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Item 7. Management’s Discussion and Analysis

2021-03-29 compared with 2020-03-13 · 537 added, 531 removed, 723 unchanged (60% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FIN ANCIAL CONDITION AND RESULTS OF OPERATIONS

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 consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K.

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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.

We provide precision-policing and security solutions for law enforcement and security personnel to help deter 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 Missions (formerly HunchLab), 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.

We provide precision-policing and security solutions for law enforcement and security personnel to help prevent and reduce gun violence and make cities, campuses and facilities safer.

Our flagship public safety solution, ShotSpotter Respond (formerly ShotSpotter Flex), is the leading outdoor gunshot detection, location and alerting system.

Our gunshot detection solutions are trusted by law enforcement agencies in over 110 cities as of December 31, 2020.

Our patrol management software, ShotSpotter Connect (formerly ShotSpotter Missions), uses artificial intelligence-driven analysis to help strategically plan directed patrols and have consistent use of tactics to deter a broad set of crime types.

Our security solutions, ShotSpotter SecureCampus and ShotSpotter SiteSecure, are designed to help law enforcement and security personnel serving universities, corporate campuses, big box retail, malls 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.

ShotSpotter Investigate™, adds case management to our expanding suite of precision policing technology solutions and provides agencies with a cloud-based investigative digital case folder and analytical and collaboration tools to improve case closure rates.

In 2019, we created a new technology innovation unit, ShotSpotter Labs, to expand our efforts supporting innovative uses of our technology to help protect wildlife and the environment

Our gunshot detection solutions consist of highly-specialized, cloud-based software integrated with proprietary, internet-enabled sensors designed to detect outdoor gunfire.

The speed and accuracy of our gunfire alerts enable law enforcement and security personnel to 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 system applies machine classification combined with human review to analyze and validate the incident and precisely locate where the incident occurred.

The speed and accuracy of our gunfire alerts enable law enforcement and security personnel to consistently and quickly respond to shooting events including those unreported through 911, which can increase the chances of apprehending the shooter, providing timely aid to victims, and identifying witnesses before they scatter, as well as aid in evidentiary collection and serve as an overall deterrent.

When a potential gunfire incident is detected by our sensors, our system precisely locates where the incident occurred and applies machine classification combined with human review to analyze and validate the incident.

An alert containing a location on a map and critical information about the incident is sent directly to subscribing law enforcement or security personnel through any internet-connected computer and to iPhone or Android mobile devices.

Our software sends validated gunfire data along with the audio of the triggering sound to our Incident Review Center (“IRC”), where our trained acoustic experts are on duty 24 hours a day, seven days a week, 365 days a year to screen and confirm actual gunfire incidents.

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.

Gunshot incidents reviewed by our IRC result in alerts 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 software sends validated gunfire data along with the audio of the triggering sound to our Incident Review Center (“IRC”), where our trained incident review specialists are on duty 24 hours a day, seven days a week, 365 days a year to screen and confirm actual gunfire incidents.

Our trained incident review specialists can supplement alerts with additional tactical information, such as the potential presence of multiple shooters or the use of high-capacity weapons.

Gunshot incidents reviewed by our IRC result in alerts typically sent within approximately 45 seconds of the receipt of the gunfire incident.

We generate annual subscription revenues from the deployment of ShotSpotter Respond on a per-square-mile basis.

Our security solutions, ShotSpotter SecureCampus and ShotSpotter SiteSecure, are typically sold on a subscription basis, each with a customized deployment plan.

Our ShotSpotter Missions solution is also sold on a subscription basis.

As of December 31, 2019, we had ShotSpotter Flex, ShotSpotter SecureCampus and ShotSpotter SiteSecure coverage areas under contract for approximately 760 square miles, of which 730 square miles had gone live.

Coverage areas under contract included 104 cities and 12 campuses/sites across the United States, South Africa and the Bahamas, including three of the ten largest cities in the United States.

During the year ended December 31, 2019, one ShotSpotter SiteSecure customer became ShotSpotter Flex customer.

For the year ended December 31, 2019, substantially all of our revenues are attributable to customers based in the United States.

While we intend to continue to devote resources to increase sales of our ShotSpotter SecureCampus , ShotSpotter SiteSecure , ShotSpotter Labs and ShotSpotter Missions solutions , we expect that revenues from our ShotSpotter Flex solution will continue to comp rise a substantial majority of our revenues for the foreseeable future .

Our ShotSpotter Connect solution is also sold on a subscription basis.

As of December 31, 2020, we had ShotSpotter Respond, ShotSpotter SecureCampus and ShotSpotter SiteSecure coverage areas under contract for 8 13 square miles, of which 779 square miles had gone live.

Coverage areas under contract included over 100 cities and 12 campuses/sites across the United States, South Africa and the Bahamas, including three of the ten largest cities in the United States.

Most of our revenues are attributable to customers based 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.

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 revenues from our ShotSpotter Respond solution will continue to comprise a substantial majority of our revenues for the foreseeable future.

ShotSpotter Labs projects are generally conducted in coordination with a sponsoring charitable organization.

These projects may or may not be revenue-producing.

When they are revenue-p roducing, they will generally be sold on a cost-plus basis.

As such, ShotSpotter Labs projects will normally produce gross margins significantly lower than our Flex solutions.

When they are revenue-producing, they will generally be sold on a cost-plus basis.

As such, ShotSpotter Labs projects will normally produce gross margins significantly lower than our ShotSpotter Respond solutions.

Additionally, in early 2020, we added new pricing programs for Tier 4 and 5 law enforcement agencies (those with fewer than 100 sworn officers) that allow them to contract for our gunshot detection solutions to cover a footprint of less than three square miles, using standardized coverage parameters, at a discounted annual subscription rate.

Since our founding, 25 years ago, ShotSpotter has been and continues to be a purpose-led company.

We are a mission-driven organization that is focused on improving public safety outcomes.

We accomplish this by earning the trust of law enforcement and providing them solutions to help them better engage and strengthen the police-community relationships in fulfilling their sworn obligation equally to serve and protect all.

Our inspiration comes from our principal founder, Dr.

Bob Showen, who believes that the highest and best use of technology is to promote social good.

We are committed to developing comprehensive, respectful, and engaged partnerships with law enforcement agencies, elected officials and communities focused on making a positive difference in the world.

We enter into subscription agreements on a term basis that typically range from one to five years in duration, with the majority having a contract term of one year.

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We generated revenues of $45.7 million, $40.8 million and $34.8 million for the years ended December 31, 2020, 2019, and 2018, respectively, representing a year-over-year increases of 12% and 17%.

For 2019, 2018, and 2017, revenues from ShotSpotter Flex represented approximately 96%, 97% and 98% of total revenues, respectively.

Our two current largest customers, The City of Chicago and the City of New York, each accounted for 20% and 14%, respectively, of our total revenues for the year ended December 31, 2019.

For 2020, 2019, and 2018, revenues from ShotSpotter Respond represented approximately 94%, 96% and 97% of total revenues, respectively.

Our two current largest customers, The City of Chicago and City of New York each accounted for 18%

and 15%, respectively, of our total revenues for the year ended December 31, 2020 .

The City of Chicago and the City of New York, each accounted for 20% and 14%, respectively , of our total revenues for the year ended December 31, 2019 .

The City of New York and Puerto Rico Housing Administration accounted for 18% and 7%, respectively, of our total revenues for the year ended December 31, 2017.

T he City of Chicago and the City of New York, each accounted for 22% and 15%, respectively, of our total revenues for the year ended December 31, 2018 .

Substantially all of our revenues for the years ended December 31 , 2020 , 201 9 , and 201 8 were derived from customers within the United States (including Puerto Rico and the U.S.

Virgin Islands ) .

We had net income of $1.8 million for the year ended December 31, 2019, and had net losses of $2.7 million and $10.0 million for the years ended December 31, 2018, and 2017, respectively.

We had net income of $1.2 million for the year ended December 31, 2020 and had net income of $1.8 million for the year ended December 31, 2019 and a net loss of $2.7 million for the year ended December 31, 2018.

Our accumulated deficit was $94.4 million and $95.6 million as of December 31, 2020 and 2019, respectively.

In September 2017, we used $13.7 million from the net proceeds of our initial public offering to voluntarily repay outstanding indebtedness of $13.5 million and $0.2 million in prepayment fees under a promissory note (the “2015 Term Note”).

In connection with this early extinguishment of debt, we wrote off $0.3 million of unamortized debt issuance costs.

During the years ended December 31, 2020, 2019, and 2018, we went “live” on 49, 82 and 168 net new square miles of coverage, respectively.

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During the year ended December 31, 2018, 71 miles out of 168 miles were due to expansion from a single customer.

During the year ended December 31, 2017, the 114 net new square miles included the impact of a 33 coverage mile reduction as a result of our discontinuation in service of Puerto Rico and the U.S Virgin Islands due to devastation caused by hurricanes.

In connection with the cessation of our service with Puerto Rico and the U.S.

Virgin Islands, we classified our contracts with them expired, stopped recognizing revenue s and accelerated the deferred revenues related to setup fees under these contracts .

Puerto Rico has returned as a customer with 16 miles already gone live at the end of 2019 .

In 2017, in connection with the cessation of our service to Puerto Rico and the U.S.

Virgin Islands as a result of hurricane damage, we classified our contracts with them as expired, stopped recognizing revenues and accelerated the deferred revenues related to setup fees under these contracts.

Puerto Rico returned as a customer in 2019 and added five new live miles in 2020, for a total of 21 miles live as of December 31, 2020.

Virgin Islands also returned as a customer in 2020 with four live miles as of December 31, 2020.

We have focused on rapidly growing our business and believe that its future growth is dependent on many factors, including our ability to increase our customer base, expand the coverage of our solutions among our existing customers, expand our international presence and increase sales of our security solutions.

Our future growth will primarily depend on the market acceptance for outdoor gunshot detection solutions.

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.

Challenges we face in achieving this market acceptance and growing our business include our target customers having limited 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.

The extent to which certain of these challenges have increased 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.” 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 ShotSpotter Flex solution.

We will also focus on expanding our business by introducing new products and services to existing customers such as ShotSpotter Missions and gaining new customers for ShotSpotter Labs.

In addition, we believe that entering into strategic partnerships with other service providers to cities and municipalities may offer an another potential avenue for expansion.

We will also focus on expanding our business by introducing new products and services, such as ShotSpotter Connect, to existing customers and expanding coverage for our existing 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.

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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 Missions solution.

ShotSpotter Missions applies risk modeling and artificial intelligence to help forecast when and where crimes are likely to emerge and recommends specific patrol missions and tactics that can deter these events.

The HunchLab technology provides a proven, 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 South Africa and the Bahamas, and to pursue opportunities in Latin America and other regions of the world.

In some cases, we will need to bring in new skill sets to properly develop, market, sell or service these new products depending on the categories they represent.

Consistent with this strategy, we acquired LEEDS, LLC in November 2020 to expand our ShotSpotter Investigate solution.

With the addition of LEEDS, ShotSpotter will offer a more complete precision policing platform to enable intelligence-driven prevention, response to, and investigation of crime for local, state and federal agencies.

ShotSpotter Investigate is expected to be our case management solution that helps automate investigative work and improve case clearance rates – addressing an inefficiency problem for many agencies that have had to rely on multiple disparate systems to work cases.

ShotSpotter Investigate will be based on software currently developed and in use by LEEDS.

Using the software, investigators benefit from a single digital case folder that includes all elements related to a case.

Analytical and collaboration tools help investigators connect the dots and share information faster while reporting helps package cases for command staff and prosecutors.

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 specific patrol s and tactics that can deter these events.

The ShotSpotter Connect technology provides a proven, high-value, and complementary solution we can offer to our existing law enforcement customers.

We believe this product helps to 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.

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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.

Initial Public Offering

In June 2017, we completed our IPO in which we sold 3,220,000 shares of our common stock at a price of $11.00 per share.

We received net proceeds of $32.4 million, excluding underwriting discounts and commissions, which was recorded to additional paid-in capital.

As a result of the IPO:

all outstanding Series B-1 convertible preferred stock warrants were remeasured at fair value using the Black-Scholes model, resulting in a loss of $3.7 million, which was recorded in other expense, net.

the entire balance of $5.7 million in convertible preferred stock warrant liability was reclassified to additional paid-in capital.

All preferred stock warrants were converted into common stock warrants.

In addition, we issued to the lead underwriter in the IPO a warrant to purchase up to 84,000 shares of our common stock.

See Note 15, Convertible Preferred Stock Warrants and Common Stock Warrants , to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further details regarding the warrants.

all shares of the then-outstanding convertible preferred stock were converted into 4,689,753 shares of common stock.

This resulted in a reclassification of $42.1 million to additional paid-in capital.

offering costs incurred by us were approximately $1.9 million, excluding underwriting commissions and discounts, which was recorded to additional paid-in capital.

Key Business Metrics

We focus primarily on three key business metrics in order to measure our operational performance and inform strategic decisions.

Revenue retention rate and sales and marketing spend per $1.00 of new annualized contract value are each calculated annually.

Net new “go-live” square miles is calculated on a quarterly basis.

We focus on four key business metrics, primarily driven by ShotSpotter Respond, in order to measure our operational performance and inform strategic decisions.

Revenue retention rate, sales and marketing spend per $1.00 of new annualized contract value and net new “go-live” square miles are each calculated annually.

Net new “go-live” cities is calculated on a quarterly basis.

All of these metrics are delivered using internal data and may be calculated in a manner different than similar metrics used by other companies.

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Net new "go-live" square miles

Net new "go-live" cities

Revenue Retention Rate

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If our revenue retention rate for a year exceeds 100%, as it did in the years presented above, this indicates a low churn and means that the revenues retained during the year, including from customer expansions, more than offset the revenues that we lost from customers that did not renew their contracts during the year.

As further evidence of our low churn, since transitioning our public safety business to the ShotSpotter Flex model in 2011, we have added over 70 new ShotSpotter Flex customers, but only ten such customers have terminated service, two of which were terminated due to hurricane damage.

One of the two customers who terminated due to hurricane damage has returned as a customer with 16 miles already gone live at the end of 2019.

We do not anticipate maintaining our revenue retention rate at the levels observed in 2018 and 2017.

For example, in 2018, our revenue retention rate excluding our largest customer, Chicago, for which we had a large expansion deployment in 2018, would have been 118%.

As further evidence of our low churn, since transitioning our public safety business to the ShotSpotter Respond model in 2011, we have added over 80 new ShotSpotter Respond customers, but only 13 customers have terminated service, two of which were terminated due to hurricane damage.

One of the two customers who terminated due to hurricane damage subsequently returned as a customer.

Our revenue retention rate in 2018 reflects a large expansion deployment by our largest customer, Chicago, without which the revenue retention rate for that year would have been 118%.

Sales and Marketing Spend per $1.00 of New Annualized Contract Value

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Net New “Go-Live” Miles

Net new “go-live” square miles represent the square miles covered by deployments 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” miles as a key business metric to measure our operational performance and inform strategic decisions.

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 year, both from initial and expanded customer deployments, net of square miles that ceased to be “live” during the year due to customer cancellations.

New square miles include deployed square miles that may have been sold, or booked, in prior years.

We focus on net new “go-live” square miles as a key business metric to measure our operational performance and inform strategic decisions.

Net New “Go-Live” Cities

Net new “go-live” cities represent the number of cities covered by deployments of our gunshot detection solutions that were formally approved by customers during the year, both from initial and expanded customer deployments, net of cities that ceased to be “live” during the year due to customer cancellations.

New cities include deployed coverage areas that may have been sold, or booked, in a prior period.

We focus on net new “go-live” cities as a key business metric to measure our operational performance and market penetration

Impact of COVID-19 and Social Unrest on our Business

The COVID-19 pandemic resulted in a substantial curtailment of business activities worldwide and caused ongoing economic uncertainty, both in the United States and many countries abroad.

In connection with efforts to contain the spread of COVID-19, many companies and state, local and foreign governments imposed restrictions, including shelter-in-place orders and travel bans that were in effect for most or all of 2020.

These factors have negatively impacted our operations and results of operations for 2020.

While some of these companies and jurisdictions have relaxed or ended such restrictions, some restrictions remain and others may be put back in place after having been lifted.

We expect that the evolving COVID-19 pandemic, associated travel restrictions and social distancing requirements will continue to have an adverse impact on our results of operations.

While the ultimate economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business and results of operations, including our revenues, earnings and cash flows from operations, may continue to be adversely impacted in 2021, potentially 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;

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 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;

the impact of the pandemic and social unrest on economic activity and actions taken in response;

the effect on our customers and demand for our products and services;

our ability to continue to sell our products and services, including as a result of travel restrictions and people working from home, or restrictions on access to our potential customers;

the ability of our customers to pay for our products and services;

any closures of our facilities and the facilities of our customers and suppliers;

the degree to which our employees or those of our customers or suppliers become ill with COVID-19.

Components of Results of Operations

Presentation of Financial Statements

Our consolidated financial statements include the accounts of our wholly-owned Colombian and South African subsidiaries, ShotSpotter Colombia S.A.S.

and ShotSpotter (Pty) Ltd.

Our consolidated financial statements include the accounts of our wholly-owned subsidiaries.

All intercompany balances and transactions have been eliminated in consolidation.

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.

Through 2020, we derived 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.

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 years.

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.

For ShotSpotter Respond, we generally invoice customers for 50% of the total contract value when the contract is fully executed and for the remaining 50% when the subscription service is operational and ready to go live – that is, when the customer has acknowledged the completion of all the deliverables in the signed customer acceptance form.

All fees billed in advance of services being delivered are recorded as deferred revenue.

The timing of when new miles go live can be uncertain and, as a result, can have a significant impact on the levels of revenues and deferred revenue from quarter to quarter.

For our ShotSpotter Flex solution, our pricing model is based on a per-square-mile basis.

For our ShotSpotter Missions solution, pricing is currently customized, generally tied to the number of sworn police officers in a particular city.

For our ShotSpotter Respond 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.

We may also offer discounts or other incentives in conjunction with ShotSpotter Missions sales in an effort to introduce the product and accelerate sales.

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 sales of ShotSpotter Connect in an effort to introduce the product to new or existing customers 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.

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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.

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.

If a customer declines to renew its subscription prior to the end of the contract term , 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.

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.

Costs include the cost of revenues and charges for impairment of property and equipment.

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 Incident Review Center (the “IRC”), providing remote and on-site customer support and maintenance and forensic services, certain personnel and related costs of operations, stock-based compensation and allocated overheads, which includes IT, facility and equipment depreciation costs.

Impairment of property and expense is primarily attributable to our write-off of the remaining book value of indoor sensor inventory and indoor sensor networks installed in certain security customers during the year ended December 31, 2018 and write-off for deployed equipment in Puerto Rico and U.S.

Virgin Islands that was destroyed by the hurricanes in September 2017.

With the acquisition of CrimeCenter, the Company also generates revenues from the sale of a software license and related maintenance and support services to its proprietary software technology and p rofessional software development services to a single customer, through a sales channel intermediary.

The sales channel intermediary contract includes an annual, renewable subscription for software and related maintenance and support services.

The contract also provides for the procurement of professional services, such as for software development and testing for product feature enhancements, by executing supplementary work orders.

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 2020, the duration of which is unknown.

Costs include the cost of revenues.

Cost of revenues primarily includes depreciation expense associated with capitalized customer acoustic sensor networks, communication expenses, costs related to hosting our service applications, costs related to operating our IRC, providing remote and on-site customer support and maintenance and forensic services, providing customer training and onboarding services, certain personnel and related costs of operations, stock-based compensation and allocated overheads, which includes information technology, facility and equipment depreciation costs .

Impairment of property and equipment is primarily attributable to our write-off of the remaining book value of sensor networks related to customers lost during the year ended December 31, 2020 and our write-off of the remaining book value of indoor sensor inventory and indoor sensor networks installed in certain security customers during the year ended December 31, 2018.

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 costs in 2021 through 2022.

We have begun plans to replace sensors in certain geographic areas starting in early 2021.

Accelerated bandwidth changes by our carriers may require us to accelerate the upgrade of our 3G sensors prior to 2021, 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 to 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 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 only over the first five years from the go-live date.

We also expect cost of revenues to increase as we continue to invest in our customer success capabilities to drive growth and value for our customers.

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 approximately $5.0 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 .

As we upgrade our sensors, cost of revenues may increase as a percentage of revenues.

In the near term, we expect our cost of revenues to increase in absolute dollars as our installed base increases, although certain of our costs of revenues are fixed and do not need to increase commensurate with increases in revenues.

In addition, depreciation expense associated with deployed equipment is recognized over the first five years from the go-live date, while equipment sometimes remains operational beyond that period, reducing our cost of revenues.

We also expect cost of revenues to increase in absolute dollars as we continue to invest in our customer success capabilities to drive growth and value for our customers.

Operating Expenses

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Salaries, bonuses, stock-based compensation expense and other personnel costs are the most significant components of each of these expense categories.

We include stock-based compensation expense incurred in connection with the grant of stock options and restricted stock units to the applicable operating expense category based on the equity award recipient’s functional area.

We include stock-based compensation expense incurred in connection with the grant of stock options and restricted stock units in the applicable operating expense category based on the equity award recipient’s functional area.

We are focused on executing on our growth strategy.

As a result, in the near term we expect our total operating expenses to increase in absolute dollars as we incur additional expenses due to growth and as a result of operating as a public company.

As a result, in the near term we expect our total operating expenses to increase in absolute dollars as we incur additional expenses due to growth.

Although our operating expenses will fluctuate, we expect that over time, they will generally decrease as a percentage of revenues.

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.

In the near term, we expect our sales and marketing expenses to i ncrease in absolute dollars primarily due to planned growth in our sales and marketing organization.

This growth will include adding sales and marketing personnel and expanding our marketing activities to continue to generate additional leads.

Sales and ma rketing expense may fluctuate from quarter to quarter based on the timing of commission expense, marketing campaigns and tradeshows.

Sales and marketing expenses primarily consist of personnel-related costs attributable to our sales and marketing personnel, commissions earned by our sales personnel and third party agencies, marketing expenses for trade shows, conferences and conventions, consulting fees, travel and facility-related costs, amortization of customer relationship assets acquired from business combinations 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

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We have devoted our product development efforts primarily to develop new lower-cost sensor hardware, develop new features including a mobile application, improve functionality of our solutions and adapt to new technologies or changes to existing technologies.

We are investing in engineering resources to support further development of the ShotSpotter Missions crime forecasting software.

We are investing in engineering resources to support further development of ShotSpotter Connect and ShotSpotter Investigate .

The focus of this effort will be in the areas of data science modeling, user experience, core application functionality and backend infrastructure improvements, including integration 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 new underwater sensor applications as well as to test and expand the functionality of our outdoor sensors in challenging environmental conditions.

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, which may include internal software applications, data analysis, event routing and customer outputs.

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.

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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.

We have recently incurred additional expenses in expanding our operations, including increased personnel, legal, insurance and accounting expenses, and the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act and other regulations.

In the near term, we expect our general and administrative expenses to increase significantly in absolute dollars as we grow our business, support our operations as a public company and increase our headcount.

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Other income (expense), net, consisted primarily of interest income and local and franchise tax expenses.

In addition, in 2017, it included expense on our outstanding debt, and losses from the remeasurement of our convertible preferred stock warrant liability and losses from early extinguishment of debt.

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, which may impact the expense or benefit from income taxes.

Results of Operations

Comparison of Years Ended December 31, 2019 and 2018

The following table sets forth our consolidated statements of operations data for the years ended December 31, 2020 and 2019 (in thousands):

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Total operating expenses

Income (loss) from operations

Other income (expense), net

Benefit (provision) for income taxes

Net income (loss)

The increase of $6.0 million in revenues was primarily attributable to $2.3 million of new customer deployments that went live during 2019, $0.8 million from expansions of existing customer coverage areas that went live during 2019, and $4.4 million related primarily to customer deployments that went live in 2018 and for which we recognized a full year of revenues in 2019.

These increases were partially offset by lost customers and the timing of renewals from certain customers resulting in deferred revenues.

We went live with 82 net new square miles in 2019 .

The increase in costs of $0.9 million was due primarily to a $1.2 million increase in overhead expenses resulting from an increase in employee headcount, a $0.9 million increase in depreciation expense associated with new customer deployment and expansions in existing customer coverage area, and a $0.1 million increase in software amortization, offset by a $0.6 million decrease in operating costs, which includes costs incurred in providing remote and on-site customer support and maintenance services, infrastructure hosting for our service application and costs related to operating our IRC and $0.7 million in impairment charges taken in 2018 that were not repeated in 2019.

During 2018, we recognized impairment expense of $0.7 million for the impairment of property and equipment primarily related to the remaining book value of indoor sensor inventory and indoor sensor networks installed at certain security customers.

Gross margin for 2019 increased five percentage points from gross margin for 2018 because certain costs of revenues are fixed and did not increase commensurate with the increase in subscription revenues.

Income from operations

Other expense, net

Benefit from income taxes

The increase of $5.0 million was primarily attributable to new customers and expansions of existing customer coverage areas, LEEDS’ revenue contribution for a partial quarter, partially offset by a normal rate of customer attrition.

We went live with 49 net new square miles during the year ended December 31, 2020.

Gross margin remained relatively consistent with prior year as a result of revenue growth offset by the increase in our investment in the customer success organization.

The increase of $2.4 million was due primarily to a $2.0 million increase in overall personnel-related costs.

including a partial quarter of costs related to LEEDS.

The increase also includes a reallocation of certain resources as we formalized our customer success organization.

There was also a $0.4 million increase in depreciation expense, a $0.2 million increase in repairs and maintenance costs, as well as a $0.2 million write-off related to sensor assets due to customer attrition.

These increases are partially offset by a $0.4 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

The increase in sales and marketing expense of $1.6 million was primarily due to a $1.3 million increase in personnel expense resulting from increased headcount, and a $0.3 million increase in consulting and travel expenses associated with the growth of our sales and marketing organization.

The increase in sales and marketing expense of $0.3 million was primarily due to a $0.8 million increase in personnel costs, and $0.3 million increase in other costs including commissions expense and amortization of the customer relationship intangible asset related to LEEDS, partially offset by $0.8 million decrease in travel costs due to limited travel during the COVID-19 pandemic.

Research and Development Expense

The increase in research and development expense of $0.4 million was primarily due to an increase in personnel and consulting expenses related to the development of our mobile applications and next-generation sensors.

The increase in research and development expense of $0.3 million was primarily due to an increase in personnel and LEEDS related expenses offset by a reduction in outside consulting fees.

General and Administrative Expense

The decrease in general and administrative expense of $1.0 million was primarily due to a $1.5 million decrease in legal expenses resulting from litigation that settled in 2018 and our HunchLab acquisition in 2018, partially offset by $0.5 million increase in personnel and consulting expenses during the year ended December 31, 2019.

The increase of $2.3 million was due primarily to a $1.0 million increase in personnel costs, $0.6 million increase in acquisition related expenses, $0.4 million increase in legal and professional fees and $0.3 million increase in insurance costs.

Other Income (Expense), Net

The increase in other income (expense), net of $0.3 million was due to a $0.4 million increase in interest income partially offset by a decrease in local and state income taxes.

The decrease of $0.3 million was due primarily to a decrease in interest income as interest rates have significantly decreased over the year.

For the years ended December 31, 2020 and 2019, our provision for income taxes consisted of a benefit (provision) for foreign income taxes only.

Comparison of Years Ended December 31, 2019 and 201 8

The following table sets forth our selected consolidated statements of operations data for the years ended December 31, 2018 and 2017 (in thousands):

The following table sets forth our consolidated statements of operations data for the years ended December 31, 2019 and 2018 (in thousands):

Cost of revenues

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Total operating expenses

Loss from operations

Other expense, net

Provision for income taxes

The increase of $11.0 million in revenues was primarily attributable to $5.2 million from expansions of existing customer coverage areas, $1.9 million of new customer solutions that went live during 2018, and $4.8 million related primarily to customer deployments that went live in 2017 and for which we recognized a full year of revenues in 2018.

The increase in costs of $3.4 million was due primarily to a $1.4 million increase in overhead expenses resulting from an increase in employee headcount, a $0.8 million increase in operating costs, which includes costs incurred in providing remote and on-site customer support and maintenance services, infrastructure hosting for our service application and costs related to operating our IRC, and a $0.6 million increase in depreciation offset by $0.4 million decrease in telecommunication fees and $0.1 million in lower impairment charges.

Income (loss) from operations

Other income (expense), net

Benefit from income taxes

Net income (loss)

These increases were partially offset by lost customers and the timing of renewals from certain customers resulting in deferred revenues.

We went live with 82 net new square miles in 2019 .

During 2017, we recognized impairment expense of $0.8 million for the impairment of property and equipment primarily related to the remaining net book value for deployed equipment that was presumed destroyed by hurricanes in September 2017.

Gross margin for 2018 increased six percentage points from gross margin for 2017 because certain costs of revenues are fixed and did not increase commensurate with the increase in subscription revenues.

Operating Expenses

Sales and Marketing Expense

The increase in sales and marketing expense of $2.2 million was primarily due to an increase of $1.3 million in salaries, commissions, recruiting, and stock-based compensation expense, and a $0.7 million increase in consulting and outside services associated with expansion of our sales, marketing and customer success organization.

Research and Development Expense

The increase in research and development expense of $0.8 million was due primarily due to a $0.7 million increase in salaries, benefits and bonuses for research and development personnel, and stock-based compensation expense and a $0.1 million increase in consulting fees related to the development of our mobile applications and next-generation sensors.

General and Administrative Expense

The increase in general and administrative expense of $2.8 million from 2017 to 2018 was due to a $2.0 million increase in legal, accounting and other outside services fees associated with litigation and settlement expenses, business acquisition expenses, and operating as a public company, a $0.4 million increase in non-employee director compensation, and a $0.4 million increase in personnel expense primarily due to stock-based compensation expense.

Other Expense, Net

The decrease in other expense, net of $5.3 million was due to a $3.7 million decrease in expense related to the remeasurement of the preferred stock warrant liability due to a final remeasurement upon our IPO in the second quarter of 2017, a $1.6 million decrease in interest expense due to the termination of debt in the third quarter of 2017, a $0.2 million in prepayment fees in connection with the early extinguishment of debt, and a write-off of $0.3 million of unamortized debt issuance costs due to the termination of debt in the third quarter on 2017.

Other Income (Expense), Net

The increase in other income (expense), net of $0.3 million was due to a $0.4 million increase in interest income partially offset by a decrease in local and state income taxes.

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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.

On November 24, 2020 , we completed the a cquisition of LEEDS , LLC for a purchase consideration of $ 21.6 million in cash, subject to working capital adjustments, and the issuance of 63,901 shares of ShotSpotter common stock worth $ 2.0 million .

The purchase consideration also included a contingent earnout payable for up to $ 5.0 million based on LEEDS’ revenues generated during 2021 and 2022.

On October 3, 2018, we acquired certain technology, referred to as HunchLab, and related assets from Azavea Inc.

The purchase consideration totaled $2.5 million, consisting of $1.7 million in cash and a contingent earnout payable in cash for up to $750,000 based on HunchLab’s revenues generated over the three-year period following the acquisition date.

In September 2017, we voluntarily repaid our outstanding borrowing of $13.5 million under the 2015 Term Note.

This resulted in a loss on early extinguishment of debt of $0.2 million for prepayment fees and other miscellaneous fees, and $0.3 million for the write-off of a portion of our unamortized debt issuance costs.

In January 2020, we paid $0.3 million based on revenues generated over the first year of the contingent earnout period.

In February 2021, subsequent to December 31, 2020, we paid the remaining $0.4 million of the contingent earnout based on revenues generated over the second year of the contingent earnout period.

Stock Repurchase Program

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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 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.

During the year ended December 31, 2020 , we repurchased 74,520 shares of its common stock at an average price of $21.65 per share for $1.6 million.

The repurchases were made in open market transactions using cash on hand, and all of the shares repurchased were retired.

Credit Facility

On September 27, 2018, we entered into the Umpqua Credit Agreement, which allows us to borrow up to $10.0 million under a revolving loan facility.

On September 27, 2018, we entered into the Umpqua Credit Agreement.

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, which allows us to borrow up to $20.0 million under a revolving loan facility.

We intend to use the revolving loan facility for general working capital purposes.

Prior to the repayment of all our outstanding indebtedness under the 2015 Term Note in September 2017, we were a party to a Loan and Security Agreement with Orix Growth Capital, LLC (the “Orix Loan Agreement”), which allowed us to borrow up to $15.0 million.

In September 2017, our credit facility with Orix Growth Capital, LLC pursuant to the Orix Loan Agreement was terminated in connection with such repayment.

Comparison of Years Ended December 31, 2020, 2019 and 2018

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As of December 31, 2020, 2019 and 2018, $1.3 million, $0.8 million and $1.1 million in cash was held by our consolidated foreign subsidiaries.

In the year ended December 31, 2017, we used $0.5 million of these funds to pay our U.S.

parent company for services delivered in the year ended December 31, 2016 under an intercompany license agreement.

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 (loss) and cash flows provided by operating activities are significantly influenced by our increase in headcount to support our growth, increase in legal, outside services fees, and sales and marketing expenses, and our ability to bill and collect in a timely manner.

Operating activities provided $13.7 million in 2019, used $1.4 million in 2018, and provided $3.4 million in 2017.

The net cash provided by operating activities in the year ended December 31, 2019 was primarily driven by higher collections of accounts receivable driven by new customer contracts and expansions of existing customer coverage.

Operating activities provided $11.2 million in 2020, provided $13.7 million in 2019, and used $1.4 million in 2018.

The net cash provided by operating activities in the year ended December 31, 2020 was primarily driven by collections of accounts receivable driven by new customer contracts and expansions of existing customer coverage.

The net cash provided by operating activities in the year ended December 31, 2019 was primarily driven by increased collections of accounts receivable driven by new customer contracts and expansions of existing customer coverage.

The use of cash for 2018 was primarily driven by changes in accounts receivable and our net loss of $2.7 million and offset by changes in deferred revenue, stock-based compensation, and depreciation and amortization.

The generation of cash for 2017 was primarily driven by changes in accrued expenses and deferred revenue, depreciation and amortization and remeasurement of warrant liability, partially offset by changes in accounts receivable and our net loss of $10.0 million.

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 $4.9 million, $10.2 million, and $6.5 million in the years ended December 31, 2019, 2018 and 2017, respectively, primarily for property and equipment expenditures to install our solutions in customer coverage areas.

Our investing activities consist primarily of capital expenditures to install our solutions in customer coverage areas, purchases of property and equipment, and investments in intangible assets and business acquisitions.

Investing activities used $18.8 million, $4.9 million, and $10.2 million in the years ended December 31, 2020, 2019 and 2018, respectively.

We completed our acquisition of LEEDS, LLC for approximately $14.6 million in cash, net of $7.0 million cash acquired at closing during the year ended December 31, 2020.

We completed our acquisition of the HunchLab assets for approximately $1.7 million in cash at closing during the year ended December 31, 2018.

The remaining use of cash was primarily for property and equipment expenditures to install our solutions in customer coverage areas.

Financing Activities

Cash generated by financing activities includes proceeds from our secondary offering, 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 $1.0 million in cash during the year ended December 31, 2020 from $1.6 million in payments for repurchases of our common stock and $0.3 million payment for HunchLab’s contingent consideration, partially offset by $0.7 million proceeds from ESPP purchase and $0.3 million in proceeds from the exercise of options and warrants.

Financing activities provided $5.5 million in cash during the year ended December 31, 2019 from $10.8 million in net proceeds from the issuance of common stock upon our secondary offering, $0.9 million proceeds from ESPP purchase and $0.5 million in proceeds from the exercise of options and warrants, partially offset by $6.7 million in payments for repurchases of our common stock.

Financing activities provided $2.4 million in the year ended December 31, 2018, primarily from $1.5 million from the exercise of stock options and warrants, and $0.9 million proceeds from employee stock purchase plan.

Financing activities provided $18.8 million in the year ended December 31, 2017, primarily from $32.4 million in net proceeds, excluding underwriting discounts and commissions, from our IPO and $1.5 million in borrowing under our 2015 Term Note (see Note 10, Financing Arrangements , to our consolidated financial statements included elsewhere in this Annual Report in Form 10-K, for details regarding the 2015 Term Note), offset in part by $13.5 million in repayment of our 2015 Term Note and $1.9 million in payments for costs associated with our IPO.

Contractual Obligations and Commitments

The following table summarizes our commitments to settle contractual obligations as of December 31, 2019.

(in thousands)

Operating lease (1)

Data center arrangements (2)

Operating lease payments include total future minimum rent payments under a non-cancelable operating lease agreement as described in Note 19, Commitments and Contingencies.

Data center arrangements include total future minimum payments under the non-cancelable contracts as described in Note 19, Commitments and Contingencies.

The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions and the approximate timing of the actions under the contracts.

The table does not include purchase obligations that we can cancel without a significant penalty.

These purchase obligations are cancellable at any time, however, we may be required to pay costs incurred through the cancellation date.

Historically, we have rarely cancelled these agreements.

Off-Balance Sheet Arrangements

As of December 31, 2019, 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.

As of December 31, 2020, we did not have any relationships, material commitments or obligations 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.

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See Note 3, Basis of Presentation and Summary of Significant Accounting Policies , to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of our other significant accounting policies.

Revenue Recognition — We generate substantially all of our revenues from the sale of gunshot detection subscription services, in which gunshot data generated by company-owned sensors and software is sold to customers through a cloud-based hosting application for a specified contract period.

Revenue Recognition

Revenue Recognition – Gunshot Detection Services

We generate substantially all of our revenues from the sale of gunshot detection subscription services, in which gunshot data generated by company-owned sensors and software is sold to customers through a cloud-based hosting application for a specified contract period.

Typically, the initial contract period is one to five years in length.

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A small portion of our revenues are generated from the delivery of setup services to install company-owned sensors in the customer’s coverage area and other services including training and license to integrate with third-party applications.

We generally invoices 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.

We generally invoices subscription service renewals for 100% of the total contract value when the renewal contract is executed.

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.

We generally invoice subscription service renewals for 100% of the total contract value when the renewal contract is executed.

For the public safety solution, the pricing model is based on a per-square-mile basis.

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We recognize revenues upon the satisfaction of performance obligations.

At contract inception, we assess the services promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the customer a good or service (or bundle of services) that is distinct.

At contract inception, we assess the services promised in our contracts with customers and identify a performance obligation for each promise to transfer to the customer a good or service (or bundle of services) that is distinct.

To identify the performance obligations, we consider all of the services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.

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Discounts are allocated pro-rata to the identified performance obligations.

For contracts that have an original duration of one year or less, we use the practical expedient applicable to such contracts and does not consider the time value of money.

For contracts that have an original duration of one year or less, we use the practical expedient applicable to such contracts and do not consider the time value of money.

Revenues from subscription services are recognized ratably, on a straight-line basis, over the term of the subscription.

Revenues from material rights are recognized ratably over the period in which they are determined to provide a material right to the customer, which is generally three years.

Revenues from training and licenses to integrate with third-party applications are recognized upon delivery which generally occurs when the subscription service is operational and ready to go live and these amounts are immaterial.

Revenues from training and licenses to integrate with third-party applications are recognized upon delivery which generally occurs when the subscription service is operational and ready to go live.

Subscription renewal fees are recognized ratably over the term of the renewal, which is typically one year.

While most customers elect to renew their agree ments, 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 services m ay continue to be provided for a period of time until the renewal process is completed.

Once the renewal is complete, we recognize subscription revenues for the period between the expiration of the term of the agreement and the completion of the renewal pr ocess in the month in which the renewal is executed.

While most 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 services may continue to be provided for a period of time until the renewal process is completed.

Once the renewal is complete, we 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, then the remaining fees from material rights, if any, are immediately recognized.

Revenue Recognition – Software License, Maintenance and Support, and Professional Services

With the acquisition of LEEDS, we also generate revenues from the sale of (i) a software license and related maintenance and support services to its proprietary software technology and (ii) p rofessional software development services to a single customer, through a sales channel intermediary.

We have been serving this customer for more than ten years.

The sales channel intermediary contract includes an annual, renewable subscription for software and related maintenance and support services.

The contract also provides for the procurement of professional services, such as for software development and testing for product feature enhancements, by executing supplementary work orders

We recognize revenue from the license of its software license and related maintenance and support services revenues upon the satisfaction of performance obligations.

We determined that the term-based software license should be combined with the maintenance and support services as a single performance obligation.

The nature of the maintenance and support services, inclusive of our obligation to provide additional, unspecified software functionality over the license term, in allowing this single customer to be flexible in utilizing the customized software to respond to the changing regulatory environment, are critical to the customer’s ability to derive benefit and value from the license.

Contractually, we provide continuous access to the software, maintenance and support services, helpdesk and technical support over the contract term, hence a time-elapsed method is used to recognize revenue.

Revenues from the software license and maintenance and support services are recognized ratably over the term of the contract because our obligation to provide the license and related support services is uniform over the license term.

We generally invoice for these services on a monthly basis in arrears.

Stock-Based Compensation — We recognize stock-based compensation expense for stock-based compensation awards granted to our employees, directors, and consultants that can be settled in shares of our common stock.

Compensation expense for stock-based compensation awards granted is based on the grant date fair value estimate for each award as determined by our board of directors.

We recognize these compensation costs on a straight-line basis over the requisite service period of the award, which is generally four years.

We recognize these compensation costs on a straight-line basis over the requisite service period of the award.

Restricted stock unit awards are valued using the last reported stock price on the date of grant.

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and discount rates.

Goodwill — Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (October 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

The Company has concluded there is only one reporting unit for purposes of performing the goodwill impairment test.

These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.

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The fair value of each reporting unit is estimated primarily through the use of a discounted cash flow methodology.

This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.

This analysis requires significant judgments, and may includ e estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.

The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors.

Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment.

We performed our annual test for goodwill and long-lived assets impairment as of October 1, 2019 and concluded that no impairment charge was necessary.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).

There have been further amendments, including practical expedients, with the issuance of ASU 2018-01 in January 2018, ASU 2018-11 in July 2018 and ASU 2018-20 in December 2018.

The amended guidance requires the recognition of lease assets and lease liabilities on the balance sheet for those leases with terms in excess of 12 months and currently classified as operating leases.

Disclosure of key information about leasing arrangements is required.

Effective January 1, 2019, we adopted Topic 842.

We elected the optional transition method which allows entities to continue to apply historical accounting guidance in the comparative periods presented in the year of adoption.

At transition, lessees and lessors may elect to apply a package of practical expedients permitting entities not to reassess:

(i) whether any expired or existing contracts are or contain leases;

(ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any expired or existing leases qual ify for capitalization under the amended guidance.

These practical expedients must be elected as a package and consistently applied.

We ha ve elected to apply the package of practical expedients upon adoption.

Our operating lease for our corporate headquarters office is impacted by the new standard and upon adoption, we recognized a right-of-use asset of $0.9 million and related lease liabilities totaling $0.9 million.

See Note 18, Leases.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) .

The amendments in Part I of ASU 2017-11 change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features.

When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock.

The amendments also clarify existing disclosure requirements for equity-classified instruments.

We adopted this ASU as of January 1, 2019 and the adoption did not have any impact on the consolidated financial statements.

QUALITATIVE AND QU ANTITATIVE DISCLOSURES ABOUT MARKET RISK

We performed our annual test for goodwill impairment as of October 1, 2020 and concluded that no impairment charge was necessary.

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.

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These securities are not dependent on interest rate fluctuations that may cause the principal amount of these assets to fluctuate.

We had cash of $24.6 million as of December 31, 2019, which consists entirely of bank deposits.

To date, fluctuations in interest income have not been significant.

We had cash and cash equivalents of $16.0 million as of December 31, 2020, which consists entirely of bank deposits.

During 2020, an emergency federal rate reduction occurred which significantly decreased the Company’s interest income.

We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.

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Movements in foreign currencies in which we transact business could significantly affect future net earnings.

For example, if the average value of the South African Rand had been 10% higher relative to the U.S.

However, if the average value of the South African Rand had been 10% higher relative to the U.S.

dollar during 2020, 2019 or 2018, it would not have resulted in a significant impact to our results of operations for the years ended December 31, 2020, 2019 or 2018.

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Consolidated Statements of Comprehensive Income (Loss)

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity/(Deficit)

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGIS TERED PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of ShotSpotter, Inc.:

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We have audited the accompanying consolidated balance sheets of ShotSpotter, Inc.

(the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), convertible preferred stock and stockholders’ equity/(deficit), and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

(the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

/s/ Baker Tilly Virchow Krause, LLP

/s/ Baker Tilly US, LLP (formerly known as Baker Tilly Virchow Krause, LLP)

We have served as the Company's auditor since 2016.

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Prepaid expenses and other current assets

Restricted cash

Total current assets

Property and equipment, net

Operating lease right-of-use asset

Operating lease right-of-use assets

Intangible assets, net

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Stockholders' equity

Preferred stock:

$ 0.005 par value;

20,000,000 shares authorized;

no shares issued and outstanding as of December 31, 2020 and 2019

Common stock:

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500,000,000 shares authorized;

11,314,150 and 10,864,722 shares issued and outstanding as of

December 31, 2019 and 2018, respectively

11,538,998 and 11,314,150 shares issued and outstanding as of December 31, 2020 and 2019, respectively

Additional paid-in capital

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Total operating expenses

Operating loss

Operating income (loss)

Other income (expense), net

Remeasurement of convertible preferred stock warrant liability

Loss on early extinguishment of debt

Interest income (expense), net

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Income (loss) before income taxes

Provision (benefit) for income taxes

Benefit from income taxes

Net income (loss)

Net income (loss) loss per share, basic

Net income (loss) loss per share, diluted

Net income (loss) per share, basic

Net income (loss) per share, diluted

Weighted average shares used in computing net income (loss) per

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ShotSpotter, Inc.

Consolidated Statements of Convertible P referred Stock and Stockholders’ Equity/(Deficit)

Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

Preferred Stock

Comprehensive

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Balance at December 31, 2017

Issuance of common stock upon IPO, net

$3.0 million in commissions and discounts

Conversion of convertible preferred stock

of common stock upon IPO

Reclassification of preferred stock warrant

liability into additional paid in capital upon IPO

Exercise of stock options

Issuance of common stock in connection

with cashless exercise of warrants

Issuance of common stock from ESPP purchase

Stock-based compensation

Foreign currency translation gain

Balance at December 31, 2017

Exercise of stock options

Issuance of common stock in connection

with exercise of warrants

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Balance at December 31, 2019

Exercise of stock options

Issuance of common stock in connection

with exercise of warrants

Repurchase of common stock

Issuance of common stock from ESPP purchase

Issuance of common stock from RSU's vested

Issuance of common stock from acquisition

Stock-based compensation

Foreign currency translation loss

Balance at December 31, 2020

See accompanying notes to consolidated financial statements.

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(used in) operating activities:

Depreciation and amortization

Depreciation of property and equipment

Amortization of intangible assets

Impairment of property and equipment

Stock-based compensation

Amortization of debt issuance costs

Remeasurement of convertible preferred stock warrant liability

Loss on early extinguishment of debt

Loss on disposal of property and equipment

Provision for accounts receivable

Changes in operating assets and liabilities:

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Investment in intangible and other assets

Business acquisition

Business acquisition, net of cash acquired

Net cash used in investing activities

Cash flows from financing activities:

Proceeds from initial public offering, net of commissions and

Proceeds from notes payable

Repayment of notes payable

Payment of debt issuance costs

Payment on debt extinguishment costs

Payment of contingent consideration liability

Payment of line of credit costs

Payments of initial public offering costs

Proceeds from issuance of common stock upon secondary offering

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Proceeds from employee stock purchase plan

Net cash provided by financing activities

Net cash provided by (used in) financing activities

Increase (decrease) in cash, cash equivalents and restricted cash

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Cash paid for income taxes

Cash paid for interest

Supplemental disclosure of non-cash financing activities:

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Estimated fair value of contingent consideration

Conversion of convertible preferred stock into common stock

Reclassification of convertible preferred stock warrant liability

into additional paid-in capital

Fair value of common stock issued as consideration for business acquisition

Deferred offering costs included in other assets

Line of credit costs included in other assets

Issuance of warrants in connection with the issuance of notes

See accompanying notes to consolidated financial statements.

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ShotSpotter, Inc.

(the “Company”) provides precision-policing solutions for law enforcement to help deter gun violence and make cities, campuses and facilities safer.

The company’s flagship product, ShotSpotter Flex, is the leading outdoor gunshot detection, location and forensic system trusted by over 100 cities.

ShotSpotter Missions uses machine learning-driven analysis to help strategically plan directed patrol missions and tactics for maximum crime deterrence.

(the “Company”) provides precision-policing solutions for law enforcement and security personnel to help prevent and reduce gun violence and make cities, campuses and facilities safer.

The Company’s flagship product, ShotSpotter Respond (formerly ShotSpotter Flex) is the leading outdoor gunshot detection, location and alerting system trusted by over 100 cities.

ShotSpotter Connect (formerly ShotSpotter Missions)

creates crime forecasts designed to enable more precise and effective use of patrol resources to deter crime.

ShotSpotter Labs is the Company’s effort to support innovative uses of its technology to help protect wildlife and the environment.

The Company’s case management solution, ShotSpotter Investigate, is a cloud-based investigative platform to help law enforcement agencies modernize every phase of an investigation and accelerate case work with easy-to-use software tools.

The Company offers its solutions on a SaaS-based subscription model to its customers.

The Company’s principal executive offices are located in Newark, California.

The Company has two wholly-owned subsidiaries, ShotSpotter (Pty) Ltd.

formed in South Africa and ShotSpotter Colombia S.A.S.

which was formed in Colombia in March 2019.

Initial Public Offering

In June 2017, the Company completed its initial public offering (“IPO”) in which the Company sold 3,220,000 shares of its common stock at a price of $11.00 per share.

The Company received net proceeds of $32.4 million, excluding underwriting discounts and commissions, which was recorded to additional paid-in capital.

The Company’s common stock commenced trading on the Nasdaq Capital Market on June 7, 2017 under the trading symbol “SSTI.”

Immediately prior to the IPO, all outstanding Series B-1 convertible preferred stock warrants were remeasured at fair value using the Black-Scholes model, resulting in a loss of $3.7 million, which was recorded in other expense, net.

Upon the closing of the IPO, the entire balance of $5.7 million in convertible preferred stock warrant liability was reclassified to additional paid-in capital.

All preferred stock warrants were converted into common stock warrants.

In addition, the Company issued to the lead underwriter in the IPO a warrant to purchase up to 84,000 shares of its common stock.

See Note 15, Convertible Preferred Stock Warrants and Common Stock Warrants , for further details regarding the warrants.

Upon the closing of the IPO, all shares of the then-outstanding convertible preferred stock were converted into 4,689,753 shares of common stock.

This resulted in a reclassification of $42.1 million to additional paid-in capital.

Offering costs incurred by the Company were approximately $1.9 million, excluding underwriting commissions and discounts, which was recorded to additional paid-in capital.

The Company has five wholly-owned subsidiaries globally, including in South Africa, Colombia, Brazil and Mexico.

Basis of Presentation and Summary of Significant Accounting Policies

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GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding financial reporting.

The consolidated financial statements include the results of the Company and its wholly-owned subsidiary, ShotSpotter (Pty) Ltd and ShotSpotter Colombia S.A.S.

The consolidated financial statements include the results of the Company and its wholly-owned subsidiaries.

All significant intercompany transactions have been eliminated during consolidation.

In the opinion of management, the accompanying consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss, equity statement and cash flows for the full year 2019.

June 2017 Amended and Restated Certificate o f Incorporation

Prior to the IPO, the Company’s Board of Directors (the “Board”) and stockholders approved an amendment (the “Charter Amendment”) to the Pre-IPO Certificate (as defined below) and an amended and restated certificate of incorporation (“Post-IPO Certificate”) that became effective on June 12, 2017.

The Charter Amendment increased the number of authorized shares of common stock from 8,600,000 to 500,000,000.

Under the Post-IPO Certificate, the Company is authorized to issue two classes of stock to be designated Common Stock and Preferred Stock.

See Note 13, Capital Stock , for further details regarding these classes of stock.

March 2017 Amendment and Restatement of Certificate of Incorporation

On March 27, 2017, the Company’s Board and stockholders approved an amendment and restatement of the Company’s then-existing certificate of incorporation (as so amended and restated, the “Pre-IPO Certificate”) to provide, among other changes, that each share of Series A-2 convertible preferred stock would automatically convert into 0.715548 shares of common stock upon the consummation of an initial public offering of the Company’s capital stock.

All share and per share data related to balance sheet and net loss information in the accompanying consolidated financial statements and their related notes have been retroactively adjusted to give effect to the application of this conversion feature when presenting the Series A-2 convertible preferred stock on an as-converted basis.

The Pre-IPO Certificate also provided for (1) an increase in the total number of authorized shares to 14,550,000 and (2) an increase in the number of authorized shares of common stock to 8,600,000, in each case to accommodate the new conversion feature for the outstanding shares of Series A-2 convertible preferred stock.

Use of Estimates

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Actual results could differ from those estimates and such differences could be material to the Company’s financial position and results of operations.

Revenue Recognition

Revenue Recognition – Gunshot Detection Services

The Company generates substantially all of its revenues from the sale of gunshot detection subscription services, in which gunshot data generated by Company-owned sensors and software is sold to customers through a cloud-based hosting application for a specified contract period.

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For security solutions, the pricing model is on a customized-site basis.

As a result of the process for invoicing contracts and renewals upon execution, cash flows from operations and accounts receivable can fluctuate due to timing of contract execution and timing of deployment.

The Company recognizes revenue s upon the satisfaction of performance obligations.

As a result of the process for invoicing contracts

and renewals upon execution, cash flows from operations and accounts receivable can fluctuate due to timing of contract execution and timing of deployment .

The Company recognizes revenues upon the satisfaction of performance obligations.

At contract inception, the Company assesses the services promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the customer a good or service (or bundle of services) that is distinct.

To identify the performance obligations, the Company considers all of the services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.

The Company d etermined that the subscription services, training, and licenses to integrate with third-party applications are each distinct services that represent separate performance obligations.

The Company determined that the subscription services, training, and licenses to integrate with third-party applications are each distinct and represent separate performance obligations.

The setup activities are not distinct from the subscription service and are combined into the subscription service performance obligation.

However, setup fees may provide a material right to the customer that has influence over the customers' decision to renew.

All setup fees are assessed on a quantitative and qualitative basi s to determine whether they represent a distinct performance obligation.

All setup fees are assessed on a quantitative and qualitative basis to determine whether they represent a distinct performance obligation.

The total contract value is allocated to each performance obligation identified based on the standalone selling price of the service.

Discounts are allocated pro-rata to the identifie d performance obligations.

Discounts are allocated pro-rata to the identified performance obligations.

For contracts that have an original duration of one year or less, the Company uses the practical expedient applicable to such contracts and does not consider the time value of money.

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Revenues from material rights are recognized ratably over the period in which they are determined to provide a material right to the customer, which is generally three years .

Revenues from training and licenses to integrate with third-party applications are recognized upon delivery which generally occurs when the subscription service is operational and ready to go live.

Subscription renewal fees are recognized ratably over the term of the renewal, which is typically one year .

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Amortization of capitalized commissions was $ 0.6 million for the year ended December 31, 2020 and was included in sales and marketing expense in the consolidated statements of operations .

Amortization of capitalized commissions was $ 0.5 million and $ 0.4 million for the year ended December 31, 2019 and December 31, 2018, respectively.

Revenue Recognition – Software License, Maintenance and Support, and Professional Services

With the acquisition of LEEDS, LLC (“LEEDS”), the Company also generates revenues from the sale of (i) a software license and related maintenance and support services to its proprietary software technology and (ii) p rofessional software development services to a single customer, through a sales channel intermediary.

The Company has been serving this customer for more than ten years .

The sales channel intermediary contract includes an annual, renewable subscription for software and related maintenance and support services.

The contract also provides for the procurement of professional services, such as for software development and testing for product feature enhancements, by executing supplementary work orders.

The Company recognizes revenue from the license of its software license and related maintenance and support services revenues upon the satisfaction of performance obligations.

The Company determined that the term-based software license should be combined with the maintenance and support services as a single performance obligation.

The nature of the maintenance and support services, inclusive of the Company’s obligation to provide additional, unspecified software functionality over the license term, in allowing this single customer to be flexible in utilizing the customized software to respond to the changing regulatory environment, are critical to the customer’s ability to derive benefit and value from the license.

Contractually, the Company provides continuous access to the software, maintenance and support services, helpdesk and technical support over the contract term, hence a time-elapsed method is used to recognize revenue.

Revenues from the software license and maintenance and support services are recognized ratably over the term of the contract because the Company’s obligation to provide the license and related support services is uniform over the license term.

The Company generally invoices for these services on a monthly basis in arrears.

Professional services revenue consists of fees typically associated with the design, development and testing of product feature enhancements requested by the customer.

The customer procures additional development services as needed, and generally based upon annual development plans negotiated by and between the customer and the Company.

Professional services do not result in significant customization of the maintenance and support services and are considered distinct services.

All, and any part of the output, of the Company’s professional services towards such product feature enhancements, belong to the customer.

Accordingly, the Company satisfies the performance obligations over time as the performance of work typically creates or enhances an asset that the customer controls as the asset is created or enhanced.

As these product feature enhancements each have a fixed contract fee, the Company recognizes revenue over time proportionally as work is performed, based on cumulative resource costs incurred as a percentage of total forecast costs for the project.

Management uses significant judgement in making these estimates, which affect the timing of revenue recognition, including how much revenue to recognize in each period, and in estimating the timing of revenue recognition for remaining performance obligations (see Note 3).

The contract price and billing schedule are stated in each work order and the Company generally invoices in monthly installments upon the commencement of each work order.

Gross versus net presentation

The Company’s single software license and related service agreement was facilitated through a sales channel intermediary.

The Company presents the total value of the billings to the customer as revenue (or gross) and that portion of the billings to the customer retained by the sales channel intermediary as a sales cost which is included in sales and marketing in the accompanying statement of operations, as the Company has determined that it was the principal in the arrangement.

The Company’s conclusion is based on its role in controlling the goods and services consumed by the end-customer throughout the license term or development life cycle, combined with its control over the price charged to the end-user for such goods and services.

The fees paid to the sales channel intermediary are expensed as incurred as it relates to a period of performance of one year , and the sales channel intermediary is paid the same rate of commission on any license term renewals or additional professional services that are sold to the customer.

Costs include the cost of revenues and charges for impairment of property and equipment.

Cost of revenues primarily includes depreciation expense associated with capitalized customer acoustic sensor networks, communication expenses, costs related to hosting our service application, costs related to operating our Incident Review Center (the “IRC”), providing remote and on-site customer support and maintenance and forensic services, certain personnel and related costs of operations, stock-based compensation and allocated overhead, which includes information technology, facility and equipment depreciation costs.

Cost of revenues related to gunshot detection services primarily includes depreciation expense associated with capitalized customer acoustic sensor networks, communication expenses, costs related to hosting our service application, costs related to operating our Incident Review Center (the “IRC”), providing remote and on-site customer support and maintenance and forensic services, certain personnel and related costs of operations, stock-based compensation and allocated overhead, which includes information technology, facility and equipment depreciation costs.

Cost of revenues related to software license, maintenance and support, and professional services primarily include personnel costs of project managers, developers and analysts working on the various support tickets and work orders.

Such costs are expensed as incurred as they do not create an asset owned by the Company.

Advertising and Promotion Costs

Advertising and promotion costs are expensed as incurred.

Advertising and promotion costs were $0.5 million, $0.6 million and $0.5 million for the year ended December 31, 2019, 2018 and 2017, and were included in sales and marketing expense in the consolidated statements of operations.

Advertising and promotion costs were $ 0.3 million, $ 0.5 million and $ 0.6 million for the years ended December 31, 2020, 2019 and 2018, and were included in sales and marketing expense in the consolidated statements of operations.

Research and Development Costs

Research and development costs are expensed as incurred and consisted primarily of salaries and benefits, consultant fees, certain facilities costs, and other direct costs associated with the continued development of the Company’s solutions.

Product development costs are expensed as incurred until technological feasibility has been established, which we define as the completion of all planning, designing, coding and testing activities that are necessary to establish products that meet design specifications including functions, features and technical performance requirements.

We have determined that technological feasibility for our software products is reached shortly before they are released for sale.

Costs incurred after technological feasibility is established are not significant, and accordingly we expense all research and development costs when incurred.

Cash and Cash Equivalents

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Foreign Currency

The functional currency for the Company’s foreign subsidiaries, ShotSpotter (Pty) Ltd.

and ShotSpotter Colombia S.A.S, is the local currency (South African Rand and Colombian Peso respectively).

The functional currency for the Company’s foreign subsidiaries is the local currency.

The assets and liabilities of the subsidiary are translated into U.S.

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Accounts receivable are recorded as the invoiced amount.

Accounts receivable also consists of trade accounts receivables (net of any commissions) from the sales channel intermediary through which we provide software license, maintenance and support, and professional services.

The Company does not require collateral or other security for accounts receivable.

Contract asset consist of revenues recognized in advance of invoicing the customer.

We do not charge interest on accounts receivables that are past due.

The Company periodically evaluates the collectability of its accounts receivable and provides an allowance for potential credit losses based on the Company’s historical experience.

At December 31, 2019 and 2018, the Company did not have an allowance for potential credit losses as there were no estimated credit losses.

At December 31, 2020, the Company had a provision against accounts receivable of $ 74,000 .

At December 31, 2019, the Company did not have an allowance for potential credit losses as there were no estimated credit losses.

If a receivable is deemed by the Company to be uncollectible, the Company will write off the receivable to bad debt expense.

Concentrations of Risk

Credit Risk — Financial instruments that potentially subject the Company to concentration of credit risk consisted primarily of restricted cash, cash and cash equivalents and accounts receivable from trade customers.

The Company maintains its cash deposits at three domestic and two international financial institutions.

The Company maintains its cash deposits at three domestic and four international financial institutions.

The Company is exposed to credit risk in the event of default by a financial institution to the extent that cash and cash equivalents are in excess of the amount insured by the Federal Deposit Insurance Corporation.

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To date, the Company has not experienced any losses on its cash and cash equivalents.

Concentration of Accounts Receivable — At December 31, 2019, one customer accounted for 55% of the Company’s total accounts receivable.

Concentration of Accounts Receivable and Contract Asset — At December 31, 2020, three customers accounted for 37 %, 27 % and 11 %, respectively, of the Company’s total accounts receivable.

At December 31, 2019, one customer accounted for 55 %, of the Company’s account receivable.

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Concentration of Revenues — For the year ended December 31, 2020, two customers accounted for 18 % and 15 % of the Company’s revenues, For the year ended December 31, 2019, two customers accounted for 20 % and 14 % of the Company’s revenues.

For the year ended December 31, 2017, one customer accounted for 18% of the Company’s revenues.

For the year ended December 31, 2018, two customers accounted for 22 % and 15 % of the Company’s revenues.

Concentration of Suppliers — The Company relies on a limited number of suppliers and contract manufacturers.

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Acquisition-related expenses are recognized separately from the business combination and are recognized as general and administrative expense as incurred.

Following the acquisition of HunchLab (see Note 8, Business Acquisitions ), the Company recorded goodwill for the first time in October 2018.

Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (October 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

We performed our first annual test for goodwill impairment as of October 1, 2019 and concluded that no goodwill impairment charge was necessary.

Since inception through December 31, 2019, the Company did not have any goodwill impairment.

We performed our annual test for goodwill impairment as of October 1, 2020 and concluded that no goodwill impairment charge was necessary.

Since inception through December 31, 2020, the Company did no t have any goodwill impairment.

Intangible Assets

Intangible assets consisted of acquired patents and capitalized legal fees related to obtaining patents, as well as customer relationships as a result from the Company’s acquisition of HunchLab in 2018 (see Note 8, Business Acquisitions ).

Patent assets are stated at costs, less accumulated amortization.

Customer relationships are recorded at fair value as of the date of the acquisition.

Intangible assets are amortized on a straight-line basis, over their expected useful lives, which range from three years for patents and seven years for customer relationships.

Intangible assets are amortized on an attribution method, over their expected useful lives, which range from three years for patents and seven to fifteen years for customer relationships.

Property and Equipment, net

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The license agreement renews automatically on each subsequent year unless it is terminated in accordance with the agreement.

The royalty fee due for each license sold to a customer is capitalized as property and equipment and amortized over the estimated useful life.

The difference in royalty fees capitalized in property and equipment and the minimum annual payment is classified as general and administrative expense in the consolidated statements of operations and was $ 3 0 ,000 , $ 35 ,000 and $ 60 ,000 for the years ended December 31, 201 9 , 201 8 , and 201 7 , respectively .

Convertible Preferred Stock Warrants

The Company issued warrants exercisable for shares of Series B-1 convertible preferred stock, or for shares of common stock upon the automatic conversion of all outstanding series of preferred stock into common stock.

These warrants were classified as a preferred stock warrant liability in the consolidated balance sheets, rather than stockholders’ equity, as they met the criteria to be classified as a derivative liability.

The convertible preferred stock warrants were subject to remeasurement to fair value at each balance sheet date and any change in fair value is recognized as a component of other expense, net, in the consolidated statements of operations.

The Company estimated the fair value of the warrants using an option pricing method (“OPM”) or probability weighed expected return method (“PWERM”) that incorporates the use of OPM, to allocate the estimated value of the Company.

Upon the closing of the IPO in 2017, the convertible preferred stock warrant liability was reclassified to additional paid-in capital.

All preferred stock warrants were converted into common stock warrants.

Fair Value Measurements

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The Company generally grants options to purchase shares of its common stock to its employees, directors and non-employees for a fixed number of shares with an exercise price equal to the fair value of the underlying shares at the grant date.

Fair value is determined by the Board.

All stock option grants are accounted for using the fair value method, and stock-based compensation expense is recognized as the underlying options vest which is the requisite service period.

All stock option grants are accounted for using the fair value method, and stock-based compensation expense is recognized ratably over the requisite service period as the underlying options vest which is the requisite

service period .

The Company uses the Black-Scholes option pricing model to measure the fair value of its stock options.

Prior to the IPO, given the absence of a public trading market for the Company’s common stock, the Board considered numerous objective and subjective factors to determine the fair value of the Company’s common stock each time stock option grants were approved.

The factors include, but are not limited to:

(i) the valuation of the Company’s common stock by an unrelated third party;

(ii) the Company’s results of operations, financial position and capital resources;

(iii) current economic indicators and outlook;

(iv) competition for the Company’s solutions;

and (v) the Company’s marketing methods.

The Company estimated the grant date fair value of its common stock options using the following assumptions:

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Consequently, we have historically used an expected dividend yield of zero .

Subsequent to the IPO, the Company uses the market closing price of its common stock as traded on the Nasdaq Capital Market to determine fair value.

The Company uses the market closing price of its common stock as traded on the Nasdaq Capital Market to determine fair value.

The Company generally grants unvested restricted stock unit awards to non-employee directors and executive management for a fixed number of shares and a fixed vesting schedule.

The restricted stock unit awards are valued using the closing price on the date of grant.

The restricted stock unit awards are valued using the closing price on the date of grant and stock-based compensation is recognized ratably over the requisite service period.

Forfeitures are recognized as and when they occur.

Segment Information

The Company has one operating segment with one business activity, providing gunshot detection systems.

The Company’s chief operating decision maker is its Chief Executive Officer, who manages operations on a consolidated basis for purposes of allocating resources.

The chief operating decision maker is its Chief Executive Officer, who allocates resources and assesses financial performance based upon discrete financial information at the consolidated level.

There are no segment managers who are held accountable by the chief operating decision maker, or anyone else, for operations, operating results and planning for levels or components below the consolidated unit level.

Accordingly, we have determined that we operate as a single operating and reportable segment.

The Company records income taxes in accordance with the liability method of accounting.

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These potentially dilutive securities are excluded from the computation of diluted net income (loss) per share if their inclusion would be anti-dilutive.

Accounting Pronouncements Recently Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).

There have been further amendments, including practical expedients, with the issuance of ASU 2018-01 in January 2018, ASU 2018-11 in July 2018 and ASU 2018-20 in December 2018.

Disclosure of key information about leasing arrangements is required.

Effective January 1, 2019, the Company adopted Topic 842.

The Company elected the optional transition method which allows entities to continue to apply historical accounting guidance in the comparative periods presented in the year of adoption.

At transition, lessees and lessors may elect to apply a package of practical expedients permitting entities not to reassess:

(i) whether any expired or existing contracts are or contain leases;

(ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any expired or existing leases qualify for capitalization under the amended guidance.

These practical expedients must be elected as a package and consistently applied.

The Company has elected to apply the package of practical expedients upon adoption.

The Company determines if an arrangement is a lease at inception.

The Company’s operating lease for its corporate headquarters office is impacted by the new standard and upon adoption, the Company recognized a right-of-use asset of $0.9 million and related lease liabilities totaling $0.9 million.

See Note 18, Leases.

In July 2017, the FASB issued ASU 2017-11 , Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815).

The amendments in Part I of ASU 2017-11 change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features.

The amendments also clarify existing disclosure requirements for equity-classified instruments.

The Company adopted this ASU as of January 1, 2019 and the adoption did not have any impact on the consolidated financial statements.

Recent Accounting Pronouncements Not Yet Effective

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects current expected credit loss (“CECL”) and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

The guidance will be effective at the beginning of the Company’s first quarter of fiscal 2023.

Early adoption of the amendments is permitted.

The Company does not expect the adoption of this ASU to have any material impact on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12 , Income Taxes (Topic 740), simplifying the accounting for income taxes by removing certain exceptions to the general principles.

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Revenue Related Disclosures

As of December 31, 2018, the Company had total short-term and long-term deferred revenue of $24.2 million.

During the year ended December 31, 2019, the Company recognized $23.1 million in revenue from the beginning deferred revenue balance and $17.2 million from new billings, and added $43.1 million to total short-term and long-term deferred revenue from new billings.

As of January 1, 2018, upon the adoption of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”), the Company had total short-term and long-term deferred revenue of $17.3 million.

During the year ended December 31, 2018, the Company recognized $9.7 million in revenue from the beginning deferred revenue balance and $24.8 million from new billings, and added $41.4 million to total short-term and long-term deferred revenue from new billings.

As of December 31, 2019, the Company has estimated remaining performance obligations for contractually committed revenues of $34.9 million, $21.6 million, $5.5 million, and $0.7 million that will be recognized during the year ending December 31, 2020, 2021, 2022, and 2023 through 2025, respectively.

Changes in deferred revenue were as follows (in thousands):

Balance at the beginning of the year

Revenue recognized during the year from balance at the beginning of the year

Revenue recognized during the year from new billings

Foreign currency impact

Balance at the end of the year

The following table presents remaining performance obligations for contractually committed revenues as of December 31, 2020 (in thousands):

The timing of revenue recognition includes estimates of go-live dates for contracts not yet live.

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During the year ended December 31, 2020 , the Company recognized revenues of $ 45.0 million from customers in the United States, and $ 0.7 million from customers in South Africa and the Bahamas.

During the year ended December 31, 2019, the Company recognized revenues of $ 39.7 million from customers in the United States

and $ 1.0 million from a customer in South Africa .

During the year ended December 31, 2018, the Company recognized revenues of $ 33.9 million from customers in the United States and $ 0.9 million from a customer in South Africa.

Business Acquisitions

On November 24, 2020 , the Company completed the acquisition of 100 % of the membership interests in LEEDS for a purchase consideration of $ 21.6 million in cash, subject to working capital adjustments, and $ 2.0 million in 63,901 units of ShotSpotter common stock.

The purchase consideration also included a contingent earnout agreement.

Up to $ 2.5 million in contingent earnout will be payable based on LEEDS' revenues generated during 2021.

An additional amount up to $ 2.5 million contingent earnout will be payable based on LEEDS' revenues during 2022.

The amounts will be determined and paid within approximately 90 days after the end of 2021 and 2022, respectively.

The preliminary fair value of the contingent earnout is $ 0.2 million, resulting in a total estimated purchase consideration of $ 23.8 million.

The acquisition will enable the Company to broaden its suite of precision policing solutions to offer its customers.

The following table summarizes the allocation of the purchase price as of the acquisition date, November 24, 2020 (in thousands):

Cash and cash equivalents

Accounts receivable and contract asset, net

Property and equipment, net

Operating lease right-of-use asset

Customer relationship

Accrued expenses and other current liabilities

Other liabilities

Total estimated consideration

The purchase price allocation above is final except for measure period adjustments which may be required in the future following purchase price adjustments related to working capital true-up.

Goodwill primarily represents the value of the employee workforce as well as cash flows from future customers.

The Company expects to deduct the amortization of goodwill and intangible assets for tax purposes.

A portion of the amortization deduction will commence upon settlement of contingent consideration and contingent liabilities.

The Company valued the customer relationship asset using the income approach.

Significant assumptions include forecasts of revenues, cost of revenues, research and development expense, sales and marketing expense, general and administrative expense and estimated customer attrition rates.

The Company discounted the cash flows at 7 %, reflecting the risk profile of the asset.

The customer relationship asset will be amortized over an estimated useful life of 15 years.

Acquisition-related expenses totaled $ 0.6 million, which were included in general and administrative expense for the year ended December 31, 2020.

The unaudited pro forma combined revenue and net income presented below have been prepared as if the Company had acquired LEEDS on January 1, 2019.

The unaudited pro forma financial information has been derived from the consolidated statements of operations of the Company and LEEDS for the below periods.

The historical financial information has been adjusted in the unaudited combined pro forma information based upon currently available information and certain estimates and assumptions.

The actual effect of the transactions ultimately may differ from the pro forma adjustments included herein.

However, management believes that the assumptions used to prepare the pro forma adjustments provide a reasonable basis for presenting the significant effects of the transactions

as currently contemplated and that the pro forma adjustments are factually supportable, give appropriate effect to the expected impact of events that are directly attributable to the transactions, and reflect those items expected to have a continuing impact on the Company.

The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2019.

The unaudited pro forma combined revenue and net income (loss) for the years ended December 31, 2020 and 2019 are as follows (in thousands):

Year Ended December 31,

Net income (loss)

On October 3, 2018 , the Company acquired certain technology, referred to as HunchLab, and related assets from Azavea Inc.

The acquisition provides an opportunity to increase the Company’s revenue per customer with a related and value-added technology that helps deter crime through strategically planned patrols.

The purchase consideration totaled $ 2.5 million, consisting of $ 1.7 million in cash and a contingent earnout payable in cash for up to $ 750,000 based on HunchLab’s revenues generated over the three-year period following the acquisition date.

The Company determined the acquisition-date fair value of the contingent consideration liability based on the likelihood of meeting revenues forecasts.

The following table presents the purchase price allocation (in thousands):

Accounts receivable

Prepaid expense

Deferred revenue, short term

Accounts payable

Software technology

Customer relationships

Total purchase consideration

Goodwill primarily represents the value of cash flows from future customers.

The Company expects to deduct goodwill and identifiable technology and intangible assets for tax purposes, a portion of which will commence upon settlement of contingent consideration and contingent liabilities.

The following table presents the components of the identifiable technology and intangible assets and the estimated useful lives (in thousands):

Software technology

Customer relationships

Total identifiable technology and intangible assets

The Company valued customer relationships and the software technology using the income approach.

The Company discounted the cash flows at 25.5 %, reflecting the risk profile of the assets.

Acquisition-related expenses totaled $ 0.2 million, which were included in general and administrative expense for the year ended December 31, 2018.

The Company has not presented separate results of operations since closing or combined pro forma financial information of the Company and HunchLab since the beginning of fiscal 2017, as results of operations for HunchLab are immaterial.

Fair Value Measurements

Prior to the IPO, the Company’s convertible preferred stock warrant liability was measured on a recurring basis and was classified within Level III of the fair value hierarchy because some of the inputs used in its measurement were neither directly or indirectly observable.

The valuation methodology and underlying assumptions in the fair value determination are discussed in Note 3, Basis of Presentation and Summary of Significant Accounting Policies , and Note 15, Convertible Preferred Stock Warrants and Common Stock Warrants .

Immediately prior to the IPO, the convertible preferred stock warrant liability was remeasured to fair value, resulting in a loss of $3.7 million which was recorded in other expense, net.

Upon the closing of the IPO, the entire balance of $5.7 million in convertible preferred stock warrant liability was reclassified to additional paid-in capital.

There were no transfers into or out of Level III during the year ended December 31, 2020.

The changes in the fair value of the convertible preferred stock warrant liability and changes in the fair value of contingent consideration are summarized below (in thousands):

The changes in the fair value of contingent consideration are summarized below (in thousands):

Measurements at

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Using Level III Inputs

Fair value at December 31, 2016

Issuance of convertible preferred stock warrants

Change in fair value recorded in other expense,

Reclassification of unexercised warrant into

additional paid-in capital upon the IPO

Fair value at December 31, 2017

Contingent consideration from business

Fair value at December 31, 2018 and 2019

December 31, 2019

Payment of contingent consideration

Contingent consideration from business

Change in fair value of contingent consideration

Fair value at December 31, 2020

As of the acquisition date of HunchLab (see Note 4, Business Acquisitions ) and as of December 31, 2018, the Company estimated, based on (i) the probability of achieving the relevant revenues targets and (ii) the timing of achieving such targets, that the fair value of the contingent consideration approximates the maximum amount payable.

There was no change in fair value during the year ended December 31, 2019.

In February 2020, subsequent to December 31, 2019, the Company made its first payment of $0.3 million to Azavea, Inc.

There was no change in fair value during the years ended December 31, 2020 and 2019.

In January 2020, the Company paid $ 0.3 million based on revenues generated over the first year of the contingent earnout period.

In February 2021, subsequent to December 31, 2020, the Company paid the remaining $ 0.4 million of the contingent earnout based on revenues generated over the second year of the contingent earnout period.

Using a Monte Carlo Simulation approach, the Company estimated the fair value of the contingent consideration at the acquisition date of LEEDS to be $ 0.2 million.

The Company estimated cash flows relevant to the revenue targets over the contingent consideration period fiscal years 2021 and 2022.

The asset volatilities used in the model ranged from 34.2 % to 54.5 %.

The revenue volatilities used in the model ranged from 8.3 % to 13.2 %.

The changes in goodwill for 2020 and 2019 are as follows (in thousands):

Balance, beginning of year

Acquisition of LEEDS (see Note 4—Business Acquisitions)

Balance, end of year

The Company had no accumulated goodwill impairment charges as of December 31, 2020.

Intangible Assets, net

Intangible assets, net, consisted of the following (in thousands):

December 31, 2019

Customer relationship

December 31, 2018

Customer relationship

Amortization expense during the years ended December 31, 2019, 2018 and 2017 was $88,000, $61,000 and $47,000, respectively.

The following table presents future intangible asset amortization as of year-end 2019 (in thousands):

Intangible Assets as of December 31, 2020 and 2019 are as follows (in thousands):

Accumulated Amortization

Customer relationships

Total intangible assets, net

Accumulated Amortization

Customer relationships

Total intangible assets, net

Intangible amortization expense was $ 187,000 , $ 88,000 and $ 61,000 for 2020, 2019 and 2018, respectively.

The following table presents future intangible asset amortization as of December 31, 2020 (in thousands):

Details of Certain Consolidated Balance Sheet Accounts

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Deferred commissions

Accounts receivable and contract asset (in thousands):

Accounts receivable

Contract asset

Allowance for potential credit losses

Other assets (in thousands):

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Accumulated depreciation and amortization

Depreciation expense during the years ended December 31, 2019, 2018 and 2017 was $4.9 million, $3.9 million and $3.1 million, respectively.

Depreciation and amortization expense during the years ended December 31, 2020, 2019 and 2018 was $ 5.4 million, $ 4.9 million and $ 3.9 million, respectively.

Accrued expenses and other current liabilities (in thousands):

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Operating lease liability

Deferred rent

Business Acquisitions

On October 3, 2018, the Company acquired certain technology, referred to as HunchLab, and related assets from Azavea Inc.

The acquisition provides an opportunity to increase the Company’s revenue per customer with a related and value-added technology that helps deter crime through strategically planned patrol missions.

The Company determined the acquisition-date fair value of the contingent consideration liability based on the likelihood of meeting revenues forecasts.

The following table presents the purchase price allocation (in thousands):

Accounts receivable

Prepaid expense

Deferred revenue, short term

Accounts payable

Software technology

Customer relationships

Total purchase consideration

Goodwill primarily represents the value of cash flows from future customers.

The following table presents the components of the identifiable technology and intangible assets and the estimated useful lives (in thousands):

Software technology

Customer relationships

Total identifiable technology and intangible assets

The Company valued customer relationships and the software technology using the income approach.

The Company discounted the cash flows at 25.5%, reflecting the risk profile of the assets.

Acquisition-related expenses totaled $0.2 million, which were included in general and administrative expense for the year ended December 31, 2018.

Other liabilities (long-term) (in thousand):

Operating lease liabilities

Contingent consideration liability

Other liabilities

Impairment of Property and Equipment

During the year ended December 31, 2019, the Company did not recognize any impairment.

During the year ended December 31, 2020, the Company recognized impairment expense of $ 234,000 for the impairment of property and equipment primarily related to the book value of customer assets installed at certain customers that did not renew during the year.

During the year ended December 31, 2019, the Company did no t recognize any impairment.

During the year ended December 31, 2018, the Company recognized impairment expense of $ 0.7 million for the impairment of property and equipment primarily related to the remaining book value of indoor sensor inventory and indoor sensor networks installed at certain security customers.

Management concluded that the impairment charges were required because the Company made the strategic decision to no longer include indoor coverage as part of its service offering.

During the year ended December 31, 2017, the Company recognized impairment expense of $0.8 million for the impairment of property and equipment primarily relating to the remaining net book value of deployed equipment in Puerto Rico and the U.S.

Virgin Islands.

Management concluded that the impairment charges were required because the equipment was presumed destroyed by the hurricanes in September 2017.

Financing Arrangem ents

Financing Arrangements

Credit Agreement

On September 27, 2018 , the Company entered into a Credit Agreement with Umpqua Bank (the “Umpqua Credit Agreement”), which allows the Company to borrow up to $ 10.0 million under a revolving loan facility (the “Revolving Facility”) .

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.

The Company intends to use the Revolving Facility for general working capital purposes.

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There were no borrowings outstanding as of December 31, 2020 and 2019.

Notes Payable- 2015 Term Note

Borrowings under the 2015 Term Note bore interest at the greater of:

(i) the average prime rate in effect during each month or (ii) the average three-month LIBOR rate during such month, plus 2.5% per annum, plus 7.5% with a minimum rate of 11%, with interest only payments through October 2017, followed by 36 equal monthly installments of principal and interest through October 2020, the maturity date.

The weighted average interest rate during the year ended December 31, 2017 was and 11.54%.

For the year ended December 31, 2017 the Company recognized interest expense of $1.1 million, based on the outstanding balance during the period.

During the year ended December 31, 2017, amortization of debt issuance costs was $132,000.

Amortization of debt issuance costs is recorded in interest expense in the consolidated statements of operations.

Borrowings under the 2015 Term Note were secured by substantially all of the assets of the Company.

Additionally, the terms of the 2015 Term Note included certain financial covenants and various negative covenants.

In March 2017, the Company amended the 2015 Term Note.

In connection with the amendment of the 2015 Term Note, the Company issued a warrant to purchase 76,704 shares of Series B-1 preferred stock at an exercise price of $5.8667 per share;

however, the terms of the warrant provided that upon the completion of a public offering in which the Company raises at least $25.0 million in net proceeds, the number of shares underlying the warrant would be reduced to 61,363 shares.

Consistent with these terms, upon the closing of the IPO, the number of shares underlying this warrant was reduced to 61,363 shares, and the warrant became exercisable for common stock.

I n September 2017, the Company voluntarily repaid all outstanding borrowings under the 2015 Term Note.

The Company recorded to other expense, net, a loss of $0.2 million, consisting of prepayment fees and miscellaneous fees, and wrote-off $0.3 million of unamortized debt issuance costs from the early extinguishment of debt .

Related Party Transactions

During the year ended December 31, 2020, the Company recognized $ 0.2 million in revenues, from ShotSpotter Labs projects with charitable organizations that have received donations from one of the Company’s directors and one of the Company’s significant shareholders.

During the year ended December 31, 2019, the Company recognized $ 0.6 million in revenues, from ShotSpotter Labs.

During the year ended December 31, 2018, the Company did not have any related party transactions.

During the year ended December 31, 2017, the Company recognized approximately $0.7 million, in revenues from a reseller who was also an investor.

As of December 31, 2017, the amount of accounts receivable due from this reseller was immaterial.

The domestic and foreign components of net income (loss) before income tax expense were as follows (in thousands):

Year Ended December 31,

Net income (loss)

Net income (loss) before income tax

The provision (benefit) for income tax consists of the following (in thousands):

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Total tax expense (benefit)

A reconciliation of income taxes at the statutory federal income tax rate to net income (loss) taxes included in the accompanying consolidated statements of opera tions is as follows (in thousands):

A reconciliation of income taxes at the statutory federal income tax rate to net income (loss) taxes included in the accompanying consolidated statements of operations is as follows (in thousands):

Income tax at statutory rate

Change in valuation allowance

Change in tax rate

Change in deferreds

Mark-to-market on warrants

Stock-based compensation

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Foreign rate differential

Subpart F - GILTI

Subpart F- transition tax

Temporary differences that gave rise to significant portions of the Company’s deferred tax assets and liabilities as of December 31, 2020 and 2019 were as follows (in thousands):

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Fixed assets and intangibles

Total deferred tax liabilities, net

Realization of deferred tax assets is dependent upon future taxable income, if any, the timing and amount of which are uncertain.

Management has determined that the deferred tax assets are not realizable on a more likely than not basis.

Accordingly, deferred tax assets have been fully offset by a valuation allowance.

The valuation allowance increased by $17,000 during the year ended December 31, 2019.

As of December 31, 2019, the Company had federal net operating loss carryforwards of approximately $85.6 million, of which $80.6 million will expire between 2026 through 2038, if not utilized, and $5.0 million which do not expire.

As of December 31, 2019, the Company also had state NOLs of approximately $55.1 million, which will expire, if not utilized, in 2019 through 2038.

Total deferred tax assets (liabilities), net

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The Company regularly assesses the likelihood that the deferred tax assets will be recovered from future taxable income.

The Company considers projected future taxable income and ongoing tax planning strategies, then records a valuation allowance to reduce the carrying value of the net deferred taxes to an amount that is more likely than not able to be realized.

Based upon the Company’s assessment of all available evidence, including the previous three years of U.S.

based taxable income and loss after permanent items, estimates of future profitability, and the Company’s overall prospects of future business, the Company determined that it is more likely than not that the Company will not be able to realize a portion of the deferred tax assets in the future.

The Company will continue to assess the potential realization of deferred tax assets on an annual basis, or an interim basis if circumstances warrant.

If the Company’s actual results and updated projections vary significantly from the projections used as a basis for this determination, the Company may need to change the valuation allowance against the gross deferred tax assets.

Management determined that a valuation allowance of $ 23.7 million and $ 23.7 million was required as of December 31, 2020 and 2019, respectively.

The federal and state loss carryforwards begin to expire in 2026 and 2021, respectively, unless previously utilized.

At December 31, 2020 and 2019, the Company had available net operating loss carryforward of approximately $ 80.4 million and $ 85.6 million, respectively, for federal income tax purposes, of which $ 75.5 million were generated before 2018 and will begin to expire in 2026 .

The remaining net operating losses of $ 5.0 million can be carried forward indefinitely under Tax Cuts and Jobs Act.

The Company continually monitor all positive and negative evidence regarding the realization of its deferred tax assets and may record assets when it

becomes more likely than not, than they will be realized , w hich may impact the expense or benefit from income taxes .

At December 31, 2020 and 2019, the net operating losses for state purposes are $ 51.1 million and $ 55.0 million, respectively, and will begin to expire in 2021 if not utilized.

As of December 31, 2020 , the Company had available for carryover research and experimental credits for federal and California income tax purposes of approximately $ 1.2 million and $ 1.3 million, respectively, which are available to reduce future income taxes.

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The California research and experimental tax credits carry forward indefinitely until utilized.

Section 382 of the Internal Revenue Code of 1986 (the “Code”), as amended, and similar California regulations impose substantial restrictions on the utilization of net operating losses and tax credits in the event of an “owner ship change” of a corporation.

Accordingly, the Company’s ability to utilize net operating losses and credit carryforwards may be limited as the result of such an “ownership change” as defined in the Code.

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The Company applied FASB ASC 740-10-50, Accounting for Uncertainty in Income Tax, which prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

The Company classifies interest and penalties as a component of tax expense as a result of the full valuation allowance.

The Company had unrecognized tax benefits of approximately $0.8 million as of December 31, 2019, all of which was offset by a full valuation allowance.

No interest or penalties have been accrued as of December 31, 2019.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):

An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

A reconciliation of the beginning and ending amounts of unrecognized uncertain tax positions is as follows (in thousands):

Balance as of December 31, 2018

Increases for current year tax positions

Increases for prior year tax positions

Decrease for prior year tax positions

Balance as of December 31, 2019

Increases for current year tax positions

Decrease for prior year tax positions

Increases for prior year tax positions

Balance as of December 31, 2020

Unrecognized tax benefits may change during the next 12 months for items that arise in the ordinary course of business.

The Company does not anticipate a material change to its unrecognized tax benefits over the next 12 months that would affect the Company’s effective tax rate as a result of the full valuation allowances.

The Company files income tax returns in federal, various state and U.S.

territory jurisdictions, and South Africa.

The statute of limitations remains open for fiscal years 2005 through 2019 in the United States and the various state and the U.S.

territory jurisdictions.

Years beyond the normal statute of limitations remain open to audit by tax authorities due to tax attributes generated in earlier years which are being carried forward and may be audited in subsequent years when utilized.

Of the total unrecognized tax benefits at December 31, 2020, no amount will impact the Company's effective tax rate.

The Company does not anticipate that there will be a substantial change in unrecognized tax benefits within the next 12 months.

The Company recognizes interest and penalties related to unrecognized tax positions within the income tax expense line in the accompanying consolidated statements of operations.

There were no accrued interest and penalties associated with uncertain tax positions as of December 31, 2020 or December 31, 2019.

The Company files federal and state income tax returns in the U.S, certain U.S.

territories, and certain foreign jurisdictions.

The statues of limitations remain open for 2006 through 2020 in U.S.

for federal and state purposes in the U.S.

and certain U.S.

Years beyond the normal statutes of limitations remain open to audit by tax authorities due to tax attributes generated in earlier years which are being carried forward and may be audited in subsequent years when utilized.

In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions of the Act.

The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations.

The guidance indicates that either accounting for deferred taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as period cost are both acceptable methods subject to an accounting policy election.

For the year ended December 31, 2019, the Company has elected to treat any potential GILTI inclusions as a period cost.

Capital Stock

Convertible Preferred Stock

Immediately prior to the IPO, the Company had the following outstanding convertible preferred stock:

(in thousands)

Upon the closing of the IPO, all shares of convertible preferred stock then outstanding were automatically converted into an aggregate of 4,689,753 shares of common stock, resulting in the reclassification of the related redeemable convertible preferred stock into $23,000 of common stock and $42.1 million into additional paid-in capital.

Since the closing of the IPO in 2017, there were no shares of convertible preferred stock outstanding.

The Company is authorized to issue 500,000,000 shares of common stock with a par value of $ 0.005 per share.

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Holders of common stock have voting rights equal to one vote per share of common stock held and are entitled to receive any dividends as may be declared from time to time by the Board.

Prior to the IPO, common stock was subordinate to Series B-1 convertible preferred stock with respect to dividend rights and subordinate to Series B-1 and A-2 convertible preferred stock with respect to rights upon certain deemed liquidation events of the Company.

At December 31, 2020, shares of common stock reserved for future issuance were as follows:

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Preferred Stock

The Company is authorized to issue 20,000,000 shares of preferred stock, with a par value of $0.005, as provided in the Post-IPO Certificate.

Since the closing of the IPO, there were no shares of preferred stock issued and outstanding.

The Company is authorized to issue 20,000,000 shares of preferred stock, with a par value of $ 0.005 .

At December 31, 2020 and 2019, there was no preferred stock issued or outstanding.

Stock Repurchase Program

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During the year ended December 31, 2020 , we repurchased 74,520 shares of our common stock at an average price of $ 21.65 per share for $ 1.6 million.

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.

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preferred or common stock

Convertible Preferred Stock Warrants and Common Stock Warrants

Immediately prior to the Company’s IPO, all outstanding Series B-1 convertible preferred stock warrants were remeasured to their fair value, using the Black-Scholes model.

Refer to Note 3, Basis of Presentation and Summary of Significant Accounting Policie s, for a description of the valuation method.

The final remeasurement of the convertible preferred stock warrant liability resulted in a $3.7 million loss which was recorded to other expense, net.

Upon the closing of the IPO, the entire balance of $5.7 million in convertible preferred stock warrant liability was reclassified to additional paid-in capital.

All convertible preferred stock warrants were converted into common stock warrants.

In addition, the Company issued to the lead underwriter in the IPO a warrant to purchase up to 84,000 shares of its common stock.

During the year ended December 31, 2019, certain warrants were exercised on a cashless basis and converted into 13,865 shares of common stock.

Common Stock Warrants

At December 31, 2020 and 2019, the Company had the following common stock warrants issued and outstanding:

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Common stock warrant

February 2014

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Common stock warrant (1)

This warrant was issued to the Company’s lead underwriter in connection with the IPO.

In March 28, 2017, in connection with the amendment of the 2015 Term Note (see Note 10 , Financing Arrangements for details regarding the amendment of the 2015 Term Note), the Company issued a warrant to purchase 76,704 shares of Series B-1 preferred stock at an exercise price of $5.8667 per share which was reduced to 61,363 shares upon the completion of the Company’s IPO because greater than $25 million in proceeds were raised.

The Company determined the fair value of the warrants on the date of issuance to be $111,000.

The warrants were immediately exercisable.

In June 2017, in connection with its public offering, the Company issued a warrant to purchase 84,000 shares of common stock to its lead underwriter (the “June 2017 Warrant”).

The Company determined the fair value of the June 2017 Warrant on the date of issuance to be $0.3 million.

The June 2017 Warrant was immediately exercisable.

In June 2017, in connection with its public offering, the Company issued a warrant to purchase 84,000 shares of common stock to its lead underwriter.

The Company determined the fair value of this warrant on the date of issuance to be $ 0.3 million.

The warrant was immediately exercisable and was exercised in 2020 on cashless basis and converted into 46,939 shares of common stock.

The outstanding warrants for 50,716 shares were exercised in February 2021 on cash basis and converted into 50,716 shares of common stock.

Equity Incentive Plans

2017 Equity Incentive Plan

In February 2005, the Company adopted the 2005 Stock Plan, as amended in January 2010 and November 2012 (the “2005 Plan”).

Under the 2005 Plan provisions, the Company was authorized to grant incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units, and shares of restricted stock.

In May 2017, the Board and the Company’s stockholders approved the 2017 Equity Incentive Plan (the “2017 Plan”), which became effective in connection with the IPO.

The 2017 Plan provides for the issuance of stock options, restricted stock units and other awards to employees, directors and consultants of the Company.

A total of 2,413,659 shares of the Company’s common stock were initially reserved for issuance under the 2017 Plan, which is the sum of (1) 900,000 shares, (2) the number of shares reserved for issuance under the 2005 Plan at the time the 2017 Plan became effective and (3) shares subject to stock options or other stock awards under the 2005 Plan that would have otherwise been returned to the 2005 Plan (up to a maximum of 1,314,752 shares).

The number of shares of common stock reserved for issuance under the 2017 Plan will automatically increase on January 1 of each year, beginning on January 1, 2018 by the lesser of (1) 5% of the number of shares of the Company’s capital stock outstanding on December 31 st of the preceding calendar year or (2) such number of shares as determined by the Board.

In accordance with the evergreen provision, the number of shares of common stock reserved for issuance under our 2017 Plan was automatically increased on January 1, 2019 by 543,236 shares, which was equal to 5% of the total number of shares of capital stock outstanding on December 31, 2018.

As a result of the adoption of the 2017 Plan, no further grants may be made under the 2005 Plan.

The 2017 Plan provides for the issuance of stock options, restricted stock units and other awards to employees, directors and consultants of the Company.

The 2017 Plan included an evergreen provision which provides for the number of shares of common stock reserved for issuance under the 2017 Plan to automatically increase on January 1 of each year by the lesser of (1) 5 % of the number of shares of the Company’s capital stock outstanding on December 31 st of the preceding calendar year or (2) such number of shares as determined by the Board.

The Company’s 2017 Plan was automatically increased on January 1, 2020 by 565,707 shares, which was equal to 5 % of the total number of shares of capital stock outstanding on December 31, 2019.

The following table summarizes the activity of shares available for grant under the 2017 Equity Incentive Plan:

Shares available for grant at December 31, 2019

Increase in accordance with the evergreen provision

Options issued during the year

Canceled during the year

Shares available for grant at December 31, 2020

Stock Options

Incentive stock options may only be granted to Company employees and may only be granted with an exercise price not less than the fair value of the common stock, or not less than 110 % of fair value when the grant is issued to a person who, at the time of grant, owns stock representing more than 10 % of the voting power of all classes of stock.

Non-statutory stock options may be granted to Company employees, directors and consultants, and may be granted at a price per share not less than fair value on the date of the grant.

The Board determines the fair value of the Company’s common stock.

Options granted under the 2005 Plan and 2017 Plan generally vest over four years and expire no later than 10 years from the grant date.

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The 2005 Plan and 2017 Plan allows for the exercise of unvested options with repurchase rights over the restricted common stock issued.

The Company records proceeds from early exercises as a li ability and reclassifies the amount to equity as the repurchase ri ght lapses.

At December 31, 2020, 2019, and 2018, there were no unvested options resulting from early exercises.

Aggregate intrinsic value represents the difference between the Company’s estimated or actual fair value of its common stock and the exercise price of outstanding “in-the-money” options.

The aggregate intrinsic value of options exercised was $12.1 million, $12.6 million and $0.8 million during the years ended December 31, 2019, 2018 and 2017, respectively.

Based on the fair market value of the Company’s common stock at December 31, 2019, 2018 and 2017, the total intrinsic value of all outstanding options was $7.8 million, $19.3 million and $15.9 million, respectively.

At December 31, 2019, 2018 and 2017, total unrecognized stock-based compensation cost related to unvested stock options was $4.4 million, $3.3 million and $0.8 million, respectively, which will be recognized ratably over a weighted-average period of 2.9 years, 3.3 years and 3.2 years for each period.

Cash received from the exercise of stock options during the years ended December 31, 2019, 2018 and 2017 was $0.5 million, $0.6 million and $55,000, respectively.

No income tax benefits from stock-based compensation arrangements have been recognized in the consolidated statements of operations.

The fair value of stock option grants is set forth below and was determined using the Black-Scholes option pricing model with the following assumptions:

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$20.07-$44.95

$23.72-$47.39

Expected term (in years)

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Expected dividend yield

In February 2005, the Company adopted the 2005 Stock Plan, as amended in January 2010 and November 2012 (the “2005 Plan”).

Following the effectiveness of the 2017 Plan in connection with the IPO, no further grants will be made under the 2005 Plan.

A summary of stock option activities under the 2005 Plan and 2017 Plan during 201 7 , 201 8 and 201 9 is as follows:

A summary of stock option activities during 2020, 2019 and 2018 is as follows:

Grant Date Fair Value per Option

Aggregate Intrinsic Value Exercised (in thousands)

Outstanding at December 31, 2017

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Outstanding at December 31, 2020

Stock options outstanding, exercisable and vested were as follows:

Outstanding at

Contractual Life

Outstanding at

Contractual Life

Outstanding at

Contractual Life

During the year ended December 31, 2019, the company granted non-employee directors restricted stock unit (“RSU”) awards totaling 14,755 shares of common stock, with vesting terms of approximately 2 months to 12 months.

The weighted average fair value of $41.90 per unit was calculated using the closing stock price on the date of grants.

During the year ended December 31, 2018, the company granted non-employee RSU awards totaling 17,881 shares of common stock, with vesting terms of approximately 12 months.

The fair value of $28.45 per unit was calculated using the closing stock price on the date of grants.

During the year ended December 31, 2019, the Company granted executive management RSU awards totaling 39,597 shares of common stock, with vesting terms of 6.25% vest quarterly for the next four years.

The fair value of $44.95 per unit was calculated using the closing stock price on the grant dates.

During the year ended December 31, 2018, the Company granted executive management RSU awards totaling 92,883 shares of common stock, with vesting terms of 35% upon the first anniversary and 21.667% on each of the three subsequent anniversaries.

The weighte d average fair value of $17.87 per unit was calculated using the closing stock price on the grant dates.

During the year ended December 31, 2017, the company granted non-employee directors RSU awards totaling 47,312 shares of common stock, with vesting terms of approximately seven to ten months.

The fair value of $11.50 to $16.96 per unit was calculated using the closing stock price on the date of grants.

The following table summarizes the activity of RSU awards during 2019:

Additional information for stock options at December 31, 2020 were as follows:

Aggregate Intrinsic Value (in thousands)

Remaining Contractual term (in years)

Outstanding at December 31, 2020

Exercisable at December 31, 2020

At December 31, 2020, total unrecognized stock-based compensation cost related to unvested stock options was $ 7.9 million, which will be recognized ratably over a weighted-average period of 3.0 years.

No income tax benefits from stock-based compensation arrangements have been recognized in the consolidated statements of operations.

Restricted Stock Units

The Company grants restricted stock units (“RSU”) under the 2017 Plan to executive management and its non-employee Board directors.

RSUs granted to executive management generally vest over four years .

RSUs granted to non-employee Board directors generally vest annually.

A new non-employee Board director will receive an initial grant upon joining the Board and all Board directors will receive new annual grants at each annual meeting of shareholders.

The following table summarizes the activity of RSU awards:

of Restricted Stock Units

Grant Date Fair Value

Grant Date Fair Value per RSU

Aggregate Fair Value of RSUs Vested (in thousands)

Unvested RSUs at December 31, 2017

Unvested RSUs at December 31, 2018

During the year ended December 31, 2019, the Company granted certain executive management RSU awards, subject to certain financial milestones, totaling 8,031 shares of common stock, with vesting terms 100% upon the first anniversary, if the Compensation Committee of the Board of Directors of the Company believes that the associated financial milestones were met.

Unvested RSUs at December 31, 2019

Unvested RSUs at December 31, 2020

During the year ended December 31, 2019, the Company granted 8,031 RSU awards to certain members of executive management subject to certain financial milestones, with vesting 100 % upon the first anniversary, if the Compensation Committee of the Board of Directors of the Company believes that the associated financial milestones were met.

The weighted average fair value of $ 43.58 per unit was calculated using the closing stock price on the grant date.

At the end of the year the associated milestones were not met and the expense was reversed.

At December 31, 2019, 2018 and 2017, total unrecognized stock-based compensation cost related to RSUs was $2.4 million, $1.4 million, and $0.3 million, respectively, which will be recognized ratably over a weighted-average period of 2.6 years, 2.7 years and 0.4 years, respectively.

The fair values of RSUs that vested during the years ended December 31, 2019 and 2018 totaled $1.4 million and $0.6 million respectively.

No RSUs vested during the year ended December 31, 2017.

Our equity-based incentive plans include stock options, restricted stock units and other stock awards.

The number of shares available for grant under these plans was 1,632,636 as of December 31, 2019.

At the end of 2019 no expense was recorded because the associated milestones were not met.

At December 31, 2020, total unrecognized stock-based compensation cost related to RSUs was $ 3.5 million, which will be recognized ratably over a weighted-average period of 2.5 years.

2017 Employee Stock Purchase Plan

In May 2017, the Board and the Company’s stockholders adopted the 2017 Employee Stock Purchase Plan (“2017 ESPP”), which became effective in connection with the Company’s IPO.

The 2017 ESPP allows eligible employees to purchase shares of the Company’s common stock in an offering at a discount of the then-current trading price, up to the lesser of (1) 85% of the fair market value of the common stock on the first day of the IPO or (2) 85% of the fair market value of the common stock on the purchase date.

In May 2017, the Board and the Company’s stockholders adopted the 2017 Employee Stock Purchase Plan (“2017 ESPP”).

The 2017 ESPP permits the maximum discounted purchase price permitted under U.S.

tax rules, including a “lookback.”

The 2017 ESPP initial offering period runs for approximately 24 months in length, and contains four 6-month purchase periods.

tax rules, including a “lookback”, which allows eligible employees to purchase shares of the Company’s common stock at a 15 % discount to the lesser of the fair market value of common stock at the beginning and end of the offering period.

The 2017 ESPP initial offering period, which began in June 2017, ran for approximately 24 months in length, and contained four 6-month purchase periods.

Subsequent offering periods generally run for six months each.

An employee’s purchase rights terminate immediately upon termination of employment or other withdrawal from the 2017 ESPP.

No participant will have the right to purchase shares of common stock in an amount that has a fair market value of more than $ 25,000 determined as of the first day of the applicable purchase period, for each calendar year.

There are 200,000 shares of common stock reserved for issuance under the 2017 ESPP.

In addition, the 2017 ESPP contains a provision which provides for an automatic annual share increase on January 1 of each year, in an amount equal to the lesser of (1) 2% of the total number of shares of common stock outstanding on December 31 st of the preceding calendar year, (2) 150,000 shares or (3) such number of shares as determined by the Board.

accordance with the evergreen provision, the number of shares of common stock reserved for issuance under our 2017 ESPP was automatically increased on January 1, 201 9 by 150,000 shares.

The 2017 ESPP contains a provision which provides for an automatic annual share increase on January 1 of each year, in an amount equal to the lesser of (1) 2 % of the total number of shares of common stock outstanding on December 31 st of the preceding calendar year, (2) 150,000 shares or (3) such number of shares as determined by the Board.

The following table summarizes the activity of shares available under the 2017 ESPP:

Shares available for grant at December 31, 2019

Increase in accordance with the evergreen provision

Issued during the year

Shares available for grant at December 31, 2020

The Company accounts for employee stock purchases made under its 2017 ESPP using the estimate grant date fair value of accounting in accordance with ASC 718, Stock Compensation .

The Company values ESPP shares using the Black-Scholes model.

There were 65,639 shares issued during 2019 and 316,623 shares available under the 2017 ESPP as of December 31, 2019.

Total stock-based compensation expense associated with the 2005 Plan, 2017 Plan and 2017 ESPP is recorded in the consolidated statements of operations and was allocated as follows (in thousands):

Total stock-based compensation expense is recorded in the consolidated statements of operations and was allocated as follows (in thousands):

Year Ended December 31,

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During the year ended December 31, 2020 the Company recorded $ 0.2 million of matching contribution expense.

During the year ended December 31, 2019 the Company recorded $ 0.2 million of matching contribution expense.

no matching contribution expense related to the year ended December 31, 2018.

These matching contributions are subject to additional vesting criteria.

The Company did not make any contributions to the plan during the years ended December 31, 2018 and 2017.

The Company leases its principal executive offices in Newark, California, under a non-cancelable operating lease which expires in October 2021 .

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Upon adoption of ASC 842 on January 1, 2019, the Company recognized an operating lease right-of-use asset of $ 0.9 million and a corresponding lease lability of $ 0.9 million, using a discount rate of 6 % which reflects the Company’s incremental borrowing rate for a similar asset and similar term as of the date of adoption.

The operating lease cost recognized for the year ended December 31, 2019 was $0.3 million.

Rent expense recognized for the years ended December 31, 2018 and 2017 was $0.6 million and $0.4 million, respectively.

Supplemental information related to the operating lease as follows (in thousands):

In April 2020, the Company executed a lease agreement for office space in Washington, DC, under a non-cancelable operating lease that expires in November 2025 .

This lease does not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses.

Further, the lease does not contain contingent rent provisions.

The lease contains an option to extend the term for an additional five years subject to certain terms and conditions.

This lease includes both lease components (e.g., fixed payments including rent, taxes, parking, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs), which are accounted for as a single lease component as the Company has elected the practical expedient to group lease and non-lease components for all leases.

Upon lease commencement on May 1, 2020, the Company recognized an operating lease right-of-use asset of $ 0.5 million and a corresponding lease liability of $ 0.5 million, using a discount rate of 3.85 %, which reflects the Company’s incremental borrowing rate for a similar asset and similar term as of the date of commencement.

In November 2020, as part of the LEEDS acquisition, the Company acquired the non-cancelable operating lease of LEEDS’ office in Newark, New Jersey, which expires in July 2022 .

This lease does not have significant rent escalation holidays, concessions, leasehold improvement incentives, or other build-out clauses.

Further, the lease does not contain contingent rent provisions or renewal options.

This lease includes both lease (e.g., fixed monthly rent payments) and non-lease components (e.g., common-area or other maintenance costs) which are accounted for as a single lease component as the Company has elected the practical expedient to group lease and non-lease components for all leases.

In measuring the lease liability upon acquisition, the Company used a discount rate of 5 % which reflects the Company’s incremental borrowing rate for a similar asset and similar term as of the date of acquisition.

The operating lease cost recognized for the year ended December 31, 2020 and 2019, was $ 0.4 million and $ 0.3 million, respectively.

Rent expense recognized for the year ended December 31, 2018 was $ 0.6 million.

Supplemental information related to the operating leases as follows (in thousands):

As of December 31,

Operating lease right-of-use asset

Lease liability (short-term) (presented within Accrued expenses and other

Operating lease right-of-use assets

Lease liabilities (short-term) (presented within Accrued expenses and other

current liabilities)

Lease liability (long-term) (presented within Other liabilities)

Total operating lease liability

Lease liabilities (long-term) (presented within Other liabilities)

Total operating lease liabilities

Cash paid for amounts included in the measurement of lease liabilities

(presented within Operating cash flows)

Maturities of the lease liability at December 31, 2019 are as follows (in thousands):

Maturities of the lease liabilities at December 31, 2020 are as follows (in thousands):

Total lease payments, undiscounted

imputed interest

The Company does not have any finance leases.

The following table is shown for comparative purposes only.

The future minimum lease payments under the non-cancelable lease at December 31, 2018 are as follows (in thousands):

Commitments and Contingencies

The company has non-cancelable data center arrangements in which the original term exceeds one year.

The following is a schedule of future minimum payments under the non-cancelable data center arrangements at December 31, 2019 (in thousands):

Contingencies

On November 6, 2017 three individuals, Ken Fisher, Kevin Baxter and Fred Holmes (the “Contractors”), filed a complaint with the Superior Court of California, County of Alameda, alleging breach of contract, a breach of the implied covenant of good faith and fair dealing and violation of Section 17200 et seq.

of the California Business and Professions Code, purportedly predicated on an alleged breach of Section 10b-5 of the Securities Exchange Act of 1934.

On October 4, 2018, the parties reached a binding settlement.

On August 28, 2018, Silvon S.

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An unfavorable outcome on any litigation matters could require payment of substantial damages, or, in connection with any intellectual property infringement claims, could require the Company to pay ongoing royalty payments or could prevent the Company from selling certain of our products.

As a result, a settlement of, or an unfavorable outcome on, any of the matters referenced above or other litigation matters could have a material adverse effect on the Company’s business, operating results, financial condition and cash flows.

As a result, a settlement of, or an

unfavorable outcome on, any of the matters referenced above or other litigation matters could have a material adverse effect on the Company’s business, operating results, financial condition and cash flows .

Subsequent Events

For the audited consolidated financial statements, management evaluated subsequent events through March 12, 2020, which is the date these consolidated financial statements were issued.

C HANGES IN AND DISAGREEMENTS WITH ACCOUNT ANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Subsequent to year end, the Company repurchased 56,162 shares of its common stock at an average price of $ 39.02 per share for $ 2.2 million.

The repurchases were made in open market transactions using cash on hand, and all of the shares repurchased were retired.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis