SOUNDTHINKING, INC. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q and the financial statements and accompanying notes and other financial information in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on March 13, 2020. 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 other SEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Overview We provide precision-policing and security solutions for law enforcement and security personnel to help prevent and reduce gun violence and make cities, campuses and facilities safer. Our flagship public safety solution, ShotSpotter Flex, is the leading outdoor gunshot detection, location and alerting system. Our patrol management software, ShotSpotter Connect (formerly ShotSpotter Missions), creates crime forecasts designed to enable more precise and effective use of patrol resources to deter crime. 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 security solutions, ShotSpotter SecureCampus and ShotSpotter SiteSecure, are designed to help law enforcement and security personnel serving universities, corporate campuses and key infrastructure or transportation centers mitigate risk and enhance security by notifying authorities of a potential outdoor gunfire incident, saving critical minutes for first responders to arrive. Our gunshot detection solutions are trusted by law enforcement agencies in over 110 cities as of September 30, 2020. Our gunshot detection solutions consist of highly-specialized, cloud-based software integrated with proprietary, internet-enabled sensors designed to detect outdoor gunfire. The speed and accuracy of our gunfire alerts enable law enforcement and security personnel to reduce their response times to shooting events, which can increase the chances of apprehending the shooter, providing timely aid to victims, and identifying witnesses before they scatter, as well as aid in evidentiary collection and serve as an overall deterrent. When a potential gunfire incident is detected by our sensors, our software precisely locates where the incident occurred and applies machine classification combined with human review by acoustic experts in our Incident Review Center (“IRC”), who are on duty 24 hours a day, seven days a week, every day of the year, to analyze and validate the incident. Our acoustic experts can supplement alerts with additional tactical information, such as the potential presence of multiple shooters or the use of high-capacity weapons. An alert containing a location on a map and additional tactical 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. Gunshot incident alerts are typically sent within 45 seconds of the receipt of the gunfire incident. We generate annual subscription revenues from the deployment of ShotSpotter Flex on a per-square-mile basis. Our security solutions, ShotSpotter SecureCampus and ShotSpotter SiteSecure, are typically sold on a subscription basis, each with a customized deployment plan. Our ShotSpotter Connect solution is also sold on a subscription basis. As of September 30, 2020, we had ShotSpotter Flex, ShotSpotter SecureCampus and ShotSpotter SiteSecure coverage areas under contract for approximately 770 square miles, of which 758 square miles had gone live. Coverage areas under contract included 113 cities and 13 campuses/sites worldwide across the United States, South Africa and the Bahamas, including three of the ten largest cities in the United States. 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 since mid-March 2020 has been adversely impacted. While this disruption is currently expected to be temporary, there is considerable uncertainty around the magnitude or duration. 18 While we intend to continue to devote resources to increase sales of our ShotSpotter SecureCampus, ShotSpotter SiteSecure, ShotSpotter Labs and ShotSpotter Connect solutions, we expect that revenu es from our ShotSpotter Flex 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 m ay 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 Flex solutions. Additiona lly, 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, usi ng standardized coverage parameters, at a discounted annual subscription rate. 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. 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. We generated revenues of $11.4 million and $10.0 million for the three months ended September 30, 2020 and 2019, respectively, a year-over-year increase of 14%. Revenues from ShotSpotter Flex during the three months ended September 30, 2020 and 2019, represented approximately 97% and 96% of total revenues, respectively. Our two current largest customers, the City of Chicago and the City of New York, accounted for 18% and 13%, respectively, of our total revenues for the three months ended September 30, 2020, and 20% and 14%, respectively, of our total revenues for the three months ended September 30, 2019. We generated revenues of $33.1 million and $29.8 million for the nine months ended September 30, 2020 and 2019, respectively, a year-over-year increase of 11%. Revenues from ShotSpotter Flex during the nine months ended September 30, 2020 and 2019, represented approximately 96% of total revenues for both periods. Our two current largest customers, the City of Chicago and the City of New York, accounted for 18% and 13%, respectively, of our total revenues for the nine months ended September 30, 2020, and 20% and 14%, respectively, of our total revenues for the nine months ended September 30, 2019. For the three months ended September 30, 2020 and 2019, revenues generated within the United States accounted for $11.2 million and $9.8 million, respectively, or 98% of total revenues for the both periods, and $0.2 million for both three months ended September 30, 2020 and 2019, and was derived from our customers located outside the United States. For the nine months ended September 30, 2020 and 2019, revenues generated within the United States accounted for $32.6 million and $28.9 million, respectively, or 98% and 97%, respectively, of total revenues for the both periods, and $0.5 million and $0.9 million for the nine months ended September 30, 2020 and 2019, respectively, and was derived from our customers located outside the United States. We had net income of $0.6 million and $0.4 million for the three months ended September 30, 2020 and 2019, respectively and a net income of $1.4 million and $0.5 million for the nine months ended September 30, 2020 and 2019, respectively. Our accumulated deficit was $94.1 million and $95.6 million at September 30, 2020 and December 31, 2019, respectively. 19 We hav e 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 pres ence 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, particularly for our ShotSpott er Flex solution. 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 for ShotSpotter Labs. We believe that developing and acquiring products for law enforcement in adjacent categories is a path for additional growth given our large and growing installed base of police departments who trust ShotSpotter’s products, support and way of doing business. The ability to cross-sell new products provides an opportunity to grow revenues per customer and lifetime value. Challenges we face in this area include ensuring our new products are reliable, integrated well with other ShotSpotter solutions and priced and serviced appropriately. In some cases, we will need to bring in new skills sets to properly develop, market, sell or service these new products depending on the categories they represent. In October 2018, we acquired the HunchLab technology and related assets that underline our ShotSpotter 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. HunchLab technology provides a high-value and complementary solution we can immediately offer to our existing law enforcement customers. We believe our investment will democratize the sharing of important intelligence with patrol officers who currently have limited direct access to crime analysts. With respect to international sales, we believe that we have the potential to expand our coverage within existing areas, and to pursue opportunities in Latin 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 of the United States. Operating successfully in international markets will require significant resources and management attention and will subject us to additional regulatory, economic and political risks. 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. On November 4, 2020, the Company entered into a definitive agreement to acquire 100% of the membership interests in LEEDS, LLC (“LEEDS”), a New Jersey-based technology company. The purchase consideration includes $15.0 million in cash, $2.0 million in issued stock and a contingent earnout payable in cash for up to $5.0 million based on LEEDS’ revenues generated over a two-year period following the acquisition date. If the acquisition is completed, the Company will account for this acquisition as a business combination. The Company expects to use existing cash on hand to fund the acquisition. Net New “Go-Live” Square Miles Net new “go-live” square miles represent the square miles covered by deployments of our gunshot detection solutions that were formally approved by customers during the quarter, both from initial and expanded customer deployments, net of square miles that ceased to be “live” during the quarter due to customer cancellations. New square miles include deployed square miles that may have been sold, or booked, in prior quarters. We focus on net new “go-live” square miles as a key business metric to measure our operational performance and inform strategic decisions. The net new “go-live” square miles during the nine months ended September 30, 2020 included the completion of our 20 deployment in Puerto Rico and Nelson Mandela Bay. It is also net of seven miles lost due to our loss of two customers and a coverage area reduction of three miles for one of our customers. This metric, presented below for the three and nine months ended September 30, 2020 and 2019, is calculated on a quarterly basis using internal data, and may be calculated in a manner different than similar metrics used by other companies. While the ultimate economic impact of the COVID-19 pandemic and social unrest is highly uncertain, we expect that our business will be adversely impacted for at least the balance of 2020. For a discussion of the risks to our ability to deploy new “go-live” square miles associated with the COVID-19 pandemic and social unrest, see “Impact of COVID-19 and Social Unrest on our Business” below, as well as in the risk factors described in Part II, Item 1A, Risk Factors, included in this Quarterly Report on Form 10-Q. Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Net new "go-live" square miles added (3) 11 28 48 Impact of COVID-19 and Social Unrest on our Business The COVID-19 pandemic has resulted in a substantial curtailment of business activities worldwide and is causing weakened economic conditions, both in the United States and many countries abroad. As part of intensifying efforts to contain the spread of COVID-19, many companies and state, local and foreign governments have imposed restrictions, including shelter-in-place orders and travel bans. While some of these companies and jurisdictions have started to relax such restrictions, in some cases, the restrictions were put back in place after having been lifted. These factors have negatively impacted our operations and results of operations for the first three quarters of 2020. 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, will be adversely impacted for at least the balance of 2020 and early 2021, including as a result of: • Delays in our ability to deploy new “go-live” miles attributable to company policies or customer policies designed to protect employee health and comply with government restrictions; • Greater funding challenges for our customer base, which may adversely affect customer contract renewals, expansion of existing customer deployments or new customer sales; • Possible disruption to our supply chain caused by distribution and other logistical issues, which may further delay our ability to deploy new go-live miles; and • Potential decrease in productivity of our employees or these of our customers or suppliers due to travel bans or restrictions, work-from-home or shelter-in-place policies and orders. We may be adversely affected by increasing social unrest, protests against racial inequality, protests against police brutality and movements such as “Defund the Police”. 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. 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; • governmental, business and individuals’ actions that have been and continue to be taken in response to these events; 21 • the impact of the pandemic and social unrest on economic activity and actions taken i n 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 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 Flex, 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 our ShotSpotter Flex solution, our pricing model is based on a per-square-mile basis. For ShotSpotter SecureCampus and ShotSpotter SiteSecure, 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. 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. ShotSpotter Labs projects may or may not be revenue-producing. When they are revenue-producing, they will generally be sold on a cost-plus basis. 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 rapidly generated in the first nine months of 2020, the duration of which is unknown. 22 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. We will have to upgrade 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 have begun plans to replace sensors in certain geographic areas starting in the second half of 2020 in order to optimize personnel utilization. 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 between $4.0 million and $6.0 million in total. We may re-use and re-deploy the old 3G sensors that have a remaining serviceable life where it makes sense to do so. 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. As we expect to build out these capabilities in 2020, even while our ability to deploy new go-live miles is significantly impacted as a result of the COVID-19 pandemic, depending on the timing of new bookings, cost of revenues is expected to increase as a percentage of revenues. 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. Sales and Marketing Sales and marketing expenses primarily consist of personnel-related costs attributable to our sales and marketing personnel, commissions earned by our sales personnel, marketing expenses for trade shows, conferences and conventions, consulting fees, travel and facility-related costs and allocated overhead. 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. 23 We are investing in engineering resources to support further development of ShotSpotter Connect . The focus of this effort will be in t he areas of data science modeling, user experience, core application functionality and backend infrastructure improvements, including integration of ShotSpotter gunshot data to enhance forecasting of gun violence. We are also investing research and development resources in conjunction with our ShotSpotter 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. 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 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. 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, than they will be realized. 24 Results of Operations Comparison of Three Months Ended September 30, 2020 and 2019 The following table sets forth our selected condensed consolidated statements of operations data for the three months ended September 30, 2020 and 2019 (in thousands): Three Months Ended September 30, As a % of As a % of Change 2020 Revenues 2019 Revenues $ % Revenues $ 11,350 100 % $ 9,984 100 % $ 1,366 14 % Costs Cost of revenues 4,745 42 % 4,019 40 % 726 18 % Impairment of property and equipment 161 1 % — — 161 — Total costs 4,906 43 % 4,019 40 % 887 22 % Gross profit 6,444 57 % 5,965 60 % 479 8 % Operating expenses: Sales and marketing 2,400 21 % 2,426 24 % (26 ) (1 )% Research and development 1,375 12 % 1,358 14 % 17 1 % General and administrative 2,040 18 % 1,803 18 % 237 13 % Total operating expenses 5,815 51 % 5,587 56 % 228 4 % Operating income 629 6 % 378 4 % 251 66 % Other income (expense), net (55 ) — 61 1 % (116 ) (190 %) Provision (benefit) for income taxes 8 — (7 ) — 15 (214 %) Net income $ 566 5 % $ 446 4 % $ 120 27 % Revenues The increase of $1.4 million was primarily attributable to new customers and expansions of existing customer coverage areas, partially offset by a normal rate of customer attrition as well as the effect of COVID-19 related delays in deploying contracted miles and contract renewals with certain customers . We went live with 62 net new square miles since September 30, 2019. Costs The increase of $0.9 million was due primarily to a $0.6 million increase in overall personnel-related costs and a reallocation of certain resources as we formalized our customer success organization as well as a $0.2 million increase in repairs and maintenance costs. There was also a $0.2 million write-off related to sensor assets due to the loss of a customer. These increases are partially offset by a $0.1 million decrease in costs related to ShotSpotter Labs projects, for which revenues and costs vary from quarter to quarter depending on the phase of the projects. Operating Expenses Sales and Marketing Expense Sales and marketing expense remained relatively unchanged, because while we have added more personnel and expanded our marketing activities, we have also reallocated certain resources as part of the formalization of our customer success organization beginning in the first quarter of 2020, thus impacting cost of revenues. Sales and marketing activity was also lower in the third quarter of 2020 because of the curtailment of business activities and travel restrictions due to the COVID-19 pandemic . 25 Research and Development Expense The expenses remained relatively unchanged due to the increased personnel-related costs offset by a reduction in outside consulting fees. General and Administrative Expense The increase of $0.2 million was due primarily to an increase in personnel-related costs and insurance costs. Other Income, Net The decrease of $0.1 million was due primarily to a decrease in interest income as interest rates have significantly decreased over the third quarter. 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 ended September 30, 2020 and 2019, due to having net operating loss carryforwards, our recorded income taxes consisted of foreign taxes only. 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, than they will be realized. Comparison of Nine Months Ended September 30, 2020 and 2019 The following table sets forth our selected condensed consolidated statements of operations data for the nine months ended September 30, 2020 and 2019 (in thousands): Nine Months Ended September 30, As a % of As a % of Change 2020 Revenues 2019 Revenues $ % Revenues $ 33,085 100 % $ 29,837 100 % $ 3,248 11 % Costs Cost of revenues 13,440 41 % 12,300 41 % 1,140 9 % Impairment of property and equipment 161 — — — 161 — Total costs 13,601 41 % 12,300 41 % 1,301 11 % Gross profit 19,484 59 % 17,537 59 % 1,947 11 % Operating expenses: Sales and marketing 7,237 22 % 7,494 25 % (257 ) (3 )% Research and development 4,104 12 % 4,026 13 % 78 2 % General and administrative 6,627 20 % 5,669 19 % 958 17 % Total operating expenses 17,968 54 % 17,189 58 % 779 5 % Operating income 1,516 5 % 348 — 1,168 336 % Other income (expense), net (72 ) — 156 — (228 ) (146 )% Provision (benefit) for income taxes (1 ) — 33 — (34 ) (103 %) Net income $ 1,445 4 % $ 471 $ — $ 974 207 % Revenues The increase of $3.2 million was primarily attributable to new customers and expansions of existing customer coverage areas, partially offset by a normal rate of customer attrition as well as COVID-19 related delays renewals of certain customers. We went live with 62 net new square miles since September 30, 2019. 26 Costs The increase of $1.3 million was due primarily to an increase of $1.1 million related to personnel-related costs as well as a reallocation of certain resources as we formalized our customer success organization. In addition, there was a $0.2 million increase in repairs and maintenance, a $0.2 million write-off related to sensor assets due to the loss of a customer, a $0.2 million increase in depreciation due to 62 net new square miles having gone live since September 30, 2019. These increases were partially offset by a $0.3 million decrease in ShotSpotter Labs projects and a $0.2 million decrease from the more efficient use of third-party labor.  Operating Expenses Sales and Marketing Expense Sales and marketing expense decreased by $0.3 million because while we have added more personnel and expanded our marketing activities, we have also reallocated certain resources as part of the formalization of our customer success organization beginning in the first quarter of 2020, thus impacting cost of revenues. Sales and marketing activity also slowed in the second and third quarters of 2020 because of the curtailment of business activities and travel restrictions due to the COVID-19 pandemic . Research and Development Expense The expenses remained flat due to increased personnel-related costs offset by a reduction in outside consulting fees. General and Administrative Expense The increase of $1.0 million was due primarily to $0.4 million increase in personnel-related costs, $0.3 million increase in cost of business insurance, $0.1 million increase in legal expenses, $0.1 million increase in equipment and software and $0.1 million in consulting fees. Other Income, Net The decrease of $0.2 million was due primarily to a decrease in interest income as interest rates have significantly decreased in response to the COVID-19 pandemic. 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 nine months ended September 30, 2020 and 2019, due to having net operating loss carryforwards, our recorded income taxes consisted of foreign taxes only. 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, than they will be realized. 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 $28.7 million as of September 30, 2020. In August 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 of September 30, 2020, no amounts were outstanding as of September 30, 2020. In March 2019, we issued and sold 250,000 shares of our common stock in an underwritten public offering, for which we received net proceeds of $10.6 million after deducting offering expenses. 27 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 r equirements 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 t hrough 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 incurrenc e of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. 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 In May 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 three months ended September 30, 2020, the Company did not repurchase any shares of its common stock. During the nine months ended September 30, 2020, the Company repurchased 74,520 shares of its common stock at an average price of $21.65 per share for $1.6 million. At September 30, 2020, $6.7 million remained of this $15 million stock repurchase program. During the year ended December 31, 2019, we repurchased 257,824 shares of our common stock at an average price of $26 per share for $6.7 million. The repurchases were made in open market transactions using cash on hand, and all of the shares repurchased were retired. Cash Flows Comparison of the Nine Months Ended September 30, 2020 and 2019 The following table presents a summary of our cash flows for the nine months ended September 30, 2020 and 2019: September 30, 2020 2019 (in thousands) Net cash provided by (used in): Operating activities $ 8,809 $ 11,151 Investing activities (3,178 ) (3,731 ) Financing activities (1,391 ) 8,492 Net change in cash and cash equivalents $ 4,240 $ 15,912 Operating Activities For standard customer deployments, we typically achieve cash flow breakeven, on a direct variable cost-basis, in less than a year from the date of execution of the contract. Our net income and cash flows provided by operating activities are significantly influenced by our ability to recognize deferred revenue by deploying new “go-live” miles, our 28 ability to bill and colle ct in a timely manner, and our planned increases in headcount and operating expenses to support our growth. Net cash provided by operating activities decreased $2.3 million from the nine months ended September 30, 2019 to the nine months ended September 30, 2020 primarily due to a $1.8 million decrease in cash collected from customers, driven by the timing of executing contracts and renewals, which impacted the timing of billings and collections and $0.5 million increase in payments including insurance and software subscriptions. 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. Investing activities used $3.2 million and $3.7 million in the nine months ended September 30, 2020 and 2019, respectively, primarily for property and equipment installed for our solutions in customer coverage areas. Financing Activities Cash generated by financing activities includes proceeds from our follow-on offering in 2019, 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 $1.4 million during the nine months ended September 30, 2020, mainly due to $1.6 million paid for the share repurchases and $0.3 million for the payment of contingent consideration liability to Azavea, Inc. in connection with the purchase of ShotSpotter Connect partially offset by the $0.4 million proceeds from the ESPP purchase during the nine months ended September 30, 2020. Financing activities provided $8.5 million in cash during the nine months ended September 30, 2019 from $11.2 million in proceeds from the issuance of common stock upon our secondary offering, $0.6 million from ESPP purchase and $0.5 million in proceeds from the exercise of options and warrants, partially offset by $3.5 million in payments for repurchases of our common stock and $0.4 million in payments related to secondary offering costs . Off-Balance Sheet Arrangements At September 30, 2020, 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 with U.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. 29 For the significant or material changes in our critical accounting policies during the nine mon ths ended September 30, 2020, see Note 2, Summary of Significant Accounting Policies, to the notes of our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. 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. 30 Item 3. Qualitative and Quantitative Disclosures about Market Risk Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign exchange rates as well as, to a lesser extent, inflation. There were no material changes in our market risk during the nine months ended September 30, 2020, compared to the market risk disclosed in the Qualitative and Quantitative Disclosures about Market Risk section of our 2019 Annual Report on Form 10-K.