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 spending associated with addressing a deep smear campaign intended to falsely question 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 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 in helping them address violent crime. We're also incredibly grateful to renew our partnership with Chief Paul Neudigate, the Chief of Police in Virginia Beach. Chief Neudigate was previously the Assistant Chief of Police in Cincinnati. He was both an artful user and ardent promoter of ShotSpotter in the Ohio region where we now have seven deployments, including Cleveland, Ohio. Strong partnerships do matter. I'm equally thrilled to report that we experienced zero customer attrition for ShotSpotter Respond. A net of price increases and discounts we anticipate coming in at approximately 1% GAAP revenue attrition, which is lower than our original estimate of 3% to 4% for the year. This is a powerful testament to the stickiness of our solutions and how customers come to depend on the value of our services once we are formally engaged. Our deal cadence is picking up, and our sales cycles are contracting due to the perfect combination of three powerful and what we believe to be sustained themes. First, violent crime is measurably increasing in a large number of cities ranging from small to large and everything in between. Many of you have probably seen both local and national press coverage on the gun violence issue. As a company, we have participated in several academic and policy discussions on the subject of increased violent crime. ShotSpotter is at the forefront of this critical issue as a leading solutions provider directly engaged with police departments. We see the real-world impact of violent crime playing out daily across 800 miles of acoustic gunshot detection coverage in over 100 cities. We have published 40% more gunfire alerts in the first half of this year compared to the 99,000 gunshots for the same period last year. Second, we believe we've reached a viral tipping point given our early and consistent success in working with police departments. We help police implement precision policing strategies that forward-leaning police departments are seeking and residents are demanding. Communities want police to better respond to prevent and reduce violent crime, but without over-policing. The market is taking note of our work in places like NYPD and Pittsburgh, as well as newer deployments that have registered early successes like Harris County, Houston, Detroit, and Memphis. Third, we're experiencing a robust funding environment driven by direct federal funding to cities through the $350 billion American Rescue Act, the return of congressional earmarks, and a public endorsement of gunshot detection from the Biden administration. We've already tracked five earmarks calling for acoustic gunshot detection projects totaling $3 billion that have been secured in the House CJS appropriations bill, including an earmark request from the Democratic chair of the CJS Appropriations Committee, Representative Cartwright of Pennsylvania. We're equally surprised and delighted to hear President Biden publicly endorse the idea that federal dollars to cities could and should be used to implement gunshot detection. After the president's comments, the White House doubled down on that endorsement and released a public memo, which highlighted Syracuse's plan to spend $4 million in American Rescue Plan Aid, with a portion of that dedicated to reactivating and expanding their ShotSpotter Respond system. This was followed by a visit to Chicago PD by Attorney General Garland and Senator Durbin to view one of the precincts where ShotSpotter was prominently featured as part of their strategic decision support center platform. This type of endorsement from the Oval Office establishes gunshot detection as a viable category in a similar fashion to how the Obama administration legitimized body-worn cameras. It appears that our federal lobbying initiatives are finally bearing fruit, making the timing of our new Washington D.C. office very fortuitous. We were excited to host a formal opening in July of our D.C. office that included an official ribbon cutting ceremony and remarks by Washington D.C. Mayor Muriel Bowser and our Chief of Metro Police, Robert Contee. The opening was attended by many policymakers, influencers, and local and national press. Our D.C. satellite office added more capacity and resiliency to our Incident Review Center operations and allows us to have closer contact for briefings and training sessions with our East Coast and Caribbean Law Enforcement Partners and prospects. In addition, we now share close proximity with many key organizations that share our objective to aggressively combat gun violence. These institutions include the Police Executive Research Forum (PERF), International Association of Chiefs of Police (IACP), National Organization of Black Law Enforcement Executives (NOBLE), ATF, along with the Department of Homeland Security, the National Police Foundation, and of course, appropriators and their staffers in Congress. Our leads colleagues continue to focus on the maintenance and support of the on-prem version of our case management solution, along with professional services projects within NYPD. They have been busy delivering on their professional services commitments in Q1 and have been gearing up in planning for another set of professional services projects for the second half of 2021 and early 2022. These projects are based on a number of anticipated work orders making their way through NYPD's procurement process, which we expect to be formally approved and funded later this month. We're optimistic about achieving at least $10 million in GAAP revenue from leads for the year based on the ongoing revenue from maintenance and support combined with the pending new work orders for professional services. We have been encouraged by the strong, positive response we've had with ShotSpotter Investigate. We recently announced our partnership with Anti-Trafficking International (ATI) to help them speed up and improve the cross-jurisdictional investigative process for human trafficking. This is the first of several deployments we expect to operationalize later this year. We have a dedicated quota-carrying sales resource for Investigate and are likely to add at least one more later this year. In addition, we're investing in further enhancing Investigate's capabilities to expand into broader investigative use cases that grow our Total Addressable Market (TAM) opportunity. As a result of our performance this quarter and continued forward momentum, we are reaffirming our full year 2021 revenue guidance of $60 million to $61 million, representing a 32% revenue growth from 2020 to 2021 at the midpoint. While we're not formally establishing revenue guidance for 2022, we believe next year will be very strong, giving the improving demand environment for our core ShotSpotter Respond solution, including its strong retention, along with the increased upsell of our ShotSpotter Connect offering and our growing confidence in the prospects for ShotSpotter Investigate. I'll now turn it over to Alan, and I look forward to taking your questions later.

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 attrition 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 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 expectations at $14.6 million, a 30% increase over the $11.3 million in the second quarter of 2020. Revenue increased as our deployed miles are up year-over-year, along with revenue contributions from 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 GAAP 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 related to the increased costs we're experiencing in our marketing and legal efforts aimed at addressing negative publicity generated by certain entities and organizations opposing the efficacy of the ShotSpotter solutions. Now turning to our expenses. Our operating expenses for the second quarter were $8.5 million or 58% of revenue versus $6 million or 53% of revenue in the second quarter of 2020. As expected, in addition to the operating expense increases related to marketing and legal, we also had costs associated with personnel expansion and incremental expenses associated with leads. Breaking down our expenses, sales and marketing expense for the second quarter was $3.9 million or 27% of total revenue versus $2.3 million or 21% of total revenue for the prior year period. Our sales and marketing teams continue to build our sales pipeline and expand our marketing efforts. We continue to focus on maintaining high levels of customer satisfaction, which helps keep our attrition rates low. During the quarter, we also added sales capacity for our Investigate product to position the segment for expected growth in 2022. Our R&D expenses for the second quarter were $1.7 million or 12% of total revenue compared to $1.4 million or 12% of total revenue for the prior year period. We've continued to invest in increasing the functionality of all of our products. G&A expenses for the quarter were $2.8 million or 19% of total revenue compared to $2.3 million or 21% of total revenue for the prior year period. The increase in G&A expenses in absolute dollars was primarily related to the increase in legal and public relations expenses mentioned above. Our net loss for the second quarter was a loss of $250,000 or a loss of $0.02 per share on 11.6 million average shares outstanding on both a basic and diluted basis. This compares to adjusted net income of $866,000 or $0.08 per share based on 11.4 million basic and $0.07 per share based on 11.7 million diluted weighted average shares outstanding for the prior year period. There were no acquisition-related expenses during this quarter. Deferred revenue at the end of the quarter was $19.8 million versus $25 million at the end of Q1 2021. We ended the quarter with $15.6 million in cash and cash equivalents versus $10.9 million at the end of the first quarter. During the quarter, we repurchased 12,585 shares for approximately $500,000. We have no short or long-term debt outstanding, and as previously discussed, we possess a $20 million line of credit to improve our financial flexibility. Turning now to our full 2021 outlook. Our revenue guidance remains at $60 million to $61 million. Please note that the midpoint of our guidance reflects 32% year-over-year growth. We also expect that we will be profitable for the full year of 2021. Now back to Ralph for some final thoughts, and then we'll be happy to take your questions.

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. 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 about that 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 two basic themes: there's the rescue act funds that's going directly to cities, which is quite encouraging. There's no additional steps that a city has to take in order to get access to that funding. And there's also the return of earmarks, which we're seeing some interesting early successes and certainly seen that progress happen on the House side. There are some things that are working their way through the Senate side that we're encouraged about. But in addition, I think we can't underestimate the validation that someone from the White House podium commenting specifically on the value that acoustic gunshot detection can bring to these communities suffering from ongoing persistent gun violence is extremely powerful. So I don't want to leave that out in answering the funding question and the macroeconomic 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. 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 add new people to our pipeline.

The next question comes from Richard Baldry with ROTH Capital. Please go ahead.

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. We definitely have made some public statements around pushing back on the two themes that were coming out there. One is what we consider to be a challenged analysis of ShotSpotter efficacy, both from real-time gunshot alerts and 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 ridiculous. The more damaging pushback we've received revolves around the idea that we're collaborating with law enforcement agencies to manufacture false evidence as part of court proceedings, which is completely ridiculous, and we pushed back on that fairly aggressively, stating that could not be further from the truth. What they're implying or explicitly stating is that we'd be involved in some criminal activity, which is just outrageous. I don't think I want to say anything else at this point. We're clearly evaluating all of our options, including legal options, to address this, and we're prepared to do whatever we have to do to protect our brand equity.

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

Sure. This is Alan. I'll start that, then Ralph please add. The biggest thing between Q1 and Q2 is tied to some of the professional services mentioned after the acquisition of Leads, which has been very lumpy. For example, our professional services revenue in Q1 was about $750,000 more than what we got in professional services for Q2. As Ralph mentioned, during Q2, we were working on potential purchase orders and work orders that, by the way, just came in today, are going to help ramp up the professional services again, going into the second half of the year. So we see the weather is lumpy, and that is something that does affect some of the revenue quarter-to-quarter. Historically, we would normally see some changes and revenue increases going into Q3, which is probably not going to be the case this time. We expect it to be higher, and then any increase in Q4 as well.

Great. Thanks. Congrats on the quarter.

Thank you.

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

Thanks. I want to follow up first on the cost impact of fighting this public battle on the efficacy of the service and products. One, what was the cost impact in Q2? 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. We have not identified exactly how much it was, but you can assume it's about $400,000 in costs, which are legal and public relations efforts against the opposition. We do expect that to continue. As Ralph mentioned, we will defend ourselves appropriately 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.

Got it. That's helpful. And then in terms of gross margin run rate with Leads, is it fair to say that this gross margin run rate is going to be in that 57% range?

Yes. It's Alan, again. The one thing that's important to understand about the professional services is that while we may have the revenue changing significantly quarter-to-quarter, we have generally about the same number of people there waiting for or getting ready to perform the next work order. So the cost quarter-to-quarter stays fairly stable. The answer to your question directly is that we do expect overall the gross margin to remain above 50% for the company overall and increase from that into the future.

That's helpful. And then just another item of context, 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 number so that we can add some context to the expectations of second half adds versus first half adds? Because I think – I heard in the script that you have like 13 cities or something that are either looking at new contracts or contract expansions for the second half?

Yes. Our project managers are fully booked working on current projects, and we expect to have some projects added over the next six months that will likely go live in early 2022. But I think we should keep it at that. We're highly confident around getting past 100 miles going live for 2021, and we have a lot of visibility into it.

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

Yes. This is Ralph again. I would say that 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 a significant uplift to GAAP revenue. So ahead on miles in terms of go-live, slightly behind on timing, more back-end loaded than front-end loaded.

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

Sure. I would definitely say that our sales motion is very different today than it has been. We're certainly getting more inbound calls as opposed to us reaching out. I think we're spending less time educating folks on the costs of ignoring or not responding to criminal gunfire. Prospects already understand that, and they're showing up with a prepared mind and a disposition to take action, not necessarily acoustic gunshot detection action, but definitely feeling compelled to act to do something because the uptick in gun violence is real. This really has changed the sales motion and why we're thinking that sales cycles are collapsing. You combine that with the robust funding environment and a reinforcement of that endorsement from the Biden administration, and then even locally when your attorney general shows up with a senator seeing an acoustic gunshot detection deployment in Chicago, asking questions about it, experiencing it, it creates a very different environment. I'll just add that our successes with other agencies are taking note. I think we have many more net promoters today than we had last year and certainly two years ago. Those net promoters are making a difference because people can look at their colleagues and see the success they've had implementing acoustic gunshot detection with effective operational processes and strategy.

Thanks for all that context, congrats and best wishes.

Thank you.

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 [email protected]. 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. We also want to offer our thoughts and prayers 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 prayers. So thank you all very much and we look forward to seeing you three months from now at our next earnings call.

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