SOUNDTHINKING, INC. 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 endedDecember 31, 2020 , filed with theSecurities and Exchange Commission ("SEC") onMarch 29, 2021 . 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 and Social Unrest 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 otherSEC 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 prevent and reduce gun violence and make cities, campuses and facilities safer. Our flagship public safety solution,ShotSpotter Respond, is the leading outdoor gunshot detection, location and alerting system. Our patrol management software, ShotSpotter Connect, creates crime forecasts designed to enable more precise and effective use of patrol resources to deter crime. Our security solutions, ShotSpotter SecureCampus andShotSpotter SiteSecure , are designed to help law enforcement and security personnel serving universities and corporations, mitigate risk and enhance security by notifying authorities of a potential outdoor gunfire incident, saving critical minutes for first responders to arrive. ShotSpotter Investigate™, adds case management to our expanding suite of precision policing technology solutions and provides agencies with a cloud-based investigative digital case folder and analytical and collaboration tools to improve case closure rates. 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 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 consistently and quickly respond to shooting events including those unreported through 911, 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 precisely locates where the incident occurred and applies machine classification combined with human review to analyze and validate the incident. An alert containing a location on a map and critical 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. Our software sends validated gunfire data along with the audio of the triggering sound to our Incident Review Center ("IRC"), where our trained incident review specialists are on duty 24 hours a day, seven days a week, 365 days a year to screen and confirm actual gunfire incidents. Our trained incident review specialists 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 approximately 45 seconds of the receipt of the gunfire incident. We generate annual subscription revenues from the deployment ofShotSpotter Respond 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 Connect solution is also sold on a subscription basis. As ofJune 30, 2021 , we had coverage areas under contract in 122 cities and 12 campuses/sites worldwide acrossthe United States ,South Africa and theBahamas , including three of the ten largest cities inthe United States . 15
-------------------------------------------------------------------------------- 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 sincemid-March 2020 has been adversely impacted. While this disruption is currently expected to be temporary, there is considerable uncertainty around the magnitude or duration. While we intend to continue to devote resources to increase sales of our solutions, we expect that revenues from our ShotSpotter Respond 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 ShotSpotter Respond solutions. Additionally, in early 2020, we 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 acquiredLEEDS, LLC ("LEEDS") inNovember 2020 to expand our suite of solutions with ShotSpotter Investigate. ShotSpotter Investigate is our case management solution that helps automate investigative work and improve case clearance rates - addressing an inefficiency problem for many agencies that have had to rely on multiple disparate systems to work cases. Using the software, investigators benefit from a single digital case folder that includes all elements related to a case. Analytical and collaboration tools help investigators connect the dots and share information faster while reporting helps package cases for command staff and prosecutors. With the launch of ShotSpotter Investigate in the second quarter of fiscal 2021, we now offer a more complete precision policing platform to enable intelligence-driven prevention, response to, and investigation of crime for local, state and federal agencies. Since our founding 25 years ago,ShotSpotter has been and continues to be a purpose-led company. We are a mission-driven organization that is focused on improving public safety outcomes. We accomplish this by earning the trust of law enforcement and providing them solutions to help them better engage and strengthen the police-community relationships in fulfilling their sworn obligation equally to serve and protect all. Our inspiration comes from our principal founder, Dr.Bob Showen , who believes that the highest and best use of technology is to promote social good. We are committed to developing comprehensive, respectful, and engaged partnerships with law enforcement agencies, elected officials and communities focused on making a positive difference in the world. We enter into subscription agreements on a term basis that typically range from one to five years in duration, with the majority having a contract term of one year. Substantially all of our sales are to governmental agencies and universities, which often undertake a prolonged contract evaluation process that affects the size or the timing of our sales contracts and may likewise increase our customer acquisition costs. For a discussion of the risks associated with our sales cycle, see risks entitled "Our sales cycle can be unpredictable, time-consuming and costly, and our inability to successfully complete sales could harm our business" and "Because we generally recognize our subscription revenues ratably over the term of our contract with a customer, fluctuations in sales will not be fully reflected in our operating results until future periods" in Item 1A, Risk Factors, included in this Quarterly Report on Form 10-Q. We rely on a limited number of suppliers and contract manufacturers to produce components of our solutions. We have no long-term contracts with these manufacturers and purchase from them on a purchase-order basis. 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 risks entitled "We rely on a limited number of suppliers and contract manufacturers, and our proprietaryShotSpotter sensors are manufactured by a single contract manufacturer" and "Impact of COVID-19 and Social Unrest on our Business" in Item 1A, Risk Factors, included in this Quarterly Report on Form 10-Q. We generated revenues of$14.6 million and$11.3 million for the three months endedJune 30, 2021 and 2020, respectively, a year-over-year increase of 30%. Revenues from ShotSpotter Respond during the three months endedJune 30, 2021 and 2020, represented approximately 79% and 96% of total revenues, respectively. Our two current largest customers, theCity of New York and theCity of Chicago , accounted for 30% and 14%, respectively, of our total revenues for the three months endedJune 30, 2021 , and 12% and 19%, respectively, of our total revenues for the three months endedJune 30, 2020 . 16 -------------------------------------------------------------------------------- We generated revenues of$29.6 million and$21.7 million for the six months endedJune 30, 2021 and 2020, respectively, a year-over-year increase of 36%. Revenues from ShotSpotter Respond during the six months endedJune 30, 2021 and 2020, represented approximately 77% and 96% of total revenues, respectively. Our two current largest customers, theCity of New York and theCity of Chicago , accounted for 32% and 14%, respectively, of our total revenues for the six months endedJune 30, 2021 , and 13% and 19%, respectively, of our total revenues for the six months endedJune 30, 2020 . For the three months endedJune 30, 2021 and 2020, revenues generated withinthe United States accounted for$14.4 million and$11.1 million , or 99%, of total revenues for both periods. For the three months endedJune 30, 2021 and 2020, revenues derived from our customers located outsidethe United States accounted for$0.2 million and$0.2 million , respectively, of total revenues. For the six months endedJune 30, 2021 and 2020, revenues generated withinthe United States accounted for$29.3 million and$21.4 million , or 99%, of total revenues for both periods. For the six months endedJune 30, 2021 and 2020, revenues derived from our customers located outsidethe United States accounted for$0.4 million and$0.3 million , respectively, of total revenues.
We had net (loss) income of
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 and Social Unrest 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. We will also focus on expanding our business by introducing new products and services to existing customers such as ShotSpotter Connect and gaining new customers forShotSpotter 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 trustShotSpotter'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 otherShotSpotter 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. InOctober 2018 , we acquired the HunchLab technology and related assets that underline our ShotSpotter Connect solution. ShotSpotter Connect 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. We believe our investment will democratize the sharing of important intelligence with patrol officers who currently have limited direct access to crime analysts. 17 -------------------------------------------------------------------------------- With respect to international sales, we believe that we have the potential to expand our coverage within existing areas, and to pursue opportunities inLatin 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 ofthe 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" cities represent the number of cities covered by deployments
of our gunshot detection solutions that were formally approved by customers
during the year, both from initial and expanded customer deployments, net of
cities that ceased to be "live" during the year due to customer cancellations.
New cities include deployed coverage areas that may have been sold, or booked,
in a prior period. We focus on net new "go-live" cities as a key business metric
to measure our operational performance and market penetration.
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Net new "go-live" cities 2 6 8 5
Impact of COVID-19 and Social Unrest on our Business
The COVID-19 pandemic resulted in a substantial curtailment of business activities worldwide and caused ongoing economic uncertainty, both inthe United States and many countries abroad. In connection with efforts to contain the spread of COVID-19, many companies and state, local and foreign governments imposed restrictions, including shelter-in-place orders and travel bans that were in effect for most or all of 2020 and during the first quarter of 2021. While some of these companies and jurisdictions have relaxed or ended such restrictions, some restrictions remain and others may be put back in place after having been lifted. We expect that the evolving COVID-19 pandemic, associated travel restrictions and social distancing requirements will continue to have an adverse impact on our results of operations. While the ultimate 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, may continue to be adversely impacted in 2021. We may be adversely affected by increasing social unrest, protests against racial inequality, protests against police brutality and movements such as "Defund the Police" and such unrest may be exacerbated by inaccurate information or negative publicity regarding our solutions. These events may directly or indirectly affect police agency budgets and funding available to current and potential customers. Participants in these events may also attempt to create the perception that our solutions are contributing to the perceived problems, which may adversely affect us, our business and results of operations, including our revenues, earnings and cash flows from operations. In addition, the global supply chain for semiconductor chips, including the type of chips used in the sensors integrated into our gunshot detection solutions, has been disrupted by events related to the COVID-19 pandemic, including business shutdowns and increased demand. As a result, we are experiencing delays in the delivery of sensors needed for new deployments and updates or repairs of existing assets. While we believe these delays are temporary and we are able to take some steps to mitigate the impact of these delays, we may not be able to deploy, update or repair our gunshot detection solutions as expected. If we are unable to deliver our solutions or update or repair existing assets, our revenues may not grow as expected and our business may be adversely impacted. It is currently not possible to predict the magnitude or duration of the COVID-19 pandemic's impact on our business or the future impact of the recent, ongoing and possible future unrest. The extent to which these events impact 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 challenges created by pandemic or by ongoing social unrest;
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governmental, business and individuals' actions that have been and continue to be taken in response to these events; • the impact of the pandemic and social unrest 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; • any closures of our facilities and the facilities of our customers and suppliers; and • the degree to which our employees or those of our customers or suppliers become ill with COVID-19.
Components of Results of Operations
Presentation of Financial Statements
Our 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 Respond, 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 ourShotSpotter Respond solution, our pricing model is based on a per-square-mile basis. For ShotSpotter SecureCampus, ShotSpotter SiteSecure and ShotSpotter Investigate, our pricing model is on a customized-site basis. For our ShotSpotter Connect 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 Connect 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. With the acquisition of LEEDS, we also generate revenues through the sale of (i) a software license and related maintenance and support services to our proprietary software technology and (ii) professional software development services to a single customer, through a sales channel intermediary. The sales channel intermediary contract includes an 19 --------------------------------------------------------------------------------
annual, renewable subscription for software and related maintenance and support services. The contract also provides for the procurement of professional services, such as for software development and testing for product feature enhancements, by executing supplementary work orders.
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.
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 generated in 2020 and the first six months of 2021, 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 information technology, facility and equipment depreciation costs. Impairment of property and equipment is primarily attributable to our write-off of the remaining book value of sensor networks related to customers lost during the six months endedJune 30, 2021 . We are upgrading 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 these upgrade costs in 2021 through 2022. We accelerated these plans and began to replace sensors in certain geographic areas starting in the second half of 2020 in order to optimize personnel utilization as deployments were limited as a result of pandemic-related restrictions. Accelerated bandwidth changes by our carriers may require us to continue to accelerate the upgrade of our 3G sensors prior to 2022, which would accelerate the costs associated with the upgrade, which are estimated to be approximately$5.0 million in total. Current delays in the supply chain for semiconductor chips are impacting the timely delivery to us of the sensors required to make these upgrades and could increase the cost to us of such upgrades. We may re-use and re-deploy the old 3G sensors that have a remaining serviceable life where it makes sense to do so. As we upgrade our sensors, cost of revenues may increase as a percentage of revenues. 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 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.
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. Although our operating expenses will
fluctuate, we expect that over time, as a whole, they will generally decrease as
a percentage of revenues.
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Sales and Marketing
Sales and marketing expenses primarily consist of personnel-related costs attributable to our sales and marketing personnel, commissions earned by our sales personnel, marketing expenses for trade shows and lead generation programs, 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, our sales and marketing expense has decreased and is expected to remain relatively flat as the pandemic continues. 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 Connect and ShotSpotter Investigate. 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 ofShotSpotter gunshot data to enhance forecasting of gun violence. We are also investing research and development resources in conjunction with ourShotSpotter 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 evolving cognitive and analytical applications to improve the efficiency of our solutions. 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, support our operations as a public company and increase our headcount.
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 income before tax and enacted federal, state and foreign tax rates, adjusted for allowable credits and deductions, as applicable.
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We continually monitor all positive and negative evidence regarding the
realization of our deferred tax assets and may record assets when it becomes
more likely than not that they will be realized, which may impact the expense or
benefit from income taxes.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. We regularly assesses the likelihood that the
deferred tax assets will be recovered from future taxable income. We consider
projected future taxable income and ongoing tax planning strategies, then
records a valuation allowance to reduce the carrying value of the net deferred
taxes to an amount that is more likely than not able to be realized. Based upon
our assessment of all available evidence, including the previous three years of
income before tax after permanent items, estimates of future profitability, and
our overall prospects of future business, we have determined that it is more
likely than not that we will not be able to realize a portion of the deferred
tax assets in the future. We will continue to assess the potential realization
of deferred tax assets on an annual basis, or an interim basis if circumstances
warrant. If our actual results and updated projections vary significantly from
the projections used as a basis for this determination, we may need to change
the valuation allowance against the gross deferred tax assets.
Results of Operations
Comparison of Three Months Ended
The following table sets forth our selected condensed consolidated statements of operations data for the three months endedJune 30, 2021 and 2020 (in thousands): Three Months Ended June 30, As a % of As a % of Change 2021 Revenues 2020 Revenues $ % Revenues$ 14,624 100 %$ 11,277 100 %$ 3,347 30 % Costs Cost of revenues 6,317 43 % 4,353 39 % 1,964 45 % Impairment of property and equipment - - - - - - Total costs 6,317 43 % 4,353 39 % 1,964 45 % Gross profit 8,307 57 % 6,924 61 % 1,383 20 % Operating expenses: Sales and marketing 3,928 27 % 2,321 21 % 1,607 69 % Research and development 1,740 12 % 1,377 12 % 363 26 % General and administrative 2,812 19 % 2,316 21 % 496 21 % Total operating expenses 8,480 58 % 6,014 53 % 2,466 41 % Operating loss (173 ) (1 %) 910 8 % (1,083 ) (119 %) Other income (expense), net (77 ) - (52 ) - (25 ) 48 % Provision (benefit) for income taxes - - (8 ) - 8 (100 %) Net income$ (250 ) (2 %)$ 866 8 %$ (1,116 ) (129 %) Revenues The increase of$3.3 million was due primarily to a$2.7 million increase in revenues attributable to the acquisition of LEEDS inNovember 2020 , with the remaining$0.6 million increase attributable to increased revenues from new customers and expansions of existing customer coverage areas, partially offset by the effect of COVID-19 related delays in deploying contracted miles and contract renewals with certain customers. We went live in two new Respond cities and had three Respond expansions during the three months endedJune 30, 2021 . Costs
The increase of
Operating Expenses
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Sales and Marketing Expense Sales and marketing expense increased by$1.6 million and was primarily due to an increase of$0.6 million in consulting and outside services, a$0.5 million increase in personnel costs, a$0.2 million increase in advertising costs and a$0.1 million increase in other costs including travel and entertainment expense and amortization of the customer relationship intangible asset related to LEEDS.
Research and Development Expense
Research and development expense increased by$0.4 million and was primarily due to an increase of$0.3 million in personnel-related costs and an increase of$0.1 million in outside consulting fees.
General and Administrative Expense
The increase of$0.5 million was due primarily to a$0.3 million increase in legal expenses, a$0.1 million increase in personnel-related costs and a$0.1 million increase in business insurance expense.
Other Income (expense), Net
The decrease in other income (expense) net of
Income Taxes
Our income taxes are based on the amount of our taxable income and enacted federal, state and foreign tax rates, adjusted for allowable credits, deductions and the valuations allowance against deferred tax assets, as applicable. For the three months endedJune 30, 2021 and 2020, due to having net operating loss carryforwards, our recorded income taxes consisted of foreign taxes only.
Comparison of Six Months Ended
The following table sets forth our selected condensed consolidated statements of operations data for the six months endedJune 30, 2021 and 2020 (in thousands): Six Months Ended June 30, As a % of As a % of Change 2021 Revenues 2020 Revenues $ % Revenues$ 29,637 100 %$ 21,735 100 %$ 7,902 36 % Costs Cost of revenues 12,617 43 % 8,695 40 % 3,922 45 % Impairment of property and equipment 25 - - - 25 - Total costs 12,642 43 % 8,695 40 % 3,947 45 % Gross profit 16,995 57 % 13,040 60 % 3,955 30 % Operating expenses: Sales and marketing 7,863 27 % 4,837 22 % 3,026 63 % Research and development 3,453 12 % 2,729 13 % 724 27 % General and administrative 5,683 19 % 4,587 21 % 1,096 24 % Total operating expenses 16,999 57 % 12,153 56 % 4,846 40 % Operating loss (4 ) 0 % 887 4 % (891 ) (100 %) Other income (expense), net (118 ) - (17 ) - (101 ) 594 % Provision (benefit) for income taxes 49 - (9 ) - 58 (644 %) Net income$ (171 ) (1 %)$ 879 4 %$ (1,050 ) (119 %) Revenues The increase of$7.9 million was due primarily to a$6.1 million increase in revenues attributable to the acquisition of LEEDS inNovember 2020 , with the remaining increase attributable to increased revenues from new customers and expansions of existing customer coverage areas. The increase was partially offset by the effect of COVID-19 related 23 --------------------------------------------------------------------------------
delays in deploying contracted miles and contract renewals with certain
customers. We went live in eight new Respond cities and had eight Respond
expansions during the six months ended
Costs
The increase of$3.9 million was due primarily driven by a$3.4 million increase in overall personnel-related costs primarily driven by our acquisition of LEEDS inNovember 2020 , a$0.2 million increase in depreciation expense, a$0.2 million increase in third-party labor expense and a$0.1 million increase in maintenance and support product and software expense
Operating Expenses
Sales and Marketing Expense
The increase in sales and marketing expense of$3.0 million was primarily due to an increase of$1.3 million in consulting and outside services, an increase of$0.9 million in personnel costs, an increase of$0.5 million in amortization of the customer relationship intangible asset related to LEEDS, an increase of$0.2 million in advertising costs and an increase of$0.1 million in equipment and software expense.
Research and Development Expense
The increase in research and development expense of$0.7 million was primarily due to an increase of$0.7 million in personnel andLEEDS related expenses and outside consulting fees.
General and Administrative Expense
The increase of$1.1 million was due primarily to an increase of$0.7 million in legal and professional fees, an increase of$0.3 million increase in personnel costs and an increase of$0.1 million increase in business insurance expense.
Other Income (expense), Net
The decrease of
Income Taxes
Our income taxes are based on the amount of our taxable income and enacted federal, state and foreign tax rates, adjusted for allowable credits, deductions and the valuations allowance against deferred tax assets, as applicable. For the six months endedJune 30, 2021 and 2020, as a result of net operating loss carryforwards, our recorded income taxes consisted of foreign taxes only.
Liquidity and Capital Resources
Sources of Funds
Our operations have been financed primarily through net proceeds from the sale of equity, debt financing arrangements and cash from operating activities. Our principal source of liquidity is cash and cash equivalents totaling$15.6 million as ofJune 30, 2021 . InAugust 2020 , we entered into an amendment to our credit facility to increase the size of our available loan facility from$10.0 million to$20.0 million . As ofJune 30, 2021 , no amounts were outstanding. We believe our existing cash and cash equivalent balances, our available credit facility and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on sales and marketing, the expansion of sales and marketing activities, the timing of new product introductions, market acceptance of our products and overall economic conditions. We may also seek additional capital to fund our operations, including through the sale of equity or debt financings. To the extent that we raise additional capital through the future sale of equity, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. The incurrence of debt financing would result in debt 24 -------------------------------------------------------------------------------- service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. Additionally, there is no guarantee debt or equity financing will be available to the Company. Use of Funds Our historical uses of cash have primarily consisted of cash used for operating activities, such as expansion of our sales and marketing operations, research and development activities and other working capital needs, and cash used in investing activities, such as property and equipment expenditures to install infrastructure in customer cities in order to deliver our solutions. We also invest in company and technology acquisitions, where appropriate.
Stock Repurchase Program
InMay 2019 , we announced that our board of directors had approved a stock repurchase program for up to$15 million of our 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 our common stock, general market and economic conditions and applicable legal requirements. The stock repurchase program does not obligate us to purchase any particular amount of common stock and may be suspended or discontinued at any time. During the six months endedJune 30, 2021 , the Company repurchased 68,747 shares of its common stock at an average price of$39.00 per share for$2.7 million . The repurchases were made in open market transactions using cash on hand, and all of the shares repurchased were retired. AtJune 30, 2021 ,$4.0 million remained available for repurchase under the Company's stock repurchase program.
Cash Flows
Comparison of Six Months Ended
The following table presents a summary of our cash flows for the six months
ended
Six Months Ended June 30,
2021 2020
(in thousands)
Net cash provided by (used in):
Operating activities $ 5,136 $ 5,213
Investing activities (3,590 ) (2,334 )
Financing activities (2,039 ) (1,456 )
Net change in cash and cash equivalents
Operating Activities Our net income and cash flows provided by operating activities are significantly influenced by our increase in headcount to support our growth, increase in legal, outside services fees, and sales and marketing expenses, and our ability to bill and collect in a timely manner. Net cash provided by operating activities decreased$0.1 million from the six months endedJune 30, 2020 to the six months endedJune 30, 2021 , primarily due to a$4.6 million increase in payments for personnel costs, an increase of$0.9 million in professional services and an increase of$0.6 million in prepaids, offset by an increase of$6.0 million in cash collected from customers.
Investing Activities
Our investing activities consist primarily of capital expenditures to install
our solutions in customer coverage areas, purchases of property and equipment,
and investment in intangible assets.
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Investing activities used
Financing Activities
Cash generated by financing activities includes net proceeds from the exercise of stock options and warrants, proceeds from the employee stock purchase plan, offset by payment for repurchases of our common stock, payment of indebtedness, and debt issuance and financing costs. Financing activities used$2.0 million in cash during the six months endedJune 30, 2021 . This was primarily driven by$2.7 million in payments for repurchases of our common stock and$0.4 million in payments for HunchLab's contingent consideration, partially offset by$0.6 million in proceeds from the exercise of options and warrants and$0.5 million in proceeds from employee stock purchase plan purchases during the six months endedJune 30, 2021 .
Off-Balance Sheet Arrangements
AtJune 30, 2021 , we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance withU.S. generally accepted accounting principles. The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of revenues, assets, liabilities, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates.
For the significant or material changes in our critical accounting policies
during the six months ended
Recently Issued Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, to the notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a summary of recently issued accounting pronouncements.
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