00

014

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, 2020

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.005 per share

SSTI

The Nasdaq Capital Market

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 every Interactive Data File required to be submitted 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 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

 

  

  

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 7, 2020, the registrant had 11,399,300 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, 2020 and December 31, 2019

2

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019

3

 

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2020 and 2019

4

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2019

5

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

16

Item 3.

Qualitative and Quantitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

26

PART II.

OTHER INFORMATION

 

Item 1A.

Risk Factors

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

Item 6.

Exhibits

53

Exhibit Index

54

Signatures

55

 

 

 

i


 

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

ShotSpotter, Inc.

Condensed Consolidated Balance Sheets  

(In thousands)

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

28,677

 

 

$

24,550

 

Accounts receivable and contract asset

 

 

7,313

 

 

 

13,883

 

Prepaid expenses and other current assets

 

 

1,564

 

 

 

1,764

 

Total current assets

 

 

37,554

 

 

 

40,197

 

Property and equipment, net

 

 

16,617

 

 

 

16,556

 

Operating lease right-of-use asset

 

 

485

 

 

 

556

 

Goodwill

 

 

1,379

 

 

 

1,379

 

Intangible assets, net

 

 

244

 

 

 

249

 

Other assets

 

 

1,563

 

 

 

1,634

 

Total assets

 

$

57,842

 

 

$

60,571

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,003

 

 

$

1,179

 

Deferred revenue, short-term

 

 

24,091

 

 

 

26,360

 

Accrued expenses and other current liabilities

 

 

4,033

 

 

 

4,885

 

Total current liabilities

 

 

29,127

 

 

 

32,424

 

Deferred revenue, long-term

 

 

497

 

 

 

598

 

Other liabilities

 

 

237

 

 

 

298

 

Total liabilities

 

 

29,861

 

 

 

33,320

 

Stockholders' equity

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

Common stock

 

 

57

 

 

 

57

 

Additional paid-in capital

 

 

123,851

 

 

 

122,907

 

Accumulated deficit

 

 

(95,566

)

 

 

(95,579

)

Accumulated other comprehensive loss

 

 

(361

)

 

 

(134

)

Total stockholders' equity

 

 

27,981

 

 

 

27,251

 

Total liabilities and stockholders' equity

 

$

57,842

 

 

$

60,571

 

 

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,

 

 

 

2020

 

 

2019

 

Revenues

 

$

10,458

 

 

$

9,593

 

Costs

 

 

 

 

 

 

 

 

Cost of revenues

 

 

4,342

 

 

 

4,004

 

Total costs

 

 

4,342

 

 

 

4,004

 

     Gross profit

 

 

6,116

 

 

 

5,589

 

Operating expenses

 

 

 

 

 

 

 

 

Sales and marketing

 

 

2,516

 

 

 

2,629

 

Research and development

 

 

1,352

 

 

 

1,294

 

General and administrative

 

 

2,271

 

 

 

1,986

 

Total operating expenses

 

 

6,139

 

 

 

5,909

 

Operating loss

 

 

(23

)

 

 

(320

)

Other income (expense), net

 

 

 

 

 

 

 

 

Interest income, net

 

 

93

 

 

 

33

 

Other expense, net

 

 

(58

)

 

 

(57

)

Total other income (expense), net

 

 

35

 

 

 

(24

)

Income (loss) before income taxes

 

 

12

 

 

 

(344

)

Provision (benefit) for income taxes

 

 

(1

)

 

 

18

 

Net income (loss)

 

$

13

 

 

$

(362

)

Net income (loss) per share, basic

 

$

0.00

 

 

$

(0.03

)

Net income (loss) per share, diluted

 

$

0.00

 

 

$

(0.03

)

Weighted average shares used in computing net income (loss) per share, basic

 

 

11,337,491

 

 

 

11,005,781

 

Weighted average shares used in computing net income (loss) per share, diluted

 

 

11,715,426

 

 

 

11,005,781

 

 

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,

 

 

 

2020

 

 

2019

 

Net income (loss)

 

$

13

 

 

$

(362

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment, net

 

 

(227

)

 

 

(13

)

Comprehensive loss

 

$

(214

)

 

$

(375

)

 

See accompanying notes to condensed consolidated financial statements.

4


 

ShotSpotter, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

(Unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balance at December 31, 2019

 

 

11,314,150

 

 

$

57

 

 

$

122,907

 

 

$

(95,579

)

 

$

(134

)

 

$

27,251

 

Exercise of stock options

 

 

17,543

 

 

 

 

 

 

57

 

 

 

 

 

 

 

 

 

57

 

Issuance of common stock in connection

   with exercise of warrants

 

 

46,939

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock from RSUs vested

 

 

20,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

887

 

 

 

 

 

 

 

 

 

887

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(227

)

 

 

(227

)

Net income

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

13

 

Balance at March 31, 2020

 

 

11,398,929

 

 

$

57

 

 

$

123,851

 

 

$

(95,566

)

 

$

(361

)

 

$

27,981

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

Balance at December 31, 2018

 

 

10,864,722

 

 

$

55

 

 

$

114,618

 

 

$

(97,377

)

 

$

(149

)

 

$

17,147

 

Exercise of stock options

 

 

177,408

 

 

 

1

 

 

 

218

 

 

 

 

 

 

 

 

 

219

 

Issuance of common stock upon secondary offering,

   net of costs

 

 

250,000

 

 

 

1

 

 

 

10,553

 

 

 

 

 

 

 

 

 

10,554

 

Issuance of common stock from RSUs vested

 

 

28,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

754

 

 

 

 

 

 

 

 

 

754

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

(13

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(362

)

 

 

 

 

 

(362

)

Balance at March 31, 2019

 

 

11,320,920

 

 

$

57

 

 

$

126,143

 

 

$

(97,739

)

 

$

(162

)

 

$

28,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


 

ShotSpotter, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

13

 

 

$

(362

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation of property and equipment

 

 

1,343

 

 

 

1,217

 

Amortization of intangible assets

 

 

24

 

 

 

21

 

Stock-based compensation

 

 

887

 

 

 

754

 

Loss on disposal of property and equipment

 

 

2

 

 

 

 

      Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable and contract asset

 

 

6,570

 

 

 

7,892

 

Prepaid expenses and other assets

 

 

310

 

 

 

195

 

Accounts payable

 

 

(562

)

 

 

(346

)

Accrued expenses and other current liabilities

 

 

(491

)

 

 

(810

)

Deferred revenue

 

 

(2,370

)

 

 

344

 

Net cash provided by operating activities

 

 

5,726

 

 

 

8,905

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(1,117

)

 

 

(896

)

Investment in intangible and other assets

 

 

(24

)

 

 

(34

)

Net cash used in investing activities

 

 

(1,141

)

 

 

(930

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payment of contingent consideration liability

 

 

(347

)

 

 

 

Proceeds from issuance of common stock in public offering

 

 

 

 

 

11,247

 

Payments of offering costs

 

 

 

 

 

(127

)

Proceeds from exercise of stock options

 

 

58

 

 

 

219

 

Net cash provided by (used in) financing activities

 

 

(289

)

 

 

11,339

 

Increase in cash, cash equivalents and restricted cash

 

 

4,296

 

 

 

19,314

 

Effect of exchange rate on cash and cash equivalents

 

 

(169

)

 

 

(8

)

Cash, cash equivalents and restricted cash at beginning of year

 

 

24,550

 

 

 

10,278

 

Cash, cash equivalents and restricted cash at end of period

 

$

28,677

 

 

$

29,584

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Offering costs included in accounts payable

 

$

 

 

$

317

 

Purchases of property and equipment included in accounts payable

 

$

623

 

 

$

626

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

6


 

ShotSpotter, Inc.

Notes to Condensed Consolidated Financial Statements

Note 1. Organization and Description of Business

ShotSpotter, Inc. (the “Company”) provides precision-policing solutions for law enforcement to help deter gun violence and make cities, campuses and facilities safer. The company’s flagship product, ShotSpotter Flex, is the leading outdoor gunshot detection, location and forensic system trusted by over 100 cities. ShotSpotter 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 of a potential outdoor gunfire incident. ShotSpotter Missions uses machine learning-driven analysis to help strategically plan directed patrol missions and tactics for maximum crime deterrence. ShotSpotter Labs is the Company’s effort to support innovative uses of its technology to help protect wildlife and the environment. The Company offers its solutions on a SaaS-based subscription model to its customers.

The Company’s principal executive offices are located in Newark, California. The Company has three wholly-owned subsidiaries in South Africa, Columbia and Brazil.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying 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 subsidiaries. All significant intercompany transactions have been eliminated upon consolidation.

In the opinion of management, the accompanying condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss, equity statement and cash flows for the interim periods, but are not necessarily indicative of the results of operations or cash flows to be anticipated for the full year 2020 or any future period. The Company has evaluated subsequent events occurring after the date of the condensed consolidated financial statements for events requiring recording or disclosure in the condensed consolidated financial statements.

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 and realization of tangible and intangible assets, stock-based compensation expense, 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.

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 three domestic and two international 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.

7


 

Concentration of Accounts Receivable –At March 31, 2020, one customer accounted for 26% of the Companys total accounts receivable. At December 31, 2019, one customer accounted for 55% of the Companys total accounts receivable.

Concentration of Revenues – For the three months ended March 31, 2020, two customers accounted for 19% and 13% of the Company’s total revenues. For the three months ended March 31, 2019, two customers accounted for 21% and 14% of the Company’s total revenues.

Concentration of Suppliers The Company relies on a limited number of suppliers and contract manufacturers. In particular, a single supplier is currently the sole manufacturer of the Company’s proprietary sensors.

Recent Accounting Pronouncements Not Yet Effective

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740), simplifying the accounting for income taxes by removing certain exceptions to the general principles. The guidance will be effective at the beginning of the Company’s first quarter of fiscal 2022. Early adoption of the amendments is permitted. We do not expect the adoption of this ASU to have any material impact on its condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects current expected credit loss (CECL) and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance will be effective at the beginning of the Company’s first quarter of fiscal 2023. Early adoption of the amendments is permitted. The Company is currently evaluating the effect this ASU will have on its condensed consolidated financial statements.

Note 3. Revenue Related Disclosures

As of December 31, 2019, the Company had total short-term and long-term deferred revenue of $27.0 million. During the three months ended March 31, 2020, the Company recognized $9.4 million in revenue from the beginning deferred revenue balance and $1.0 million from new billings and added $8.1 million to total short-term and long-term deferred revenue from new billings.

As of December 31, 2018, the Company had total short-term and long-term deferred revenue of $24.2 million. During the three months ended March 31, 2019, the Company recognized $8.4 million in revenue from the beginning deferred revenue balance and $1.1 million from new billings and added $9.8 million to total short-term and long-term deferred revenue from new billings. 

As of March 31, 2020, the Company has estimated remaining performance obligations for contractually committed revenues of $29.3 million, $21.9 million, $5.5 million, and $0.8 million that will be recognized during the remainder of the year ending December 31, 2020, the years ending December 31, 2021, 2022, and the three-year period from 2023 through 2025, respectively. The timing of revenue recognition includes estimates of go-live dates for contracts not yet live. There is considerable uncertainty in the Company’s estimates of go-live dates as a result of the novel strain of coronavirus (COVID-19) pandemic and resulting disruption in the Company’s ability to deploy new go-live miles. See Note 12. Commitments and Contingencies. Contractually committed revenue includes deferred revenue as of March 31, 2020 and amounts under contract that will be invoiced after March 31, 2020. 

During the three months ended March 31, 2020, the Company recognized revenues of $10.3 million from customers in the United States, and $0.2 million from a customer in the Bahamas.  

During the three months ended March 31, 2019, the Company recognized revenues of $9.3 million from customers in the United States and $0.3 million from customers in South Africa and the Bahamas.

Accounts Receivable, net and Contract Asset

Accounts receivable, net consist of trade accounts receivable from the Company’s customers, net of allowance for doubtful accounts if deemed necessary. Accounts receivable are recorded as the invoiced amount. The Company does

8


 

not require collateral or other security for accounts receivable. Contract asset consists of revenues recognized in advance of invoicing the customer.

The Company periodically evaluates the collectability of its accounts receivable and provides an allowance for potential credit losses based on the Company’s historical experience. At March 31, 2020 and December 31, 2019, the Company did not have an allowance for potential credit losses as there were no estimated credit losses.

Note 4. Fair Value Measurements

In October 2018, upon the acquisition of certain technology, referred to as HunchLab, from Azavea, Inc., the Company recognized a contingent consideration liability classified within Level III of the fair value hierarchy because some of the inputs used in its measurement were neither directly nor indirectly observable. The Company estimates the fair value of the contingent consideration based on management’s estimates of (i) the probability of achieving the relevant revenue targets and (ii) the timing of achieving such targets. During the three months ended March 31, 2020, based on the relevant revenues earned during the first year of the three-year contingent consideration period, the Company paid $0.3 million to Azavea, Inc., resulting in a reduction of the contingent consideration liability.

The changes in the fair value of contingent consideration liability for 2020 and 2019 are as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Balance, beginning of period

 

$

750

 

 

$

750

 

Payment of contingent consideration liability

 

 

(347

)

 

 

 

Balance, end of period

 

$

403

 

 

$

750

 

 

 

Note 5. Details of Certain Condensed Consolidated Balance Sheet Accounts

 

Prepaid expenses and other current assets (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Prepaid software and licenses

 

$

413

 

 

$

321

 

Prepaid insurance

 

 

197

 

 

 

473

 

Other prepaid expenses

 

 

111

 

 

 

94

 

Deferred commissions

 

 

726

 

 

 

753

 

Other

 

 

117

 

 

 

123

 

 

 

$

1,564

 

 

$

1,764

 

 

Other assets (long-term) (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Deferred commissions

 

$

1,439

 

 

$

1,579

 

Other

 

 

124

 

 

 

55

 

 

 

$

1,563

 

 

$

1,634

 

 

9


 

Accrued expenses and other current liabilities (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2020

 

 

2019

 

Personnel-related accruals

$

2,410

 

 

$

2,883

 

Royalties payable

 

74

 

 

 

115

 

Professional fees

 

374

 

 

 

317

 

Sales/ use tax payable

 

84

 

 

 

91

 

Contingent consideration liability

 

403

 

 

 

750

 

Operating lease liability

 

309

 

 

 

302

 

Other

 

379

 

 

 

427

 

 

$

4,033

 

 

$

4,885

 

 

Other liabilities (long-term) (in thousands):

 

 

March 31,

 

 

December 31,

 

 

2020

 

 

2019

 

Operating lease liability

$

209

 

 

$

297

 

Other

 

28

 

 

 

1

 

 

$

237

 

 

$

298

 

 

Note 6. Related Party Transactions

During the three months ended March 31, 2020, the Company recognized $0.1 million in revenues from ShotSpotter Labs projects with charitable organizations that have received donations from one of the Company’s directors and one of the Company’s significant stockholders. The Company did not have any revenues from ShotSpotter Labs projects during the three months ended March 31, 2019.

 

Note 7. Capital Stock

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.

At March 31, 2020 and December 31, 2019, there were 11,398,929 and 11,314,150 shares of common stock issued and outstanding, respectively.

Preferred Stock

The Company is authorized to issue 20,000,000 shares of preferred stock, with a par value of $0.005. At March 31, 2020, there were no shares of preferred stock issued and outstanding.

Stock Repurchase Program

In May 2019, the Company announced that its Board of Directors (the “Board”) had approved a stock repurchase program for up to $15 million of the Company’s common stock. The shares may be repurchased from time to time in open market transactions, in privately negotiated transactions or by other methods in accordance with federal securities laws. The actual timing, number and value of shares repurchased under the program will be determined by management in its discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions and applicable legal requirements. The stock repurchase program does not obligate the Company to purchase any particular amount of common stock and may be modified, suspended or discontinued at any time.

10


 

During the three months ended March 31, 2020 and 2019, the Company did not repurchase any shares. At March 31, 2020, the Company was authorized to repurchase the remaining $8.3 million of its common stock under the stock repurchase program.

Note 8. Net Income (Loss) per Share

The computation of basic net income (loss) per share is based on the weighted-average number of common stock outstanding during each period. The computation of diluted net income (loss) per share is based on the weighted-average number of shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options, restricted stock units, employee stock purchase plan purchase rights and warrants.

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

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

13

 

 

$

(362

)

Denominator:

 

 

 

 

 

 

 

 

Weighted-average shares outstanding, basic

 

 

11,337,491

 

 

 

11,005,781

 

     Dilutive effect of common stock equivalents

 

 

377,935

 

 

 

 

Weighted-average shares outstanding, diluted

 

 

11,715,426

 

 

 

11,005,781

 

Net income (loss) per share, basic

 

$

0.00

 

 

$

(0.03

)

Net income (loss) per share, diluted

 

$

0.00

 

 

$

(0.03

)

 

 

Note 9. Common Stock Warrants

At March 31, 2020, 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

 

 

50,716

 

 

February 2014

 

$

0.1700

 

 

February 2021

     

 

Note 10. 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 Company’s initial public offering of common stock (“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 (as defined below) 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 the Board. In accordance with the evergreen provision, the number of shares of common stock reserved for issuance under the 2017 Plan was automatically increased on January 1, 2020 by 565,707 shares, which was equal to 5% of the total number of shares of capital stock outstanding on December 31, 2019.

 

11


 

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 were made under the 2005 Plan.

A summary of option activities under the 2005 Plan and 2017 Plan during the three months ended March 31, 2020 is as follows:

 

 

 

Number

of Options

Outstanding

 

 

Weighted

Average

Exercise

Price

 

Outstanding as of December 31, 2019

 

 

617,493

 

 

$

17.13

 

Granted

 

 

226,205

 

 

$

32.26

 

Exercised

 

 

(17,543

)

 

$

3.29

 

Canceled

 

 

(18,212

)

 

$

24.12

 

Outstanding as of March 31, 2020

 

 

807,943

 

 

$

21.51

 

 

During the three months ended March 31, 2020, the Company granted executive management restricted stock unit (“RSU”) awards totaling 57,048 shares of common stock, with quarterly vesting over the next four years. The weighted average fair value of $34.07 per unit was calculated using the closing stock price on the grant date.

The number of shares available for grant under the 2017 Plan was 1,933,302 as of March 31, 2020.

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.”

There were 200,000 shares of common stock initially 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, 2020 by 150,000 shares.

There were no shares issued under the 2017 ESPP during the three months ended March 31, 2020. The number of shares available for grant under the 2017 ESPP was 466,623 as of March 31, 2020.

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.

12


 

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,

 

 

 

2020

 

 

2019

 

Cost of revenues

 

$

217

 

 

$

133

 

Sales and marketing

 

 

256

 

 

 

266

 

Research and development

 

 

102

 

 

 

87

 

General and administrative

 

 

312

 

 

 

268

 

Total

 

$

887

 

 

$

754

 

 

Note 11. Leases

Operating Lease

The Company leases its principal executive offices in Newark, California, under a non-cancelable operating lease that expires in October 2021. This lease does not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses. Further, the lease does not contain contingent rent provisions or renewal options. Our lease includes both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs), which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components for all leases. Upon adoption of Topic 842 on January 1, 2019, the Company recognized an operating lease right-of-use asset of $0.9 million and a corresponding lease lability of $0.9 million, using a discount rate of 6%, which reflects the Company’s incremental borrowing rate for a similar asset and similar term as of the date of adoption. The operating lease cost recognized for the three months ended March 31, 2020 and 2019 was $0.1 million for each period. 

Supplemental information related to the operating lease is as follows (in thousands):

 

 

 

 

As of March 31,

2020

 

 

As of December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Operating lease right-of-use asset

 

$

485

 

 

$

556

 

Liabilities

 

 

 

 

 

 

 

 

Lease liability (short-term)

   (presented within Accrued expenses and other current

   liabilities)

 

$

309

 

 

$

302

 

Lease liability (long-term)

   (presented within Other liabilities)

 

 

209

 

 

 

296

 

Total operating lease liability

 

$

518

 

 

$

598

 

 

 

 

Three months ended March 31, 2020

 

 

Three months ended March 31, 2019

 

Cash paid for amounts included in the measurement of lease liabilities

   (presented within Cash flows from operating activities)

 

$

89

 

 

$

86

 

 

 

Maturities of the lease liability at March 31, 2020 are as follows (in thousands):

 

2020 (remainder of year)

 

$

239

 

2021

 

 

304

 

Total lease payments, undiscounted

 

 

543

 

Less: imputed interest

 

 

(25

)

Total

 

$

518

 

13


 

 

The Company does not have any finance leases.

 

Note 12. Commitments and Contingencies

The Company has non-cancelable data center arrangements in which the original term exceeds one year.

The following is a schedule of future minimum payments under the non-cancelable data center arrangements at March 31, 2020 (in thousands):

 

 

 

Data Center

Arrangements

 

2020 (remainder of year)

 

$

19

 

Total

 

$

19

 

 

Contingencies

On August 28, 2018, Silvon S. Simmons (the “Plaintiff”) amended a complaint against the City of Rochester, New York and various city employees, filed in the United States District Court, Western District of New York, to add the Company and employees as a defendant. The amended complaint alleges conspiracy to violate plaintiff’s civil rights, denial of the right to a fair trial, and malicious prosecution. The Plaintiff claims that ShotSpotter colluded with the City of Rochester to fabricate and create gunshot alert evidence to secure Plaintiff’s conviction. On the basis of the allegations, the Plaintiff has petitioned for compensatory and punitive damages and other costs and expenses, including attorney’s fees. The Company believes that the Plaintiff’s claims are without merit and are disputing them vigorously. 

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

An unfavorable outcome on any litigation matters could require payment of substantial damages, or, in connection with any intellectual property infringement claims, could require the Company to pay ongoing royalty payments or could prevent the Company 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 the Company’s business, operating results, financial condition and cash flows.

The COVID-19 pandemic has resulted in a substantial curtailment of business activities worldwide and is causing weakened economic conditions, both in the United States and many countries abroad. As part of intensifying efforts to contain the spread of COVID-19, many companies and state, local and foreign governments have imposed restrictions, including shelter-in-place orders and travel bans. These factors have negatively impacted the Company’s operations and results of operations for the first quarter of 2020, in particular due to its inability to deploy new “go-live” miles since mid-March 2020. The Company expects that the evolving COVID-19 pandemic will continue to have an adverse impact on its results of operations, in particular while its sales force remains restricted from traveling due to a travel ban the Company imposed for the safety of its employees.  While the ultimate economic impact of the COVID-19 pandemic is highly uncertain, the Company expects that its business and results of operations, including its revenues, earnings and cash flows from operations, will be materially adversely impacted in the second quarter of 2020 and at least the balance of 2020, including as a result of:

Further delays in its ability to deploy new “go-live” miles attributable to company policies designed to protect employee health and government restrictions;

Greater funding challenges for its customer base, which may adversely affect customer contract renewals, expansion of existing customer deployments or new customer sales;

14


 

Possible disruption to the Company’s supply chain caused by distribution and other logistical issues, which may further delay its ability to deploy new go-live miles; and

potential decrease in productivity of its employees or that of its customers or suppliers due to travel ban, work-from-home or shelter-in-place policies and orders.

 

Note 13. Subsequent Event

In April 2020, the Company entered into a non-cancelable five-year lease for an office space in Washington D.C., in connection with establishing a presence in the nation’s capital. The new facilities will also house a satellite Incident Review Center. 

15


 

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

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and accompanying notes and other financial information in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on March 13, 2020. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Exchange Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (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, those discussed in the subsection titled “– Impact of COVID-19 on our Business” below, as well as 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 provide precision-policing and security solutions for law enforcement and security personnel to help deter gun violence and make cities, campuses and facilities safer. Our flagship public safety solution, ShotSpotter Flex, is the leading outdoor gunshot detection, location and alerting system. Our patrol management software, ShotSpotter Missions (formerly HunchLab), creates crime forecasts designed to enable more precise and effective use of patrol resources to deter crime. In 2019, we created a new technology innovation unit, ShotSpotter Labs, to expand our efforts supporting innovative uses of our technology to help protect wildlife and the environment. Our security solutions, ShotSpotter 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 of a potential outdoor gunfire incident, saving critical minutes for first responders to arrive. Our gunshot detection solutions are trusted by law enforcement agencies in over 100 cities as of March 31, 2020.

Our gunshot detection solutions consist of highly-specialized, cloud-based software integrated with proprietary, internet-enabled sensors designed to detect outdoor gunfire. The speed and accuracy of our gunfire alerts enable law enforcement and security personnel to reduce their response times to shooting events, which can increase the chances of apprehending the shooter, providing timely aid to victims, and identifying witnesses before they scatter, as well as aid in evidentiary collection and serve as an overall deterrent. When a potential gunfire incident is detected by our sensors, our software precisely locates where the incident occurred and applies machine classification combined with human review by acoustic experts in our Incident Review Center (“IRC”), who are on duty 24 hours a day, seven days a week, every day of the year, to analyze and validate the incident. Our acoustic experts can supplement alerts with additional tactical information, such as the potential presence of multiple shooters or the use of high-capacity weapons. An alert containing a location on a map and additional tactical information about the incident is sent directly to subscribing law enforcement or security personnel through any internet-connected computer and to iPhone or Android mobile devices. Gunshot incident alerts are typically sent within 45 seconds of the receipt of the gunfire incident.

 

We generate annual subscription revenues from the deployment of ShotSpotter Flex on a per-square-mile basis. Our security solutions, ShotSpotter SecureCampus and ShotSpotter SiteSecure, are typically sold on a subscription basis, each with a customized deployment plan. Our ShotSpotter Missions solution is also sold on a subscription basis. As of March 31, 2020, we had ShotSpotter Flex, ShotSpotter SecureCampus and ShotSpotter SiteSecure coverage areas under contract for approximately 760 square miles, of which 735 square miles had gone live. Coverage areas under contract included 105 cities and 13 campuses/sites across the United States, South Africa and the Bahamas, including three of the ten largest cities in the United States. As a result of the COVID-19 pandemic, work-from-home and travel ban policies designed to protect the health of employees, and related government-mandated restrictions, our ability to deploy customer solutions since mid-March 2020 has been materially impacted. While this disruption is currently expected to be temporary, there is considerable uncertainty around the magnitude or duration.

16


 

While we intend to continue to devote resources to increase sales of our ShotSpotter SecureCampus, ShotSpotter SiteSecure, ShotSpotter Labs and ShotSpotter Missions solutions, we expect that revenues from our ShotSpotter Flex solution will continue to comprise a substantial majority of our revenues for the foreseeable future. ShotSpotter Labs projects are generally conducted in coordination with a sponsoring charitable organization. These projects may or may not be revenue-producing. When they are revenue-producing, they will generally be sold on a cost-plus basis. As such, ShotSpotter Labs projects will normally produce gross margins significantly lower than our Flex solutions. Additionally, starting in early 2020, we have added new pricing programs for Tier 4 and 5 law enforcement agencies (those with fewer than 100 sworn officers) that allow them to contract for our gunshot detection solutions to cover a footprint of less than three square miles, using standardized coverage parameters, at a discounted annual subscription rate.

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.

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.

We generated revenues of $10.5 million and $9.6 million for the three months ended March 31, 2020 and 2019, respectively, a year-over-year increase of 9%. Revenues from ShotSpotter Flex during the three months ended March 31, 2020 and 2019, represented approximately 97% and 96% of total revenues, respectively. Our two current largest customers, the City of Chicago and the City of New York, accounted for 19% and 13%, respectively, of our total revenues for the three months ended March 31, 2020, and 21% and 14%, respectively, of our total revenues for the three months ended March 31, 2019.

For the three months ended March 31, 2020 and 2019, revenues generated within the United States accounted for $10.3 million and $9.0 million, respectively, or 98% and 97%, respectively, of total revenues for the both periods, and $0.2 million and $0.3 million for the three months ended March 31, 2020 and 2019, respectively, and was derived from our customers located outside the United States.

We had net income of $13,000 and a net loss of $0.4 million for the three months ended March 31, 2020 and 2019, respectively. Our accumulated deficit was $95.6 million at March 31, 2020 and December 31, 2019.

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 outdoor gunshot detection solutions. The challenges we are facing in this regard as a result of the COVID-19 pandemic are summarized in the section below entitled “—Impact of COVID-19 on our Business.”  Other 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, difficult to estimate accurately and can be costly. We expect international sales cycles to be even longer than our domestic sales cycles. To combat these challenges, we invest in research and development, increase awareness of our solutions, invest in new sales and marketing campaigns, often in different languages for international sales, 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.

17


 

We will also focus on expanding our business by introducing new products and services to existing customers such as ShotSpotter Missions and gaining new customers for ShotSpotter Labs. We believe that developing and acquiring products for law enforcement in adjacent categories is a path for additional growth given our large and growing installed base of police departments who trust ShotSpotter’s products, support and way of doing business. The ability to cross-sell new products provides an opportunity to grow revenues per customer and lifetime value. Challenges we face in this area include ensuring our new products are reliable, integrated well with other ShotSpotter solutions and priced and serviced appropriately. In some cases, we will need to bring in new skills sets to properly develop, market, sell or service these new products depending on the categories they represent.

In October 2018, we acquired the HunchLab technology and related assets that underline our ShotSpotter Missions solution. ShotSpotter Missions applies risk modeling and artificial intelligence to help forecast when and where crimes are likely to emerge and recommends directed patrols that can deter these events. HunchLab technology provides a high-value, and complementary solution we can immediately offer to our existing law enforcement customers. We believe our investment will democratize the sharing of important intelligence with patrol officers who currently have limited direct access to crime analysts.

With respect to international sales, we believe that we have the potential to expand our coverage within existing areas, and to pursue opportunities in Latin 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 in a limited number of regions outside of the United States. Operating successfully in international markets will require significant resources and management attention and will subject us to additional regulatory, economic and political risks. We may face additional challenges that may delay contract execution related to negotiating with governments in transition, the use of third-party integrations and consultants. Moreover, we anticipate that different political and regulatory considerations that vary across different jurisdictions could extend or make more difficult to predict the length of what is already a lengthy sales cycle.

Net New “Go-Live” Miles

Net new “go-live” square miles represent the square miles covered by deployments of our gunshot detection solutions 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 business metric to measure our operational performance and inform strategic decisions. The new “go-live” miles in the first quarter of 2020 included the completion of our deployment in Puerto Rico, and also are net of four miles lost due to our loss of a customer in Georgia.

This metric, presented below for the three months ended March 31, 2020 and 2019, is calculated on a quarterly basis using internal data, and may be calculated in a manner different than similar metrics used by other companies. As a result of the COVID-19 pandemic, policies designed to protect the health of our employees and those of our customers, and related government-mandated restrictions on our business, as well as the businesses of our customers and suppliers, we have been unable to deploy customer solutions since mid-March 2020, resulting in an inability to recognize revenues from new go-live miles from customers under contract. While this disruption is currently expected to be temporary, there is considerable uncertainty around the duration. For a discussion of the risks to our ability to deploy new miles associated with the COVID-19 pandemic, see “– “Impact of COVID-19 on our Business” below, as well as in the risk factors described in Part II, Item 1A, Risk Factors, included in this Quarterly Report on Form 10-Q.

 

 

 

Three Months Ended

 

 

March 31,

 

 

2020

 

2019

Net new "go-live" square miles added

 

5

 

12

18


 

 

Impact of COVID-19 on our Business

 

The COVID-19 pandemic has resulted in a substantial curtailment of business activities worldwide and is causing weakened economic conditions, both in the United States and many countries abroad. As part of intensifying efforts to contain the spread of COVID-19, many companies and state, local and foreign governments have imposed restrictions, including shelter-in-place orders and travel bans. These factors have impacted our operations and results of operations for the first quarter of 2020, in particular due to our inability to deploy new “go-live” miles since mid-March and delays by certain of our customers in renewing contracts. We expect the evolving COVID-19 pandemic to continue to have an adverse impact on our results of operations, in particular while our sales force remains restricted from traveling and visiting customers. While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business and results of operations, including our revenues, earnings and cash flows from operations, will be materially adversely impacted for the second quarter of 2020 and at least the balance of 2020, including as a result of:

 

 

Further delays in our ability to deploy new “go-live” miles attributable to company policies designed to protect employee health and government restrictions;

 

 

Further delays in customer contract renewals or delays in signing new customer contracts;

 

 

Greater funding challenges for our customer base, which may adversely affect customer contract renewals, expansion of existing customer deployments or new customer sales, and may require us to increase our allowance for doubtful accounts, which would adversely affect our financial results; and

 

 

Possible disruption to the supply chain caused by distribution and other logistical issues, which may further delay our ability to deploy new go-live miles; and

 

 

Potential decrease in productivity of our employees or that of our customers or suppliers due to travel ban, work-from-home or shelter-in-place policies and orders.

 

It is currently not possible to predict the magnitude or duration of the COVID-19 pandemic’s impact on our business. The extent to which the COVID-19 pandemic impacts our business will depend on numerous evolving factors that we may not be able to control or accurately predict, including without limitation:

 

 

the duration and scope of the pandemic;

 

governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic;

 

the impact of the pandemic on economic activity and actions taken in response;

 

the effect on our customers and demand for our products and services;

 

our ability to continue to sell our products and services, including as a result of travel restrictions and people working from home, or restrictions on access to our potential customers;

 

the ability of our customers to pay for our products and services; and

 

any closures of our facilities and the facilities of our customers and suppliers.

We plan to make investments in our customer success organization and other functional organizations in 2020 and 2021. Management will consider the timing and size of those investments from a viewpoint of our goal to maintain profitability on full year basis over the course of the remainder of 2020 and 2021, and to keep a strong balance sheet with liquidity in order to be both opportunistic and disciplined from a capital allocation perspective.

 

19


 

Components of Results of Operations

Presentation of Financial Statements

Our condensed consolidated financial statements include the accounts of our wholly-owned subsidiaries. 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 to five years. Training and third-party integration license fees are recognized upon delivery.

For ShotSpotter Flex, 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. The timing of when new miles go live can be uncertain and, as a result, can have a significant impact on the levels of revenues and deferred revenue from quarter to quarter. For our ShotSpotter Flex solution, our pricing model is based on a per-square-mile basis. For ShotSpotter SecureCampus and ShotSpotter SiteSecure, our pricing model is on a customized-site basis. For our ShotSpotter Missions solution, pricing is currently customized, generally tied to the number of sworn police officers in a particular city. We may also offer discounts or other incentives in conjunction with ShotSpotter Missions sales in an effort to introduce the product and accelerate sales. As a result of our process for invoicing contracts and renewals upon execution, our cash flow from operations and accounts receivable can fluctuate due to timing of contract execution and timing of deployment.

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

It is likely that international deployments may have different payment and billing terms due to their local laws, restrictions or other customary terms and conditions.

ShotSpotter Labs projects may or may not be revenue-producing. When they are revenue-producing, they will generally be sold on a cost-plus basis.

We anticipate that, due to the ongoing COVID-19 pandemic, our customers may be facing budget shortfalls due to the increased expenditures our customers have had to endure to address the pandemic, as well as the anticipated significant tax revenue declines resulting from the economic impact that the pandemic has rapidly generated in the first half of 2020, the duration of which is unknown.

Costs

Costs include the cost of revenues. Cost of revenues primarily includes depreciation expense associated with capitalized customer acoustic sensor networks, communication expenses, costs related to hosting our service applications, costs related to operating our IRC, providing remote and on-site customer support and maintenance and forensic services, providing customer training and onboarding services, certain personnel and related costs of operations, stock-based compensation and allocated overheads, which includes IT, facility and equipment depreciation costs.

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We will have to upgrade our sensors that use third-generation (“3G”) cellular communications to the fourth-generation Long-Term Evolution wireless technology, which will increase our cost of revenues. Originally, we had expected to start incurring costs in 2021 through 2022. We have begun plans to replace sensors in certain geographic areas starting in mid-2020. Accelerated bandwidth changes by our carriers may require us to accelerate the upgrade of our 3G sensors prior to 2021, which would accelerate the costs associated with the upgrade, which are estimated to be between $4.0 million and $6.0 million in total. We may re-use and re-deploy the old 3G sensors that have a remaining serviceable life where it makes sense to do so.

In the near term, we expect our cost of revenues to increase in absolute dollars as our installed base increases, although 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 from the go-live date. We also expect cost of revenues to increase in absolute dollars as we continue to invest in our customer success capabilities to drive growth and value for our customers. As we expect to build out these capabilities in 2020, even while our ability to deploy new go-live miles is significantly impacted as a result of the COVID-19 pandemic, cost of revenues is expected to increase as a percentage of revenues.

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.

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.

During the duration of the COVID-19 pandemic and associated shelter-in-place orders, work-from-home policies and travel bans, we expect our sales and marketing expense will decrease. Thereafter, 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 may include adding sales and/or 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, improve functionality of our solutions and adapt to new technologies or changes to existing technologies.

We are investing in engineering resources to support further development of ShotSpotter Missions. The focus of this effort will be in the areas of data science modeling, user experience, core application functionality and backend infrastructure improvements, including integration of ShotSpotter gunshot data to enhance forecasting of gun violence.

We are also investing research and development resources in conjunction with our ShotSpotter Labs projects and initiatives. The initial focus of these efforts is to develop innovative sensor applications as well as to test and expand the functionality of our outdoor sensors in challenging environmental conditions.

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

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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.

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.

In the near term, we expect our general and administrative expenses to increase in absolute dollars as we grow our business.

Other Income (Expense), Net

Other income (expense), net, consisted primarily of interest income and local and franchise tax expenses.

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, 2020 and 2019

The following table sets forth our selected condensed consolidated statements of operations data for the three months ended March 31, 2020 and 2019 (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As a % of

 

 

 

 

 

 

As a % of

 

 

Change

 

 

 

2020

 

 

Revenues

 

 

2019

 

 

Revenues

 

 

$

 

 

%

 

Revenues

 

$

10,458

 

 

 

100

%

 

$

9,593

 

 

 

100

%

 

$

865

 

 

 

9

%

Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

4,342

 

 

 

42

%

 

 

4,004

 

 

 

42

%

 

 

338

 

 

 

8

%

     Total costs

 

 

4,342

 

 

 

42

%

 

 

4,004

 

 

 

42

%

 

 

338

 

 

 

8

%

Gross profit

 

 

6,116

 

 

 

58

%

 

 

5,589

 

 

 

58

%

 

 

527