 

 

$

2,359

 

 

$

2,795

 

 

Note 7. Impairment of Property and Equipment

During the three and nine months ended September 30, 2017, the Company recognized impairment expense of $0.7 million for the impairment of property and equipment relating to the remaining book value of deployed equipment in Puerto Rico and the U.S. Virgin Islands.  Management concluded that the impairment charges were required because the equipment was presumed destroyed by the hurricanes in September 2017. 

During the three and nine months ended September 30, 2017, the Company also recognized $0.9 million in revenues relating to the remaining deferred set-up fees to be recognized on contracts with customers in Puerto Rico and the U.S. Virgin Islands.  Management concluded that the revenues associated with these contracts was required to be accelerated because the contracts with customers in Puerto Rico and the U.S. Virgin Islands were expired at the time of the hurricanes and all subscription services were fully delivered. 

 

Note 8. Financing Arrangements

2015 Term Note 

At December 31, 2016, the Company had outstanding borrowings under a term note (the “2015 Term Note”) of $11.7 million, net of unamortized debt issuance costs.  There were no outstanding borrowings as of September 30, 2017. 

Borrowings under the 2015 Term Note bore 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 nine months ended September 30, 2016 was 11.00% for both periods. The weighted average interest rate during the three and nine months ended September 30, 2017 was 11.75% and 11.54%, respectively.

For the three and nine months ended September 30, 2016, the Company recognized interest expense of $0.3 million and $0.9 million, respectively, based on the outstanding balance during the respective periods. For the three and nine months ended September 30, 2017, the Company recognized interest expense of $0.4 million and $1.1 million, respectively, based on the outstanding balance during the respective periods.

During the three and nine months ended September 30, 2016, amortization of debt issuance costs was $33,000 and $97,000, respectively. During the three and nine months ended September 30, 2017, amortization of debt issuance costs was $48,000 and $132,000, respectively. Amortization of debt issuance costs is recorded in interest expense in the condensed consolidated statements of operations.

Borrowings under the 2015 Term Note were secured by substantially all of the assets of the Company. Additionally, the terms of the 2015 Term Note included 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

11


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):

 

 

 

December 31,

 

 

September 30,

 

 

 

2016

 

 

2017

 

Notes payable

 

$

12,000

 

 

$

 

Unamortized debt issuance costs

 

 

(321

)

 

 

 

Current maturities of term note

 

 

(667

)

 

 

 

Total notes payable, net of current maturities

 

$

11,012

 

 

$

 

 

 

Early Extinguishment of Debt

In September 2017, the Company voluntarily repaid all outstanding borrowings under the 2015 Term Note. The Company recorded to other expense, net, a loss of $0.2 million, consisting of prepayment fees and miscellaneous fees, and wrote-off $0.3 million of unamortized debt issuance costs from the early extinguishment of debt.

 

Note 9. 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 September 30, 2017, there were no shares of convertible preferred stock outstanding.

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 September 30, 2017, there were 9,639,594 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 September 30, 2017, there were no shares of preferred stock issued and outstanding.

12


Note 10. 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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(1,539

)

 

$

(1,611

)

 

$

(5,996

)

 

$

(7,477

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding, basic and

   diluted

 

 

1,602,254

 

 

 

9,619,659

 

 

 

1,598,285

 

 

 

5,016,825

 

Net loss per share

 

$

(0.96

)

 

$

(0.17

)

 

$

(3.75

)

 

$

(1.49

)

 

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:

 

 

 

As of September 30,

 

 

 

2016

 

 

2017

 

Options to purchase common stock

 

 

1,128,737

 

 

 

1,287,977

 

Unvested restricted stock units

 

 

 

 

 

44,238

 

Warrants to purchase Series B-1 convertible preferred or common stock

 

 

680,027

 

 

 

714,596

 

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

 

 

3,848,023

 

 

 

 

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

 

 

841,730

 

 

 

 

Total

 

 

6,498,517

 

 

 

2,046,811

 

 

Note 11. 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.

13


At September 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

 

 

March 2027

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 8, Financing Arrangements, for further details regarding this warrant.  

(2)

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

Note 12. 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 31st 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 Stock 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.

14


A summary of option activities under the 2005 Plan and 2017 Plan during the nine months ended September 30, 2017 is as follows:

 

 

 

Number

of Options

Outstanding

 

 

Weighted

Average

Exercise

Price

 

Outstanding at December 31, 2016

 

 

1,130,141

 

 

$

0.86

 

Granted

 

 

236,788

 

 

$

4.30

 

Exercised

 

 

(57,938

)

 

$

0.72

 

Canceled

 

 

(21,014

)

 

$

1.43

 

Outstanding at September 30, 2017

 

 

1,287,977

 

 

$

1.49

 

 

During the nine months period ended September 30, 2017, the company granted non-employee directors restricted stock unit (“RSU”) awards totaling 44,238 shares of common stock, with a vesting term of approximately ten months. The fair value of $11.50 per unit was calculated using the closing stock price on the date of grants.

In the second quarter of 2017, our board of directors authorized for issuance 900,000 new shares under our 2017 Plan.

Our equity- based incentive plans include stock options, restricted stock units and other stock awards. The number of shares available for grant under these plans was 1,030,152 as of September 30, 2017.

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.

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 nine months ended September 30, 2017.

15


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 September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

Costs

 

$

3

 

 

$

33

 

 

$

9

 

 

$

43

 

Sales and marketing

 

 

2

 

 

 

54

 

 

 

5

 

 

 

74

 

Research and development

 

 

5

 

 

 

26

 

 

 

14

 

 

 

42

 

General and administrative

 

 

13

 

 

 

118

 

 

 

29

 

 

 

147

 

Total

 

$

23

 

 

$

231

 

 

$

57

 

 

$

306

 

 

Note 13. 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 and $0.2 million for the three and nine months ended September 30, 2016, respectively.  Rent expense for the Company’s facilities was $0.1 million and $0.3 million for the three and nine months ended September 30, 2017, respectively.  

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

 

2017 (remainder of year)

 

$

77

 

2018

 

 

336

 

2019

 

 

346

 

2020

 

 

357

 

2021

 

 

305

 

Total

 

$

1,421

 

 

Contingencies

On November 6, 2017, three individuals, Ken Fisher, Kevin Baxter and Fred Holmes (the “Contractors”), filed a complaint with the Superior Court of California, County of Alameda, alleging breach of contract, a breach of the implied covenant of good faith and fair dealing and violation of Section 17200 et seq. of the California Business and Professions Code, purportedly predicated on an alleged breach of Section 10b-5 of the Securities Exchange Act of 1934, based on the Contractors’ claim that they were entitled to be granted options to purchase 350,000 shares of our common stock on the basis of a term sheet between us and the Contractors signed in July 2007. The Contractors claim that our subsequent one-for-five and one-for-17 reverse stock splits should not apply to their option awards. On the basis of their allegations, the Defendants have petitioned for approximately $6.5 million in damages and other costs and expenses, including attorneys’ fees. The Company intends to dispute these claims vigorously.

The Company may become subject to legal proceedings, as well as demands and claims, that arise in the normal course of our business. Such claims, even if not meritorious, could result in the expenditure of significant financial and management resources.  The Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed and adjusted to include the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel, and other information and events pertaining to a particular matter.

16


An unfavorable outcome on any such matters could require us to pay substantial damages, or, in connection with any intellectual property infringement claims, could require us to pay ongoing royalty payments or could prevent us from selling certain of our products. As a result, a settlement of, or an unfavorable outcome on, any of the matters referenced above or other litigation matters could have a material adverse effect on our business, operating results, financial condition and cash flows.

 

Note 14. Subsequent Events

None.

17


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 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 September 30, 2017, we had 74 public safety customers with coverage areas of approximately 490 square miles in 85 cities and municipalities across the United States and South Africa, including four of the ten largest cities in the United States. As of September 30, 2017, we had six security customers covering seven higher-education campuses, of which five customers had their solutions fully deployed on six campuses.

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.

18


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. Our outsourced manufacturers generally procure the components directly from third-party suppliers. Although we use a limited number of suppliers and contract manufacturers, we believe that we could find alternate suppliers or 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 $4.0 million and $6.8 million for the three months ended September 30, 2016 and 2017, respectively, a year-over-year increase of 72%. Revenues from our ShotSpotter Flex public safety solution during the three months ended September 30, 2016 and 2017 represented approximately 99% of total revenues for both periods. Two of our customers, City of New York and Puerto Rico Housing Administration, accounted for 12% and 13%, respectively, of our total revenues for the three months ended September 30, 2016, and 17% and 14%, respectively, of our total revenues for the three months ended September 30, 2017.  A substantial majority of our revenues for the three months ended September 30, 2016 and 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 $11.0 million and $17.2 million for the nine months ended September 30, 2016 and 2017, respectively, a year-over-year increase of 57%. Revenues from our ShotSpotter Flex public safety solution during the nine months ended September 30, 2016 and 2017 represented approximately 97% of total revenues for both periods. Our two largest customers, the City of New York and the Puerto Rico Housing Administration, each accounted for approximately 12% of our total revenues for the nine months ended September 30, 2016, and approximately 18% and 10% of our total revenues for the nine months ended September 30, 2017.  A substantial majority of our revenues for the nine months ended September 30, 2016 and 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 substantial majority of our revenues going forward.

We have not yet achieved profitability and had net losses of $1.6 million and $7.5 million for the three and nine months ended September 30, 2017, respectively. Our accumulated deficit was $87.6 million and $95.1 million as of December 31, 2016 and September 30, 2017, respectively.

In September 2017, we used $13.7 million from the net proceeds of our initial public offering to voluntarily repay our outstanding indebtedness of $13.5 million and $0.2 million in prepayment fees under a promissory note (the “2015 Term Note”). In connection with this early extinguishment of debt, we wrote off $0.3 million of unamortized debt issuance costs.

During the years ended December 31, 2015 and 2016 and the nine months ended September 30, 2017, we went “live” on 50, 70 and 91 net new square miles of coverage, respectively.  In each case, the increase in coverage was achieved through a combination of new customers and expansion with existing customers and, in the case of nine months ended September 30, 2017, the 91 net new square miles reflects the impact of a 33 coverage mile reduction as a result of our discontinuation in service of Puerto Rico and the U.S Virgin Islands due to the devastation caused by the recent hurricanes.

In connection with the cessation of our service with Puerto Rico and the U.S. Virgin Islands, we classified the contracts as expired, and stopped recognizing revenue and accelerated the deferred revenues related to setup fees under these contracts.

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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.

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 one region outside of the continental United States, 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.

Net New “Go-Live” Miles

We focus on net new “go live” miles” as a key quarterly business metric to measure our operational performance and inform strategic decisions. 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.

This metric, presented below for the three and nine months ended September 30, 2016 and 2017, is calculated on a quarterly basis using internal data and may be calculated in a manner different than similar metrics used by other companies.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2016

 

2017

 

2016

 

2017

Net new "go-live" square miles added

 

11

 

17

 

60

 

91

 

Components of Results of Operations

Presentation of Financial Statements

Our condensed 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.

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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.

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. If a customer declines to renew its subscription prior to the end of five years, then the remaining setup fees are immediately recognized.

Costs

Costs include the cost of revenues and charges for impairment of property and equipment.  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 (the “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.

Impairment of property and expense is attributable to our write off of the remaining book value for deployed equipment in Puerto Rico and the U.S. Virgin Islands that was presumed destroyed by the hurricanes in September 2017.

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 and restricted stock units 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.

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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.

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 initial public offering of common stock (the “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 and losses from early extinguishment of debt. 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.

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Results of Operations

Comparison of Three Months Ended September 30, 2016 and 2017

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

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As a % of

 

 

 

 

 

 

As a % of

 

 

Change

 

 

 

2016

 

 

Revenues

 

 

2017

 

 

Revenues

 

 

$

 

 

%

 

Revenues

 

$

3,977

 

 

 

100

%

 

$

6,846

 

 

 

100

%

 

$

2,869

 

 

 

72

%

Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

2,400

 

 

 

60

%

 

 

2,791

 

 

 

40

%

 

 

391

 

 

 

16

%

Impairment of property and equipment

 

 

 

 

 

 

 

 

666

 

 

 

10

%

 

 

666

 

 

 

100

%

Total costs

 

 

2,400