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 March 31, 2018

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 May 8, 2018, the registrant had 10,625,264 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 March 31, 2018 and December 31, 2017

2

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017

3

 

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2018 and 2017

4

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

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

17

Item 3.

Qualitative and Quantitative Disclosures About Market Risk

24

Item 4.

Controls and Procedures

24

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

49

Item 6.

Exhibits

49

Exhibit Index

50

Signatures

51

 

 

 

i


 

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

ShotSpotter, Inc.

Condensed Consolidated Balance Sheets  

(In thousands)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,732

 

 

$

19,567

 

Accounts receivable

 

 

6,367

 

 

 

3,928

 

Prepaid expenses and other current assets

 

 

1,301

 

 

 

839

 

Restricted cash

 

 

30

 

 

 

30

 

Total current assets

 

 

22,430

 

 

 

24,364

 

Property and equipment, net

 

 

13,802

 

 

 

11,596

 

Intangible assets, net

 

 

92

 

 

 

95

 

Other assets

 

 

1,556

 

 

 

143

 

Total assets

 

$

37,880

 

 

$

36,198

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,932

 

 

$

1,627

 

Deferred revenue, short-term

 

 

16,477

 

 

 

15,780

 

Accrued expenses and other current liabilities

 

 

2,989

 

 

 

3,815

 

Total current liabilities

 

 

21,398

 

 

 

21,222

 

Deferred revenue, long-term

 

 

1,615

 

 

 

2,710

 

Other liabilities

 

 

98

 

 

 

104

 

Total liabilities

 

 

23,111

 

 

 

24,036

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock

 

 

51

 

 

 

48

 

Additional paid-in capital

 

 

110,475

 

 

 

109,708

 

Accumulated deficit

 

 

(95,787

)

 

 

(97,595

)

Accumulated other comprehensive income

 

 

30

 

 

 

1

 

Total stockholders' equity

 

 

14,769

 

 

 

12,162

 

Total liabilities and stockholders' equity

 

$

37,880

 

 

$

36,198

 

 

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 March 31,

 

 

 

2018

 

 

2017

 

Revenues

 

$

6,907

 

 

$

4,562

 

Costs

 

 

 

 

 

 

 

 

Cost of revenues

 

 

3,308

 

 

 

2,675

 

Total costs

 

 

3,308

 

 

 

2,675

 

Gross profit

 

 

3,599

 

 

 

1,887

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Sales and marketing

 

 

1,554

 

 

 

1,108

 

Research and development

 

 

1,236

 

 

 

1,034

 

General and administrative

 

 

2,028

 

 

 

930

 

Total operating expenses

 

 

4,818

 

 

 

3,072

 

Operating loss

 

 

(1,219

)

 

 

(1,185

)

Other income (expense), net

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

27

 

 

 

(365

)

Other income (expense), net

 

 

1

 

 

 

(11

)

   Total other income (expense), net

 

 

28

 

 

 

(376

)

Loss before income taxes

 

 

(1,191

)

 

 

(1,561

)

Provision for income taxes

 

 

26

 

 

 

 

Net loss

 

$

(1,217

)

 

$

(1,561

)

Net loss per share, basic and diluted

 

$

(0.12

)

 

$

(0.93

)

Weighted average shares used in computing net loss per

   share, basic and diluted

 

 

10,067,830

 

 

 

1,678,326

 

 

See accompanying notes to condensed consolidated financial statements.

3


ShotSpotter, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(1,217

)

 

$

(1,561

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

29

 

 

 

(13

)

Comprehensive loss

 

$

(1,188

)

 

$

(1,574

)

 

See accompanying notes to condensed consolidated financial statements.


4


 

ShotSpotter, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(1,217

)

 

$

(1,561

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

817

 

 

 

679

 

Stock-based compensation

 

 

427

 

 

 

23

 

Amortization of debt issuance costs

 

 

 

 

 

34

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,439

)

 

 

(1,946

)

Prepaid expenses and other assets

 

 

11

 

 

 

(26

)

Accounts payable

 

 

305

 

 

 

(382

)

Accrued expenses and other current liabilities

 

 

(834

)

 

 

(166

)

Deferred revenue

 

 

706

 

 

 

1,470

 

Net cash used in operating activities

 

 

(2,224

)

 

 

(1,875

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(2,985

)

 

 

(1,077

)

Investment in intangible and other assets

 

 

(10

)

 

 

(7

)

Net cash used in investing activities

 

 

(2,995

)

 

 

(1,084

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from notes payable

 

 

 

 

 

1,500

 

Proceeds from exercise of stock options

 

 

342

 

 

 

5

 

Net cash provided by financing activities

 

 

342

 

 

 

1,505

 

Decrease in cash and cash equivalents

 

 

(4,877

)

 

 

(1,454

)

Effect of exchange rate on cash and cash equivalents

 

 

42

 

 

 

2

 

Cash, cash equivalents and restricted cash at beginning of year

 

 

19,597

 

 

 

3,895

 

Cash, cash equivalents and restricted cash at end of period

 

$

14,762

 

 

$

2,443

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

 

$

336

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

 

 

 

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

   financial institution

 

$

 

 

$

111

 

Debt origination fees included in accrued expenses and other current liabilities

 

$

 

 

$

30

 

Deferred offering costs included in other assets

 

$

 

 

$

731

 

 

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, after 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 8, 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. The condensed consolidated financial statements include the results of the Company and its wholly-owned subsidiary, ShotSpotter (Pty) Ltd. All significant intercompany transactions have been eliminated during consolidation.

The condensed consolidated balance sheet as of December 31, 2017, 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 2018 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 6, 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.

 

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 revenue recognition and 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.

Revenue Recognition

The Company generates substantially all of its revenues from the sale of gunshot detection subscription services, in which gunshot data generated by Company-owned sensors and software is sold to customers through a cloud-based hosting application for a specified contract period. Typically, the initial contract period is one to five years in length. The subscription contract is generally noncancelable without cause. Generally, these service arrangements do not provide the customer with the right to take possession of the hardware or software supporting the subscription service at any time. A small portion of the Company’s revenues are generated from the delivery of setup services to install Company-owned sensors in the customer’s coverage area and other services including training and license to integrate with third-party applications.

The Company generally invoices 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. The Company generally invoices subscription service renewals for 100% of the total contract value when the renewal contract is executed. For the public safety solution, the pricing model is based on a per-square-mile basis. For security solutions, the pricing model is on a customized-site basis. As a result of the process for invoicing contracts and renewals

7


upon execution, cash flows from operations and accounts receivable can fluctuate due to timing of contract execution and timing of deployment.

Prior to the adoption of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers ("Topic 606"), the Company recognized revenue in accordance with Accounting Standard Codification (“ASC”) 605, Revenue Recognition, and, accordingly, when all of the following criteria were met.

 

Persuasive evidence of an arrangement exists

 

 

Delivery has occurred or services have been rendered

 

The sales price is fixed or determinable

 

 

Collection of the related receivable is reasonably assured

Under ASC 605, the Company recognized subscription revenues ratably over the subscription period committed by the customer and commencing when the subscription service was fully operational and ready to go live, that is, upon completion of all deliverables stated in the signed customer acceptance form, assuming all other revenue recognition criteria were met. The Company recognized revenues from setup fees ratably based on the expected customer relationship period, typically over five years, which could extend beyond the initial contract period. In determining the expected customer relationship period, the Company considered specific customer details and renewal history with similar customers. If a customer declined to renew its subscription prior to the end of five years, then the remaining setup fees were immediately recognized.

Effective January 1, 2018, after the adoption of Topic 606, the Company recognizes revenue upon the satisfaction of performance obligations. At contract inception, the Company assesses the services promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the customer a good or service (or bundle of services) that is distinct. To identify the performance obligations, the Company considers all of the services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. The Company determined that the subscription services, training, and licenses to integrate with third-party applications are each distinct services that represent separate performance obligations. The setup activities are not distinct from the subscription service and are combined into the subscription service performance obligation. However, setup fees may provide a material right to the customer that has influence over the customers' decision to renew. All setup fees are assessed on a quantitative and qualitative basis to determine whether they represent a distinct performance obligation. The total contract value is allocated to each performance obligation identified based on the standalone selling price of the service. Discounts are allocated pro-rata to the identified performance obligations.

Revenues from subscription services are recognized ratably, on a straight-line basis, over the term of the subscription. Revenues from material rights are recognized ratably over the period in which they are determined to provide a material right to the customer, which is generally three years. Revenues from training and licenses to integrate with third-party applications are recognized upon delivery which generally occurs when the subscription service is operational and ready to go live and these amounts are immaterial.  

Subscription renewal fees are recognized ratably over the term of the renewal, which is typically one year. While most 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, the Company stops recognizing subscription revenues at the end of the current contract term, even though services may continue to be provided for a period of time until the renewal process is completed. Once the renewal is complete, the Company recognizes 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 three years, then the remaining fees from material rights, if any, are immediately recognized.

 

As of January 1, 2018, upon the adoption of ASC 606, the Company had total short-term and long-term deferred revenue of $17.3 million. During the three months ended March 31, 2018, the Company recognized $5.7 million in revenue from the beginning deferred revenue balance and $1.2 million from new billings, and added $7.7 million to total short-term and long-term deferred revenue from new billings.  

As of March 31, 2018, the Company has estimated remaining performance obligations for contractually committed revenues of $17.0 million, $12.1 million, $9.7 million, $6.8 million, and $500,000 that will be recognized during the remainder of the year ended December 31, 2018, and years ended December 31, 2019, 2020, 2021, and 2022

8


through 2024, respectively. The timing of revenue recognition includes estimates of go live dates for contracts not yet live. Contractually committed revenue includes deferred revenue as of March 31, 2018 and amounts under contract that will be invoiced after March 31, 2018. 

During the three months ended March 31, 2018, the Company recognized revenues of $6.7 million from customers in the United States and $0.2 million from a customer in South Africa.  

Topic 606 also requires the capitalization of certain incremental costs of obtaining a contract, which impacts the period in which the Company records sales commissions expense. Historically, the Company recognized sales commissions expense upfront. Under Topic 606, the Company is required to capitalize these expenses. As there are not commensurate commissions earned on renewals of the subscription services, the Company concluded that the capitalized commissions are related to subscription services provided under both the initial contract and renewal periods.  Therefore, the amortization period for the capitalized commissions is the customer life, which is determined to be five years. As the capitalized commissions are related to subscription services that are transferred over the customer's life, the Company amortizes the capitalized commissions on a straight-line basis of five years. For commissions that are earned on renewal contracts with an original duration of one year or less, the Company uses the practical expedient applicable to such commissions and recognizes the commissions as expense instead of capitalizing.

Accounts Receivable

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 March 31, 2018 and December 31, 2017, the Company did not have an allowance for potential credit losses as there were no estimated credit losses.

Concentrations of Risk

Credit Risk – Financial instruments that potentially subject the Company to concentration of credit risk consisted primarily of restricted cash, cash and cash equivalents and accounts receivable from trade customers. The Company maintains its cash deposits at two domestic financial institutions. The Company is exposed to credit risk in the event of default by a financial institution to the extent that cash and cash equivalents are in excess of the amount insured by the Federal Deposit Insurance Corporation. The Company generally places its cash and cash equivalents with high-credit quality financial institutions. To date, the Company has not experienced any losses on its cash and cash equivalents

Concentration of Accounts Receivable –As of March 31, 2018, one customer accounted for 30% 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. As of December 31, 2017, three customers accounted for 18%, 18% and 14% of the Company’s accounts receivable.

Concentration of Revenues –For the three months ended March 31, 2018, two customers each accounted for 18% of the Company’s total revenues. For the three months ended March 31, 2017, two customers accounted for 17% and 10% of the Company’s total revenues.    

Accounting Pronouncements Recently Adopted

Effective January 1, 2018, the Company adopted Topic 606. This standard outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Topic 606 was adopted on a modified retrospective basis and the new standard was applied only to new contracts entered into after January 1, 2018, and contracts that were not completed as of January 1, 2018. The cumulative effect of this adoption of Topic 606 as of January 1, 2018 resulted in a reduction to accumulated deficit of $3.0 million, a reduction of short-term and long-term deferred revenue of $1.2 million and the capitalization of commissions in assets of $1.8 million.

The impact from the adoption of Topic 606 was as follows:

 

9


 

 

Three Months Ended March 31, 2018

 

 

 

As Reported

 

 

Effect of Change Increase/ (Decrease)

 

 

Amounts Without Adoption of Topic 606

 

Revenues

 

$

6,907

 

 

$

53

 

 

$

6,854

 

Costs

 

 

3,308

 

 

 

 

 

 

3,308

 

Gross profit

 

 

3,599

 

 

 

53

 

 

 

3,546

 

Sales and marketing expense

 

 

1,554

 

 

 

(141

)

 

 

1,695

 

Operating loss

 

 

(1,219

)

 

 

(88

)

 

 

(1,307

)

Net loss

 

 

(1,217

)

 

 

(88

)

 

 

(1,305

)

 

 

 

As of March 31, 2018

 

 

 

As Reported

 

 

Effect of Change Increase/ (Decrease)

 

 

Amounts Without Adoption of Topic 606

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

$

1,301

 

 

$

553

 

 

$

748

 

Other assets

 

 

1,556

 

 

 

1,417

 

 

 

139

 

Total assets

 

 

37,880

 

 

 

1,970

 

 

 

35,910

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue, short term

 

 

16,477

 

 

 

(151

)

 

 

16,628

 

Total current liabilities

 

 

21,398

 

 

 

(151

)

 

 

21,549

 

Deferred revenue, long term

 

 

1,615

 

 

 

(1,100

)

 

 

2,715

 

Total liabilities

 

 

23,111

 

 

 

(1,251

)

 

 

24,362

 

 

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 balance sheet as of the beginning of the fiscal year of adoption. The Company adopted this ASU as of January 1, 2018. The adoption of this ASU did not have any impact on the Company’s condensed 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. This ASU is effective for the Company as of January 1, 2018. Early adoption is permitted. The adoption of this ASU did not have any 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. The Company adopted this ASU as of January 1, 2018. The adoption of this ASU did not have any impact on the Company’s 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. The Company adopted this ASU as of January 1, 2018. The adoption of this ASU did not have any material impact on the Company’s condensed consolidated financial statements.

10


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. The Company adopted this ASU as of January 1, 2018. 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 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 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. Details of Certain Condensed Consolidated Balance Sheet Accounts

 

Prepaid expenses and other current assets (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Prepaid software and licenses

 

$

368

 

 

$

407

 

Prepaid insurance

 

 

89

 

 

 

211

 

Other prepaid expenses

 

 

203

 

 

 

137

 

Deferred commissions

 

 

553

 

 

 

 

Other

 

 

88

 

 

 

84

 

 

 

$

1,301

 

 

$

839

 

 

Accrued expenses and other current liabilities (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Payroll liabilities

 

$

577

 

 

$

1,697

 

Accrued employee paid time off

 

 

558

 

 

 

469

 

Accrued commissions

 

 

90

 

 

 

199

 

Accrued ESPP

 

 

335

 

 

 

115

 

Royalties payable

 

 

129

 

 

 

125

 

Professional fees

 

 

361

 

 

 

328

 

Use and other taxes

 

 

436

 

 

 

406

 

Other

 

 

503

 

 

 

476

 

 

 

$

2,989

 

 

$

3,815

 

 

11


Note 5. Impairment of Property and Equipment

During the year ended December 31, 2017, the Company recognized impairment expense of $0.8 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. 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 6. 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

 

 

$

22,575

 

Series A-2

 

 

1,177,000

 

 

 

1,176,423

 

 

 

20,000

 

 

 

 

 

 

 

 

 

 

 

$

42,575

 

 

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 $23,000 of common stock and $42.1 million into additional paid-in capital.  

 

As of March 31, 2018, 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 March 31, 2018, there were 10,329,846 shares of common stock issued and outstanding. At December 31, 2017, there were 9,827,129 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 March 31, 2018, there were no shares of preferred stock issued and outstanding.

Note 7. 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 March 31,

 

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(1,217

)

 

$

(1,561

)

Denominator:

 

 

 

 

 

 

 

 

Weighted-average shares outstanding, basic and diluted

 

 

10,067,830

 

 

 

1,678,326

 

Net loss per share

 

$

(0.12

)

 

$

(0.93

)

 

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:

 

 

 

As of March 31,

 

 

 

2018

 

 

2017

 

Options to purchase common stock

 

 

801,397

 

 

 

1,308,248

 

Unvested restricted stock units

 

 

129,575

 

 

 

 

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

 

 

445,611

 

 

 

756,731

 

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

 

 

 

 

 

3,848,023

 

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

 

 

 

 

 

841,730

 

Total

 

 

1,376,583

 

 

 

6,754,732

 

 

Note 8. 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.

As of March 31, 2018, 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

 

 

165,924

 

 

July 2012

 

$

5.8667

 

 

July 2019

Common stock warrant

 

 

38,835

 

 

August 2012

 

$

5.8667

 

 

August 2019

Common stock warrant

 

 

156,852

 

 

February 2014

 

$

0.1700

 

 

February 2021

Common stock warrant (1)

 

 

84,000

 

 

June 2017

 

$

13.2000

 

 

June 2020

 

 

 

445,611

 

 

 

 

 

 

 

 

 

 

 

(1)

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

Note 9. 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). Under an “evergreen” provision, 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 and ending on and including January 1, 2027, by of 5% of the total number of shares of our capital stock outstanding on December 31 of the preceding calendar year or a lesser number of shares determined by our Board of Directors. In accordance with the evergreen provision, the number of shares of common stock reserved for issuance under our 2017 Plan was automatically increased on January 1, 2018 by 491,356 shares, which was equal to 5% of the total number of shares of capital stock outstanding on December 31, 2017.

 

13


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.

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 option activities under the 2005 Plan and 2017 Plan during the three months ended March 31, 2018 is as follows:

 

 

 

Number

of Options

Outstanding

 

 

Weighted

Average

Exercise

Price

 

Outstanding as of December 31, 2017

 

 

1,294,128

 

 

$

1.79

 

Granted

 

 

7,776

 

 

$

23.72

 

Exercised

 

 

(486,588

)

 

$

0.70

 

Canceled

 

 

(13,919

)

 

$

3.29

 

Outstanding as of March 31, 2018

 

 

801,397

 

 

$

2.64

 

 

During the three months ended March 31, 2018, the company granted executive management restricted stock unit (“RSU”) awards totaling 82,263 shares of common stock, with vesting terms of 35% upon the first anniversary and 21.667% on each of the three subsequent anniversaries. The fair value of $16.41 per unit was calculated using the closing stock price on the grant date.

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 1,419,111 as of March 31, 2018.

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 an “evergreen” 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. In accordance with the evergreen provision, the number of shares of common stock reserved for issuance under our 2017 ESPP was automatically increased on January 1, 2018 by 150,000 shares.

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 months ended March 31, 2018.

14


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 March 31,

 

 

 

2018

 

 

2017

 

Costs

 

$

57

 

 

$

2

 

Sales and marketing

 

 

66

 

 

 

5

 

Research and development

 

 

40

 

 

 

7

 

General and administrative

 

 

264

 

 

 

9

 

Total

 

$

427

 

 

$

23

 

 

Note 10. 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 both the three months ended March 31, 2018 and 2017.

The following is a schedule of future minimum lease payments under the non-cancelable operating lease at March 31, 2018 (in thousands):

 

2018 (remainder of year)

 

$

252

 

2019

 

 

346

 

2020

 

 

357

 

2021

 

 

305

 

2022

 

 

 

Total

 

$

1,260

 

 

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. The Contractors filed a First Amended Complaint on November 22, 2017, adding claims for promissory estoppel, conversion, anticipatory breach of contract, and unjust enrichment, and then sought a writ of attachment over damages, which the court denied on December 21, 2017. The Contractors subsequently filed a motion seeking leave of court to file a Second Amended Complaint (“SAC”) on January 26, 2017. The motion was granted and on March 2, 2018 the Contractors filed a SAC asserting claims for breach of contract, anticipatory breach of contract, breach of the implied covenant, and conversion. The Contractors have filed another motion for leave to amend to file a Third Amended Complaint (“TAC”), which will be heard on June 14, 2018. The proposed TAC alleges breach of contract, breach of the covenant of good faith and fair dealing, conversion, violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, violation of Section 17200 et seq. of the California Business and Professions Code, Material Misrepresentations in Violation of Cal. Civ. Code § 1710, Negligent Misrepresentation, Fraudulent Concealment, violation of S.E.C. Rule 701 and 17 C.F.R. § 230.701, and Rescission. The basis of the Contractors current and pending claims is 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, punitive damages, and other costs and expenses, including attorneys’ fees. We believe that the Contractors’ claims are without merit and intend to dispute them 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

15


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.

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 11. Subsequent Events

In April 2018, the Company issued 268,294 shares of common stock upon the exercise of common stock warrants for an aggregate cash payment of $1 million.

 

16


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 2017 Annual report on form 10-K, filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, on March 28, 2018 (“Annual Report”). 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 March 31, 2018, we had 79 public safety customers with coverage areas of approximately 550 square miles in 90 cities and municipalities across the United States and South Africa, including three of the ten largest cities in the United States. As of March 31, 2018, we had eight security customers covering nine higher-education campuses, of which seven customers had their solutions fully deployed on eight 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 Part II, Item 1A, Risk Factors, included in this Quarterly Report on Form 10-Q.

17


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 Part II, Item 1A, Risk Factors, included in this Quarterly Report on Form 10-Q.

We generated revenues of $6.9 million and $4.6 million for the three months ended March 31, 2018 and 2017, respectively, a year-over-year increase of 51%. Revenues from our ShotSpotter Flex public safety solution during the three months ended March 31, 2018 and 2017 represented approximately 99% and 98% of total revenues, respectively. Our two current largest customers, the City of Chicago and the City of New York, each accounted for 18% of our total revenues for the three months ended March 31, 2018. For the three months ended March 31, 2017, our two largest customers were the City of New York and the Puerto Rico Housing Administration, representing 17% and 10%, respectively, of our total revenues for the three months ended March 31, 2017. As a result of widespread destruction caused by hurricanes in the fall of 2017 in Puerto Rico and the U.S. Virgin Islands, in September 2017, we discontinued our service to our customers in those locations.  

For the three months ended March 31, 2018 and 2017, revenues generated within the United States (including, for the three months ended March 31, 2017, Puerto Rico and the U.S. Virgin Islands) accounted for $6.7 million and $4.4 million, or 97% and 96% of total revenues, respectively, and $0.2 million for both three months ended March 2018 and 2017, was derived from our customer located in South Africa.

We have not yet achieved profitability and had net losses of $1.2 million and $1.6 million for the three months ended March 31, 2018 and 2017, respectively. Our accumulated deficit was $95.8 million and $97.6 million as of March 31, 2018 and December 31, 2017, respectively.

During the three months ended March 31, 2018 and 2017 we went “live” on 47 and 29 net new square miles of coverage, respectively. In each case, the increase in coverage was achieved through a combination of expansion with existing customers and new 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, expand our international presence and increase sales of our security solutions. 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, and time-consuming and the fact that our typical sales cycle is often very long and can be costly. To combat these challenges, invest in research and development, increase awareness of our solutions, and hire additional sales representatives to drive sales in order to continue to maintain our position as a market leader. 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,

18


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 formally 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 due to customer cancellations. New square miles include deployed square miles that may have been sold, or booked, in prior quarters. We focus on net new “go-live” miles” as a key quarterly business metric to measure our operational performance and inform strategic decisions.

This metric, presented below for the three months ended March 31, 2018 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

 

 

March 31,

 

 

2018

 

2017

Net new "go-live" square miles added

 

47

 

29

 

 

 

 

 

 

 

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.

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 three 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. If the set-up fees are deemed to be a material right, they are recognized ratably over three years. Training and third-party integration license fees are recognized upon delivery.

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

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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.

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.

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.

We will continue to invest in research and development to leverage our large and growing database of acoustic events, which includes those from both gunfire and non-gunfire. We also intend to leverage third-party AI and our own evolving cognitive and analytical applications to improve the efficiency of our solutions, which may include internal software applications, data analysis, event routing and customer outputs. Certain of these applications and outputs may expand the platform of services that we will be able to offer our customers.

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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 we operate 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.

Income Taxes

Our income taxes are based on the amount of our taxable income and enacted federal, state and foreign tax rates, adjusted for allowable credits, deductions and the valuations allowance against deferred tax assets, as applicable.

Results of Operations

Comparison of Three Months Ended March 31, 2018 and 2017

The following table sets forth our selected condensed consolidated statements of operations data for the three months ended March 31, 2018 and 2017 (in thousands):

 

 

 

Three Months March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As a % of

 

 

 

 

 

 

As a % of

 

 

Change

 

 

 

2018

 

 

Revenues

 

 

2017

 

 

Revenues

 

 

$

 

 

%

 

Revenues

 

$

6,907

 

 

 

100

%

 

$

4,562

 

 

 

100

%

 

$

2,345

 

 

 

51

%

Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

3,308

 

 

 

48

%

 

 

2,675

 

 

 

59

%

 

 

633

 

 

 

24

%

Total costs

 

 

3,308

 

 

 

48

%

 

 

2,675

 

 

 

59

%

 

 

633

 

 

 

24

%

Gross profit

 

 

3,599

 

 

 

52

%

 

 

1,887

 

 

 

41

%

 

 

1,712

 

 

 

91

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

1,554

 

 

 

22

%

 

 

1,108

 

 

 

24

%

 

 

446

 

 

 

40

%

Research and development

 

 

1,236

 

 

 

18

%

 

 

1,034

 

 

 

23

%

 

 

202

 

 

 

20

%

General and administrative

 

 

2,028

 

 

 

29

%

 

 

930

 

 

 

20

%

 

 

1,098

 

 

 

118

%

Total operating expenses

 

 

4,818

 

 

 

70

%

 

 

3,072

 

 

 

67

%

 

 

1,746

 

 

 

57

%

Loss from operations

 

 

(1,219

)

 

 

(18

%)

 

 

(1,185

)

 

 

(26

%)

 

 

(34

)

 

 

3

%

Other income (expense), net

 

 

28

 

 

 

 

 

 

(376

)

 

 

(8

%)

 

 

404

 

 

 

(107

%)

Provision for income taxes

 

 

(26

)

 

 

 

 

 

 

 

 

 

 

 

(26

)

 

 

100

%

Net loss

 

$

(1,217

)

 

 

(18

%)

 

$

(1,561

)

 

 

(34

%)

 

$

344

 

 

 

(22

%)

 

Revenues

The increase of $2.3 million was primarily attributable to the expansions of existing customer coverage areas and an increase in new customers.

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Costs

The increase of $0.6 million was due primarily to $0.4 million increase in overhead expenses, due to an increase in employee headcount since March 31, 2017, and $0.1 million increase in depreciation expense associated with expansions in existing customer coverage areas.

Gross margin increased by 11 percentage points because certain costs of revenues are fixed and did not increase commensurate with the increase in subscription revenues.

Operating Expenses

Sales and Marketing Expense

The increase of $0.4 million was primarily due to an increase of $0.2 million in salaries, commissions and stock-based compensation expense associated with expansion of our sales, marketing and customer success organization.

Research and Development Expense

The increase of $0.2 million was due primarily to an increase in personnel and recruiting expenses due to the hiring of new personnel since March 31, 2017.

General and Administrative Expense

The increase of $1.1 million was due to a $0.8 million increase in legal and accounting fees associated with operating as a public company and litigation expenses, a $0.2 million increase in salaries, benefits and bonuses resulting from an increase in hiring new personnel, and a $0.1 million increase in director and officer insurance premium.

Other Expense (expense), Net

The decrease of $0.4 million in the three months ended March 31, 2018 was due to the decrease in interest expense due to repayment of all of our outstanding debt balances during the year ended December 31, 2017.

Income Taxes

Our income taxes are based on the amount of our taxable income and enacted federal, state and foreign tax rates, adjusted for allowable credits, deductions and the valuations allowance against deferred tax assets, as applicable. For the three months ended March 31, 2018, our provision for income taxes consists of the foreign taxes only.

 

 Liquidity and Capital Resources

Sources of Funds

Our operations have been financed primarily through net proceeds from the sale of equity, debt financing arrangements and cash from operating activities. Our principal source of liquidity is cash and cash equivalents totaling $14.7 million as of March 31, 2018.

In June 2017, we received net proceeds of $32.4 million after deducting underwriting warrant, discounts and commissions, from our IPO.

We believe our existing cash and cash equivalent balances and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on sales and marketing, the expansion of sales and marketing activities, the timing of new product introductions, market acceptance of our products and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional capital or debt financing. Raising additional capital would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations.

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Use of Funds

Our historical uses of cash have primarily consisted of cash used for operating activities, such as expansion of our sales and marketing operations, research and development activities and other working capital needs, and cash used in investing activities, such as property and equipment expenditures to install infrastructure in customer cities in order to deliver our solutions.

In September 2017, we voluntarily repaid our outstanding borrowing of $13.5 million under the 2015 Term Note.

Cash Flows

Comparison of the Three Months Ended March 31, 2018 and 2017

The following table presents a summary of our cash flows for the three months ended March 31, 2018 and 2017:

 

 

 

 

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

Operating activities

 

$

(2,224

)

 

$

(1,875

)

Investing activities

 

 

(2,995

)

 

 

(1,084

)

Financing activities

 

 

342

 

 

 

1,505

 

Net change in cash and cash equivalents

 

$

(4,877

)

 

$

(1,454

)

 

Operating Activities

For standard customer deployments, we typically achieve cash flow breakeven, on a direct variable cost-basis, in less than a year from the date of execution of the contract. Our net loss and cash flows provided by operating activities are significantly influenced by our increase in headcount to support our growth, sales and marketing expenses, and our ability to bill and collect in a timely manner.

Operating activities used $2.2 million in the three months ended March 31, 2018 was primarily from an increase in accounts receivable of $2.4 million and net loss of $1.2 million partially offset by $0.8 million in depreciation and amortization, and a $0.7 million increase in deferred revenue from new customers and contract renewals with existing customers.

Operating activities used $1.9 million during the three months ended March 31, 2017, primarily from our net loss of $1.6 million and $1.0 million in cash used as a result of changes in operating assets and liabilities, partially offset by non-cash charges aggregating $0.7 million, primarily from depreciation and amortization. The change in operating assets and liabilities reflected a $1.9 million increase in accounts receivable due to increase in billings from customers renewing their contracts in the first quarter of 2017, and a $0.4 million decrease in accounts payable, partially offset by a $1.5 million increase in deferred revenues from new customers and contract renewals with existing customers.  

Investing Activities

Our investing activities consist primarily of capital expenditures to install our solutions in customer coverage areas, purchases of property and equipment, and investment in intangible assets.

Investing activities used $3.0 million and $1.1 million in the three months ended March 31, 2018 and 2017, respectively, primarily for property and equipment expenditures to install our solutions in customer coverage areas.

Financing Activities

Cash generated by financing activities includes borrowings under our term loan and proceeds from the exercise of stock options.  

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Financing activities provided $0.3 million in the three months ended March 31, 2018, primarily from the proceeds from exercise of stock options.

Financing activities provided $1.5 million in cash during the three months ended March 31, 2017 from our term loan of $1.5 million.

Contractual Obligations and Commitments

There were no material changes during the three months ended March 31, 2018 to the contractual obligations and commitments disclosed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our 2017 Annual Report on Form 10-K. See Note 10, Commitments and Contingencies, to the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding commitments.

Off-Balance Sheet Arrangements

As of March 31, 2018, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of revenue, assets, liabilities, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates.

For the significant or material changes in our critical accounting policies during the three months ended March 31, 2018, see Note 3, Summary of Significant Accounting Policies, to the notes of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Recently Issued Accounting Pronouncements

See Note 3, Summary of Significant Accounting Policies, to the notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a summary of recently issued accounting pronouncements.

Item 3. Qualitative and Quantitative Disclosures about Market Risk

 

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign exchange rates as well as, to a lesser extent, inflation.

There were no material changes in our market risk during the three months ended March 31, 2018, compared to the market risk disclosed in the Qualitative and Quantitative Disclosures about Market Risk section of our 2017 Annual Report on Form 10-K.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13-a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have

24


concluded that as of March 31, 2018, our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

Beginning January 1, 2018, we implemented ASU 2014-09 Revenue from Contracts with Customers (Topic 606) and ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date. As a result of the adoption of the new standard, we have implemented changes to our controls related to revenue. These included the development of new policies based on the five-step model provided in the new revenue standard, enhanced contract review requirements, and other ongoing monitoring activities. These controls were designed to provide assurance at a reasonable level of the fair presentation of our condensed consolidated financial statements and related disclosures. There was no other change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

25


PART II. OTHER INFORMATION

Item 1. Legal Proceedings

 

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. The Contractors filed a First Amended Complaint on November 22, 2017, adding claims for promissory estoppel, conversion, anticipatory breach of contract, and unjust enrichment, and then sought a writ of attachment over damages, which the court denied on December 21, 2017. The Contractors subsequently filed a motion seeking leave of court to file a Second Amended Complaint (“SAC”) on January 26, 2017. The motion was granted and on March 2, 2018 the Contractors filed a SAC asserting claims for breach of contract, anticipatory breach of contract, breach of the implied covenant, and conversion. The Contractors have filed another motion for leave to amend to file a Third Amended Complaint (“TAC”), which will be heard on June 14, 2018. The proposed TAC alleges breach of contract, breach of the covenant of good faith and fair dealing, conversion, violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, violation of Section 17200 et seq. of the California Business and Professions Code, Material Misrepresentations in Violation of Cal. Civ. Code § 1710, Negligent Misrepresentation, Fraudulent Concealment, violation of S.E.C. Rule 701 and 17 C.F.R. § 230.701, and Rescission. The basis of the Contractors current and pending claims is 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, punitive damages, and other costs and expenses, including attorneys’ fees. We believe that the Contractors’ claims are without merit and intend to dispute them vigorously.

From time to time, we may become in involved in lawsuits as well as subject to various legal proceedings, claims, threats of litigation, and investigations in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment, and other matters. While certain matters to which we are a party may specify the damages claimed, such claims may not represent reasonably possible losses. Given the inherent uncertainties of litigation, the ultimate outcome of these matters cannot be predicted at this time, nor can the amount of possible loss or range of loss, if any, be reasonably estimated.

An unfavorable outcome on any litigation 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.

Item 1A. RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this report, including our condensed consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. We have marked with an asterisk (*) those risks described below that reflect substantive changes from the risks described in our Annual Report on Form 10-K for the year ended December 31, 2017. If any of the following risks is realized, our business, operating results, financial condition and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment. Moreover, the risks described below are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also affect our business, operating results, prospects or financial condition. You should carefully consider these risk factors, together with all of the other information included in this report as well as our other publicly available filings with the SEC.

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Risks Related to Our Business and Industry

Our success depends on maintaining and increasing our sales, which depends on factors we cannot control, including the availability of funding to our customers.

To date, substantially all of our revenues have been derived from contracts with local governments and their agencies, in particular the police departments of major cities in the United States. To a lesser extent, we also generate revenues from federal agencies, foreign governments and higher education institutions. We believe that the success and growth of our business will continue to depend on our ability to add new police departments and other government agencies as customers of our public safety solution and new universities, corporate campuses and key infrastructure and transportation centers as customers of our security solutions. Many of our target customers have restricted budgets, such that we are forced to compete with programs or solutions that offer an alternative use of the same funds. A number of factors could cause potential customers to delay or refrain from purchasing our solutions or prevent expansion of their use of our solutions, including:

 

decreases or changes in available funding, including budgetary allocations, government grants and other government funding programs;

 

potential delays or changes in appropriations or other funding authorization processes;

 

changes in fiscal or contracting policies; and

 

changes in elected or appointed officials.

The occurrence of any of the foregoing would impede our ability to maintain or increase the amount of revenues derived from these customers, which could have a material adverse effect on our business, operating results and financial condition.

Contracting with government entities can be complex, expensive and time-consuming.

The procurement process for government entities is in many ways more challenging than contracting in the private sector. We must comply with laws and regulations relating to the formation, administration, performance and pricing of contracts with government entities, including U.S. federal, state and local governmental bodies. These laws and regulations may impose added costs on our business or prolong or complicate our sales efforts, and failure to comply with these laws and regulations or other applicable requirements could lead to claims for damages from our customers, penalties, termination of contracts and other adverse consequences. Any such damages, penalties, disruptions or limitations in our ability to do business with government entities could have a material adverse effect on our business, operating results and financial condition.

Government entities often require highly specialized contract terms that may differ from our standard arrangements. For example, if the federal government provides grants to certain state and local governments for our solutions, and such governments do not continue to receive these grants, then these customers have the ability to terminate their contracts with us without penalty. Government entities often impose compliance requirements that are complicated, require preferential pricing or “most favored nation” terms and conditions, or are otherwise time-consuming and expensive to satisfy. Compliance with these special standards or satisfaction of such requirements could complicate our efforts to obtain business or increase the cost of doing so. Even if we do meet these special standards or requirements, the increased costs associated with providing our solutions to government customers could harm our margins. Additionally, even once we have secured a government contract, the renewal process can be lengthy and as time-consuming as the initial sale, and we may be providing our service for months past the contract expiration date without certainty if the renewal agreement will be signed or not.

Changes in the underlying regulatory conditions, political landscape or required procurement procedures that affect these types of customers could be introduced prior to the completion of our sales cycle, making it more difficult or costly to finalize a con