Good afternoon and welcome to ShotSpotter's Second Quarter 2021 Earnings Conference Call. My name is Anastasia and I will be your operator for today's call. Joining us are ShotSpotter's CEO, Ralph Clark; and CFO, Alan Stewart. Please note that certain information discussed on the call today will include forward-looking statements about future events and ShotSpotter's business strategy and future financial and operating performance. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict and may cause the actual results to differ materially from those stated or implied by those statements. Certain of these risks and assumptions are discussed in ShotSpotter's SEC filings, including its registration statement on Form S-1. These forward-looking statements reflect management's beliefs, estimates and predictions as of the date of this live broadcast, August 10, 2021, and ShotSpotter undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Finally, I would like to remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the company's website at ir.shotspotter.com. Now, I would like to turn the call over to ShotSpotter's CEO, Ralph Clark. Sir, please proceed.

Good afternoon and thank you for joining us today. I hope everyone is doing well. As usual, I'll start with a quick overview of the quarter and our operational outlook before Alan details the quarterly results. We will then take your questions. We're very pleased with our second quarter results reporting revenue in line with our expectations of $14.6 million, up 30% from Q2 of 2020. During the quarter, we went live with ShotSpotter respond with one multi-unit security customer, two new cities and three expansions. We also went live with three ShotSpotter Connect deployments and have built a very strong pipeline of prospects for ShotSpotter Investigate that we expect to go beta before year-end. We believe our cross solution sales momentum is confirmation that our precision policing platform and positioning is resonating with market demand. Quarterly adjusted EBITDA was $2.9 million compared to $3.4 million last year. The decrease was largely due to unbudgeted marketing and legal spend associated with addressing a deep on the police variant intended to falsely smear the efficacy of our real-time acoustic gunshot detection and post incident forensic services. Although distracting this misguided effort for now appears to have had little to no impact on our short-term to medium-term revenue growth prospects. However, we intend to vigorously defend our long-term brand reputation and are carefully evaluating our strategic options, including legal actions going forward. Our field engineering and customer success teams are fully booked with over 13 respond new customer and expansion projects in the process of being deployed and onboarded in the second half of this year. This includes a number of Tier 1 and Tier 2 expansions that demonstrate the value our customers experience with our solutions and helping them address violent crime. We're also incredibly grateful to renew our partnership with…

Thank you, Ralph. We're pleased with our performance in the second quarter. As Ralph mentioned we added two new response cities and one security customer this quarter while seeing no city attrition. We also had three city expansions and achieved strong revenue growth of 30% compared with the second quarter of 2020. Losing those cities to attrition continues the trend of keeping our actual attrition low, similar to what we experienced in 2020. With this ongoing success, we expect that our 2021 revenue interest will be close to only 1% similar to last year's excellent results. Early feedback on our third quarter deployments is also positive with the addition of new city customers and expansions already the underway. Let me provide more details on the quarter, and then I will share some thoughts around the balance of the year. Second quarter revenues were in line with the expectations at $14.6 million, a 30% increase over the $11.3 months in the second quarter of 2020. Revenue increased as our deployed miles are up year-over-year, along with revenue contribution for our leads acquisition. Gross profit for the second quarter of 2021 was $8.3 million or 57% of revenue versus $6.9 million or 61% of revenue for the prior year period. Gross margin was a bit lower as a result of slightly lower gross margins on the professional services provided by our leads team. Adjusted EBITDA for the second quarter was $2.9 million a decrease from the $3.4 million in the second quarter of 2020. As a reminder, adjusted EBITDA is calculated by taking our gap net income or net loss and adding back interest taxes, depreciation, amortization, and stock-based compensation. As Ralph mentioned, the primary reason for our lower adjusted EBITDA and our net loss for the quarter is primarily related to…

Thank you, Alan. As you can see there's a lot to be excited about here. We continue to be inspired in our work of bringing precision policing solutions to market. Policing is undergoing a fundamental transformation and we're grateful to be a positive force in that journey. We're now ready to take your questions.

Thank you. [Operator Instructions] The first question comes from Will Power with Baird. Please go ahead.

Hey guys, thanks for taking a question. This is Charlie Erlikh for Will. Thanks for all the color on the macro environment and the federal stimulus. I'd love if you could just talk a little bit of that thing from federal stimulus to state and local governments and how you're thinking about that in terms of whether that's going to be, you're already seeing a benefit from that in the numbers or if that's more of a future benefit? Thanks.

Yes. So thank you for that question. This is Ralph, and I'll start and Alan jump in to add on. We're really encouraged by what we're seeing on the federal stimulus side, as I've mentioned in my prepared remarks we're seeing it come through base - two basic themes, there's the rescue act up funds that's going directly to cities, which is quite encouraging. There's no additional steps that a city have to take in order to get access to that funding. And there's also the return of earmarks, which we're seeing some really interesting early successes and certainly seen that progress happen on the house side. There's some things that are working their way through the Senate side that we're pre-encouraged about. But in addition landing, think we can't underestimate the validation that someone from the White House Podium kind of commenting specifically on the value that acoustic gunshot detection can bring to these communities that are suffering from ongoing persistent gun violence is extremely powerful. So I don't want to leave that out in answering the funding question in the macroeconomic or the macro-environment question.

Thanks for that color. And then also just last question for me. Could you talk a little bit about the pipeline for response, maybe what the pipeline looks like now versus what it looked like six months ago and maybe a year ago?

Sure. This is Alan.

But I think that cover a couple of thing.

Yes. Sure. So basically, if you remember at the Analyst Day, we talked about going live in about 90 miles for this year. We still believe we're going to beat that. In fact, it'll be over 100 miles, so that's tied to the pipeline. The pipeline is as strong as it's ever been and continues to grow. Some of the funding that you mentioned in terms of government is also helping, adding new people to our pipeline.

Great. Thanks very much.

The next question comes from Richard Baldry with ROTH Capital. Please go ahead. Richard Baldry, your line is live.

Thanks. Could you maybe address a little more specifically this defund the police environment, the propaganda sort of being pushed out against you and what your responses have been to-date, what you – what type of magnitude of legal responses or avenues you think you have to push back?

Yes. Thank you for that question, Richard. So we definitely have made some very public statements around kind of pushing back on kind of the two themes that were coming out there. One is what we consider to be a challenge analysis of ShotSpotter efficacy, both from real time gunshot alerts as well as forensic reports. We pushed back on that. We commissioned an independent analysis of that study that I think pointed out very clearly that the study was flawed. Basically they were conflating the issue of no reports filed to no gunshots happening, which is pretty, pretty ridiculous. And the more, I guess, you know hurtful salicious pushback we're having around the idea that we're collaborating with law enforcement agencies to manufacturer false evidence as a part of court proceedings is completely ridiculous, and we pushed back on that fairly aggressively staying at that couldn't be [Audio Dip] from the truth. And really what they're implying or explicitly stating is that we'd be involved in some criminal activity which are just completely outrageous. I don't think I want to say anything at that at this point in time. We're clearly evaluating all of our options, including legal options to kind of take this on, and we're prepared to do whatever we have to do to protect our brand equity.

And moving over the same side again, the company's seasonality has tended to be stronger. It historically Q4, that pattern is changing now. Can you talk about how the second half seasonality sequential up down so we should play given the more moving parts you've got with leads internally now?

Sure. This is Alan. I'll start that, Ralph please add. I think the biggest thing between Q1 and Q2 is really tied to some of the professional services that we've mentioned it after acquisition of LEEDS and our Q1 call is very lumpy. So for example, what we got in professional services revenue, Q1 was about $750,000 more than what we got in professional services for Q2. But, well Ralph also mentioned that during Q2, we were working on positional purchase orders and work orders that by the way have even come in just literally today, is that they're going to help ramp-up the professional services again, going into the second half of the year. So we – as we see the weather is lumpy, that is something that does affect someone of the revenue quarter-to-quarter. Historically we would normally see some changes and increase in revenue going into a flat from Q2 to Q3, which is probably not going to be the case this time we expect it to be higher and then any increase in Q4, which we also do expect will happen this year, too the revenue.

Great. Thanks. Congrats on the quarter.

Thank you.

The next question comes from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead.

Thanks. And I want to follow-up first on the cost impact of kind of fighting this public battle here on the efficacy of the service and products. One, what was the cost impact in Q2? And then secondly, what do you expect the cost impact to be in Q3? I'm assuming all that falls into G&A. Can you clarify Alan?

Sure. Yes. And just we have not identified exactly how much it was, but you can assume it's about $400,000 in costs, which is legal and public relations efforts against the opposition. We do expect to that to continue. As Ralph mentioned, we will defend ourselves appropriately so going forward. So we can't really tell you exactly when it's going to end or what the dollars are going to be. Only that we're going to do it appropriately, not overspend, but spend where we should be spending on that.

Got it. That's helpful. And then in terms of gross margin run rate with LEEDS, a pretty decent portion of your overall revenue is it fair. Is it fair to that, that kind of gross margin run rate is going to be in that 57% per seven – 57% range?

Yes. It's Alan, again. Great question. The one thing that's important to understand about the professional services, as we may have the revenue changing significant quarter-the-quarter, but we have generally about the same number of people that are there waiting for or getting ready to perform the next work order. So the cost quarter-to-quarter stays fairly safe, the same when the revenue drops down for that particular quarter cost of goods sold might go down for that aspect of it. To answer your question directly, we do expect overall the gross margin to continue will be in a north 50% for the company overall and increasing about that into the out years.

That's helpful. And then just another item of context, so, I'm encouraged by the confidence around the new mileage growth. I think it sounds like you have increased confidence that you're going to hit 100 new miles added this year. Can you give a cumulative year-to-date? I know you're not breaking out the quarterlies anymore but can you provide a cumulative numbers so that we can add some context of the expectation of second half ads versus first half ads? Because I think – I heard in the script that, did you say you had like 13 cities or something like that that are either looking at new contracts or contract expansions for the second half?

Yes. Yes. Our project managers are fully booked working on currently being projects except to have some projects added over the next six months or so that we'll probably end up going live into early 2022. But I think – I think we just leave it at. We're highly confident around getting past 100 miles go-live up for this year for 2021. We have a lot of visibility into it.

But no context for – is that kind of split 50/50. I mean, my guess would be that it's more back halfway weighted than, than front halfway. Is that a fair assumption?

Yes. So this is Ralph, again. I would say that it is, yes, it is more back-end loaded, but I would say back-end loaded even in terms of the timing of it happening into kind of Q4 maybe versus Q3 or not in early Q3, but more like late Q3, early Q4, which is why it doesn't necessarily translate to uplift – a significant uplift to GAAP revenue. So ahead on miles in terms of go-live, slightly I would say behind on timing, more back-end loaded than front-end loaded.

Great. And then the last follow up is I can't recall a time where we had that type of presidential endorsement of the product that definitely caught our attention, but I wanted to get a sense of inbound calls and I believe that happened in about three weeks ago or so. But can you give us a sense, Ralph, on the types of inbound calls whether or not that's accelerated since that public endorsement of the product just as – again some helpful context in terms of what that potentially could change on the trajectory of the business over the next couple of years?

Sure. So I would definitely say that our sales motion is very different today than it has been since the time I've been at the company. We're certainly getting more inbound calls as opposed to us reaching out. I think we're spending less time kind of educating folks on the cost of ignoring or not responding to criminal gunfire. I think the prospect's already kind of understand that and they're kind of showing up with a prepared mind and a disposition to take action, not necessarily acoustic gunshot detection action, but definitely they're feeling compelled to act to do something because the uptick in gun violence is real. I mean, it's not imaginary at all. So that's really changed the – I would say again the sales motion why we're thinking that sales cycles are collapsing. You combine that of course with the robust funding environment and then kind of this Oval Office endorsement from the Biden administration and then even kind of locally when your attorney general kind of shows up with a Senator really viewing a acoustic gunshot detection deployment in Chicago, asking questions about it, seeing it visually and experiencing it viscerally. It makes for a very different environment. I'll just add, lastly, that I think our successes in other agencies is taking note. I think we have many more net promoters today than we had last year in certainly two years ago. And I think those net promoters are making a difference because now people can look at their colleagues and see the success that they've had implementing acoustic gunshot detection with good operational processes in a strategy.

Thanks for all that color, congrats and best wishes.

Thank you.

Thank you.

The next question comes from Brian Ruttenbur with Imperial Capital. Please go ahead.

Yes, thank you very much. First question is number of cities added. I didn't see that. I think in the first quarter you talked about six new cities added. I know that you're not necessarily giving a lot of quarterly information. Can you talk about the cities you have right now versus where you were last quarter?

This is Alan and we mentioned that we added two new cities. We added one new security customer as well and we also expanded in three cities as well.

Great. I just didn't catch that. Thank you so much. And then…

I don't want to leave out ShotSpotter Connect actually. I have to say we went live with three ShotSpotter Connect because this is much more than acoustic gunshot detection. It really is a full suite of solutions, which is today acoustic gunshot detection and patrol management with ShotSpotter Connect very important and sometime in the very near future ShotSpotter Investigate.

Okay. Where those – the connect ads the three that you had in the period where they from existing locations you're already in.

Yes. So they are upsells. They're upsells to existing customer relationships we have with acoustic gunshot detection.

Okay.

Yes.

Right, I didn't know if they were new relationships, so they're selling into existing relationships, which makes sense. Let me move on to a macro question on the federal stimulus. You talked about rescue act funds and the return of earmarks. Can you give us some dollar amounts around either the rescue act funds that you can address or the return of earmarks that you're addressing?

Yes, so this is Ralph and Alan jump in here, but we've identified $4 million of earmarks that are – I'm sorry, I misstated that. I think it was $3 million of earmarks that are – we've identified on the house side. The Senate is still working through their process – through their appropriations process. We know there is a number of asks out there on the Senate side. So we're pretty encouraged to kind of go from zero to $3 million on The House. There will be some corresponding figure on the Senate. And hopefully, it will go full appropriations bill pass, and we'll see that funding go directly to those agencies. It's hard to handicap really how that $350 billion or $450 billion of rescue act funds are going to go, but the good news is it's going directly to cities. There is not an additional step or process a city has to go through to get their hands on those funds. They're basically showing up in the checking accounts, if you will, of those cities. We identified specifically this – we only know this because Biden -- President Biden spoke about it in a memo that $4 million is directly going from the American Rescue Plan A to Syracuse for them to renew and expand their solutions. So our expectation is we're going to see similar situations play out across the U.S.

Okay very good. And then the competence is extremely high on the 100 miles. And if I take a – if we take kind of fourth quarter run rate, we should be seeing a similar kind of growth rate in 2022. I guess I'm asking for a little bit of guidance on. Will growth accelerate from these levels from 2021 to 2022 with everything kind of be in the third and fourth quarter weighted?

Yes, so this is Alan, just – I mean, we don't give our guidance for 2022 until November timeframe, but we did say in Ralph's prepared marks that we are seeing expansions and we do expect to see an excellent 2022.

Great, thank you. That's all my questions. I appreciate it.

[Operator Instructions] The next question comes from David Robinson with William Blair. Please go ahead.

Hi, thanks for taking my question. I guess on the attrition, I'm expecting it to be about 1% of GAAP revenue for the year. What was driving the improvement in attrition that you've seen throughout the year? And then have any changes in sales commerce – have there been any changes in sales conversations I guess with the kind of emerging uncertainty with the different COVID variants out there and potentials about economies closing back down?

Do you want to take that Alan?

Yes, this is Alan. Yes, sure. I mean I guess the bottom line is we see several things that are occurring. Number one, the funding environment is better than we have seen in a long time. Number two, the pipeline is increasing for us. Number three, though, the ShotSpotter customs that we have right now are seeing that what we do provide is absolutely critical for what they're doing in their gun violence solutions. So that is why the attrition is low and staying as low as it can be. And if you think about that 1% obviously means – about 99% is going to continue from a GAAP revenue perspective. That does not happen to our customers, who are providing solutions, where their customers are challenged about how valuable it is.

Got it. Thanks for taking my question.

The next question comes from Mike Latimore with Northland Capital Markets. Please go ahead.

Great, thank you. Ralph, you mentioned a couple of times the sales cycles shrunk. I guess, can you quantify that a little bit?

Yes, I mean, it's hard to quantify. I know it more anecdotally, I'm kind of watching some of the more recent deals that we booked, how quickly they'd happen and kind of tracking the nature of the conversation that we are having with folks that just feel fundamentally different. We've had a couple of very, very fast transactions that have closed. I mean I think a lot of the credit goes to again, people that have been using our solution and generating success with it. And I think once agencies experience going from being 90% to 95% deaf, dumb and blind to incidents of ongoing persistent gun violence, they kind of get these real-time alerts kind of coming within typically 30 to 45 seconds with a very accurate location. It really can't change the game in terms of response, a follow-on investigation, but importantly showing the community that police are there to serve and protect. And there is nothing more critical than showing when someone is engaged in aggregated assault best case, in attempted murder worse case. That's what happens when people are firing these guns in these at risk underserved neighborhood. So, I mean, credit really goes to our agency partners and the success that they're putting up and how they're talking about it and helping it be much more of a safe solution for other agencies to consider.

Got it. And then with regard to Connect, can you give any more color either quantitative or just generally about Connect as a percent of the pipeline that you have now?

Yes, so we have a lot of work to do with Connect. I'm pretty pleased with the progress that we've made to date, but we need to do more. We have some, I would say, kind of early adopter agencies that have adopted the ShotSpotter Connect solution. We're learning along with them the value that that can produce. Certainly a lot of agencies are having challenges around kind of resource deployments. Our ShotSpotter connect or patrol management solution is to actually help them address that resource shortage. And so, we think there is a huge opportunity for us to further penetrate our existing install base as well as kind of venture outside of our install base and work with customers that don't necessarily have a gun violence problem. So they're not a ShotSpotter Respond customer, but they do have patrol resources out there that they want to optimize to be more preventative and community engaged versus more response after the facts engage. And again, that's what that ShotSpotter Connect solution does. So we're pretty excited about it.

Okay, thank you.

This concludes our question-and-answer session. If your question was not taken, you may contact ShotSpotter's Investor Relations team by emailing ssti@gatewayir.com. I'd now like to turn the call back over to Mr. Clark for his closing remarks.

Yes, awesome. Thank you so much and thank you all for joining our call today. We certainly appreciate all the support that we're getting from our stakeholders, including investors. And we also want to offer our thoughts and prayers. We want to put them out to Officer Ella French along with other victims of gun violence whose lives have been tragically taken too soon due to senseless gun violence. We want to keep all those folks close to our hearts and in our prayer. So thank you all very much and looking forward to seeing you guys three months from now at our next earnings call.

Thank you for joining us today for today’s call. You may now disconnect.