Who Offers The Better Threat-Detection System: ShotSpotter Or Patriot One Technologies?
Aug. 14, 2018 8:43 AM ET|93 comments | About: ShotSpotter, Inc. (SSTI), PTOTF
Deltabot Capital
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Deltabot Capital
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Summary
ShotSpotter and Patriot One provide threat-detection solutions aimed at reducing overall violent crime.
ShotSpotter utilizes a reactionary detection method while Patriot One's preventative system detects threats prior to a violent incident occuring.
Patriot One's PATSCAN detection system can detect a wider variety of weapon than ShotSpotter and can be installed for a fraction of the price.
With violent crime rates rising consistently over the past few years, public and municipal demand for systems that can detect threats and alert the proper channels has grown rapidly. This has created viable market opportunities for two of the leading threat-detection companies on the markets today, ShotSpotter (SSTI) and Patriot One Technologies (OTCQX:PTOTF). While both companies offer methods to improve response times and deter individuals from committing violent acts, Patriot One can detect a wider variety of weapons and threats at a lower cost than ShotSpotter, making it the ideal choice for the larger non-municipal markets, and the best investment for investors looking to get long-term exposure to the threat-detection industry.
ShotSpotter Company Overview
Source: ShotSpotter.com
ShotSpotter is a Bay Area threat-detection company that has grown from a small startup founded in 1996 to a $500MM public company whose share price has risen 240% since its IPO in June 2017. ShotSpotter's eponymous flagship product is a gunshot detection system that constantly scans for and reports gunfire to the proper authority channels. Law enforcement agencies who have installed ShotSpotter in their cities say that the technology has drastically reduced gunshot response times. Response times that could take up to 5 minutes have been reduced to times as low as 30 seconds. This efficiency is a result of phasing out traditional 911 calls by having the ShotSpotter system automatically record the location of the gunshots and relay that information to the proper law enforcement channels. The company's research has found that 80% of gunshots are never reported to 911, which heavily contributed to the high unsolved murder rate that the Washington Post reported to be over 50% in the past decade. Currently, ShotSpotter has over 12,000 sensors installed in 90 municipalities which collectively cover 550 square miles of public space. The ShotSpotter network recorded and reported over 99,000 instances of shooting activity in 2017 alone. To further improve their technology, ShotSpotter records and analyzes every gunshot their sensors detect in their database to improve the detection accuracy by giving it a data set for gunshot comparison to identify which specific firearm was discharged.
Source: ShotSpotter Investor Presentation July 2018
ShotSpotter also offers a specialized service for large indoor spaces where the installation team will produce a floor map that will be updated with an optimal path to the location of the shots when the system notifies law enforcement of an event. The indoor applications are currently cumbersome due to the additional labor efforts the facility mapping requires but ShotSpotter is actively working to improve both the accuracy and cost of indoor installations.
Patriot One Technologies Company Overview
Source: Owler.com
Patriot One is an Ontario-based company that grew from a project team at McMaster University working to develop a preventative threat-detection system that could identify active shooter and terrorist threats before an attack occurred. The project group formed Patriot One after making significant progress on the use of microwave radar to detect unique weapon signatures and alert authorities of the potential threat prior to a violent event occurring. This led to the creation of PATSCAN technology, a specialized application of radar the company refers to as Cognitive Microwave Radar (CMR-1).
Source: Patriot1Tech.com
The company IPO'd on Canadian markets under the name Patriot One Technologies in October 2017 and currently sits 25% higher than its IPO price at C$1.84 and a market cap of just under C$200MM. Patriot One has been hard at work preparing their PATSCAN threat-detection unit for a full public launch expected to occur within the next several quarters. While the product has not yet been released on a commercial level, Patriot One has been partnering with a multitude of security firms, resorts, schools, and government agencies to install early versions of their product which obtain valuable field data that is used to further improve and optimize the detection algorithms of their technology.
Market Outlook
See our previous article on threat-detection for a deeper look into the rapid growth of active shooter incidents in America.
While both companies operate in the threat-detection industry, the range of applications is far greater for Patriot One than ShotSpotter. The majority of ShotSpotters revenues are generated from contracts with local government and law enforcement agencies. Patriot One PATSCAN units can be utilized by public and private institutions alike an assortment of environments without the need for specific modification. Between schools, offices, public spaces, event venues and government buildings, Patriot One can be effectively installed in a wider variety of locations then ShotSpotters network of gunshot detection sensors. Due to inability to easily install ShotSpotter in small private locations, we believe Patriot One's detection units will be available for a wider variety of consumers and will generate demand for PATSCAN technology outside of government and law enforcement agencies. ShotSpotter does control a highly-specialized market with law enforcement but we believe the limitations of operating in a smaller market where customers have severely constrained budgets gives Patriot One the larger potential market. This thesis is also strongly supported by the additional demand the ability to detect knives and bombs will generate for Patriot One as well. ShotSpotter can only detect firearm threats after the weapon has been discharged. Patriot One can detect firearms, knives, and explosive threats prior to an incident occurring. It can be reasonably inferred that when private customers are deciding between detecting only firearm threats vs. firearm, knife, and explosive threats, they will likely choose the system that encompasses a wider variety of possible threats.
Financials
Patriot One Technologies Financials
The information provided below was pulled from the available MD&A discussions that Patriot One Technologies provides investors on SEDAR (the Canadian equivalent of EDGAR). Therefore, the following model for Patriot One Technologies is based in Canadian Dollars. As can be seen below we ran a burn rate analysis for Patriot One Technologies due to a lack of revenue at this stage in the company's development. As we have discussed in our previous article, the company is still pre-revenue but plans to begin filling back-orders for their system in the coming quarters. The burn rate analysis shows that among the three scenarios we have a range of 10-17 quarters of continued runway without revenue before a lack of funding becomes an issue for Patriot One Technologies. This is a substantial amount of time for the company to implement full production of the PATSCAN technology, providing our long investment thesis substantial weight.
Patriot One Technologies Analyst Ratings
Moreover, the single investment company that covers Patriot One Technologies recommends a buy with a price target of $2.50 CAD. Canaccord Genuity explained that "This afternoon, Patriot One CEO Martin Cronin presented at in Boston. We continue to rate Patriot One shares SPECULATIVE BUY and believe that as the company successfully commercializes its unique cognitive microwave radar technology and broadens its threat detection platform, there is a significant potential upside for investors. There remain risks to the development timeline which informs our SPECULATIVE rating. However, the company continues to progress through developmental milestones and expects to begin recognizing revenue by the end of this calendar year. Our DCF value and target price for Patriot One remains unchanged at C$2.50."
ShotSpotter Financials
ShotSpotter recently reported their Q2 2018 earnings with revenues coming in at $89.3MM and EPS of ($0.03) beating overall analysts' expectations. Over the past fiscal year, ShotSpotter has grown their revenue by 53% and increased their Gross Margin from 41% to 56%. ShotSpotter has also reduced operating expenses from 83% of sales in Q4 2017 to 59% as of Q2 2018. Steady revenue growth with increasing margins and declining operating expenses are driving ShotSpotter closer to profitability with Q2 2018 net loss coming in at a fiscal year low of ($369K). Sales & Marketing have overtaken General & Administrative as the largest expense category, indicating positive progress to investors as gears shift heavily to focus on increasing brand exposure and approaching municipalities about subscribing to the ShotSpotter service.
ShotSpotter Analyst Ratings
Below the analyst recommendations for ShotSpotter can be seen. Immediately, one notices that the analyst recommendations are all for outperforms and buys which is usually a positive indicator. The issue we find with the recommendations is that three of the four analyst price targets have already been passed by ShotSpotter which is currently trading at 43.13 at the time of the article. We believe this is a sign of over-extension of the share price of ShotSpotter and should induce skepticism about their continued ability to further increase their share price. Especially considering they are yet to post a positive earnings period.
Costs
One of the largest concerns with installing ShotSpotter sensors is the high annual subscription cost to keep the sensors connected to the ShotSpotter network. Municipalities are being charged between $35,000-$65,000 per square mile of coverage they want. ShotSpotter also has a 3 square mile minimum that must be met to have the system installed. With how tight city and law enforcement budgets already are, many municipalities are unable to afford the yearly costs and have been inadvertently isolated from ShotSpotters target market. While there are numerous cities with large enough budgets and gun-crime rates to justify the annual costs, several ShotSpotter pilot cities, such as Charlotte, NC, and Fall River, CA, have been dropping out of the service, opting to use the saved money on additional officers and surveillance devices. Most municipalities are spending over $200,000 on ShotSpotter as cities typically have multiple areas with high gun-violence that exist more than 1 square mile from each other.
Patriot One's PATSCAN units sell to retailers for $10,000 apiece with an additional $500 per year to keep the unit connected to their network. Patriot One's units are installed in specific locations with high foot-traffic This enables municipalities to place individual units in high-risk environments rather than needing to unnecessarily cover additional lower-risk areas which is the main issue with ShotSpotter's 3 square mile coverage minimum. Both city officials and private institutions will likely prefer PATSCAN because of the drastically decreased cost-barrier compared to ShotSpotter. While large cities may have the capital allocated in the budget to subscribe to ShotSpotter's coverage, individual institutions such as retailers and schools do not. While ShotSpotter does offer a coverage package for buildings that will generate a floor map and the optimal path to the location of the shots, it comes at the same cost at the general system intended to cover miles of city environments. This makes Patriot One the more appealing choice for individual institutions for a variety of reasons. They are able to control their costs as they can purchase one or two individual units for $10,000-$20,000 to install at choke points rather than spending up to $60,000 to achieve the same level of coverage. Installing PATSCAN technology also drastically decreases future related expenses as one PATSCAN unit would only require $500 per year or 5% of the initial purchase price to maintain while ShotSpotter requires 100% of the initial price in subscription fees each year.
Technology
Source: ShotSpotter.com
ShotSpotter detects gunfire through a network of audio sensors that are triggered by the unique frequency of gunshots. This prevents the system from triggering on traffic or other loud noises but has led to a series of false reports around New Year's Eve and the Fourth of July from fireworks. When ShotSpotter sensors pick up gunfire, they quickly communicate with each other to triangulate a location and then relay that location and information about the type of gun used to law enforcement. ShotSpotter also has an application smartphone users can download to be alerted when a gun is fired in the area. The technology has a high success rate and catches well over 50% of gunshots, but cities have had issues with the system not catching all shots fired within the coverage area. This has led to cities removing themselves from the program as they cannot justify the cost of the technology if they cannot be guaranteed 100% coverage.
Source: Patriot1Tech.com
Patriot One takes a different approach to detecting violent threats. They utilize a proprietary detection system that identifies unique weapon signatures by sending our CMR-1 signals that are then analyzed by a series of search algorithms that try and fit the signal to a weapon profile. This allows threats to be identified before they use their weapon and before they have a chance to leave the area. PATSCAN's CMR-1 technology also ensures the privacy of general citizens it may scan. It does not capture any images or video, does not record sound, and does not even try and identify each body it sees. The system is only searching for specific profiles known to be weapons, and will only begin finding information on the individual after it has confirmed a weapon to be on their person. Personal privacy is also an issue ShotSpotter is currently dealing with because while their sensors do not try and monitor conversations, they must be listening constantly to be able to take in gunfire sounds. Patriot One's alternative can accomplish even more by providing a proactive alert rather than a reactive one without needing to record any type of information that could compromise citizen's privacy rights if it fell into the wrong hands.
Product Offerings
Both companies offer a product that can and will continue to save lives as they are continually implemented around the country and world. Although this is true, we recognize that the capacity for saving lives and securing places is much better addressed by Patriot One Technologies as compared to ShotSpotter. Both offer the ability to be used indoors and outdoors, but their installation process and utility vary greatly. As can be seen above ShotSpotter focuses on the reactive measures after a firearm has been discharged in the radius of their acoustic gunshot identification system. These systems operate in very large areas, comprising of a square mile of coverage per installation unit. In comparison, Patriot One Technologies provides a range of two meters for their system which provides transparency to security professionals, guards and law enforcement of concealed weapons moving through access points and other high traffic areas. This technology while limited by survey area compared to ShotSpotter can be used in choke/access points of buildings to identify any weapons entering or exiting an area. This allows for early detection of weapons in any secured area and the deterrence of an event through preemptive response by security or law enforcement. The differences between these two systems objectives highlight the main difference between the two companies. Patriot One provides users with a preemptive identification of possible threats while ShotSpotter is entirely reactive. For use in protecting the public, we believe both are necessary, but the offerings of Patriot One seem much more attractive and necessary to begin to curb the active shooter and gun violence issues that plague the United States.
Moreover, Patriot One Technologies offers in our opinion a more comprehensive system, which includes the use of AI for optimization of the units as well as plans to develop Facial Recognition software to compliment their threat identification software. Patriot One's use of AI strongly enhances their offerings to consumers. As each individual unit experiences a new environment, it will optimize itself to best scan their environment which allows for its use in a multitude of unconventional spaces. Furthermore, the AI system continuously updates a database with new and pertinent information about weapons that it has identified. This shared database accessible by each unit allows for constant improvement in the systems threat detection abilities. In ShotSpotters case they utilize a human managed database of sounds which are used to identify different firearms audio resonations. This presents a disadvantage for their system as the database needs continued manual updating to function properly.
Finally, Patriot One Technologies a more internationally friendly product. In many other countries around the world, guns are either illegal or are under such intense regulation that they are much less of a threat compared to other weapons such as knives, In this capacity, the applications of the Patriot One system are much more comprehensive for integration into the international security market than ShotSpotters system which revolves around firearm usage.
Conclusion
Both of these firms have thrown their full weight into attempting to reduce gun violence and active shooter events. Comparatively, they have unique approaches for how their systems aid communities in either preventing or responding to these tragic events. The detection triggers, costs, and market applications of ShotSpotter and Patriot One were the largest differentiators in our analysis of the two company's product offerings. Patriot One is preventative while ShotSpotter is reactionary. Given the overall goal of threat-detection as a means to lower violent crime rates, we believe that a preventive system will be the more attractive monitoring system among consumers. The attractiveness of Patriot One is further exemplified by the range of applications that the prevention system provides over a reactionary one. Whether the customer is a small local business, a large concert venue, or university, the utilization of the Patriot One system can help to keep their consumer and their clients safe and alert them of possible threats before an act of violence occur. This additional level of security also comes at a much lower cost than ShotSpotter with even lower annual costs to maintain. Because of the preventative detection methods, low costs, and a wide array of market applications, we believe that investors looking to gain exposure to the threat-detection industry will realize greater long-term returns with Patriot One Technologies than they will with an investment in ShotSpotter.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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