10-Q 1 ssti-10q_20190331.htm 10-Q ssti-10q_20190331.htm

 

 

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, 2019

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 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  

 

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

As of May 7, 2019, the registrant had 11,320,983 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, 2019 and December 31, 2018

2

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018

3

 

Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2019 and 2018

4

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018

5

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

15

Item 3.

Qualitative and Quantitative Disclosures About Market Risk

23

Item 4.

Controls and Procedures

23

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

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,

 

 

 

2019

 

 

2018

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,524

 

 

$

10,218

 

Accounts receivable and unbilled revenue

 

 

7,375

 

 

 

15,267

 

Prepaid expenses and other current assets

 

 

1,332

 

 

 

1,527

 

Restricted cash

 

 

60

 

 

 

60

 

Total current assets

 

 

38,291

 

 

 

27,072

 

Property and equipment, net

 

 

16,688

 

 

 

16,504

 

Operating lease right-of-use asset

 

 

765

 

 

 

 

Goodwill

 

 

1,379

 

 

 

1,379

 

Intangible assets, net

 

 

255

 

 

 

242

 

Other assets

 

 

1,638

 

 

 

1,922

 

Total assets

 

$

59,016

 

 

$

47,119

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,698

 

 

$

1,307

 

Deferred revenue, short-term

 

 

23,415

 

 

 

23,102

 

Accrued expenses and other current liabilities

 

 

3,960

 

 

 

4,427

 

Total current liabilities

 

 

29,073

 

 

 

28,836

 

Deferred revenue, long-term

 

 

1,095

 

 

 

1,060

 

Other liabilities

 

 

549

 

 

 

76

 

Total liabilities

 

 

30,717

 

 

 

29,972

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock

 

 

57

 

 

 

55

 

Additional paid-in capital

 

 

126,143

 

 

 

114,618

 

Accumulated deficit

 

 

(97,739

)

 

 

(97,377

)

Accumulated other comprehensive loss

 

 

(162

)

 

 

(149

)

Total stockholders' equity

 

 

28,299

 

 

 

17,147

 

Total liabilities and stockholders' equity

 

$

59,016

 

 

$

47,119

 

 

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,

 

 

 

2019

 

 

2018

 

Revenues

 

$

9,593

 

 

$

6,907

 

Cost of revenues

 

 

4,004

 

 

 

3,308

 

Gross profit

 

 

5,589

 

 

 

3,599

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

Sales and marketing

 

 

2,629

 

 

 

1,554

 

Research and development

 

 

1,294

 

 

 

1,236

 

General and administrative

 

 

1,986

 

 

 

2,028

 

Total operating expenses

 

 

5,909

 

 

 

4,818

 

Operating loss

 

 

(320

)

 

 

(1,219

)

Other income (expense), net

 

 

 

 

 

 

 

 

Interest income, net

 

 

33

 

 

 

27

 

Other income (expense), net

 

 

(57

)

 

 

1

 

Total other income (expense), net

 

 

(24

)

 

 

28

 

Loss before income taxes

 

 

(344

)

 

 

(1,191

)

Provision for income taxes

 

 

18

 

 

 

26

 

Net loss

 

$

(362

)

 

$

(1,217

)

Net loss per share, basic and diluted

 

$

(0.03

)

 

$

(0.12

)

Weighted average shares used in computing net loss per share, basic and diluted

 

 

11,005,781

 

 

 

10,067,830

 

 

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,

 

 

 

2019

 

 

2018

 

Net loss

 

$

(362

)

 

$

(1,217

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment, net

 

 

(13

)

 

 

29

 

Comprehensive loss

 

$

(375

)

 

$

(1,188

)

 

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, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Income

 

 

Equity

 

Balance at December 31, 2017

 

 

9,827,129

 

 

$

48

 

 

$

109,708

 

 

$

(97,595

)

 

$

1

 

 

$

12,162

 

Exercise of stock options

 

 

486,588

 

 

 

3

 

 

 

340

 

 

 

 

 

 

 

 

 

 

 

343

 

Issuance of common stock in connection

   with exercise of warrants

 

 

16,129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

427

 

 

 

 

 

 

 

 

 

 

 

427

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29

 

 

 

29

 

Cumulative effect of change in accounting principle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,025

 

 

 

 

 

 

 

3,025

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,217

)

 

 

 

 

 

 

(1,217

)

Balance at March 31, 2018

 

 

10,329,846

 

 

$

51

 

 

$

110,475

 

 

$

(95,787

)

 

$

30

 

 

$

14,769

 

 

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,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(362

)

 

$

(1,217

)

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

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,238

 

 

 

817

 

Stock-based compensation

 

 

754

 

 

 

427

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

7,892

 

 

 

(2,439

)

Prepaid expenses and other assets

 

 

195

 

 

 

11

 

Accounts payable

 

 

(346

)

 

 

305

 

Accrued expenses and other current liabilities

 

 

(810

)

 

 

(834

)

Deferred revenue

 

 

344

 

 

 

706

 

Net cash provided by (used in) operating activities

 

 

8,905

 

 

 

(2,224

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(896

)

 

 

(2,985

)

Investment in intangible and other assets

 

 

(34

)

 

 

(10

)

Net cash used in investing activities

 

 

(930

)

 

 

(2,995

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock upon secondary offering

 

 

11,247

 

 

 

 

Payments of offering costs

 

 

(127

)

 

 

 

Proceeds from exercise of stock options

 

 

219

 

 

 

342

 

Net cash provided by financing activities

 

 

11,339

 

 

 

342

 

Increase (decrease) in cash, cash equivalents and restricted cash

 

 

19,314

 

 

 

(4,877

)

Effect of exchange rate on cash and cash equivalents

 

 

(8

)

 

 

42

 

Cash, cash equivalents and restricted cash at beginning of year

 

 

10,278

 

 

 

19,597

 

Cash, cash equivalents and restricted cash at end of period

 

$

29,584

 

 

$

14,762

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Offering costs included in accounts payable

 

$

317

 

 

$

 

 

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 approximately 100 cities. ShotSpotter Missions uses artificial intelligence-driven analysis to help strategically plan patrol missions and tactics for maximum crime deterrence. 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 two wholly-owned subsidiaries, ShotSpotter (Pty) Ltd. formed in South Africa and ShotSpotter Colombia S.A.S. which was formed in Colombia in March 2019.

Note 2. 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 subsidiaries. All significant intercompany transactions have been eliminated during consolidation.

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, stockholder’s equity and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2019 or any future period.

 

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, 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.

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 one 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.

Concentration of Accounts Receivable –As of March 31, 2019, two customers accounted for 27% and 11% of the Company’s accounts receivable. Fluctuations in accounts receivable result from timing of the Company’s execution of contracts and collection of related payments. As of December 31, 2018, one customer accounted for 77% of the Company’s accounts receivable.

7


 

Concentration of Revenues –For the three months ended March 31, 2019, two customers accounted for 21% and 14% of the Companys total revenues. For the three months ended March 31, 2018, two customers each accounted for 18% of the Companys total revenues.

Concentration of SuppliersThe 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.   

Accounting Pronouncements Recently Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). There have been further amendments, including practical expedients, with the issuance of ASU 2018-01 in January 2018, ASU 2018-11 in July 2018 and ASU 2018-20 in December 2018. The amended guidance requires the recognition of lease assets and lease liabilities on the balance sheet for those leases with terms in excess of 12 months and currently classified as operating leases. Disclosure of key information about leasing arrangements is required. Effective January 1, 2019, the Company adopted Topic 842. The Company elected the optional transition method which allows entities to continue to apply historical accounting guidance in the comparative periods presented in the year of adoption.

At transition, lessees and lessors may elect to apply a package of practical expedients permitting entities not to reassess: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any expired or existing leases qualify for capitalization under the amended guidance. These practical expedients must be elected as a package and consistently applied. The Company has elected to apply the package of practical expedients upon adoption.

The Company’s operating lease for its corporate headquarters office is impacted by the new standard and upon adoption, the Company recognized a right-of-use asset of $0.9 million and related lease liabilities totaling $0.9 million. See Note 10, Leases.

         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 ASU 2017-11 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, 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 ASU 2017-11 replace the indefinite deferral of certain guidance in Topic 480 with a scope exception. The amendments in Part II of ASU 2017-11 do not require any transition guidance. The Company adopted Part I of this ASU as of January 1, 2019 and the adoption did not have any impact on the consolidated financial statements.

Note 3. Revenue Related Disclosures

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 January 1, 2018, upon the adoption of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 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, 2019, the Company has estimated remaining performance obligations for contractually committed revenues of $24.0 million, $12.0 million, $7.1 million, and $0.7 million that will be recognized during the remainder of the year ending December 31, 2019, and years ended December 31, 2020, 2021, and 2022 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, 2019 and amounts under contract that will be invoiced after March 31, 2019. 

8


 

During the three months ended March 31, 2019, the Company recognized revenues of $9.4 million from customers in the United States and $0.2 million from a customer in South Africa.  

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.  

Accounts Receivable, net and Unbilled Revenue

Accounts receivable, net consist of trade accounts receivables 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 not require collateral or other security for accounts receivable. Unbilled revenue consists of revenue recognized in advance of invoicing the customer.

 

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 or 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. There were no changes in fair value of contingent consideration for the three months ended March 31, 2019.

Level III balances (in thousands):

 

 

 

As of March 31,

 

 

As of December 31,

 

 

 

2019

 

 

2018

 

Fair value of contingent consideration

 

$

750

 

 

$

750

 

 

 

Note 5. Details of Certain Condensed Consolidated Balance Sheet Accounts

 

Prepaid expenses and other current assets (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Prepaid expenses

 

$

595

 

 

$

832

 

Deferred commissions

 

 

655

 

 

 

629

 

Other

 

 

82

 

 

 

66

 

 

 

$

1,332

 

 

$

1,527

 

 

Other assets (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Deferred commissions

 

$

1,541

 

 

$

1,560

 

Other

 

 

97

 

 

 

362

 

 

 

$

1,638

 

 

$

1,922

 

 

9


 

Accrued expenses and other current liabilities (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Personnel-related accruals

 

$

1,967

 

 

$

2,603

 

Royalties payable

 

 

114

 

 

 

130

 

Professional fees

 

 

122

 

 

 

396

 

Sales/ use tax payable

 

 

249

 

 

 

273

 

Contingent consideration

 

 

750

 

 

 

750

 

Operating lease liability

 

 

282

 

 

 

 

Deferred rent

 

 

 

 

 

24

 

Other

 

 

476

 

 

 

251

 

 

 

$

3,960

 

 

$

4,427

 

 

Other liabilities (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Operating lease liability

 

$

545

 

 

$

 

Deferred rent

 

 

 

 

 

71

 

Other

 

 

4

 

 

 

5

 

 

 

$

549

 

 

$

76

 

 

Note 6. 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, 2019, there were 11,320,920 shares of common stock issued and outstanding. At December 31, 2018, there were 10,864,722 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 of March 31, 2019, 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,

 

 

 

2019

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(362

)

 

$

(1,217

)

Denominator:

 

 

 

 

 

 

 

 

Weighted-average shares outstanding, basic and diluted

 

 

11,005,781

 

 

 

10,067,830

 

Net loss per share

 

$

(0.03

)

 

$

(0.12

)

 

10


 

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,

 

 

 

2019

 

 

2018

 

Options to purchase common stock

 

 

706,472

 

 

 

801,397

 

Unvested restricted stock units

 

 

121,571

 

 

 

129,575

 

Warrants to purchase common stock

 

 

163,713

 

 

 

445,611

 

Total

 

 

991,756

 

 

 

1,376,583

 

 

Note 8. Common Stock Warrants

As of March 31, 2019, 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

 

 

3,766

 

 

July 2012

 

$

5.8667

 

 

July 2019

Common stock warrant

 

 

25,231

 

 

August 2012

 

$

5.8667

 

 

August 2019

Common stock warrant

 

 

50,716

 

 

February 2014

 

$

0.1700

 

 

February 2021

Common stock warrant (1)

 

 

84,000

 

 

June 2017

 

$

13.2000

 

 

June 2020

 

 

 

163,713

 

 

 

 

 

 

 

 

 

 

(1)

This warrant was issued to the Company’s lead underwriter in connection with the Company’s initial public offering.    

 

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, 2019 by 543,236 shares, which was equal to 5% of the total number of shares of capital stock outstanding on December 31, 2018.

 

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.

11


 

A summary of option activities under the 2005 Plan and 2017 Plan during the three months ended March 31, 2019 is as follows:

 

 

 

Number

of Options

Outstanding

 

 

Weighted

Average

Exercise

Price

 

Outstanding as of December 31, 2018

 

 

820,186

 

 

$

8.44

 

Granted

 

 

73,280

 

 

$

44.95

 

Exercised

 

 

(177,408

)

 

$

1.23

 

Canceled

 

 

(9,586

)

 

$

4.91

 

Outstanding as of March 31, 2019

 

 

706,472

 

 

$

14.09

 

 

During the three months ended March 31, 2019, the company granted executive management restricted stock unit (“RSU”) awards totaling 39,597 shares of common stock, with quarterly vesting over the next four years. The weighted average fair value of $44.95 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 1,688,369 as of March 31, 2019.

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, 2019 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, 2019.

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,

 

 

 

2019

 

 

2018

 

Cost of revenues

 

$

133

 

 

$

57

 

Sales and marketing

 

 

266

 

 

 

66

 

Research and development

 

 

87

 

 

 

40

 

General and administrative

 

 

268

 

 

 

264

 

Total

 

$

754

 

 

$

427

 

12


 

 

Note 10. Leases

Operating Lease

The Company leases its principal executive offices in Newark, California, under a non-cancelable operating lease which 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 ASC 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, 2019 was $0.1 million. Rent expense recognized for the three months ended March 31, 2018 was $0.1 million.

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

 

 

 

As of March 31,

2019

 

Assets

 

 

 

 

Operating lease right-of-use asset

 

$

765

 

Liabilities

 

 

 

 

Lease liability (short-term)

   (presented within Accrued expenses and other current

   liabilities)

 

$

282

 

Lease liability (long-term)

   (presented within Other liabilities)

 

 

545

 

Total operating lease liability

 

$

827

 

 

 

 

 

Three months

ended March 31,

2019

 

Cash paid for amounts included in the measurement of lease

   liabilities

   (presented within Operating cash flows)

 

$

86

 

 

Maturities of the lease liability at March 31, 2019 are as follows (in thousands):

 

2019 (remainder of year)

 

$

232

 

2020

 

 

357

 

2021

 

 

304

 

Total lease payments, undiscounted

 

 

893

 

Less: imputed interest

 

 

(66

)

Total

 

$

827

 

 

The Company does not have any finance leases.

The following table is shown for comparative purposes only. The future minimum lease payments under the non-cancelable lease at December 31, 2018 are as follows (in thousands):

 

2019

 

$

352

 

2020

 

 

357

 

2021

 

 

304

 

Total

 

$

1,013

 

13


 

 

Note 11. Commitments and Contingencies

The Company has data center non-cancelable contracts that exceed one year.

The following is a schedule of future minimum data center arrangements under the non-cancelable operating commitments at March 31, 2019 (in thousands):

 

 

 

Data Center

Arrangements

 

2019 (remainder of year)

 

$

160

 

2020

 

 

71

 

Total

 

$

231

 

 

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.

14


 

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, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 4, 2019 (“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 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 newly-acquired patrol management software, ShotSpotter Missions (formerly HunchLab), creates crime forecasts designed to enable more precise and effective use of patrol resources to deter crime. Recently 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 in approximately 100 cities as of March 31, 2019.

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 system applies machine learning combined with human review to analyze and validate the incident and precisely locate where the incident occurred. An alert containing a location on a map and critical information about the incident is transmitted directly to subscribing law enforcement or security personnel through any internet-connected computer and to iPhone or Android mobile devices.

Our software transmits validated gunfire data along with a recorded digital file of the triggering sound to our Incident Review Center (“IRC”), where our trained acoustic experts are on duty 24 hours a day, seven days a week, 365 days a year to screen and confirm actual gunfire incidents. 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. Gunshot incidents reviewed by our IRC result in alerts 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 pricing is under development, but will also be subscription based. As of March 31, 2019, we had ShotSpotter Flex, ShotSpotter SecureCampus and ShotSpotter SiteSecure coverage areas under contract for approximately 680 square miles, of which 660 square miles had gone live. These coverage areas included 99 cities and 11 campuses/sites across the United States and in South Africa, including three of the ten largest cities in the United States. During the three months ended March 31, 2019, we changed the classification of one customer to be a SiteSecure customer instead of a city customer. For the three months ended March 31, 2019, substantially all of our revenues are attributable to customers based in the United States.

15


 

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

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.

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 $9.6 million and $6.9 million for the three months ended March 31, 2019 and 2018, respectively, a year-over-year increase of 39%. Revenues from our ShotSpotter Flex during the three months ended March 31, 2019 and 2018 represented approximately 96% and 99% of total revenues, respectively. Our two current largest customers, the City of Chicago and the City of New York, accounted for 21% and 14%, respectively, of our total revenues for the three months ended March 31, 2019, and each accounted for 18% of our total revenues for the three months ended March 31, 2018.

For the three months ended March 31, 2019 and 2018, revenues generated within the United States accounted for $9.4 million and $6.7 million, respectively, or 97% of total revenues for the both periods, and $0.2 million for both three months ended March 2019 and 2018, and was derived from our customer located in South Africa.

We had net losses of $0.4 million and $1.2 million for the three months ended March 31, 2019 and 2018, respectively. Our accumulated deficit was $97.7 million and $97.4 million as of March 31, 2019 and December 31, 2018, respectively.

During the three months ended March 31, 2019 and 2018 we went “live” on 12 and 47 net new square miles of coverage, respectively. During the three months ended March 31, 2019, the increase in coverage was achieved through new customers, and is net of miles lost from a customer no longer under contract. During the three months ended March 31, 2018, 31 miles out of 47 were due to expansion from a single customer.

Net New “Go-Live” Miles

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 business metric to measure our operational performance and inform strategic decisions.

16


 

This metric, presented below for the three months ended March 31, 2019 and 2018, 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,

 

 

2019

 

2018

Net new "go-live" square miles added

 

12

 

47

 

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. 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, we 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 introducing new products and services to existing customers such as ShotSpotter Missions and 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 revenue 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 specific patrol missions and tactics that can deter these events. The HunchLab technology provides a proven, 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 South Africa and to pursue opportunities in Europe, South America and other regions of the world. For example, we signed a contract with the Bahamas in early 2019. 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. Moreover, we anticipate that different political and regulatory considerations that vary across different jurisdictions could extend what is already a lengthy sales cycle.

 

 

Components of Results of Operations

Presentation of Financial Statements

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

17


 

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. The timing of when new miles go live can be uncertain and, as a result, can have a significant impact on the levels of revenue and deferred revenue from quarter to quarter. For our ShotSpotter Flex solution, our pricing model is based on a per-square-mile basis. For our ShotSpotter Missions solution, our final pricing model is still evolving, but is currently based on a percentage of Flex subscription price, for customers using Flex, and on a customized basis for customers not using Flex. For ShotSpotter SecureCampus and ShotSpotter SiteSecure, our pricing model is on a customized-site basis. As a result of our process for invoicing contracts and renewals upon execution, our cash flow from operations and accounts receivable can fluctuate due to timing of contract execution and timing of deployment.

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

Cost of Revenues

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.

Starting mid-2020 through 2022, we will have to upgrade our sensors that use third-generation cellular communications to the fourth-generation Long-Term Evolution wireless technology, which will increase our cost of revenues.

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.

18


 

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.

We are investing in engineering resources to support further development of the ShotSpotter Missions crime forecasting software. 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.

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.

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, 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.

19


 

Other Expense, Net

Other expense, net, consists primarily of 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, 2019 and 2018

The following table sets forth our selected condensed consolidated statements of operations data for the three months ended March 31, 2019 and 2018 (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As a % of

 

 

 

 

 

 

As a % of

 

 

Change

 

 

 

2019

 

 

Revenues

 

 

2018

 

 

Revenues

 

 

$

 

 

%

 

Revenues

 

$

9,593

 

 

 

100

%

 

$

6,907

 

 

 

100

%

 

$

2,686

 

 

 

39

%

Cost of revenues

 

 

4,004

 

 

 

42

%

 

 

3,308

 

 

 

48

%

 

 

696

 

 

 

21

%

Gross profit

 

 

5,589

 

 

 

58

%

 

 

3,599

 

 

 

52

%

 

 

1,990

 

 

 

55

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

2,629

 

 

 

27

%

 

 

1,554

 

 

 

22

%

 

 

1,075

 

 

 

69

%

Research and development

 

 

1,294

 

 

 

13

%

 

 

1,236

 

 

 

18

%

 

 

58

 

 

 

5

%

General and administrative

 

 

1,986

 

 

 

21

%

 

 

2,028

 

 

 

29

%

 

 

(42

)

 

 

(2

%)

Total operating expenses

 

 

5,909

 

 

 

62

%

 

 

4,818

 

 

 

70

%

 

 

1,091

 

 

 

23

%

Loss from operations

 

 

(320

)

 

 

(3

%)

 

 

(1,219

)

 

 

(18

%)

 

 

899

 

 

 

(74

%)

Other income (expense), net

 

 

(24

)

 

 

 

 

 

28

 

 

 

 

 

 

(52

)