SOUNDTHINKING, INC. 10-K

Item 7. 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. This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors”, set forth in Part I, Item 1A of this Annual Report on Form 10-K and in our other SEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. Overview We provide precision-policing and security solutions for law enforcement and security personnel to help prevent and reduce gun violence and make cities, campuses and facilities safer. Our flagship public safety solution, ShotSpotter 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 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 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. 55 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 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-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. Substantially all of our sales are to governmental agencies and universities, which often undertake a prolonged contract evaluation process that affects the size or the timing of our sales contracts and may likewise increase our customer acquisition costs. For a discussion of the risks associated with our sales cycle, see risks entitled “Our sales cycle can be unpredictable, time-consuming and costly, and our inability to successfully complete sales could harm our business” and “Because we generally recognize our subscription revenues ratably over the term of our contract with a customer, fluctuations in sales will not be fully reflected in our operating results until future periods” in Item 1A, Risk Factors , included in this Annual Report on Form 10-K. We rely on a limited number of suppliers and contract manufacturers to produce components of our solutions. We have no long-term contracts with these manufacturers and purchase from them on a purchase-order basis. Our outsourced manufacturers generally procure the components directly from third-party suppliers. Although we use a limited number of suppliers and contract manufacturers, we believe that we could find alternate suppliers or manufacturers if circumstances required us to do so, in part because a significant portion of the components required by our solutions is available off the shelf. For a discussion of the risks associated with our limited number of suppliers, see risk entitled “We rely on a limited number of suppliers and contract manufacturers, and our proprietary ShotSpotter sensors are manufactured by a single contract manufacturer” in Item 1A, Risk Factors , included in this Annual Report on Form 10-K. 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 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% 56 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 . 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 $1.2 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. 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. In each case, the increase in coverage was achieved through a combination of new customers and expansions with existing customers. During the year ended December 31, 2018, 71 miles out of 168 miles were due to expansion from a single customer. 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. U.S. 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 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 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. The ability to cross-sell new products provides an opportunity to grow revenues per customer and lifetime value. Challenges we face in this area include ensuring our new products are reliable, integrated well with other ShotSpotter solutions and priced and serviced appropriately. In some cases, we will need to bring in new 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. 57 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. However, we recognize that we have limited international operational experience and currently operate in a limited number of regions outside of the United States. Operating successfully in international markets will require significant resources and management attention and will subject us to additional regulatory, economic and political risks. We may face additional challenges that may delay contract execution related to negotiating with governments in transition, the use of third-party integrations and consultants. Moreover, we anticipate that different political and regulatory considerations that vary across different jurisdictions could extend or make more difficult to predict the length of what is already a lengthy sales cycle. Key Business Metrics 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. Year Ended December 31, 2020 2019 2018 (in thousands) Revenue retention rate 107 % 111 % 139 % Sales and marketing spend per $1.00 of new annualized contract value $ 0.51 $ 0.43 $ 0.30 Net new "go-live" square miles 49 82 168 Net new "go-live" cities 10 6 10 Revenue Retention Rate We calculate our revenue retention rate annually by dividing the (a) total revenues for such year from those customers who were customers during the corresponding prior year by (b) the total revenues from all customers in the corresponding prior year. For the purposes of calculating our revenue retention rate, we count as customers all entities with which we had contracts in the applicable year. Revenue retention rate for any given period does not include revenues attributable to customers first acquired during such period. We focus on our revenue retention rate because we believe that this metric provides insight into revenues related to and retention of existing customers. 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 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%. 58 Sales and Marketing Spend per $1.00 of New Annualized Contract Value We calculate sales and marketing spend annually as the total sales and marketing expense during a year divided by the first 12 months of contract value for contracts entered into during the same year. We use this metric to measure the efficiency of our sales and marketing efforts in acquiring customers, renewing customer contracts and expanding their coverage areas. Net New “Go-Live” Miles Net new “go-live” square miles represent the square miles covered by deployments of our gunshot detection solutions that were formally approved by customers during the 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; and • Potential decrease in productivity of our employees or these of our customers or suppliers due to travel bans or restrictions, work-from-home or shelter-in-place policies and orders. We may be adversely affected by 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. 59 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; and • 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 subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Revenues 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 to five years. Training and third-party integration license fees are recognized upon delivery. 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 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. 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. We generally invoice subscription service renewals for 100% of the total contract value when the renewal contract is executed. Renewal fees are recognized ratably over the term of the renewal, which is typically one year. While most of our customers elect to renew their agreements, in some cases, they may not be able to obtain the 60 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 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. 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 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 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. 61 Operating Expenses Operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Salaries, bonuses, stock-based compensation expense and other personnel costs are the most significant components of each of these expense categories. We include stock-based compensation expense incurred in connection with the grant of stock options and restricted stock units 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. 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 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 Research and development expenses primarily consist of personnel-related costs attributable to our research and development personnel, consulting fees and allocated overhead. We have devoted our product development efforts primarily to develop new lower-cost sensor hardware, develop new features 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 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 innovative sensor applications as well as to test and expand the functionality of our outdoor sensors in challenging environmental conditions. In the near term, we expect our research and development expenses to increase in absolute dollars as we increase our research and development headcount to further strengthen our software and invest in the development of our service. We will continue to invest in research and development to leverage our large and growing database of acoustic events, which includes those from both gunfire and non-gunfire. We also intend to leverage third-party AI and our own evolving cognitive and analytical applications to improve the efficiency of our solutions. Certain of these applications and outputs may expand the platform of services that we will be able to offer our customers. 62 General and Administrative General and administrative expenses primarily consist of personnel-related costs attributable to our executive, finance, and administrative personnel, legal, accounting and other professional services fees, other corporate expenses and allocated overhead. In the near term, we expect our general and administrative expenses to increase significantly in absolute dollars as we grow our business, support our operations as a public company and increase our headcount. Other Income (Expense), Net Other income (expense), net, consisted primarily of interest income and local and franchise tax expenses. Income Taxes Our income taxes are based on the amount of our taxable income and enacted federal, state and foreign tax rates, adjusted for allowable credits, deductions and the valuations allowance against deferred tax assets, as applicable. We continually monitor all positive and negative evidence regarding the realization of our deferred tax assets and may record assets when it becomes more likely than not, than they will be realized, which may impact the expense or benefit from income taxes. Results of Operations The following table sets forth our consolidated statements of operations data for the years ended December 31, 2020 and 2019 (in thousands): As a % of As a % of Change 2020 Revenues 2019 Revenues $ % Revenues $ 45,734 100 % $ 40,752 100 % $ 4,982 12 % Costs Cost of revenues 18,525 41 % 16,409 40 % 2,116 13 % Impairment of property and equipment 234 — — — 234 — Total costs 18,759 41 % 16,409 40 % 2,350 14 % Gross profit 26,975 59 % 24,343 60 % 2,632 11 % Operating expenses: Sales and marketing 10,328 23 % 9,989 25 % 339 3 % Research and development 5,614 12 % 5,344 13 % 270 5 % General and administrative 9,740 21 % 7,415 18 % 2,325 31 % Total operating expenses 25,682 56 % 22,748 56 % 2,934 13 % Income from operations 1,293 3 % 1,595 4 % (302 ) (19 %) Other expense, net (158 ) — 162 — (320 ) (198 %) Benefit from income taxes 90 — 41 — 49 120 % Net income $ 1,225 3 % $ 1,798 4 % $ (573 ) (32 %) Revenues 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. 63 Costs 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 $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 $0.3 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 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 decrease of $0.3 million was due primarily to a decrease in interest income as interest rates have significantly decreased over the year. Income Taxes Our income taxes are based on the amount of our taxable income and enacted federal, state and foreign tax rates, adjusted for allowable credits, deductions and the valuations allowance against deferred tax assets, as applicable. For the years ended December 31, 2020 and 2019, our provision for income taxes consisted of a benefit (provision) for foreign income taxes only. We continually monitor all positive and negative evidence regarding the realization of our deferred tax assets and may record assets when it becomes more likely than not, than they will be realized, which may impact the expense or benefit from income taxes. 64 Comparison of Years Ended December 31, 2019 and 201 8 The following table sets forth our consolidated statements of operations data for the years ended December 31, 2019 and 2018 (in thousands): As a % of As a % of Change 2019 Revenues 2018 Revenues $ % Revenues $ 40,752 100 % $ 34,753 100 % $ 5,999 17 % Costs Cost of revenues 16,409 40 % 14,846 43 % 1,563 11 % Impairment of property and equipment — — 686 2 % (686 ) (100 %) Total costs 16,409 40 % 15,532 45 % 877 6 % Gross profit 24,343 60 % 19,221 55 % 5,122 27 % Operating expenses: Sales and marketing 9,989 25 % 8,377 24 % 1,612 19 % Research and development 5,344 13 % 4,987 14 % 357 7 % General and administrative 7,415 18 % 8,425 24 % (1,010 ) (12 %) Total operating expenses 22,748 56 % 21,789 63 % 959 4 % Income (loss) from operations 1,595 4 % (2,568 ) (7 %) 4,163 (162 %) Other income (expense), net 162 — (170 ) (1 %) 332 (195 %) Benefit from income taxes 41 — 13 — 28 215 % Net income (loss) $ 1,798 4 % $ (2,725 ) (8 %) $ 4,523 (166 %) Revenues 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 . Costs 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. 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. 65 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. 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. 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. Income Taxes Our income taxes are based on the amount of our taxable income and enacted federal, state and foreign tax rates, adjusted for allowable credits, deductions and the valuations allowance against deferred tax assets, as applicable. For the years ended December 31, 2019 and 2018, our provision for income taxes consisted of a benefit (provision) for foreign income taxes only. Liquidity and Capital Resources Sources of Funds Our operations have been financed primarily through net proceeds from the sale of equity, debt financing arrangements and cash from operating activities. Our principal source of liquidity is cash and cash equivalents totaling $16.0 million as of December 31, 2020. We also have a $20.0 million credit facility, of which no amounts were outstanding as of December 31, 2020. In March 2019, we issued and sold 250,000 shares of our common stock in an underwritten public offering, for which we received net proceeds of $10.6 million after deducting offering expenses. We believe our existing cash and cash equivalent balances, our available credit facility and cash flow from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenues growth, the timing and extent of spending on sales and marketing, the expansion of sales and marketing activities, the timing of new product introductions, market acceptance of our products and overall economic conditions. We may also seek additional capital to fund our operations, including through the sale of equity or debt financings. To the extent that we raise additional capital through the future sale of equity, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. Use of Funds Our historical uses of cash have primarily consisted of cash used for operating activities, such as expansion of our sales and marketing operations, research and development activities and other working capital needs, and cash used in investing activities, such as property and equipment expenditures to install infrastructure in customer cities in order to deliver our solutions. 66 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 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 In May 2019, we announced that our Board of Directors had approved a stock repurchase program for up to $15 million of our common stock. The shares may be repurchased from time to time in open market transactions, in privately negotiated transactions or by other methods in accordance with federal securities laws. The actual timing, number and value of shares repurchased under the program will be determined by management in its discretion and will depend on a number of factors, including the market price of our common stock, general market and economic conditions and applicable legal requirements. The stock repurchase program does not obligate us to purchase any particular amount of common stock and may be suspended or discontinued at any time. During the 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. 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. Cash Flows Comparison of Years Ended December 31, 2020, 2019 and 2018 The following table presents a summary of our cash flows for the years ended December 31, 2020, 2019 and 2018: Year Ended December 31, 2020 2019 2018 (in thousands) Net cash provided by (used in): Operating activities $ 11,209 $ 13,692 $ (1,386 ) Investing activities (18,758 ) (4,909 ) (10,203 ) Financing activities (956 ) 5,482 2,437 Net change in cash and cash equivalents $ (8,505 ) $ 14,265 $ (9,152 ) 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. 67 Operating Activities 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 $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. Investing Activities 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. Off-Balance Sheet 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 68 sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”). The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of revenues, assets, liabilities, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. Our most critical accounting policies are summarized below. 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 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. The subscription contract is generally noncancelable without cause. Generally, these service arrangements do not provide the customer with the right to take possession of the hardware or software supporting the subscription service at any time. 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 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. 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. We recognize revenues upon the satisfaction of performance obligations. 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. We determined that the subscription services, training, and licenses to integrate with third-party applications are each distinct services that 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 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 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 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. 69 Subscription renewal fees are recognized ratably over the term of the renewal, which is typically one year. 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. Restricted stock unit awards are valued using the last reported stock price on the date of grant. We estimate the fair value of stock option awards at the date of grant using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and are freely transferable. The fair values generated by the model may not be indicative of the actual fair values of our awards as it does not consider other factors important to those stock-based payment awards, such as continued employment, periodic vesting requirements and limited transferability. Business Acquisition — We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing such intangible assets include, but not limited to, future expected cash flows from customer relationships and developed technology; 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 70 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. Application of the goodwill impairment test requires judgment, including the identification of reporting units and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated primarily through the use of a discounted cash flow methodology. 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 impairment as of October 1, 2020 and concluded that no impairment charge was necessary. Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign exchange rates as well as, to a lesser extent, inflation. Interest Rate Risk We are exposed to interest rate risk in the ordinary course of our business. Our cash includes cash in readily available checking and money market accounts. These securities are not dependent on interest rate fluctuations that may cause the principal amount of these assets to fluctuate. 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. Foreign Currency Exchange Risk We have foreign currency risks related to our revenues and operating expenses denominated in currencies other than our functional currency, the U.S. dollar, principally the South African Rand. Movements in foreign currencies in which we transact business could significantly affect future net earnings. 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. To date, we have not engaged in any hedging strategies. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in foreign currency rate. Inflation Risk We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations. 71 Item 8 . FINANCIAL STATEMEN TS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm 73 Consolidated Balance Sheets 74 Consolidated Statements of Operations 75 Consolidated Statements of Comprehensive Income (Loss) 76 Consolidated Statements of Stockholders’ Equity 77 Consolidated Statements of Cash Flows 78 Notes to Consolidated Financial Statements 79 72 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of ShotSpotter, Inc.: Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of ShotSpotter, Inc. (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 These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Baker Tilly US, LLP (formerly known as Baker Tilly Virchow Krause, LLP) We have served as the Company's auditor since 2016. Minneapolis, Minnesota March 29, 2021 73 ShotSpotter, Inc. Consolidated Balance Sheets (In thousands, except share and per share data) December 31, 2020 2019 Assets Current assets Cash and cash equivalents $ 16,043 $ 24,550 Accounts receivable and contract asset 12,921 13,883 Prepaid expenses and other current assets 2,172 1,764 Total current assets 31,136 40,197 Property and equipment, net 15,346 16,556 Operating lease right-of-use assets 882 556 Goodwill 2,811 1,379 Intangible assets, net 14,540 249 Other assets 1,605 1,634 Total assets $ 66,320 $ 60,571 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 1,192 $ 1,179 Deferred revenue, short-term 24,174 26,360 Accrued expenses and other current liabilities 5,613 4,885 Total current liabilities 30,979 32,424 Deferred revenue, long-term 405 598 Other liabilities 631 298 Total liabilities 32,015 33,320 Commitments and contingencies (Note 19) 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: $ 0.005 par value; 500,000,000 shares authorized; 11,538,998 and 11,314,150 shares issued and outstanding as of December 31, 2020 and 2019, respectively 58 57 Additional paid-in capital 128,771 122,907 Accumulated deficit ( 94,354 ) ( 95,579 ) Accumulated other comprehensive loss ( 170 ) ( 134 ) Total stockholders' equity 34,305 27,251 Total liabilities and stockholders' equity $ 66,320 $ 60,571 See accompanying notes to consolidated financial statements. 74 ShotSpotter, Inc. Consolidated Statements of Operations (In thousands, except share and per share data) Year Ended December 31, 2020 2019 2018 Revenues $ 45,734 $ 40,752 $ 34,753 Costs Cost of revenues 18,525 16,409 14,846 Impairment of property and equipment 234 — 686 Total costs 18,759 16,409 15,532 Gross profit 26,975 24,343 19,221 Operating expenses Sales and marketing 10,328 9,989 8,377 Research and development 5,614 5,344 4,987 General and administrative 9,740 7,415 8,425 Total operating expenses 25,682 22,748 21,789 Operating income (loss) 1,293 1,595 ( 2,568 ) Other income (expense), net Interest income (expense), net 113 440 82 Other expense, net ( 271 ) ( 278 ) ( 252 ) Total other income (expense), net ( 158 ) 162 ( 170 ) Income (loss) before income taxes 1,135 1,757 ( 2,738 ) Benefit from income taxes ( 90 ) ( 41 ) ( 13 ) Net income (loss) $ 1,225 $ 1,798 $ ( 2,725 ) Net income (loss) per share, basic $ 0.11 $ 0.16 $ ( 0.26 ) Net income (loss) per share, diluted $ 0.10 $ 0.15 $ ( 0.26 ) Weighted average shares used in computing net income (loss) per share, basic 11,408,757 11,302,780 10,569,007 Weighted average shares used in computing net income (loss) per share, diluted 11,730,294 11,846,348 10,569,007 See accompanying notes to consolidated financial statements. 75 ShotSpotter, Inc. Consolidated Statements of Comprehensive Income (Loss) (In thousands) Year Ended December 31, 2020 2019 2018 Net income (loss) $ 1,225 $ 1,798 $ ( 2,725 ) Other comprehensive income (loss): Change in foreign currency translation adjustment ( 36 ) 15 ( 150 ) Comprehensive income (loss) $ 1,189 $ 1,813 $ ( 2,875 ) See accompanying notes to consolidated financial statements. 76 ShotSpotter, Inc. Consolidated Statements of Stockholders’ Equity (In thousands, except share data) Common Stock Additional Paid-in Accumulated Accumulated Other Comprehensive Total Stockholders' Equity/ Shares Par Value Capital Deficit Income (Loss) (Deficit) Balance at December 31, 2017 9,827,129 $ 48 $ 109,708 $ ( 97,595 ) $ 1 $ 12,162 Exercise of stock options 609,985 3 547 — — 550 Issuance of common stock in connection with exercise of warrants 296,691 1 987 — — 988 Issuance of common stock from ESPP purchase 83,605 — 909 — — 909 Issuance of common stock from RSU's vested 47,312 3 ( 1 ) — — 2 Stock-based compensation — — 2,468 — — 2,468 Foreign currency translation loss — — — — ( 150 ) ( 150 ) Cumulative effect of change in accounting principle — — — 2,943 — 2,943 Net loss — — — ( 2,725 ) — ( 2,725 ) Balance at December 31, 2018 10,864,722 $ 55 $ 114,618 $ ( 97,377 ) $ ( 149 ) $ 17,147 Exercise of stock options 307,365 2 452 — — 454 Issuance of common stock in connection with exercise of warrants 26,098 — 71 — — 71 Issuance of common stock upon secondary offering, net of costs 250,000 1 10,553 — — 10,554 Repurchase of common stock and retirement ( 257,824 ) ( 2 ) ( 6,716 ) — — ( 6,718 ) Issuance of common stock from ESPP purchase 65,639 1 872 — — 873 Issuance of common stock from RSU's vested 58,150 — — — — — Stock-based compensation — — 3,057 — — 3,057 Foreign currency translation gain — — — — 15 15 Net income — — — 1,798 — 1,798 Balance at December 31, 2019 11,314,150 $ 57 $ 122,907 $ ( 95,579 ) $ ( 134 ) $ 27,251 Exercise of stock options 96,456 1 313 — — 314 Issuance of common stock in connection with exercise of warrants 46,939 — — — — — Repurchase of common stock ( 74,520 ) — ( 1,615 ) — — ( 1,615 ) Issuance of common stock from ESPP purchase 37,102 — 704 — — 704 Issuance of common stock from RSU's vested 54,970 — — — — — Issuance of common stock from acquisition 63,901 — 2,000 — — 2,000 Stock-based compensation — — 4,462 — — 4,462 Foreign currency translation loss — — — — ( 36 ) ( 36 ) Net income — — — 1,225 — 1,225 Balance at December 31, 2020 11,538,998 58 128,771 ( 94,354 ) ( 170 ) $ 34,305 See accompanying notes to consolidated financial statements. 77 ShotSpotter, Inc. Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2020 2019 2018 Cash flows from operating activities: Net income (loss) $ 1,225 $ 1,798 $ ( 2,725 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation of property and equipment 5,399 4,894 3,856 Amortization of intangible assets 187 88 61 Impairment of property and equipment 234 — 686 Stock-based compensation 4,462 3,057 2,468 Loss on disposal of property and equipment 3 — 4 Provision for accounts receivable 74 — — Changes in operating assets and liabilities: Accounts receivable and contract asset 1,953 1,383 ( 11,224 ) Prepaid expenses and other assets ( 321 ) ( 192 ) ( 766 ) Accounts payable ( 190 ) ( 243 ) ( 346 ) Accrued expenses and other current liabilities 575 108 ( 246 ) Deferred revenue ( 2,392 ) 2,799 6,846 Net cash provided by (used in) operating activities 11,209 13,692 ( 1,386 ) Cash flows from investing activities: Purchase of property and equipment ( 4,059 ) ( 4,823 ) ( 8,444 ) Investment in intangible and other assets ( 72 ) ( 86 ) ( 48 ) Business acquisition, net of cash acquired ( 14,627 ) — ( 1,711 ) Net cash used in investing activities ( 18,758 ) ( 4,909 ) ( 10,203 ) Cash flows from financing activities: Payment of contingent consideration liability ( 347 ) — — Payment of line of credit costs ( 12 ) — ( 10 ) Proceeds from issuance of common stock upon secondary offering — 11,247 — Payments of secondary offering costs — ( 445 ) — Proceeds from exercise of stock options 314 454 550 Repurchases of common stock ( 1,615 ) ( 6,718 ) — Proceeds from exercise of warrants — 71 988 Proceeds from employee stock purchase plan 704 873 909 Net cash provided by (used in) financing activities ( 956 ) 5,482 2,437 Increase (decrease) in cash, cash equivalents and restricted cash ( 8,505 ) 14,265 ( 9,152 ) Effect of exchange rate on cash and cash equivalents ( 2 ) 7 ( 167 ) Cash, cash equivalents and restricted cash at beginning of year 24,550 10,278 19,597 Cash, cash equivalents and restricted cash at end of year $ 16,043 $ 24,550 $ 10,278 Supplemental cash flow disclosures: Cash paid for income taxes $ — $ 51 $ 79 Supplemental disclosure of non-cash financing activities: Property and equipment purchases included in accounts payable $ 522 $ 311 $ 205 Estimated fair value of contingent consideration $ 170 $ — $ 750 Fair value of common stock issued as consideration for business acquisition $ 2,000 $ — $ — Deferred offering costs included in other assets $ — $ — $ 249 Line of credit costs included in other assets $ — $ — $ 91 See accompanying notes to consolidated financial statements. 78 ShotSpotter, Inc. Notes to Consolidated Financial Statements Note 1. Organization and Description of Business ShotSpotter, Inc. (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 five wholly-owned subsidiaries globally, including in South Africa, Colombia, Brazil and Mexico. Note 2. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. 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 subsidiaries. All significant intercompany transactions have been eliminated during consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its significant estimates including the valuation of accounts receivable, the lives and realization of tangible and intangible assets, stock-based compensation expense, accounting for revenue recognition, and income taxes. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions it believes to be reasonable under the circumstances. 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 – 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. Typically, the initial contract period is one to five years in length. The subscription contract is generally noncancelable without cause. Generally, these service arrangements do not provide the customer with the right to take possession of the hardware or software supporting the subscription service at any time. A small portion of the Company’s 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. The Company 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. The Company generally invoices 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. For security solutions, the pricing model is on a customized-site basis. As a result of the process for invoicing contracts 79 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 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 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 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. 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. Subscription renewal fees are recognized ratably over the term of the renewal, which is typically one year . 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, the Company stops 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, the Company recognizes 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. The Company capitalizes certain incremental costs of obtaining a contract, which includes sales commissions. As there are not commensurate commissions earned on renewals of the subscription services, the Company capitalizes commissions related to subscription services provided under both the initial contract and renewal periods and amortizes the capitalized commissions on a straight-line basis over the customer life, which is determined to be five years . For commissions that are earned on renewal contracts with an original duration of one year or less, the Company uses the practical expedient applicable to such commissions and recognizes the commissions immediately as expense instead of capitalizing. 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. 80 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 Costs include the cost of revenues and charges for impairment of property and equipment. 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. 81 Advertising and Promotion Costs Advertising and promotion costs are expensed as incurred. 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 Cash and cash equivalents include all cash and highly liquid investments with an original maturity of three months or less. At December 31, 2020 and 2019, the Company’s cash and cash equivalents consisted of cash deposited in financial institutions. Foreign Currency 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. dollars using the exchange rate at the end of each balance sheet date. Revenues and expenses are translated at the average exchange rates for the period. Gains and losses from translations are recognized in foreign currency translation included in accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets. Foreign currency exchange gains and losses that are realized are recorded in other expense, net, in the accompanying consolidated statements of operations. Accounts Receivable, net and Contract Asset Accounts receivable, net consist of trade accounts receivables from the Company’s customers, net of allowance for doubtful accounts if deemed necessary. 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, 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. 82 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 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. The Company generally places its cash and cash equivalents with high-credit quality financial institutions. To date, the Company has not experienced any losses on its cash and cash equivalents. 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. Fluctuations in accounts receivable result from timing of the Company’s execution of contracts and collection of related payments. 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, 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. In particular, a single supplier is currently the sole manufacturer of the Company’s proprietary sensors. Business Acquisitions The Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Acquisition-related expenses are recognized separately from the business combination and are recognized as general and administrative expense as incurred. 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. 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. 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 and LEEDS in 2020 (see Note 4, 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 an attribution method, over their expected useful lives, which range from three years for patents and seven to fifteen years for customer relationships. 83 Property and Equipment, net Property and equipment, net, is stated at cost, less accumulated depreciation and amortization. The Company depreciates property and equipment using the straight-line method over their estimated useful lives, ranging from three to five years . Leasehold improvements are amortized over the shorter of the asset’s useful life or the remaining lease term. Costs incurred to develop software for internal use and for the Company’s solutions are capitalized and amortized over such software’s estimated useful life. Internally developed software costs capitalized during all periods presented have not been material. Property and equipment, net also includes software technology resulting from the Company’s acquisition of HunchLab, which is recorded at fair value as of the date of the acquisition, amortized on the straight-line basis over five years . Impairment of Long-Lived Assets The Company annually reviews long-lived assets for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount of the asset to the future undiscounted net cash flows which the asset is expected to generate. If such assets are determined to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the future undiscounted net cash flows arising from the assets. Assets to be disposed of are reported at the lower of their carrying amounts or fair value less cost to sell. Royalty Expense In 2009, the Company entered into a license agreement with a third party relating to a patented gunshot digital imaging system that facilitates integration with certain third-party systems. The terms of the license agreement require the Company to pay a one-time fee of $ 5,000 for each license sold to a customer allowing the customer to integrate their ShotSpotter service with a third-party application, such as a video management system, with a minimum annual amount due of $ 75,000 . In 2020, 2019, and 2018, the Company incurred only the $ 75,000 minimum amount. The license agreement renews automatically on each subsequent year unless it is terminated in accordance with the agreement. Fair Value Measurements The Company uses a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date. The three-level hierarchy prioritizes, within the measurement of fair value, the use of market-based information over entity-specific information. Fair value focuses on an exit price and is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The inputs or methodology used for valuing financial instruments are not necessarily an indication of the risks associated with investing in those financial instruments. The three-level hierarchy for fair value measurements is defined as follows: Level I — Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level II — Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level III — Inputs to the valuation methodology are unobservable and significant to the fair value measurement. An asset’s or a liability’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Stock-Based Compensation 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. 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 84 service period . The Company uses the Black-Scholes option pricing model to measure the fair value of its stock options. The Company estimated the grant date fair value of its common stock options using the following assumptions: Expected Term — The expected term represents the period that the stock-based compensation awards are expected to be outstanding. Since the Company did not have sufficient historical information to develop reasonable expectations about future exercise behavior, the Company used the simplified method to compute expected term, which reflects the weighted-average of time-to-vesting. Risk-Free Interest Rate — The risk-free interest rate is based on the yield on U.S. Treasury yield curve in effect at the grant date. Expected Volatility —The expected volatility is based on the historical volatility of the Company’s stock. Dividend Yield — Expected dividend yield is based on our dividend policy at the time the options were granted. We do not plan to pay any dividends in the foreseeable future. Consequently, we have historically used an expected dividend yield of zero . 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 and stock-based compensation is recognized ratably over the requisite service period. Forfeitures are recognized as and when they occur. Segment Information 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. Income Taxes The Company records income taxes in accordance with the liability method of accounting. Deferred taxes are recognized for the estimated taxes ultimately payable or recoverable based on enacted tax law. The Company establishes a valuation allowance to reduce the deferred tax assets when it is more likely than not that a deferred tax asset will not be realizable. Changes in tax rates are reflected in the tax provision as they occur. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. 85 Net Income (Loss) per Share Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares and common stock equivalents outstanding during the period. Common stock equivalents are only included when their effect is dilutive. Common stock equivalents and unvested restricted stock units are potentially dilutive securities and include convertible preferred stock, warrants and outstanding stock options. These potentially dilutive securities are excluded from the computation of diluted net income (loss) per share if their inclusion would be anti-dilutive. 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. The guidance will be effective at the beginning of our first quarter of fiscal 2022. Early adoption of the amendments is permitted. We do not expect the adoption of this ASU to have any impact on the consolidated financial statements. Note 3. Revenue Related Disclosures Changes in deferred revenue were as follows (in thousands): December 31, 2020 2019 Balance at the beginning of the year $ 26,958 $ 24,161 New billings 42,499 43,080 Revenue recognized during the year from balance at the beginning of the year ( 18,944 ) ( 17,198 ) Revenue recognized during the year from new billings ( 25,947 ) ( 23,092 ) Foreign currency impact 12 7 Balance at the end of the year $ 24,578 $ 26,958 The following table presents remaining performance obligations for contractually committed revenues as of December 31, 2020 (in thousands): 2021 $ 41,967 2022 10,493 2023 3,522 Thereafter 1,371 Total $ 57,353 The timing of revenue recognition includes estimates of go-live dates for contracts not yet live. Contractually committed revenue includes deferred revenue as of December 31, 2020 and amounts under contract that will be invoiced after December 31, 2020 . 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 86 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. Note 4. Business Acquisitions LEEDS 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 $ 7,044 Accounts receivable and contract asset, net 1,060 Property and equipment, net 161 Operating lease right-of-use asset 225 Goodwill 1,432 Customer relationship 14,410 Other asset 45 Accrued expenses and other current liabilities ( 458 ) Other liabilities ( 98 ) Total estimated consideration $ 23,821 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 87 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, 2020 2019 Revenues $ 59,196 $ 50,630 Net income (loss) $ 5,014 $ ( 145 ) HunchLab 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 $ 114 Prepaid expense 4 Deferred revenue, short term ( 120 ) Accounts payable ( 26 ) Software technology 950 Customer relationships 160 Goodwill 1,379 Total purchase consideration $ 2,461 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): Fair Value Useful Life Software technology $ 950 5 years Customer relationships 160 7 years Total identifiable technology and intangible assets $ 1,110 The Company valued customer relationships and the software technology 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 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. 88 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. Note 5. Fair Value Measurements There were no transfers into or out of Level III during the year ended December 31, 2020. The changes in the fair value of contingent consideration are summarized below (in thousands): Fair Value Measurements at Reporting Date Using Level III Inputs Fair value at December 31, 2018 and 2019 $ 750 Payment of contingent consideration $ ( 347 ) Contingent consideration from business combination 170 Change in fair value of contingent consideration — Fair value at December 31, 2020 $ 573 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 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 %. Note 6. Goodwill The changes in goodwill for 2020 and 2019 are as follows (in thousands): 2020 2019 Balance, beginning of year $ 1,379 $ 1,379 Acquisition of LEEDS (see Note 4—Business Acquisitions) 1,432 — Balance, end of year $ 2,811 $ 1,379 The Company had no accumulated goodwill impairment charges as of December 31, 2020. 89 Note 7. Intangible Assets, net Intangible Assets as of December 31, 2020 and 2019 are as follows (in thousands): 2020 Gross Accumulated Amortization Net Customer relationships $ 14,570 $ ( 147 ) $ 14,423 Patents 1,158 ( 1,041 ) 117 Total intangible assets, net $ 15,728 $ ( 1,188 ) $ 14,540 2019 Gross Accumulated Amortization Net Customer relationships $ 160 $ ( 29 ) $ 131 Patents 1,092 ( 974 ) 118 Total intangible assets, net $ 1,252 $ ( 1,003 ) $ 249 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): 2021 $ 1,046 2022 1,022 2023 1,000 2024 984 2025 978 Thereafter 9,510 Total $ 14,540 Note 8. Details of Certain Consolidated Balance Sheet Accounts Prepaid expenses and other current assets (in thousands): December 31, 2020 2019 Prepaid software and licenses $ 653 $ 321 Prepaid insurance 561 473 Other prepaid expenses 136 94 Deferred commissions 715 753 Other 107 123 $ 2,172 $ 1,764 90 Accounts receivable and contract asset (in thousands): December 31, 2020 2019 Accounts receivable $ 12,459 $ 13,798 Contract asset 536 85 Allowance for potential credit losses ( 74 ) — $ 12,921 $ 13,883 Other assets (in thousands): December 31, 2020 2019 Deferred commissions $ 1,465 $ 1,579 Other 140 55 $ 1,605 $ 1,634 Property and equipment, net (in thousands): December 31, 2020 2019 Deployed equipment $ 31,761 $ 28,930 Computer equipment 1,550 1,141 Software 1,314 1,314 Furniture and fixtures 217 169 Leasehold improvements 306 234 Vehicles 124 124 Construction in progress 1,506 1,209 $ 36,778 $ 33,121 Accumulated depreciation and amortization ( 21,432 ) ( 16,565 ) $ 15,346 $ 16,556 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. 91 Accrued expenses and other current liabilities (in thousands): December 31, 2020 2019 Personnel-related accruals $ 4,217 $ 2,883 Royalties payable 55 115 Professional fees 92 317 Sales/ use tax payable 46 91 Contingent consideration 403 750 Operating lease liability 484 302 Other 316 427 $ 5,613 $ 4,885 Other liabilities (long-term) (in thousand): December 31, 2020 2019 Operating lease liabilities $ 461 $ 296 Contingent consideration liability 170 ─ Other liabilities ─ 2 $ 631 $ 298 Note 9. Impairment of Property and Equipment 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. Note 10. 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. Borrowings under the Umpqua Credit Agreement are secured by substantially all of the assets of the Company. The Umpqua Credit Agreement includes a letter of credit subfacility of up to $ 3.0 million. Any amounts outstanding under the letter of credit subfacility reduce the amount available for the Company to borrow under the Revolving Facility. 92 Borrowings under the Umpqua Credit Agreement bear interest, at the Company’s option, at a rate equal to either (1) a base rate, which fluctuates daily and is the greater of (a) the prime rate in effect as of any date of determination and (b) the daily LIBOR rate as of such date of determination plus 1.0 % per annum, or (2) a LIBOR rate, which can be for a period of 30, 60 or 90 days at the Company’s option and is equal to the published rate in the Wall Street Journal for such 30-, 60- or 90-day period two business days prior to the commencement of such period, in each case plus 2.0 % per annum. The Company will be required to repay all amounts outstanding under the Umpqua Credit Agreement on September 27, 2022 or earlier if the Umpqua Credit Agreement is terminated prior to such date. The Umpqua Credit Agreement also includes an uncommitted incremental facility provision that would allow the Company, subject to satisfaction of certain conditions, including approval by Umpqua Bank, to increase the Revolving Facility up to a total of $ 25.0 million. Under the Umpqua Credit Agreement, the Company is subject to various negative covenants that limit, subject to certain exclusions, the Company’s ability to incur indebtedness, make loans, invest in or secure the obligations of other parties, pay or declare dividends, make distributions with respect to the Company’s securities, redeem outstanding shares of the Company’s stock, create subsidiaries, materially change the nature of its business, enter into related party transactions, engage in mergers and business combinations, the acquisition or transfer of Company assets outside of the ordinary course of business, grant liens or enter into collateral relationships involving company assets or reincorporate, reorganize or dissolve the Company. There were no borrowings outstanding as of December 31, 2020 and 2019. Note 11. 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. Note 12. Income Taxes The domestic and foreign components of net income (loss) before income tax expense were as follows (in thousands): Year Ended December 31, 2020 2019 2018 Domestic $ 1,562 $ 1,743 $ ( 3,083 ) Foreign ( 427 ) 14 345 Net income (loss) before income tax $ 1,135 $ 1,757 $ ( 2,738 ) The provision (benefit) for income tax consists of the following (in thousands): Year Ended December 31, ​ 2020 2019 2018 Current: Federal $ — $ — $ — State — — — Foreign ( 7 ) 7 ( 13 ) Total ( 7 ) 7 ( 13 ) Deferred: Federal — — — State — — — Foreign ( 83 ) ( 48 ) — Total ( 83 ) ( 48 ) — Total tax expense (benefit) $ ( 90 ) $ ( 41 ) $ ( 13 ) 93 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): December 31, 2020 2019 2018 Income tax at statutory rate $ 240 $ 369 $ ( 575 ) Change in valuation allowance ( 165 ) ( 17 ) 1,595 Change in deferreds 8 100 7 State tax ( 37 ) ( 133 ) ( 309 ) Stock-based compensation ( 11 ) ( 420 ) ( 615 ) Research and development credit ( 103 ) ( 82 ) ( 220 ) Foreign rate differential ( 40 ) ( 43 ) ( 86 ) Other 18 185 190 Total $ ( 90 ) $ ( 41 ) $ ( 13 ) 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): Year Ended December 31, 2020 2019 Deferred tax assets: Net operating losses $ 20,265 $ 21,556 Credits 2,292 2,055 Accruals and reserves 1,648 767 Deferred revenue and contract costs 296 116 Gross deferred tax assets 24,501 24,494 Valuation allowance ( 23,667 ) ( 23,693 ) Net deferred tax assets 834 801 Deferred tax liabilities: Fixed assets and intangibles ( 785 ) ( 836 ) Total deferred tax assets (liabilities), net $ 49 $ ( 35 ) 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 94 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. The federal research and experimental tax credits will begin to expire, if not utilized, in 2026. 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 “ownership 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. Uncertain Tax Positions 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. 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 $ 734 Increases for current year tax positions 75 Decrease for prior year tax positions ( 37 ) Balance as of December 31, 2019 772 Increases for current year tax positions 70 Increases for prior year tax positions 17 Balance as of December 31, 2020 $ 859 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. territories. 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. 95 Note 13. Capital Stock Common Stock The Company is authorized to issue 500,000,000 shares of common stock with a par value of $ 0.005 per share. At December 31, 2020 and 2019, there were 11,538,998 and 11,314,150 shares of common stock issued and outstanding, respectively. 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. At December 31, 2020, shares of common stock reserved for future issuance were as follows: December 31, 2020 Options outstanding 813,242 Shares available for future grant 1,248,672 Unvested restricted stock units 141,508 Warrants to purchase common stock 50,716 Total 2,254,138 Preferred Stock 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 In May 2019, our board of directors adopted a stock repurchase program for up to $ 15 million of our common stock. Although our board of directors has authorized the stock repurchase program, it does not obligate us to repurchase any specific dollar amount or number of shares, there is no expiration date for the stock repurchase program, and the stock repurchase program may be modified, suspended or terminated at any time and for any reason. 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. Note 14. Net Income (Loss) per Share The following table summarizes the computation of basic and diluted net loss per share (in thousands, except share and per share data): Year Ended December 31, 2020 2019 2018 Numerator: Net income (loss) $ 1,225 $ 1,798 $ ( 2,725 ) Denominator: Weighted-average shares outstanding, basic 11,408,757 11,302,780 10,569,007 Weighted-average shares outstanding, diluted 11,730,294 11,846,348 10,569,007 Net income (loss) per share, basic $ 0.11 $ 0.16 $ ( 0.26 ) Net income (loss) per share, diluted $ 0.10 $ 0.15 $ ( 0.26 ) 96 The following potentially dilutive shares outstanding at the end of the periods presented were excluded in the calculation of diluted net income (loss) per share as the effect would have been anti-dilutive: Year Ended December 31, 2020 2019 2018 Options to purchase common stock 573,340 269,202 820,186 Unvested restricted stock units 101,255 54,620 110,764 Warrants to purchase Series B-1 convertible preferred or common stock — — 163,713 Total 674,595 323,822 1,094,663 Note 15. Common Stock Warrants At December 31, 2020 and 2019, the Company had the following common stock warrants issued and outstanding: Shares Warrant Class 2020 2019 Issuance Date Price per Share Expiration Date Common stock warrant 50,716 50,716 February 2014 $ 0.1700 February 2021 Common stock warrant (1) — 84,000 June 2017 $ 13.2000 June 2020 50,716 134,716 (1 ) 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. Note 16. Equity Incentive Plans 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. 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: 97 Shares available for grant at December 31, 2019 1,632,636 Increase in accordance with the evergreen provision 565,707 Options issued during the year ( 347,095 ) Canceled during the year 54,890 RSUs granted ( 91,759 ) Shares available for grant at December 31, 2020 1,814,379 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. 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. The 2005 Plan and 2017 Plan grants the Board discretion to determine when the options granted will become exercisable. The 2005 Plan and 2017 Plan allows for the exercise of unvested options with repurchase rights over the restricted common stock issued. At December 31, 2020, 2019, and 2018, there were no unvested options resulting from early exercises. 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: Year Ended December 31, 2020 2019 2018 Fair value of common stock $23.49-$34.07 $20.07-$44.95 $23.72-$47.39 Expected term (in years) 6 6 6 Risk-free interest rate 0.36%-0.83% 1.71%-2.49% 2.60%-3.00% Expected volatility 64%-68% 64%-67% 64%-67% Expected dividend yield — — — A summary of stock option activities during 2020, 2019 and 2018 is as follows: Number of Options Outstanding Weighted Average Exercise Price Weighted Average Grant Date Fair Value per Option Aggregate Intrinsic Value Exercised (in thousands) Outstanding at December 31, 2017 1,294,128 $ 1.79 Granted 157,078 $ 33.70 $ 20.59 Exercised ( 609,985 ) $ 0.90 $ 12,574 Canceled ( 21,035 ) $ 6.78 Outstanding at December 31, 2018 820,186 $ 8.44 Granted 138,200 $ 35.76 $ 21.86 Exercised ( 307,365 ) $ 1.47 $ 12,117 Canceled ( 33,528 ) $ 24.80 Outstanding at December 31, 2019 617,493 $ 17.13 Granted 347,095 $ 32.14 $ 19.15 Exercised ( 96,456 ) $ 3.25 $ 2,257 Canceled ( 54,890 ) $ 26.07 Outstanding at December 31, 2020 813,242 $ 24.58 98 Additional information for stock options at December 31, 2020 were as follows: Number of Options Weighted Average Exercise Price Aggregate Intrinsic Value (in thousands) Weighted Average Remaining Contractual term (in years) Outstanding at December 31, 2020 813,242 24.58 $ 11,445 7.69 Exercisable at December 31, 2020 391,438 16.22 $ 8,779 6.29 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: Number of Restricted Stock Units Weighted Average Grant Date Fair Value per RSU Aggregate Fair Value of RSUs Vested (in thousands) Unvested RSUs at December 31, 2017 47,312 $ 11.85 Granted 110,764 $ 19.58 Vested ( 47,312 ) $ 11.85 $ 1,346 Unvested RSUs at December 31, 2018 110,764 $ 19.58 Granted 62,382 $ 44.05 Vested ( 58,150 ) $ 24.75 $ 2,610 Unvested RSUs at December 31, 2019 114,996 $ 30.24 Granted 91,759 $ 31.75 Vested ( 54,970 ) $ 32.12 $ 1,766 Forfeited ( 10,277 ) $ 41.50 Unvested RSUs at December 31, 2020 141,508 $ 29.67 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 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. 99 2017 Employee Stock Purchase Plan 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”, 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. 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 316,623 Increase in accordance with the evergreen provision 150,000 Issued during the year ( 37,102 ) Shares available for grant at December 31, 2020 429,521 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. Total stock-based compensation expense is recorded in the consolidated statements of operations and was allocated as follows (in thousands): Year Ended December 31, 2020 2019 2018 Cost of revenues $ 1,093 $ 670 $ 316 Sales and marketing 1,268 955 770 Research and development 580 365 272 General and administrative 1,521 1,067 1,110 Total $ 4,462 $ 3,057 $ 2,468 Stock-based compensation expense is recognized over the award’s expected vesting schedule. Forfeitures are recognized as and when they occur. Note 17. Benefit Plan The Company sponsors a 401(k) plan to provide defined contribution retirement benefits for all eligible employees. Participants may contribute a portion of their compensation to the plan, subject to the limitations under the Internal Revenue Code. The Company is allowed to make 401(k) matching contributions as defined in the plan and as approved by the Board. The Company matched 50 % of employee contributions made during 2020 up to a maximum of 2 % of compensation; the match will be deposited to the employees’ 401(k) accounts in 2021. 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. There was 100 no matching contribution expense related to the year ended December 31, 2018. These matching contributions are subject to additional vesting criteria. Note 18. Leases The Company leases its principal executive offices in Newark, California, under a non-cancelable operating lease which expires in October 2021 . 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. Our 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 we have elected the practical expedient to group lease and non-lease components for all leases. 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. 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. 101 Supplemental information related to the operating leases as follows (in thousands): As of December 31, 2020 Assets Operating lease right-of-use assets $ 882 Liabilities Lease liabilities (short-term) (presented within Accrued expenses and other current liabilities) $ 484 Lease liabilities (long-term) (presented within Other liabilities) 461 Total operating lease liabilities $ 945 Year ended December 31, 2020 Cash paid for amounts included in the measurement of lease liabilities (presented within Operating cash flows) $ 386 Maturities of the lease liabilities at December 31, 2020 are as follows (in thousands): 2021 $ 511 2022 187 2023 102 2024 105 2025 98 Total lease payments, undiscounted 1,003 Less: imputed interest ( 58 ) Total $ 945 Note 19. Commitments and Contingencies Contingencies On August 28, 2018, Silvon S. Simmons (the "Plaintiff") amended a complaint against the City of Rochester, New York and various city employees, filed in the United States District Court, Western District of New York, to add the Company and employees as a defendant. The amended complaint alleges conspiracy to violate plaintiff's civil rights, denial of the right to a fair trial, and malicious prosecution. The Plaintiff claims that ShotSpotter colluded with the City of Rochester to fabricate and create gunshot alert evidence to secure Plaintiff's conviction. On the basis of the allegations, the Plaintiff has petitioned for compensatory and punitive damages and other costs and expenses, including attorney's fees. The Company believes that the Plaintiff's claims are without merit and are disputing them vigorously. No amounts have been accrued as of December 31, 2020 or 2019. The Company may become subject to legal proceedings, as well as demands and claims that arise in the normal course of business. Such claims, even if not meritorious, could result in the expenditure of significant financial and management resources. The Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed and adjusted to include the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel, and other information and events pertaining to a particular matter. 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 102 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 . Note 20. Subsequent Events 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. 103 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.