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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-38107
ShotSpotter, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
7979 Gateway Blvd., Suite 210
Newark, California
(Address of principal executive offices)
47-0949915
(I.R.S. Employer
Identification No.)
94560
(Zip Code)
Registrant’s telephone number, including area code: (510) 794-3100
Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.005 par value per share; Common Stock traded on the Nasdaq Capital Market; trading symbol SSTI.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the Registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large
accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
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☐
☒
Accelerated filer
Smaller reporting company
☒
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If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act. ☒Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on a closing price of $44.20 per share of the Registrant’s common stock as reported on the
Nasdaq Capital Market on June 28, 2019 was $360,807,561.
The number of shares of Registrant’s common stock outstanding as of March 6, 2020 was 11,346,538.
Portions of the Registrant’s Definitive Proxy Statement relating to the Annual Meeting of Stockholders, scheduled to be held on June 10, 2020, are incorporated by reference into Part III of this Report. Such Proxy
Statement will be filed with the Securities and Exchange Commission no later than 120 days following the end of the Registrant’s fiscal year ended December 31, 2019.
Table of Contents
Special Note Regarding Forward-Looking Statements
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Consolidated Financial and Other Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Qualitative and Quantitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Directors Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Exhibit Index
Signatures
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained
principally in the sections of this Annual Report on Form 10-K entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Business,” but are also contained elsewhere in this Annual Report on Form 10-K. Often, you can identify forward-looking statements by the words
“anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,”
or “would,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. Forward-looking statements include statements
about:
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our ability to continue to increase revenues, secure customer renewals and expand coverage areas of existing public safety customers;
our ability to continue to add new customers for our public safety and security solutions;
our ability to grow both domestically and internationally;
our ability to effectively manage or sustain our growth;
our ability to maintain, increase or strengthen awareness of our solutions;
our ability to achieve and maintain service level agreement standards (SLAs) in our customer contracts;
future revenues, hiring plans, expenses, capital expenditures, capital requirements and stock performance;
our ability to service outstanding debt, if any, and satisfy covenants associated with outstanding debt facilities;
our ability to attract and retain qualified employees and key personnel and further expand our overall headcount;
our ability to comply with new or modified laws and regulations that currently apply or become applicable to our business both in the United States and
internationally; and
our ability to maintain, protect and enhance our intellectual property.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K.
These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance
or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis
for each forward-looking statement contained in this Annual Report on Form 10-K, we caution you that these statements are based on a combination of facts and factors
currently known by us and our expectations of the future, about which we cannot be certain. You should refer to the “Risk Factors” section of this Annual Report on Form 10-K
for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of
these factors, we cannot assure you that the forward-looking statements in this Annual Report on Form 10-K will prove to be accurate. We undertake no obligation to publicly
update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You should read this Annual Report on
Form 10-K and the documents that we reference in this Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially
different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
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Item 1. BUSINESS
Overview
PART I.
We provide precision-policing and security solutions for law enforcement and security personnel to help deter gun violence and make cities, campuses and facilities
safer. Our flagship public safety solution, ShotSpotter Flex, is the leading outdoor gunshot detection, location and alerting system. Our patrol management software,
ShotSpotter Missions (formerly HunchLab), creates crime forecasts designed to enable more precise and effective use of patrol resources to deter crime. In 2019, we created a
new technology innovation unit, ShotSpotter Labs, to expand our efforts supporting innovative uses of our technology to help protect wildlife and the environment. Our
security solutions, ShotSpotter SecureCampus and ShotSpotter SiteSecure, are designed to help law enforcement and security personnel serving universities, corporate
campuses and key infrastructure or transportation centers mitigate risk and enhance security by notifying authorities of a potential outdoor gunfire incident, saving critical
minutes for first responders to arrive. Our gunshot detection solutions are trusted by law enforcement agencies in over 100 cities as of December 31, 2019.
Our gunshot detection solutions consist of highly-specialized, cloud-based software integrated with proprietary, internet-enabled sensors designed to detect outdoor
gunfire. The speed and accuracy of our gunfire alerts enable law enforcement and security personnel to reduce their response times to shooting events, which can increase the
chances of apprehending the shooter, providing timely aid to victims, and identifying witnesses before they scatter, as well as aid in evidentiary collection and serve as an
overall deterrent. When a potential gunfire incident is detected by our sensors, our system applies machine classification combined with human review to analyze and validate
the incident and precisely locate where the incident occurred. An alert containing a location on a map and critical information about the incident is sent directly to subscribing
law enforcement or security personnel through any internet-connected computer and to iPhone or Android mobile devices.
Our software sends validated gunfire data along with the audio of the triggering sound to our Incident Review Center (“IRC”), where our trained acoustic experts are
on duty 24 hours a day, seven days a week, 365 days a year to screen and confirm actual gunfire incidents. Our acoustic experts can supplement alerts with additional tactical
information, such as the potential presence of multiple shooters or the use of high-capacity weapons. Gunshot incidents reviewed by our IRC result in alerts typically sent
within 45 seconds of the receipt of the gunfire incident.
We generate annual subscription revenues from the deployment of ShotSpotter Flex on a per-square-mile basis. Our security solutions, ShotSpotter SecureCampus and
ShotSpotter SiteSecure, are typically sold on a subscription basis, each with a customized deployment plan. Our ShotSpotter Missions solution is also sold on a subscription
basis. As of December 31, 2019, we had ShotSpotter Flex, ShotSpotter SecureCampus and ShotSpotter SiteSecure coverage areas under contract for approximately 760 square
miles, of which 730 square miles had gone live. Coverage areas under contract included 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.
We are a mission-driven organization focused on earning the trust of law enforcement to help them provide equal protection to all and strengthen the police-community
relationship, ultimately reducing gun violence. 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 our society.
Industry Background: The Problem of Gun Violence
According to the Federal Bureau of Investigation (the “FBI”), an estimated 1.2 million violent crimes occurred in the United States in 2018. Of those violent crimes, it
is estimated that firearms were used in 72.7% of murders, 38.2% of robberies and 26.1% of aggravated assaults.
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There is a staggering economic cost associated with gun violence. A 2019 study commissioned by the U.S Congress Joint Economic Committee Democratic Staff
found that gun violence costs the American economy at least $229 billion every year.
The Challenge of Urban Gun-Related Crime
The majority of urban gunfire goes unreported. A report published by The Brookings Institute analyzing data collected from ShotSpotter Flex and our customers
suggests that approximately 90% of the gunshots detected by our public safety solution are not reported to 911 by residents. Even in the instances when 911 calls are made, the
information reported by the caller is often incomplete or inaccurate as to the time and location of the gunshot. Furthermore, in many cases it is often difficult for the caller to
authenticate the incident as gunfire. In addition, we believe that in communities plagued by gun violence, there is often a lack of trust between the community’s residents and its
police force, which can exacerbate the underreporting of gunfire and create a vicious cycle of underreporting, lack of response and increased mistrust due to continued
unaddressed gun violence in the community. When gunfire is not reported or is reported inaccurately, law enforcement and medical personnel cannot address injuries nor
effectively investigate and solve related crimes or prevent future incidents.
The communities in which gun violence occurs suffer significant economic loss. A 2016 report by the Urban Institute, which studied the effect of gun violence in
Minneapolis, Minnesota, Oakland, California and Washington, D.C., noted that the perceived risk of gun violence imposed heavy social, psychological and monetary damages
in communities, including fewer jobs and lower economic vitality. The study concluded:
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In Minneapolis, one fewer gun homicide in a given year was statistically associated with the creation of 80 jobs and an additional $9.4 million in sales
across all business establishments in the next year.
In Oakland, every additional gun homicide in a given year was statistically associated with five fewer job opportunities in contracting businesses in the next
year.
In Washington, D.C., every additional gun homicide in a given year was statistically associated with two fewer retail and service establishments the next
year.
In addition, several studies have suggested that property values are inversely correlated with violent crime. For example, the Center for American Progress conducted a
study of changes in homicide incidents and housing prices in Boston, Massachusetts; Seattle, Washington; Chicago, Illinois; Philadelphia, Pennsylvania and Milwaukee,
Wisconsin and found that a reduction in a given year of one homicide in a ZIP code causes a 1.5% increase in housing values in that same ZIP code the following year.
The Rise of Active-Shooter Events
In addition to the problem of localized, persistent gun violence, there has been an increasing number of high-profile mass shootings and terror events over the past
several years. According to a 2016 report by the FBI, the number of active-shooter events in the United States in 2014 and 2015 was among the highest for any two-year average
period in the preceding 16 years and nearly six times as many as the period between 2000 and 2001, the first two years that the FBI began tracking active-shooter events.
Unlike gunfire incidents occurring in high-crime areas, active-shooter events often result in a high volume of telephone reports to 911. However, each caller may
provide untimely, inaccurate or incomplete information, causing confusion or delays in first responders’ ability to react quickly and accurately. Response time is critical as
nearly 70% of active-shooter events last five minutes or less with over one third ending in two minutes or less according to a 2013 study conducted by the FBI of active-shooter
events.
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Our Market
We believe there is significant demand for advanced gunfire detection and location notification solutions that accurately and quickly report instances of gunfire, based
on two primary use cases:
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law enforcement— for domestic and international law enforcement serving communities plagued by persistent, localized gun violence, in order to identify,
locate and deter gun violence; and
security— for security personnel (which may include law enforcement personnel) serving universities, corporate campuses, key infrastructure,
transportation centers and other areas in which authorities desire to prepare for and mitigate risks related to an active-shooter event, and desire to provide a
zone of detection coverage surrounding the respective campus or secured area.
Based on data from the 2018 FBI Uniform Crime Report, we estimate that the domestic market for our public safety solution consists of the approximately 1,400 cities
that had four or more homicides per 100,000 residents in 2015. The Uniform Crime Report includes information reported directly to the FBI on a voluntary basis by 18,000 city,
university and college, county, state, tribal and federal law enforcement agencies. We believe that four or more homicides per 100,000 residents represents a significant gun
violence problem. We estimate that a customer in this market could invest an average of approximately $400,000 per year for ShotSpotter Flex.
Outside of the United States, we estimate that the market for ShotSpotter Flex includes approximately 200 cities in the European Union, Central America, the
Caribbean, South America and southern Africa that have at least 500,000 residents. We estimate that a customer in this market could invest an average of approximately $1.0
million per year for our public safety solution.
We estimate the average investment amounts for prospective customers based on our experience with existing customers, our anticipated demand for our solutions and
the corresponding coverage areas that we expect prospective customers would elect to cover with our solutions.
Based on data made available by the National Center for Education Statistics and the Federal Aviation Administration, we believe that the domestic market for our
security solutions includes approximately 5,000 college campuses and airports. We estimate that, on average, a customer in this market could invest approximately $50,000-
$75,000 per year for one of our security solutions. In addition, we believe that there exists a broader market for our security solutions that include, primarily the outdoor areas of
college campuses and airports outside of the United States as well as large corporate campuses, train stations and other highly-trafficked areas worldwide.
We also believe there is demand for ShotSpotter Missions within our existing ShotSpotter Flex customers and within police departments in the same cities we target for
our gunshot detection solutions, as it designed to help police departments strategically plan patrol directed missions and tactics for more effective crime deterrence. We estimate
that the market for our ShotSpotter Missions solution includes approximately 1,500 cities, based on cities that have a population above 25,000 people. We expect that, on
average, a customer could invest approximately $50,000 per year for our ShotSpotter Missions solution.
The ShotSpotter Solutions
All of our solutions are based on our highly-specialized, cloud-based software. In the case of our gunshot detection solutions, ShotSpotter Flex, ShotSpotter
SecureCampus and ShotSpotter SiteSecure, the software is integrated with our proprietary, internet-enabled sensors and connected through third-party communication networks.
We brand our solutions based on particular use cases and target customers as follows:
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ShotSpotter Flex. ShotSpotter Flex, a public safety solution, serves cities and municipalities seeking to identify, locate and deter persistent, localized gun
violence by incorporating a real-time gunshot detection system into their policing systems.
ShotSpotter Missions. This cloud-based patrol management solution uses artificial intelligence-driven analysis to help police departments strategically
plan directed patrol missions and tactics for more effective crime deterrence. The system provides: crime forecasting and mission planning to enable more
precise deployment of patrol resources and reports on mission activity and tactics for command staff.
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ShotSpotter SecureCampus. ShotSpotter SecureCampus helps the law enforcement and security personnel serving universities, colleges and other
educational institutions mitigate risk and enhance security by notifying authorities and first responders of an active-shooter event, involving outdoor
gunfire, almost immediately, and provide “dome of protection” outside the campus where our coverage areas extends.
ShotSpotter SiteSecure. ShotSpotter SiteSecure is designed to serve customers such as corporations trying to safeguard their facilities and public agencies
focused on protecting critical infrastructure, including train stations, airports and freeways.
ShotSpotter Labs. ShotSpotter Labs houses our advanced technology efforts to adapt and extend our commercial technology to address significant wildlife
and environmental issues. Our current focus is on combating rhino poaching in Kruger National Park, South Africa and blast fishing that threatens coral
reefs and food security in Southeast Asia. The company has been able to collect revenues from philanthropic entities to cover direct and indirect costs.
Innovations have made their way back into our commercial business such as the development of solar-powered sensor from the Kruger deployment,
presenting that technologies similar to those now being used for our freeway deployment.
The key features of our gunshot detection solutions are:
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Comprehensive Coverage. We believe that we sell the only public safety solution that provides comprehensive outdoor coverage for gunshot detection over
large and complex acoustic environments. Our outdoor acoustic sensors are strategically placed in an array of 20 to 25 sensors per square mile and can
easily be expanded to cover any size area. In addition to providing acoustic surveillance over wide areas, our solutions operate on a continuous basis—
24 hours a day, seven days a week, 365 days a year—to provide immediate notification of gunfire at any time of day.
Real-Time, Precise Alerts. Our solutions typically notify users within 45 seconds of a gunshot, providing data on the time and location of the shooting and
the number of shots fired. An alert is sent depicting a dot on a map that corresponds to a specific address or latitudinal and longitudinal coordinates. In
addition, our alerts provide valuable additional information about the scene of the incident, such as the potential presence of multiple shooters or the use of
fully automatic and high-capacity weapons. This enhanced tactical awareness can help protect first responders in dangerous and unpredictable situations.
Forensically-Sound Data. Because our solutions provide an exact time, location and audio recording of a gunshot, we can provide authorities with critical
evidence for investigations and prosecutions. Our Detailed Forensic Reports (“DFRs”) provide law enforcement personnel and prosecutors with
comprehensive, court-admissible analysis of a shooting incident including the gunfire audio. We also offer expert witness testimony to introduce the
forensic analysis of the DFRs at trial and to provide technical ex pertise regarding our technology. During the year ended December 31, 2019, we
completed and delivered 266 DFRs for outdoor gunshot incidents, and our evidence was presented in form of expert witness testimony in 33 state and
Federal trials. In 2019 we introduced a new automated, machine generated forensic report, called an Investigative Lead Summary (“ILS”), which fills the
need for a significant percentage of DFRs in a more cost effective, timely manner. During 2019, over 45,000 ILS reports were generated by our customers
and used for investigative purposes.
Annual Subscription to a Cloud-Based Solution. We provide each of our gunshot detection solutions as an annual subscription-based service in which we
design, deploy, own, manage and maintain the acoustic sensors, host the software and gunshot data and operate our IRC with trained acoustic experts.
Occasionally we receive customer requests for direct purchase of our sensors in conjunction with the purchase of a subscription service. We evaluate each of
these requests on a case by case basis.
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The key benefits provided by these features of our gunshot detection solutions include:
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Expedited Response to Gunfire. In 2019, we issued over 140,000 gunshot alerts to our customers. In areas where gun violence is persistent, we believe
most gunshots are not otherwise reported. Even when calls are made, many callers are unable to provide a location of the gunshot or other relevant details.
Human response time to unfolding violence often delays calls for several minutes in circumstances where response time can be critical. By contrast, our
solutions typically alert emergency dispatch centers and field personnel within 45 seconds of confirmed gunfire and provide an exact location, enabling
them to respond faster and to a specific location. The ability to respond more quickly increases the chances of apprehending the shooter and assisting victims
of violence, in addition to aiding in evidence collection.
Prevention and Deterrence of Gun Violence. We believe increasing the speed and accuracy of law enforcement responses to gunfire can act as a long-term
deterrent that can decrease the overall prevalence of gunfire. We also believe that knowledge of the existence of our solutions may have a deterrent effect on
localized gun violence. When elected officials and law enforcement have an enhanced awareness of gun violence activity and patterns, they have tools to
facilitate a rapid and accurate response to gunfire incidents and improve relations between law enforcement and these communities, potentially increasing
crime reporting and community cooperation with investigations, which can result in improved public safety.
Improved Community Relations and Collaboration. We believe that persistent gun violence limits the ability of police and other community leaders to
serve their constituents and improve their communities. Many cities struggle to establish and foster a cooperative and trusting relationship between their
police department and the communities they serve. Our public safety solution provides cities with the ability to react quickly to gun violence, thus providing
the ability to improve their responses and residents’ perception of their responses. This provides our customers with the opportunity to foster improved
community relations and collaboration with their residents.
Improved Police Officer Safety. We believe that our solutions provide additional and valuable information regarding gunshot incidents as the alerts we
provide give additional insight and situational awareness, including, in the case shots fired outdoors, round count, potential multiple shooters and use of an
automatic weapon, that allow the responders to be better prepared to respond appropriately.
Ease to Procure and Use. By delivering our solution as a cloud- and subscription-based service, our customers do not need to design, install or maintain
their own complex infrastructure or hire or train acoustic experts to continuously manage such a solution. We offer consultative ongoing on-boarding, best
practices and tactical training support to our customers to insure they derive the full value of implementing our solution.
Integration Capability. We can customize the integration of our solutions with existing customer systems, including video management systems, computer-
aided dispatch, records management systems, video analytics, automated license plate number readers, camera management systems, crime analysis and
statistics packages (including the COMPSTAT software tools commonly used by police departments) and common operating picture software. Interfacing
with our alerts can enhance the effectiveness of these customer tools by providing information such as precise latitude and longitude (geolocation),
timestamps, incident audio and situational context. For example, police in Minneapolis, Minnesota used our alerts to trigger video recordings of certain key
intersections in high crime areas and capture the image of a suspect fleeing the scene of a shooting. Similarly, in Boston, Massachusetts, police correlate our
data with surveillance cameras and parolee ankle bracelet tracking data to monitor parolees who may be violating parole terms by committing crimes or
consorting with criminals.
Gun Violence Data Collection. We believe that we have amassed the world’s largest and most accurate collection of urban gunshot data. We provide our
public safety customers with detailed gun crime pattern analysis for their coverage areas as well as access to additional data that can assist them with further
analytics. This information provides an awareness of gunshot activity that may otherwise go unreported. For example, by collecting information regarding
the time and location of otherwise unreported gunfire, our customers can become aware of patterns of violence in the community. This increased awareness
can help our customers create policy, allocate appropriate resources and help to address pervasive problems in high gun-activity areas.
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The key features and key benefits of our ShotSpotter Missions solution include:
Crime Forecasting and Mission Planning. ShotSpotter Missions provides crime forecasting and mission planning to enable more precise deployment of
patrol resources and reports on mission activity and tactics for command staff. ShotSpotter Missions also provides agencies the flexibility to select which
crime types to forecast and to weight them based on police and community priorities.
Tactical Mission Confirmation. Tactical missions can be configured with police input, and effectively communicate predictions to police staff of discrete
areas of high risk for crime types. The key benefit of ShotSpotter Missions is its ability to help police departments strategically plan directed patrol missions
and tactics for more effective crime deterrence with focused, directed and visible patrol presence.
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Strategy
We intend to drive growth in our business by continuing to build on our position as the leading provider of outdoor gunshot detection, location and alerting solutions.
Key elements of our strategy include:
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Accelerate Our Acquisition of Public Safety Customers. We believe that we continue to be in the early stages of penetrating the markets for our public
safety solutions. We count law enforcement agencies in three of the ten largest U.S. cities among our ShotSpotter Flex customers. Over the last few years
we expanded our direct sales force and customer success teams and added marketing lead-generation capabilities to accelerate growth in this market.
Moreover, as we add new public safety customers, publicity and the number of potential references for our solutions increase, which results in our brand and
our solutions becoming more well known. We intend to capitalize on this momentum to drive an increase in sales.
Expand Our International Footprint. With only two currently deployed ShotSpotter Flex customers outside of the United States in South Africa and the
Bahamas, we believe that we have a significant opportunity to expand internationally. We estimate that the market outside the United States for our public
safety solutions includes approximately 200 cities in the European Union, Central America, the Caribbean, South America and southern Africa that have at
least 500,000 residents. In addition, we believe that there is a market for our security solutions and ShotSpotter Missions outside the United States that
primarily includes the outdoor areas of college campuses and airports, large corporate campuses, train stations and other highly-trafficked areas. We intend
to invest in our international sales and marketing efforts to reach these customers.
Expand ShotSpotter Flex Revenue within Our Existing Customer Base. As customers realize the benefits of our solutions, we believe that we have a
significant opportunity to increase the lifetime value of our customer relationships by expanding coverage within their communities through a “land and
expand” strategy . For example, of our ShotSpotter Flex customers, approximately 36% have expanded their coverage areas from their original deployment
areas by an average of ten square miles as of December 31, 2019. Our overall revenue retention rate has been over 100% for each of 2019, 2018 and 2017.
Drive Additional Revenue per Customer with the Development or Acquisition of New Products and Services. We evaluate opportunities to develop or
acquire complementary products and services. For example, our acquisition of HunchLab, renamed ShotSpotter Missions, in 2018 provides an opportunity
to increase our revenue per customer with a related and value-added technology that helps deter crime through strategically planned patrol missions. Our
current focus is to leverage trusted relationships with current customers to drive initial adoption, and increase revenue and lifetime value per customer.
Maintain Passionate Focus on Customer Success and Net Promoter Score. Given the specialized nature of our market, a key component of our strategy is
to maintain our passionate focus on customer success and satisfaction. We pride ourselves on our execution of customer on-boarding as well as ongoing
consulting and customer support, all of which are critical to ensure not only high customer retention rates, but new customer acquisitions. We implement our
customer success initiative early in the sales process in order to ensure that we are aligned with the customer’s objectives and can positively impact their
defined outcomes. We apply consultative best practices and policy development at the command staff level as well as tactical training for field patrol
officers. We also consistently measure our performance with customers through an annual Net Promoter Survey. We have extremely high agency
participation rates and our scores the last two years have ranked between “excellent” and “world class” according to our Survey partner benchmarks. All of
our efforts are focused on driving positive measurable outcomes on gun violence reduction and prevention, which we know leads to positive word of mouth
referrals that can attract new customers and drive an increase in sales.
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Integrate with New Technologies that Enhance our Value. We believe that integrating our solutions with other tools and technologies enhances the value
of our solutions to our customers. For example, our solutions can be used in connection with computer-aided dispatch systems, video surveillance cameras,
National Integrated Ballistic Information Network (“NIBIN”), and automated license plate readers used by law enforcement to improve the effectiveness of
police response and investigation efforts. We continue to evaluate new technologies that may integrate with our solutions to generate additional value for
our customers.
Leverage ShotSpotter Labs to Accelerate the Introduction of Innovations into our Commercial Business. Labs allows us to invest in developing
innovative extensions to our technology that protect wildlife and the environment while covering our costs through philanthropic partners. These
innovations can and have made their way back into our commercial business. For example, the technology behind the solar sensors developed for rhino
protection across large swaths of land in Kruger National Park were similar to those used in our freeway deployments where some sensor placements did
not have direct access to electricity.
Grow Our Security Business. We have developed our ShotSpotter SecureCampus solution for universities and other educational institutions. We have also
developed ShotSpotter SiteSecure for customers such as corporations trying to safeguard their facilities, and public agencies focused on protecting critical
infrastructure, including train stations, airports and highways. As of December 31, 2019, we had 12 ShotSpotter SecureCampus and ShotSpotter SiteSecure
customers. With more than 5,000 target customers in the United States, we believe that these markets represent an opportunity for growth.
Extend Our Market and Product Leadership in Gun Violence Prevention. We will continue to invest in improving our acoustic gunshot detection
solutions, our sensors, our gunshot detection algorithms, the design and deployment of our network arrays, our mobile applications, and the integration of
our platform with third-party technologies, to maintain our technology leadership position. With what we believe is the world’s largest collection of loud,
impulsive sounds collected over 20 years, we believe we are in a unique position to improve gunshot detection accuracy via machine learning. In addition,
we intend to leverage our extensive collection of gunfire data to better understand the facts, trends and circumstances surrounding gun activity in order to
maintain our reputation as gun violence experts. In doing so, we hope to contribute to the efforts of the community at large to identify, locate and deter gun
violence.
Extend our Platform of Services and the Value of our Data. We will continue to invest in research and development to leverage our large and growing
database of impulsive acoustic events, which includes those from both gunfire and non-gunfire. We also intend to leverage third-party artificial intelligence
(“AI”) and our own evolving cognitive and analytical applications to improve the efficiency of our solutions, which may include internal software
applications, data analysis, event routing and customer outputs. Certain of these applications and outputs may expand the platform of services that we will
be able to offer our customers.
Integrated Platform
Our gunshot detection solutions provide for the complete integration of several complex components- intelligent sensors, networking infrastructure, and enterprise
software and computing resources — in an easy-to-adopt and affordable annual subscription that eliminates the need for our customers to design, install or maintain their own
complex infrastructure or hire or train acoustic experts to monitor continuously the solution.
We believe that offering these solutions as a service on an annual subscription basis is cost-effective, provides for more resilient, redundant infrastructure and
significantly reduces friction during customer adoption by eliminating the complexity and front-loaded capital expenditure associated with perpetual licenses for on-site
technology projects. Our sensors operate on machine-to-machine networks and, because we maintain thousands of live sensor connections, we are able to aggregate usage for all
of our customers and negotiate lower rates from communications service providers than a single customer would likely be able to procure on their own.
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Our hybrid cloud infrastructure is architected to deliver a platform for high availability and elasticity. We partner with an industry leading private cloud vendor that
supplies colocation facilities worldwide and with Amazon Web Services the leading vendor of public cloud services. We are able to provide a level of 24/7/365 fault-tolerant
hardware and network uptime that few of our customers could afford to procure or maintain on their own.
Gunshot Detection Software
The heart of our gunshot detection solutions is our sophisticated and highly-specialized software. Our software analyzes audio signals for potential gunshots first in our
intelligent sensors. Our sensor filters out ambient background noise, such as traffic or wind, and looks for impulsive sounds characteristic of gunfire. If the sensor detects such
an impulse, it extracts pulse features of the soundwave, such as sharpness, strength, duration, rise time and decay time. Then, the sensor sends these features to our cloud servers
as part of a data packet that includes the location coordinates of the reporting sensor and the precise time-of-arrival and angle-of-arrival of the sound.
When the data reaches our cloud servers, our software assesses whether three or more of our outdoor sensors detected the same sound impulse and, if so, multilaterates
the location coordinates of the sound source based on the time of arrival and the angle of arrival of the sound. The software then verifies that the data is mathematically
consistent with the sound having originated at a single location. The accuracy of the coordinates derived from our proprietary software is significantly improved when more than
three sensors participate, as is typically the case. We deploy our sensor arrays such that, on average, six to eight sensors participate in the detection of a gunshot.
After the software determines the location of the sound source, the machine classifier algorithms analyze the pulse features to determine if the sound is likely to be
gunfire. Our algorithms consider pulse features, the distance from the sound source, pattern matching and other heuristic methods to evaluate and classify the sound. The
machine classifier is periodically trained and validated against a large database of known gunfire and other community sounds that are impulsive in nature. We continue to add
new data to our machine learning database from the incidents reviewed by our acoustic experts in our IRC process. Classification continuously improves as the machine
classifiers are re-trained using the expanded data set.
Once an incident is classified as likely gunfire, it is sent to the acoustic experts in our IRC for additional analysis and confirmation. Along with confirming an incident
is gunfire, our acoustic experts also annotate the alerts with additional information that may be helpful to first responders, such as whether there are multiple shooters or if a
high-capacity or fully automatic weapon is being used. Incident notifications are sent when the incident is confirmed as gunfire by one of our acoustic experts. Alerts are
delivered by SMS text and push notifications and also through our mobile applications. The time from outdoor trigger-pull to a notification being sent to our customers is
typically 45 seconds or less.
Our patrol management software, ShotSpotter Missions, combines historical crime data ingested through agency computer-aided dispatch (“CAD”) and record
management system (“RMS”) feeds along with temporal, location and event-based inputs including ShotSpotter data for cities that use our ShotSpotter Flex solution, to create
crime forecasts. The system ingests multiple years’ worth of agency data and is “trained” using machine learning to determine correlations across variables. The models are then
tested against recent crime data to calibrate forecast accuracy.
The ShotSpotter Missions system is flexible, enabling agencies to select which crime types to forecast and to weight them based on police and community priorities.
Mission duration and suggested tactics are configured with police input. Upon deployment, new missions are created for every patrol shift and beat using colored boxes overlaid
on a map to indicate discrete areas of high risk for particular crime types. These mission areas enable focused, directed and visible patrol presence to deter crime.
Intelligent Sensors Used in Gunshot Detection Solutions
Our rugged gunshot detection sensor is an intelligent, internet-enabled device that is specially built to ignore ambient noise and respond to impulsive sounds, accurately
time-stamping their arrival times. Advanced digital signal processing algorithms filter out background sounds such as traffic, and extract pulse features from the audio signal
that, along with the time and angle of arrival of the sound, are sent to our servers where algorithms compute the location of the sound source.
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The sensors do not have the ability to live stream audio. Typically, sounds, noises or voices captured on the secure sensors are cached temporarily but are written over
and permanently deleted within 30 hours. When a sensor is triggered by an impulsive sound, it creates a potential gunshot “incident” that contains a recording including no more
than one second before the incident and one second after the incident. This audio snippet is preserved indefinitely for potential evidentiary use.
Our sensors are designed and tested against international standards for installation in unprotected outdoor environments. Special consideration is given to minimize the
sound of wind, rain and hail, which could otherwise limit the range of detection and produce false results. Environmental condition tests performed on the sensors include
temperature cycling, temperature soak, shock, vibration, salt fog and moisture ingress protection.
We typically design and deploy arrays of 20 to 25 sensors per square mile taking into consideration the unique acoustic environment in which we are deploying. The
cumulative experience of deploying in various cities with different acoustic properties has provided a distinct advantage in tailoring our sensor arrays to perform at high levels.
We have full telemetry to each sensor that provides detailed heartbeat data to our system to monitor each sensor’s health and availability. Sensor firmware is maintained with
over-the-air updates. Because we purposely over-deploy our sensor arrays, multiple sensors can be offline at any given time without affecting the overall performance of the
system.
Incident Review Center
Our IRC operates 24 hours a day, seven days a week, 365 days a year. When a loud impulsive sound triggers enough of our outdoor sensors that an incident is detected
and located, audio from the incident is sent to our IRC via secure, high-speed network connections for real-time confirmation. Within seconds of an incident, one of our
acoustic experts analyzes audio data and recordings of the potential gunfire. When gunfire is confirmed, our IRC team sends an alert directly to emergency dispatch centers and
field personnel through any computer or mobile device with access to the Internet. This process typically takes less than 45 seconds from the time of the gunshot. Alerts include:
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the precise location of gunfire, including both latitude/longitude and street address;
the number and exact time of shots fired;
the number of shooters; and
if detectable, the use of fully automatic or high-capacity weapons.
Our IRC operates primarily out of our principal facilities in Newark, California and receives audio from incidents detected by our outdoor sensors regardless of where
such incidents occur. Although our IRC currently operates at a single location, our trained personnel can perform IRC functions from any location that has a high-speed internet
connection.
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Gunshot Detection Alerts
Our alerts are delivered in the following forms:
ShotSpotter Dispatch
Our IRC sends real-time notifications of outdoor gunfire incidents to the ShotSpotter Dispatch application, which is the user interface designed for emergency dispatch
centers. In addition, alerts can also be sent directly to field personnel using the ShotSpotter Respond application installed on computers in police cars.
Through the ShotSpotter applications, the alert provides the type of gunfire (single-round or multiple-round), a unique identification number (Flex ID number), a date
and time of the muzzle blast (trigger time), nearest address to the precise latitude and longitude of the gunfire, number of shots and police district and beat identification. The
alert also includes an audio clip of the incident.
One of our acoustic experts may add other contextual information related to the incident such as the possibility of multiple shooters, high-capacity or fully automatic
weapons, and the shooter’s location relative to a building (for example, in the front or back yard or in the street). An audit trail of the time the alert was published to and
acknowledged by our customer is also contained in the report. Any notes added by 911 dispatchers are time- and date-stamped and indicate the operator’s identification.
ShotSpotter Respond
We also offer a robust mobile application, for customers using iPhone and Android devices. This application allows field personnel to directly receive immediate alerts
of outdoor gunshots and related critical information. The alert provides the type of gunfire (single-round or multiple-round), a unique identification number (Flex ID number), a
date and time of the muzzle blast (trigger time), nearest address to the location of the gunfire, number of shots and police district and beat identification. The alert also includes
an audio clip of the incident.
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Real-time alert data with respect to gunshots can also be delivered to customers through email or SMS text messages.
Other Applications and Services
Investigator Portal
All historical incident data in our database can be viewed, searched, sorted, and filtered using the Investigator Portal. The Investigator Portal can create reports for
single incidents or groups of incidents. Filter settings may be used to select incidents grouped into a single report. Any predefined reports may be viewed, printed, or the raw
data exported for use in third-party applications. The Investigator Portal also includes the ability to save audio clips to any recordable media.
Forensic Reports and Certified Expert Witness Services
Our gunshot data is also useful for detailed forensic analysis that helps reveal and clarify what actually occurred during a gunfire incident, including the identification
of certain weapon types, the number and specific time of each individual round fired, the number of shooters involved and the changes in location and direction of shooters in
motion. Because our solutions provide an exact time, location and audio recording of a gunshot, we are able to provide authorities with critical evidence for investigations and
prosecutions.
As part of our solution, we offer Detailed Forensic Reports (“DFRs”). These provide law enforcement personnel and prosecutors with comprehensive, court-admissible
analysis of a shooting incident, including the gunfire audio. We also offer expert witness testimony to introduce the forensic analysis of the DFRs at trial and to provide
technical expertise regarding our technology. Our forensic evidence has been admitted in over 100 criminal prosecutions throughout the United States. Our technology and the
forensic results achieved from it have been found to be admissible in numerous states, adhering to either the Frye or Daubert expert testimony standard, including Minnesota,
Nebraska, Pennsylvania, California, Missouri, New York, Colorado, Indiana and New Jersey.
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ShotSpotter Missions
In the era where police agencies are constantly asked to do more with less, ShotSpotter Missions helps agencies make their largest cost center – patrol – more efficient
and effective in reducing crime. The software-based patrol management system displays AI-driven risk assessments for officers by shift and beat that direct their patrolling and
tactics in a more precise, standardized and impactful way. ShotSpotter Missions collects data from all directed patrol sessions that can be analyzed to determine their impact on
crime so that operations and tactics can be optimized over time.
ShotSpotter Missions provides:
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crime forecasting and directed patrol planning;
dosage and tactics guidance by crime type; and
reports on directed patrol activity and tactics for command staff.
The system combines historical crime data ingested through agency CAD and RMS feeds along with temporal, location and event-based inputs including ShotSpotter
data for cities use our ShotSpotter Flex solution, to create crime forecasts. The system ingests multiple years’ worth of agency data and is “trained” using machine learning to
determine correlations across variables. The models are then tested against recent crime data to calibrate forecast accuracy.
Deployment and Customer Success
When we deploy our ShotSpotter Flex, ShotSpotter SiteSecure and ShotSpotter SecureCampus solutions, we install our outdoor sensors in a specified coverage area
according to our contract with the customer. As an initial step, we perform site surveys of the coverage area to design a sensor array, which typically consist of 20 to 25 sensors
per square mile. We typically install sensors on the highest buildings in the area, but we may also use existing infrastructure assets such as light poles. Once permission for
installation is obtained, we typically engage local electricians to augment our team of field service technicians to install the sensors and perform required maintenance.
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Given the specialized nature of our market, a key component of our strategy is to maintain our passionate focus on customer success. We pride ourselves on our
execution in customer on-boarding as well as ongoing consulting and customer support, all of which is critical to ensure not only high customer retention rates but new customer
acquisitions. We implement our customer success initiative early in the sales process in order to ensure that we are aligned with the customer’s objectives and can positively
impact their defined outcomes. For example, during deployment, our customer success team, consisting of experienced law enforcement professionals, provides on-site training
to the customer’s officers, dispatchers and investigators, including training on how to use the solution and best practices for optimal results. We apply consultative best practices
and policy development at the command staff level as well as tactical training for field patrol officers. All of our efforts are focused on driving positive measurable outcomes on
gun violence reduction and prevention.
Our IRC and customer service organizations provide continuous outdoor incident classification and technical support 24 hours a day, seven days a week, 365 days a
year. The nature of our outdoor incident classification process provides ongoing and significant touchpoints with our customers through our published alerts. We also interact
with our customers through email, chat and telephone inquiries, and monitor our customers’ local news feeds and radio dispatch traffic in order to remain aware of their
violence prevention activities.
Our customer success team is responsible for conducting periodic in-person account reviews that detail all aspects of the services provided, including outcomes
generated and areas for future improvement. We believe that these account reviews, along with our formalized on-boarding customer success program, are largely responsible
for our high net promoter score (“NPS”). We obtain our NPS by conducting surveys to measure customer loyalty and satisfaction. We believe a high NPS indicates a substantial
competitive advantage in facilitating customer acquisition and retention and increases customer lifetime value. In 2019, we achieved an NPS score of 53%.
Customers
We generate annual subscription revenues from the deployment of our public safety and security solutions on a per-square-mile basis. As of December 31, 2019, we
had coverage areas under contract of approximately 760 square miles in the aggregate, of which 730 miles have gone live, which included 102 cities and 11 campuses and other
sites across the United States, South Africa and Bahamas, including three of the ten largest cities in the United States. Since transitioning our public safety business to the
ShotSpotter Flex subscription model in 2011, we have added over 70 new ShotSpotter Flex customers, but only ten such customers have terminated service, two of which we re
terminated due to hurricane damage in 2017, and one of which, Puerto Rico, had returned as a customer at the end of 2019. For the year ended December 31, 2019, our two
largest customers, City of Chicago and City of New York accounted for 20% and 14% of our revenues, respectively. For the year ended December 31, 2018, our two largest
customers, City of Chicago and City of New York accounted for 22% and 15% of our revenues, respectively. The City of New York and Puerto Rico Housing Administration
accounted for 18% and 7%, respectively, of our revenues for the year ended December 31, 2017.
Sales
We sell our solutions through our direct sales teams. Our sales teams focus on both new customer acquisition, customer renewal and coverage expansion. Our public
safety solution sales team identifies communities with the opportunity to benefit from our solutions, communicates with key stakeholders, navigates the challenges associated
with our customers’ complex funding and sales cycles, and establishes a foundation for a successful customer relationship. In addition, our sales team works with customers to
identify and procure funds from alternate sources, including state and federal government grants. Our security solutions sales team focuses primarily on college and university
campuses, typically with the head of campus security, but also by engaging with boards of regents, budget office personnel and other campus stakeholders. We intend to
continue to invest in building a global sales organization as we further penetrate the market for ShotSpotter Flex and expand the customer base for our security solutions.
At times, we may sell our solutions through channel partners as part of “Smart Cities” initiatives. To help integrate our solutions with other services in this space and
to take advantage of current and emerging technologies, we seek to enter into alliances with leading companies focused on such initiatives. In August 2018, we entered into an
agreement with Verizon, through which they may sell our Flex solutions as a reseller, in addition to the solution bundled with their Light Sensory Network. In October 2019, we
entered into an agreement with AT&T, through which they may sell our Flex solutions as a reseller as well.
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Marketing
The company continues to expand the scope and capability of the marketing function. The top marketing initiatives include: 1) targeted lead-generation campaigns and
events to build sales pipeline; 2) creation of compelling content to educate prospects and build credibility as police agencies go through the buyers’ journey; and 3) an active
public relations program to increase the overall awareness of our products.
In 2019, we launched a lead-generation initiative to drive additional pipeline for the sales team consisting of a marketing automation technology platform, a series of
online campaigns and an outbound calling team of sales development representative (“SDR”s). The campaigns are designed to educated prospects and generate initial interest
based on compelling content. The SDR team supports the campaigns with outbound calls to drive further interest and qualify the lead. Over the course of the year the flow of
qualified leads that turned into sales opportunities doubled. A key part of the lead generation program is creating a presence at key industry events and conferences where we
can personally engage with customers, prospects and influencers such as mayors, city managers, and trauma surgeons. The face-to-face interactions are invaluable for
introducing our value proposition, establishing relationships and building trust.
Content creation is focused on leveraging our happy customer base to share their experiences and results with other prospects. We have developed an initial set of
video and online assets that share success stories from our customers’ point of view and describe how our technology positively impacts their department and community. We
are expanding the breadth and depth of our content library significantly for the user, economic buyer and influencers.
In the area of public relations, we increased our social media presence, have expanded the number of spokespeople available to talk to the media and continue to put
out a significant number of press releases each year. Due to the high visibility of shootings, the media’s interest in covering them, and ShotSpotter’s key role in alerting police
for a quick response to these events, we benefit from significant television, print and online press that is generated at little to no cost. In 2019, we were mentioned in over 11,000
articles, broadcast TV and radio segments - the majority of which were organically generated. Members of the media have access to a self-serve, comprehensive media kit to
easily insert video and photos that depict the service and its benefits in a compelling fashion to enhance broadcast TV segments and print/online articles. This exposure creates
awareness for our system and lends credibility to our market leadership position.
Research and Development
We focus our research and development efforts on enhancing our advanced signal processing and classification algorithms, updating our sensor hardware technology,
reducing manufacturing costs, developing mobile, web and desktop applications, evolving our cloud-deployed back-end infrastructure and integration with “smart cities”
initiatives. ShotSpotter Missions crime forecasting uses machine learning and has led to additional investment in data science resources. As of December 31, 2019, we had 20
employees in our research and development organization. In addition, we engage in research and development activities with manufacturing partners and outsource certain
activities to engineering firms to further supplement our internal team. Our research and development team is increasingly focused on exploring the use of our data sets to
conduct cognitive analysis and AI integration.
Competition
The markets for public safety and security solutions are highly fragmented and evolving. Whether installed in local communities, on critical infrastructure or on a
campus, for a gunfire detection system to be effective, the protection zone must be comprehensive. We believe our gunshot detection solutions represent the most effective
public safety and security solutions on the market.
We compete on the basis of a number of factors, including:
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product functionality, including the ability to cover broad outdoor geographic spaces;
solution performance, including the rapid capture of multiple acoustic incidents and accuracy;
ease of implementation, use and maintenance;
total cost of ownership; and
customer support and customer success initiatives.
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ShotSpotter Flex Solution Competitors
Our ShotSpotter Flex solution is unique because it provides scalable wide area gunshot detection over large and geographically diverse areas, provides immediate and
precise data on gunfire, helps communities define the scope of illegal gunfire, and provides cities with detailed forensic data for investigation, prosecution and analysis. While
we are not aware of any direct competitors offering wide-area solutions comparable to ShotSpotter Flex, we believe the primary competitors in the broader gunfire detection
space are Rafael Advanced Defense Systems Ltd., Raytheon Company, V5 Systems, Safety Dynamics, Inc., Wi-fiber, Inc. EAGL Technology, Shooter Detection Systems and
Thales Group.
Most of these other outdoor solutions on the market offer limited scope point protection, proximity sensors, or “counter-sniper systems.” These systems are designed
primarily for covering small areas, or for defined military or SWAT team applications, where the target is known in advance and it is possible to put a sensor directionally
toward the target. However, urban areas and critical infrastructure require a wider system of protection that can cover a large area.
We also compete with other possible uses of the limited funding available to our ShotSpotter Flex customers. Because law enforcement agencies or government
entities have limited funds, they may have to choose among resources or solutions that help them to meet their overall mission. Accordingly, we compete not only with our
customers’ internal budget decisions, but with numerous companies vying for these limited funds, including Everbridge, Inc. and Axon Enterprises, Inc., among others. We
believe that in areas with significant levels of gun activity, ShotSpotter Flex is uniquely positioned to assist customers in interrupting, detecting and preventing gun violence.
Security Solutions Competitors
Our security solutions operate in a highly competitive environment. In addition to other gunfire detection companies, we may face competition from companies
offering alternative security technologies, such as video surveillance, access control, alarm and lighting systems. The direct competitors for security solutions include the
Guardian system by Shooter Detection Systems LLC, Safety Dynamics Inc., V5 Systems, EAGL, Wi-fiber, and AmberBox, Inc. We believe none of our security solutions
competitors is able to offer the comprehensive outdoor coverage we offer.
ShotSpotter Missions Competitors
ShotSpotter Missions operates in a developing and potentially competitive environment. In addition to control management and data analytics customers companies,
we may face competition from companies offering alternative solutions as well as solutions developed internally by our customers. The direct competitors to our Missions
solution include PredPol, Inc. and may include other CAD/RMS providers and other third-party solutions providers, such as Genetech, Inc., CentralSquare Technologies, Mark
43, and Motorola Solutions, Inc.
Intellectual Property
Our future success and competitive position depend in part on our ability to protect our intellectual property and proprietary technologies. To safeguard these rights, we
rely on a combination of patent, trademark, copyright and trade secret laws, and contractual protections in the United States and other jurisdictions.
As of December 31, 2019, we had 34 issued patents, 32 in the United States, one in Israel and one in Mexico, as well as patent applications pending for examination in
the United States, Europe and Brazil.
The issued patents expire on various dates from 2022 to 2034. We also license one patent from a third party, which expires in 2023.
We also license software from third parties for integration into our offerings, including open source software and other software available on commercially reasonable
terms. We cannot assure you that such third parties will maintain such software or continue to make it available.
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Facilities
Our principal facilities consist of office space for our corporate headquarters in Newark, California, where we occupy approximately 12,020 square feet of space under
a lease that expires in October 2021.
We lease our facilities and do not own any real property. We may procure additional space as we add employees and expand geographically. We believe that our
facilities are adequate to meet our needs for the immediate future and that should it be needed, suitable additional space will be available to accommodate expansion of our
operations.
Employees
As of December 31, 2019, we had 108 full-time and four part-time employees, of which 21 were in sales and marketing, 11 were in general and administrative
functions, 20 in research and development and 60 in operations, customer support and customer success. None of our employees are represented by a labor union or covered by
collective bargaining agreements. We consider our relationship with our employees to be good.
Segment and Geographic Information
Information about segment reporting and long-lived assets is set forth in Note 3 of our Notes to Consolidated Financial Statements included in “Financial
Statements and Supplementary Data” of th is Annual Report on Form 10-K. Total revenues generated outside the United States were derived from our customer located in
South Africa and Bahamas and were $1.0 million in the year ended December 31, 2019, and $0.9 million and $0.8 million, in the years ended December 31, 2018 and 2017,
respectively. Substantially all of our non-monetary long-lived assets are located in the United States. For a discussion of risks related to our international operations, see the risk
factors set forth in Part I, Item 1A of this Annual Report on Form 10-K.
Corporate Information
We were formed as ShotSpotter, Inc., a California corporation, in 2001 and reincorporated as ShotSpotter, Inc., a Delaware corporation, in 2004. We also do business
as “SST” pursuant to a registered trade name.
Our principal executive offices are located at 7979 Gateway Boulevard, Suite 210, Newark, California 94560 and our telephone number is (510) 794-3100. Our
website address is www.shotspotter.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into this Annual Report
on Form 10-K, and you should not consider any information contained on, or that can be accessed through, our website as part of this Annual Report on Form 10-K.
ShotSpotter, the ShotSpotter logo, ShotSpotter Missions, ShotSpotter Flex, ShotSpotter SecureCampus, ShotSpotter SiteSecure, and other trade names, trademarks or
service marks of ShotSpotter appearing in this Annual Report on Form 10-K are the property of ShotSpotter, Inc. Trade names, trademarks and service marks of other
companies appearing in this Annual Report on Form 10-K are the property of their respective holders.
Where You Can Find More Information
You can read our SEC filings, including this Annual Report on Form 10-K, over the internet at the SEC’s website at www.sec.gov. You may also read and copy any
document we file with the SEC at its public reference facilities at 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of these documents at prescribed
rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on
the operation of the public reference facilities.
We are subject to the information reporting requirements of the Exchange Act, and we are required to file reports, proxy statements and other information with the
SEC. These reports, proxy statements and other information are available for inspection and copying at the public reference room and website of the SEC referred to above. We
also maintain a website at www.shotspotter.com, at which you may access these materials, free of charge, as reasonably practicable after they are electronically filed with, or
furnished to, the SEC. We are not, however, including the information contained on our website, or information that may be accessed through links on our website, as part of, or
incorporating such information by reference into, this Annual Report on Form 10-K.
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Item 1A. RISK FACTORS.
Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other
information in this report, including our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the
following risks is realized, our business, operating results, financial condition and prospects could be materially and adversely affected. In that event, the price of our common
stock could decline, and you could lose part or all of your investment. Moreover, the risks described below are not the only ones that we face. Additional risks not presently
known to us or that we currently deem immaterial may also affect our business, operating results, prospects or financial condition. You should carefully consider these risk
factors, together with all of the other information included in this Annual Report on Form 10-K as well as our other publicly available filings with the SEC.
Risks Related to Our Business and Industry
Our success depends on maintaining and increasing our sales, which depends on factors we cannot control, including the availability of funding to our customers.
To date, substantially all of our revenues have been derived from contracts with local governments and their agencies, in particular the police departments of major
cities in the United States. To a lesser extent, we also generate revenues from federal agencies, foreign governments and higher education institutions. We believe that the
success and growth of our business will continue to depend on our ability to add new police departments and other government agencies, domestically and internationally, as
customers of our public safety solution and new universities, corporate campuses and key infrastructure and transportation centers as customers of our security solutions. Many
of our target customers have restricted budgets, such that we are forced to compete with programs or solutions that offer an alternative use of the same funds. A number of
factors could cause current and/or potential customers to: delay or refrain from purchasing our solutions, prevent expansion of, or reduce coverage areas and/ or terminate use of
our solutions, including:
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decreases or changes in available funding, including budgetary allocations, government grants and other government funding programs;
potential delays or changes in appropriations or other funding authorization processes;
changes in fiscal or contracting policies;
macro-and/or local economic changes that may affect customer funding;
changes in elected or appointed officials; and
changes in laws or public sentiment regarding privacy or surveillance.
The occurrence of any of the foregoing would impede or delay our ability to maintain or increase the amount of revenues derived from these customers, which could
have a material adverse effect on our business, operating results and financial condition.
Contracting with government entities can be complex, expensive and time-consuming.
The procurement process for government entities is in many ways more challenging than contracting in the private sector. We must comply with laws and regulations
relating to the formation, administration, performance and pricing of contracts with government entities, including U.S. federal, state and local governmental bodies. These laws
and regulations may impose added costs on our business or prolong or complicate our sales efforts, and failure to comply with these laws and regulations or other applicable
requirements could lead to claims for damages from our customers, penalties, termination of contracts and other adverse consequences. Any such damages, penalties,
disruptions or limitations in our ability to do business with government entities could have a material adverse effect on our business, operating results and financial condition.
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Government entities often require highly specialized contract terms that may differ from our standard arrangements. For example, if the federal government provides
grants to certain state and local governments for our solutions, and such governments do not continue to receive these grants, then these customers have the ability to terminate
their contracts with us without penalty. Government entities often impose compliance requirements that are complicated, require preferential pricing or “most favored nation”
terms and conditions, or are otherwise time-consuming and expensive to satisfy. Compliance with these special standards or satisfaction of such requirements could compl icate
our efforts to obtain business or increase the cost of doing so. Even if we do meet these special standards or requirements, the increased costs associated with providing our
solutions to government customers could harm our margins. Additionally, eve n once we have secured a government contract, the renewal process can be lengthy and as time-
consuming as the initial sale, and we may be providing our service for months past the contract expiration date without certainty if the renewal agreement will be signed or not.
Changes in the underlying regulatory conditions, political landscape or required procurement procedures that affect these types of customers could be introduced prior
to the completion of our sales cycle, making it more difficult or costly to finalize a contract with a new customer or expand or renew an existing customer relationship. For
example, customers may require a competitive bidding process with extended response deadlines, review or appeal periods, or customer attention may be diverted to other
government matters, postponing the consideration of the purchase of our products. Such delays could harm our ability to provide our solutions efficiently and to grow or
maintain our customer base.
If we are unable to maintain and expand coverage of our existing public safety customer accounts and further penetrate the public safety market, our revenues may not
grow.
Our ability to increase revenues will depend in large part on our existing public safety solution customers renewing their annual subscriptions and expanding their
mileage coverage, or purchasing and implementing our ShotSpotter Missions solutions. Most of our ShotSpotter Flex customers begin using our solution in a limited coverage
area. Our experience has been, and we expect will continue to be, that after the initial implementation of our solutions, our new customers typically renew their annual
subscriptions, and many also choose to expand their coverage area. If our existing customers do not renew their subscriptions, our revenues may decrease. However, some
customers may choose to not renew or reduce their coverage. For example, as a result of widespread destruction caused by hurricanes in Puerto Rico and the U.S. Virgin Islands,
in September 2017, we discontinued our service to our customers in coverage areas in those locations and we classified the contracts as expired because the customers were no
longer live. At the time, the Housing Authority of Puerto Rico had been one of our largest customers. If other existing customers do not choose to renew or expand their
coverage areas, our revenues will not grow as we anticipate.
Our ability to further penetrate the market for our public safety solutions depends on several factors, including: maintaining a high level of customer satisfaction and a
strong reputation among law enforcement; increasing the awareness of our ShotSpotter Flex and ShotSpotter Missions solutions and their benefits; the effectiveness of our
marketing programs; the availability of funding to our customers; and the costs of our solutions. Some potential public safety customers may be reluctant or unwilling to use
our solution for a number of reasons, including concerns about additional costs, unwillingness to expose or lack of concern regarding the extent of gun violence in their
community, uncertainty regarding the reliability and security of cloud-based offerings or lack of awareness of the benefits of our public safety solutions. If we are unsuccessful
in expanding the coverage of ShotSpotter Flex by existing public safety customers or adding new ShotSpotter Flex and ShotSpotter Missions public safety customers, our
revenues and growth prospects would suffer.
If we are unable to sell our solutions into new markets, our revenues may not grow.
Part of our growth strategy depends on our ability to increase sales of our security solutions and add new customers for our public safety solution in markets outside of
the United States. Our security solutions include ShotSpotter Missions, ShotSpotter Labs, ShotSpotter SecureCampus and ShotSpotter SiteSecure. We are focused on expanding
the sales of these solutions into new markets, but customers in these new markets may not be receptive or sales may be delayed beyond our expectations, causing our revenues
growth and growth prospects to suffer.
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Our ability to successfully face these challenges depends on several factors, including increasing the awareness of our solutions and their benefits; the effectiveness of
our marketing programs; the costs of our solutions; our ability to attract, retain and effectively train sales and marketing personnel; and our ability to develop relationships with
communication carriers and other partners. If we are unsuccessful in developing and marketing our solutions into new markets, new markets for our solutions might not develop
or might develop more slowly than we expect, either of which would harm our revenues and growth prospects.
Our sales cycle can be lengthy, time-consuming and costly, and our inability to successfully complete sales could harm our business.
Our sales process involves educating prospective customers and existing customers about the use, technical capabilities and benefits of our solutions. Prospective
customers, especially government agencies, often undertake a prolonged evaluation process that may last up to nine months or more and that typically involves comparing the
benefits of our solutions to alternative uses of funds. We may spend substantial time, effort and money on our sales and marketing efforts without any assurance that our efforts
will produce any sales.
Additionally, events affecting our customers’ budgets or missions may occur during the sales cycle that could negatively impact the size or timing of a purchase after
we have invested substantial time, effort and resources into a potential sale, contributing to more unpredictability in the growth of our business. If we are unable to succeed in
closing sales with new and existing customers, our business, operating results and financial condition will be harmed.
Changes in the availability of federal funding to support local law enforcement efforts could impact our business.
Many of our customers rely to some extent on funds from the U.S. federal government in order to purchase and pay for our solutions. Any reduction in federal funding
for local law enforcement efforts could result in our customers having less access to funds required to continue, renew, expand or pay for our solutions. For example, changes in
policies with respect to “sanctuary cities” may result in a reduction in federal funds available to our current or potential customers. If federal funding is reduced or eliminated
and our customers cannot find alternative sources of funding to purchase our solutions, our business will be harmed.
If our business does not grow as we expect, or if we fail to manage our growth effectively, our operating results and business prospects would suffer.
Our ability to successfully grow our business depends on a number of factors including our ability to:
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accelerate our acquisition of new customers;
further sell expansions of coverage areas to our existing customers;
expand our international footprint;
expand into new vertical markets, such as our ShotSpotter Missions, and our security solutions;
increase awareness of the benefits that our solutions offer; and
maintain our competitive and technology leadership position.
As usage of our solutions grows, we will need to continue to make investments to develop and implement new or updated solutions, technologies, security features and
cloud-based infrastructure operations. In addition, we will need to appropriately scale our internal business systems and our services organization, including the suppliers of our
detection equipment and customer support services, to serve our growing customer base. Any failure of, or delay in, these efforts could impair the performance of our solutions
and reduce customer satisfaction.
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Further, our growth could increase quickly and place a strain on our managerial, operational, financial and other resources, and our future operating results depend to
a large extent on our ability to successfully manage our anticipated expansion and growth. To manage our growth successfully, we will need to continue to invest in sales and
marketing, research and development, and general and administrative functions and other areas. We are likely to recognize the costs associated with these investments earlier
than receiving some of the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect, which could adversely affect
our operating results.
If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new solutions or upgrades to our existing
solutions, satisfy customer requirements, maintain the quality and security of our solutions or execute on our business plan, any of which could have a material adverse effect on
our business, operating results and financial condition.
Our business is dependent upon our ability to deploy and deliver our solutions, and the failure to meet our customers’ expectations could harm our reputation, which may
have a material adverse effect on our business, operating results and financial condition.
Promoting and demonstrating the utility of our solutions as useful, reliable and important tools for law enforcement and security personnel is critical to the success of
our business. Our ability to secure customer renewals and enter into new customer contracts is dependent on our reputation and our ability to deliver our solutions effectively.
We believe that our reputation among police departments using ShotSpotter Flex is particularly important to our success. Our ability to meet customer expectations will depend
on a wide range of factors, including:
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our ability to continue to offer high-quality, innovative and accurate gunshot detection and gunshot deterrence services, and precision policing software and
solutions;
our ability to maintain continuous monitoring during high outdoor-noise activity periods such as New Year’s Day, the Fourth of July and Cinco de Mayo,
and Carnival for international deployments;
our ability to maintain high customer satisfaction, including meeting our SLA standards;
the perceived value and quality of our solutions;
differences in opinion regarding the metrics that measure the success of our solutions;
our ability to successfully communicate the unique value proposition of our solutions;
our ability to provide high-quality customer support;
any misuse or perceived misuse of our solutions;
interruptions, delays or attacks on our platform;
litigation- or regulation-related developments; and
damage to or degradation of our sensors or sensor network by third parties.
Furthermore, negative publicity, whether or not justified, relating to events or activities attributable to us, our solutions, our employees, our partners or others
associated with any of these parties, may tarnish our reputation. Damage to our reputation may reduce demand for our solutions and would likely have a material adverse effect
on our business, operating results and financial condition. Moreover, any attempts to rebuild our reputation may be costly and time-consuming, and such efforts may not
ultimately be successful.
Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and results of operations.
We have in the past experienced, and may in the future experience, performance issues due to a variety of factors, including infrastructure changes, human or software
errors, intentional or accidental damage to our technology (including sensors), website or third-party hosting disruptions or capacity constraints due to a number of potential
causes including technical failures, natural disasters or security attacks. If our security is compromised, our platform is unavailable or our users are unable to receive our alerts
or otherwise communicate with our IRC, within a reasonable amount of time or at all, our business could be negatively affected. In some instances, we may not be able to
identify the cause or causes of these performance problems within an acceptable period of time.
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In addition, our IRC is located in a single facility. Although the functions of our IRC can be performed remotely, any interruption or delay in service from our IRC,
such as from a communications or power outage, could limit our ability deliver our solutions. In addition, it may become increasingly difficult to maintain and improve the
performance of our solutions, especially during peak usage times as the capacity of our IRC operations reaches its limits. If there is an interruption or delay in service from our
IRC and a gunshot is detected but not reviewed in the allotted time, our software will flag the incident for off line review. This may result in delayed notifications to our
customers and as a result, we could experience a decline in customer satisfaction with our solutions and our reputation and growth prospects could be harmed.
We expect to continue to make significant investments to maintain and improve the performance of our solutions. To the extent that we do not effectively address
capacity constraints, upgrade our systems as needed and continually develop our technology to accommodate actual and anticipated changes in technology, our business,
operating results and financial condition may be adversely affected.
We rely on wireless carriers to provide access to wireless networks through which our acoustic sensors communicate with our cloud-based backend and with which we
provide our notification services to customers, and any interruption of such access would impair our business.
We rely on wireless carriers, mainly AT&T and Verizon, to provide access to wireless networks for machine-to-machine data transmissions, which are an integral part
of our services. Our wireless carriers may suspend wireless service to expand, maintain or improve their networks. These wireless carriers perform routine maintenance and
periodic software and firmware updates that may damage our sensors or make them inoperable. Any suspension or other interruption of services would adversely affect our
ability to provide our services to our customers and may adversely affect our reputation. In addition, the terms of our agreements with these wireless carriers provide that either
party can cancel or terminate the agreement for convenience with 90 days’ notice. If one of our wireless carriers were to terminate its agreement with us, we would need to
source a different wireless carrier and/or modify our equipment during the notice period in order to minimize disruption in the performance of our solutions. Price increases or
termination by our wireless carriers or changes to existing contract terms could have a material adverse effect on our business, operating results and financial condition.
Natural disasters, infectious disease outbreaks, power outages or other events impacting us or our customers could harm our operating results and financial condition.
We recognize revenue on a subscription basis as our solutions are provided to our customers over time. If our services are disrupted due to natural disasters, power
outages or other events that we cannot control, as happened when hurricanes hit Puerto Rico and the U.S. Virgin Islands in 2017, we may not be able to continue providing our
solutions as expected.
When we stop providing coverage, we also stop recognizing revenues as a result of the affected subscription agreement. If we are forced to discontinue our services
due to natural disasters, power outages and other events outside of our control, our revenues may decline, which would negatively impact our results of operations and financial
condition. In addition, we may face liability for damages caused by our sensors in the event of heavy weather or other natural disasters. We may also incur additional costs to
repair or replace installed sensor networks damaged by heavy weather, hurricanes or other natural disasters.
Any of our facilities or operations may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, tornadoes, hurricanes, wildfires,
floods, nuclear disasters, acts of terrorism or other criminal activities, infectious disease outbreaks, such as COVID-19, and power outages, which may render it difficult or
impossible for us to operate our business for some period of time or decrease productivity. For example, our IRC and a data center that hosts some of our customer services are
located in the San Francisco Bay Area, a region known for seismic activity. Our facilities would likely be costly to repair or replace, and any such efforts would likely require
substantial time. In addition, like many companies, we have recently implemented a work from home policy as a result of the COVID-19 pandemic. This policy may negatively
impact productivity. Any disruptions in our operations could negatively impact our business and operating results, and harm our reputation. In addition, we may not carry
business insurance or may not carry sufficient business insurance to compensate for losses that may occur. Any such losses or damages could have a material adverse effect on
our business, operating results and financial condition. In addition, the facilities of significant vendors, including the manufacturer of our proprietary
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acoustic sensor, may be harmed or rendered inoperable by such natural or man-made disasters, which may cause disruptions, difficulties or material adverse effects on our
business.
Real or perceived false positive gunshot alerts or failure or perceived failure to generate alerts for actual gunfire could adversely affect our customers and their operations,
damage our brand and reputation and adversely affect our growth prospects and results of operations.
A false positive alert, in which a non-gunfire incident is reported as gunfire, could result in an unnecessary rapid deployment of police officers and first responders,
which may raise unnecessary fear among the occupants of a community or facility, and may be deemed a waste of police and first responder resources. A failure to alert law
enforcement or security personnel of actual gunfire (false negative) could result in a less rapid or no response by police officers and first responders, increasing the probability
of injury or loss of life. Both false positive alerts and the failure to generate alerts of actual gunfire (false negative) may result in customer dissatisfaction, potential loss of
confidence in our solutions, and potential liabilities to customers or other third parties, any of which could harm our reputation and adversely impact our business and operating
results. Additionally, the perception of a false positive alert or of a failure to generate an alert, even where our customers understand that our solutions were utilized correctly,
could lead to negative publicity or harm the public perception of our solutions, which could harm our reputation and adversely impact our business and operating results.
Economic uncertainties or downturns, or political changes, could limit the availability of funds available to our customers and potential customers, which could materially
adversely affect our business.
Economic uncertainties or downturns could adversely affect our business and operating results. Negative conditions in the general economy both in the United States
and abroad, including conditions resulting from changes in gross domestic product growth, financial and credit market fluctuations, political deadlock, natural catastrophes,
such as the devastation caused by the hurricanes in Puerto Rico and U.S. Virgin Islands, warfare, terrorist attacks and infectious disease outbreaks, such as COVID-19, in the
United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in funds available to our customers and potential customers and negatively affect the rate of
growth of our business.
These economic conditions may make it extremely difficult for our customers and us to forecast and plan future budgetary decisions or business activities accurately,
and they could cause our customers to reevaluate their decisions to purchase our solutions, which could delay and lengthen our sales cycles or result in cancellations of planned
purchases. Furthermore, during challenging economic times or as a result of political changes, our customers may tighten their budgets and face constraints in gaining timely
access to sufficient funding or other credit, which could result in an impairment of their ability to make timely payments to us. In turn, we may be required to increase our
allowance for doubtful accounts, which would adversely affect our financial results.
We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry, or the impact of
political changes. If the economic conditions of the general economy or industries in which we operate worsen from present levels, or if recent political changes result in less
funding being available to purchase our solutions, our business, operating results, financial condition and cash flows could be adversely affected.
We have not been profitable historically and may not achieve or maintain profitability in the future.
We only reached our first full year of net income in 2019; prior to that, we posted a net loss in each year since inception. As of December 31, 2019, we had an
accumulated deficit of $95.6 million. We are not certain whether we will be able to maintain high enough volume of sales of our solutions to sustain or increase our growth or
maintain profitability in the future. We also expect our costs to increase in future periods, which could negatively affect our future operating results if our revenues do not
increase. In particular, we expect to continue to expend substantial financial and other resources on:
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sales and marketing, including a significant expansion of our sales organization, both domestically and internationally;
research and development related to our solutions, including investments in our engineering and technical teams;
acquisition of complementary technologies or businesses, such as our acquisition of HunchLab technology in October 2018;
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continued international expansion of our business; and
general and administrative expenses, including legal and accounting expenses related to operating as a public company.
These investments may not result in increased revenues or growth in our business. If we are unable to increase our revenues at a rate sufficient to offset the expected
increase in our costs, our business, operating results and financial position may be harmed, and we may not be able to maintain profitability over the long term. Additionally, we
may encounter unforeseen operating expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods. If our revenues growth
does not meet our expectations in future periods, our financial performance may be harmed, and we may not maintain profitability in the future.
We may require additional capital to fund our business and support our growth, and our inability to generate and obtain such capital on acceptable terms, or at all, could
harm our business, operating results, financial condition and prospects.
We intend to continue to make substantial investments to fund our business and support our growth. In addition, we may require additional funds to respond to business
challenges, including the need to develop new features or enhance our solutions, improve our operating infrastructure or acquire or develop complementary businesses and
technologies. As a result, in addition to the revenues we generate from our business and our existing cash balances, we may need to engage in additional equity or debt
financings to provide the funds required for these and other business endeavors. If we raise additional funds through future issuances of equity or convertible debt securities, our
existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our
common stock. Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and
operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be
able to obtain such additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require
it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be adversely affected. In
addition, our inability to generate or obtain the financial resources needed may require us to delay, scale back, or eliminate some or all of our operations, which may have a
material adverse effect on our business, operating results, financial condition and prospects.
The incurrence of debt may impact our financial position and subject us to additional financial and operating restrictions.
On September 27, 2018, we entered into a $10.0 million senior secured revolving credit facility with Umpqua Bank (the “Umpqua Credit Agreement”), which we
intend to use for general working capital purposes. As of December 31, 2019, we had no outstanding amounts due on nor any usage of the Umpqua Credit Agreement.
Under the Umpqua Credit Agreement, we are subject to various negative covenants that limit, subject to certain exclusions, our ability to incur indebtedness, make
loans, invest in or secure the obligations of other parties, pay or declare dividends, make distributions with respect to our securities, redeem outstanding shares of our 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. These covenants could adversely affect our financial health and business and future operations by, among other things:
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making it more difficult to satisfy our obligations, including under the terms of the Umpqua Credit Agreement;
limiting our ability to refinance our debt on terms acceptable to us or at all;
limiting our flexibility to plan for and adjust to changing business and market conditions and increasing our vulnerability;
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limiting our ability to use our available cash flow to fund future acquisitions, working capital, business activities, and other general corporate requirements;
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limiting our ability to obtain additional financing for working capital to fund growth or for general corporate purposes, even when necessary to maintain
adequate liquidity.
We are also required to maintain certain financial covenants tied to our leverage, interest charges and profitability. Our ability to meet such covenants (those negative
covenants discussed in the preceding paragraph) or other restrictions can be affected by events beyond our control, and our failure to comply with the financial and other
covenants would be an event of default under the Umpqua Credit Agreement. If an event of default under the Umpqua Credit Agreement, has occurred and is continuing, the
outstanding borrowings thereunder could become immediately due and payable, and we would then be required to cash collateralize any letters of credit then outstanding, and
the lender could refuse to permit additional borrowings under the facility. We cannot assure you that we would have sufficient assets to repay those borrowings and, if we are
unable to repay those amounts, the lender could proceed against the collateral granted to them to secure such indebtedness. We have pledged substantially all of our assets as
collateral, and an event of default would likely have a material adverse effect on our business.
New competitors may enter the market for our public safety solution.
If cities and other government entities increase their efforts to reduce gun violence or our solutions gain visibility in the market, companies could decide to enter into
the public safety solution market and thereby increase the competition we face. In addition to other gunshot detection products, we also compete with other technologies and
solutions targeting our public safety customers’ resources for law enforcement and crime prevention. Our competitors could benefit from the disclosure of our data or
information concerning our techniques and processes due to legal or other obligations (for example, as a result of public-records requests or subpoenas to provide information or
to testify in court). Because there are several possible uses for these limited budgetary resources, if we are not able to compete successfully for these limited resources, our
business may not grow as we expect, which could adversely impact our revenues and operating results.
The competitive landscape for our security solutions is evolving.
The market for security solutions for university campuses, corporate campuses and transportation and key infrastructure centers includes a number of available
options, such as video surveillance and increased human security presence. Because there are several possible uses of funds for security needs, we may face increased
challenges in demonstrating or distinguishing the benefits of ShotSpotter SecureCampus and ShotSpotter SiteSecure. In particular, while we have seen growing interest in our
security solutions, interest in the indoor gunshot detection offering was limited, and as a result, in June 2018, we made the strategic decision to cease indoor coverage as part of
our service offering. While our ShotSpotter Missions may increase sales of our outdoor detection services, we may face challenges in demonstrating or distinguishing the
benefits of ShotSpotter Missions’ development of crime forecasts and increased effectiveness of patrol resources.
Failure to effectively develop and expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance
of our solutions.
To increase total customers and customer coverage areas and to achieve broader market acceptance of our solutions, we will need to expand our sales and marketing
organization and increase our business development resources, including the vertical and geographic distribution of our sales force and our teams of account executives focused
on new accounts and responsible for renewal and growth of existing accounts.
Our business requires that our sales personnel have particular expertise and experience in working with law enforcement agencies, other government organizations and
higher education institutions. We may not achieve revenues growth from expanding our sales force if we are unable to hire, develop and retain talented sales personnel with
appropriate experience, if our new sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if our sales and marketing programs are not
effective.
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Our strategy includes pursuing acquisitions, and our inability to successfully integrate newly-acquired technologies, assets or businesses may harm our financial results.
Future acquisitions of technologies, assets or businesses, which are paid for partially or entirely through the issuance of stock or stock rights, could dilute the ownership of
our existing stockholders.
We will evaluate and consider potential strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products and other assets
in the future. For example, in October 2018, we acquired the HunchLab technology and related assets from Azavea Inc. We also may enter into relationships with other
businesses to expand our platform and applications, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in
other companies.
We believe that part of our continued growth will be driven by acquisitions of other companies or their technologies, assets, businesses and teams. The HunchLab
acquisition gives rise, and any acquisitions in the future that we complete will give rise, to risks, including:
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incurring higher than anticipated capital expenditures and operating expenses;
failing to assimilate the operations and personnel or failing to retain the key personnel of the acquired company or business;
failing to integrate the acquired technologies, or incurring significant expense to integrate acquired technologies, into our platform and applications;
disrupting our ongoing business;
diverting our management’s attention and other company resources;
failing to maintain uniform standards, controls and policies;
incurring significant accounting charges;
impairing relationships with our customers and employees;
finding that the acquired technology, asset or business does not further our business strategy, that we overpaid for the technology, asset or business or that
we may be required to write off acquired assets or investments partially or entirely;
failing to realize the expected synergies of the transaction;
being exposed to unforeseen liabilities and contingencies that were not identified prior to acquiring the company; and
being unable to generate sufficient revenues and profits from acquisitions to offset the associated acquisition costs.
Fully integrating an acquired technology, asset or business into our operations may take a significant amount of time. We may not be successful in overcoming these
risks or any other problems encountered with acquisitions. To the extent that we do not successfully avoid or overcome the risks or problems related to any such acquisitions,
our results of operations and financial condition could be harmed. Acquisitions also could impact our financial position and capital requirements, or could cause fluctuations in
our quarterly and annual results of operations. Acquisitions could include significant goodwill and intangible assets, which may result in future impairment charges that would
reduce our stated earnings. We may incur significant costs in our efforts to engage in strategic transactions and these expenditures may not result in successful acquisitions.
We expect that the consideration we might pay for any future acquisitions of technologies, assets, businesses or teams could include stock, rights to purchase stock,
cash or some combination of the foregoing. If we issue stock or rights to purchase stock in connection with future acquisitions, net income per share and then-existing holders of
our common stock may experience dilution.
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The nature of our business exposes us to inherent liability risks.
Our solutions, including ShotSpotter Flex, ShotSpotter SecureCampus and ShotSpotter SiteSecure, are designed to communicate real-time alerts of gunfire incidents to
police officers and first responders. Due to the nature of such applications, we are potentially exposed to greater risks of liability for employee acts or omissions or system
failures than may be inherent in other businesses. Although substantially all of our customer agreements contain provisions limiting our liability to our customers, we cannot be
certain that these limitations will be enforced or that the costs of any litigation related to actual or alleged omissions or failures would not have a material adverse effect on us
even if we prevail. Further, certain of our insurance policies and the laws of some states may limit or prohibit insurance coverage for punitive or certain other types of damages
or liability arising from gross negligence, or other issues, such as damages caused due to installation of our sensors on buildings owned by third parties, and we cannot assure
you that we are adequately insured against the risks that we face.
The nature of our business may result in undesirable press coverage or other negative publicity.
Our solutions are used to assist law enforcement and first responders in the event that gunfire is detected. Even when our solutions work as intended, the incidents
detected by our solutions could lead to injury, loss of life and other negative outcomes, and such events are likely to receive negative publicity. If we fail to detect an incident, or
if we detect an incident, such as a terrorist attack or active-shooter event, but the response time of law enforcement or first responders is not sufficiently quick to prevent injury,
loss of life, property damage or other adverse outcomes, we may receive negative media attention. At times, our data or information concerning our techniques and processes
may become a matter of public record due to legal or other obligations (for example, as a result of public-records requests or subpoenas to provide information or to testify in
court), and we may receive negative media attention as a result.
In addition, our solutions require that our customers monitor alerts and respond timely to notifications of gunshots. If our customers do not fully utilize our systems,
we may be subject to criticism and unflattering media coverage regarding the effectiveness of our solutions and the cost of our solutions to our customers. Such negative
publicity could have an adverse impact on new sales or renewals or expansions of coverage areas by existing customers, which would adversely impact our financial results and
future prospects.
Real or perceived errors, failures or bugs in our software could adversely affect our operating results and growth prospects.
Because our software is complex, undetected errors, failures or bugs may occur. Our software is often installed and used with different operating systems, system
management software, and equipment and networking configurations, which may cause errors or failures of our software or other aspects of the computing environment into
which it is deployed. In addition, deployment of our software into computing environments may expose undetected errors, compatibility issues, failures or bugs in our software.
Despite our testing, errors, failures or bugs may not be found in our software until it is released to our customers. Moreover, our customers could incorrectly implement or
inadvertently misuse our software, which could result in customer dissatisfaction and adversely impact the perceived utility of our products as well as our brand. Any of these
real or perceived errors, compatibility issues, failures or bugs in our software could result in negative publicity, reputational harm, loss of or delay in market acceptance of our
software, loss of competitive position or claims by customers for losses sustained by them. In any such event, we may be required, or may choose, for customer relations or
other reasons, to expend additional resources in order to correct the problem. Alleviating any of these problems could require significant expenditures of our capital and other
resources and could cause interruptions or delays in the use of our solutions, which could cause us to lose existing or potential customers and could adversely affect our
operating results and growth prospects.
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Interruptions or delays in service from our third-party providers could impair our ability to make our solutions available to our customers, resulting in customer
dissatisfaction, damage to our reputation, loss of customers, limited growth and reduction in revenues.
We currently use third-party data center hosting facilities to host certain components of our solutions. Our operations depend, in part, on our third-party providers’
abilities to protect these facilities against damage or interruption from natural disasters, power or communications failures, cyber incidents, criminal acts and similar events. In
the event that any of our third-party facility arrangements is terminated, or if there is a lapse of service or damage to a facility, we could experience service interruptions in our
solutions as well as delays and additional expenses in arranging new facilities and services. Any changes in third-party service levels at our data centers or any errors, defects,
disruptions, cyber incidents or other performance problems with our solutions could harm our reputation.
Any damage to, or failure of, the systems of our third-party providers could result in interruptions to our solutions. Despite precautions taken at our data centers, the
occurrence of spikes in usage volume, natural disasters, cyber incidents, acts of terrorism, vandalism or sabotage, closure of a facility without adequate notice or other
unanticipated problems could result in lengthy interruptions in the availability of our services. Problems faced by our third-party data center locations, with the network
providers with whom they contract, or with the systems by which our communications providers allocate capacity among their customers, including us, could adversely affect
the experience of our customers. Interruptions in our services might cause us to issue refunds to customers and subject us to potential liability.
Further, our insurance policies may not adequately compensate us for any losses that we may incur in the event of damage or interruption, and therefore the occurrence
of any of the foregoing could subject us to liability, cause us to issue credits to customers or cause customers not to renew their subscriptions for our applications, any of which
could materially adversely affect our business.
If our security measures or those of our customers or third-party providers are compromised, or if unauthorized access to the data of our customers is otherwise obtained,
our solutions may be perceived as not being secure, our customers may be harmed and may curtail or cease their use of our solutions, our reputation may be damaged and
we may incur significant liabilities.
Our operations involve the storage and transmission of gunfire incident data, including date, time, address and GPS coordinates, occurring in our customer’s coverage
area. Security incidents, whether as a result of third-party action, employee or customer error, technology impairment or failure, malfeasance or criminal activity, could result in
unauthorized access to, or loss or unauthorized disclosure of, this gunfire incident data, which could result in litigation expenses or damages, indemnity and other contractual
obligations and other possible liabilities, including but not limited to government fines and penalties and mitigation expenses, as well as negative publicity, which could damage
our reputation, impair our sales and harm our customers and our business. Cyber incidents and malicious internet-based activity continue to increase generally, and providers of
cloud-based services have been targeted. If third parties with whom we work, such as vendors or developers, violate applicable laws or our security policies, such violations
may also put our gunfire incident data at risk and could in turn have an adverse effect on our business. In addition, such a violation could expose the locations of our sensors,
including those sensors for which we obtained third-party consents that include confidentiality obligations. We may be unable to anticipate or prevent techniques used to obtain
unauthorized access or to sabotage systems because such techniques change frequently and often are not detected until after an incident has occurred. As we increase our
customer base and our brand becomes more widely known and recognized, third parties may increasingly seek to compromise our security controls or gain unauthorized access
to customer data or other sensitive information. Further, because of the nature of the services that we provide to our customers, we may be a unique target for attacks.
Many governments have enacted laws requiring companies to notify individuals of data security incidents or unauthorized transfers involving certain types of personal
data. In addition, some of our customers contractually require notification of any data security incident. Accordingly, security incidents experienced by our competitors, by our
customers or by us may lead to public disclosures, which may lead to widespread negative publicity. Any security compromise in our industry, whether actual or perceived,
could harm our reputation, erode customer confidence in the effectiveness of our security measures, negatively impact our ability to attract new customers, cause existing
customers to elect not to renew their subscriptions or subject us to third-party lawsuits, regulatory fines or other action or liability, which could materially and adversely affect
our business and operating results. Further, the costs of compliance with notification laws and contractual obligations may be significant and any requirement that we provide
such notifications as a result of an actual or alleged compromise could have a material and adverse effect on our business.
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While we maintain general liability insurance coverage and coverage for errors or omissions, we cannot assure you that such coverage would be adequate or would
otherwise protect us from liabilities or damages with respect to claims alleging compromise or loss of data, or that such coverage will continue to be available on acceptable
terms or at all.
We rely on the cooperation of customers and third parties to permit us to install our ShotSpotter sensors on their facilities, and failure to obtain these rights could increase
our costs or limit the effectiveness of our ShotSpotter Flex solution.
Our ShotSpotter Flex solution requires us to deploy ShotSpotter sensors in our customer coverage areas, which typically entails the installation of approximately 20 to
25 sensors per square mile. The ShotSpotter sensors are mounted on city facilities and third-party buildings, and occasionally on city or utility-owned light poles, and installing
the sensors requires the consent of the property owners, which can be time-consuming to obtain and can delay deployment. Generally, we do not pay a site license fee in order to
install our sensors, and our contractual agreements with these facility owners provide them the right to revoke permission to use their facility with notice of generally 60 days.
To the extent that required consents delay our ability to deploy our solutions or facility owners do not grant permission to use their facilities, revoke previously granted
permissions, or require us to pay a site license fee in order to install our sensors, our business may be harmed. If we were required to pay a site license fee in order to install
sensors, our deployment expenses would increase, which would impact our gross margins. If we cannot obtain a sufficient number of sensor mounting locations that are
appropriately dispersed in a coverage area, the effectiveness of our ShotSpotter Flex solution would be limited, we may need to reduce the coverage area of the solution, or we
may not be able to meet our service level requirements, any of which could result in customer dissatisfaction or have a material adverse impact on our reputation, our business
and our financial results.
If we fail to offer high-quality customer support, our business and reputation may suffer.
We offer customer support 24 hours a day, seven days a week, as well as training on best practices, forensic expertise and expert witness services. Providing these
services requires that our personnel have specific experience, knowledge and expertise, making it more difficult for us to hire qualified personnel and to scale up our support
operations. The importance of high-quality customer support will increase as we expand our business and pursue new customers. We may be unable to respond quickly enough
to accommodate short-term increases in customer demand for support services or scale our services if our business grows. Increased customer demand for these services,
without corresponding revenues, could increase our costs and harm our operating results. If we do not help our customers use applications within our solutions and provide
effective ongoing support, our ability to sell additional applications to, or to retain, existing customers may suffer and our reputation with existing or potential customers may be
harmed.
Our reliance on wireless carriers will require updates to our technology, and making such updates could result in disruptions in our service or increase our costs of
operations.
Approximately 60% of our installed ShotSpotter sensors use fourth-generation Long-Term Evolution (“LTE”) wireless technology and 40% use third-generation
(“3G”) cellular communications. Our US wireless carriers have advised us that they will discontinue their 3G services in the future and our ShotSpotter sensors will not be able
to transmit on these networks. As a result, we will have to upgrade the sensors that use 3G cellular communications at no additional cost to our customers prior to the
discontinuation of 3G services. As our wireless carriers phase out their 3G services or make changes to their spectrum allocation, we may experience reduced service
performance, which may require us to replace our 3G sensors sooner than planned. Originally, we had expected to start incurring costs to do so mid-2020 through 2022. We
have begun plans to replace sensors in certain geographic areas starting in early 2021. Accelerated bandwidth changes by our carriers may require us to continue to accelerate
the upgrade of our 3G sensors prior to 2021, which would accelerate the costs associated with the upgrade. These sensor replacements will require significant capital
expenditures, which are estimated to be between $4.0 million and $6.0 million in total and may reduce our gross margins and also divert management’s attention and other
important resources away from our customer service and sales efforts for new customers.
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In the future, we may not be able to successfully implement new technologies or adapt existing technologies to changing market demands. If we are unable to adapt
timely to changing technologies, market conditions or customer preferences, our business, operating results and financial condition could be materially and adversely affected.
Concerns regarding privacy and government-sponsored surveillance may deter customers from purchasing our solutions.
Governmental agencies and private citizens have become increasingly sensitive to real or perceived government or third-party surveillance and may wrongly believe
that our outdoor sensors allow customers to listen to private conversations and monitor private citizen activity. Our sensors are not designed for “live listening” and are triggered
only at loud impulsive sounds that may likely be gunfire. However, perceived privacy concerns may result in negative media coverage and efforts by private citizens to persuade
municipalities, educational institutions or other potential customers not to purchase our solutions for their communities, campuses or facilities. In addition, laws may exist or be
enacted to address such concerns that could impact our ability to deploy our solutions. For example, the City of Toronto, Canada decided against using ShotSpotter solutions
because the Ministry of the Attorney General of Ontario indicated that it may compromise Section 8 of Canada’s Charter of Rights and Freedoms, which relates to unreasonable
search and seizure. If customers choose not to purchase our solutions due to privacy or surveillance concerns, then the market for our solutions may develop more slowly than
we expect, or it may not achieve the growth potential we expect, any of which would adversely affect our business and financial results.
We rely on a limited number of suppliers and contract manufacturers, and our proprietary ShotSpotter sensors are manufactured by a single contract manufacturer.
We rely on a limited number of suppliers and contract manufacturers. In particular, we use a single manufacturer, with which we have no long-term contract and from
which we purchase on a purchase-order basis, to produce our proprietary ShotSpotter sensors. Our reliance on a sole contract manufacturer increases our risks since we do not
currently have any alternative or replacement manufacturers, and we do not maintain a high volume of inventory. In the event of an interruption from a contract manufacturer,
we may not be able to develop alternate or secondary sources without incurring material additional costs and substantial delays. Furthermore, these risks could materially and
adversely affect our business if our contract manufacturer is impacted by a natural disaster or other interruption at a particular location because each of our contract
manufacturers produces our products from a single location. Although our contract manufacturer has alternative manufacturing locations, transferring manufacturing to another
location may result in significant delays in the availability of our sensors. Also, many standardized components used broadly in our sensors are manufactured in significant
quantities in concentrated geographic regions, particularly in Greater China. As a result, protracted regional crises, such as the recent outbreak of the COVID-19 disease in
Greater China, could lead to eventual shortages of necessary components. It could be difficult, costly and time consuming to obtain alternative sources for these components, or
to change product designs to make use of alternative components. In addition, difficulties in transitioning from an existing supplier to a new supplier could create delays in
component availability that would have a significant impact on our ability to fulfill orders for our products.
Many of the key components used to manufacture our proprietary ShotSpotter sensors also come from limited or sole sources of supply. Our contract manufacturer
generally purchases these components on our behalf, and we do not have any long-term arrangements with our suppliers. We are therefore subject to the risk of shortages and
long lead times in the supply of these components and the risk that suppliers discontinue or modify components used in our products. In addition, the lead times associated with
certain components are lengthy and preclude rapid changes in quantities and delivery schedules. Developing alternate sources of supply for these components may be time-
consuming, difficult, and costly, and we or our suppliers may not be able to source these components on terms that are acceptable to us, or at all, which may undermine our
ability to fill our orders in a timely manner.
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If we experience significantly increased demand, or if we need to replace an existing supplier or contract manufacturer, we may be unable to supplement or replace
such supply or contract manufacturing on terms that are acceptable to us, which may undermine our ability to deliver our products to customers in a timely manner. For
example, for our ShotSpotter sensors, it may take a significant amount of time to identify a contract manufacturer that has the capability and resources to build the sensors to our
specifications. Identifying suitable suppliers and contract manufacturers is an extensive process that requires us to become satisfied with their quality control, technical
capabilities, responsiveness and service, financial stability, regulatory compliance, and labor and other ethical practices. Accordingly, the loss of any key supplier or contract
manufacturer could adversely impact our business, operating results and financial condition.
Our solutions use third-party software and services that may be difficult to replace or cause errors or failures of our solutions that could lead to a loss of customers or harm
to our reputation and our operating results.
We license third-party software and depend on services from various third parties for use in our solutions. In the future, such software or services may not be available
to us on commercially reasonable terms, or at all. Any loss of the right to use any of the software or services could result in decreased functionality of our solutions until
equivalent technology is either developed by us or, if available from another provider, is identified, obtained and integrated, which could harm our business. In addition, any
errors or defects in or failures of the third-party software or services could result in errors or defects in our solutions or cause our solutions to fail, which could harm our
business and be costly to correct. Many of these providers attempt to impose limitations on their liability for such errors, defects or failures, and if enforceable, we may have
additional liability to our customers or third-party providers that could harm our reputation and increase our operating costs.
We will need to maintain our relationships with third-party software and service providers, and obtain from such providers software and services that do not contain
any errors or defects. Any failure to do so could adversely impact our ability to deliver effective products to our customers and could harm our operating results.
If we do not or cannot maintain the compatibility of our platform with applications that our customers use, our business could suffer.
Some of our customers choose to integrate our solutions with certain other systems used by our customers, such as real-time crime center platforms or computer-aided
dispatch systems. The functionality and popularity of our solutions depend, in part, on our ability to integrate our solutions these systems. Providers of these systems may
change the features of their technologies, restrict our access to their applications or alter the terms governing use of their applications in an adverse manner. Such changes could
functionally limit or terminate our ability to use these technologies in conjunction with our solutions, which could negatively impact our customer service and harm our
business. If we fail to integrate our solutions with applications that our customers use, we may not be able to offer the functionality that our customers need, and our customers
may not renew their agreements, which would negatively impact our ability to generate revenues and adversely impact our business.
We are subject to governmental regulation and other legal obligations, particularly related to privacy, data protection and information security, and our actual or perceived
failure to comply with such obligations could harm our business. Compliance with such laws could impair our efforts to maintain and expand our customer base, and
thereby decrease our revenues.
Our outdoor sensors are acoustic devices that are designed to recognize impulsive sounds that are likely to be gunfire. ShotSpotter sensors do not use high gain,
directional or other specialized microphones.
The sensors do not have the ability to live stream audio. Typically, sounds, noises or voices captured on the secure sensors are cached temporarily but are written over
and permanently deleted within 30 hours. When a sensor is triggered by an impulsive sound, it creates a potential gunshot “incident” that contains a recording, which includes
no more than one second before the incident and one second after the incident. This incident audio snippet is preserved indefinitely for potential evidentiary use.
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There is the potential to include human voices that occur at the same time as the gunshot in these incident audio snippets. We retain incident audio snippets
indefinitely as evidence. We also use information collected to support, expand and improve our software algorithms as well as our gunfire detection and notification methods.
Sensors are often installed in densely populated urban areas. They are not designed or tuned to capture human voices, but it is possible they could pick up a human voice.
Human voices are not impulsive and do not typically trigger the sensors, and unless accompanied by an impulsive sound no audio snippet would be transmitted out of the
sensor and preserved as an incident audio snippet. The human voice would be temporarily cached on the sensor for 30 hours and would then be written over and permanently
deleted. Information collected from loud impulsive sounds ("incidents") is used to provide information to our customers regarding those incidents, but shared information is
limited, by both our technology and our privacy policies, to the audit snippet containing the incident.
Our handling and storage of data is subject to a variety of laws and regulations, including regulation by various government agencies and various state, local and
foreign agencies. The U.S. federal and various state and foreign governments have adopted or proposed legislation that regulates the monitoring and collection of personal
information of individuals and that mandates security requirements with respect to certain personally identifiable information. In the United States, the Federal Trade
Commission and numerous state attorneys general are imposing standards for the online collection, distribution, use and storage of data by applying federal and state consumer
protection laws. The lack of a clear and universal standard for protecting such information means, however, that these obligations may be interpreted and applied in a manner
that is inconsistent from one j urisdiction to another and may conflict with other requirements or our practices. Any failure or perceived failure by us to comply with privacy or
security laws, policies, legal obligations or industry standards or any security incident that results in the unauthorized release or transfer of sensitive corporate information,
personally identifiable information or other customer data may result in governmental enforcement actions, litigation, fines and penalties and/or adverse publicity, and could
cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.
California enacted the California Consumer Privacy Act (the “CCPA”), which became operative on January 1, 2020. The CCPA requires covered companies to,
among other things, provide new disclosures to California consumers, and affords such consumers new abilities to opt-out of certain sales of personal information. The CCPA is
the subject of proposed regulations of the California Attorney General that were released on October 10, 2019 but have yet to be finalized. Aspects of the CCPA and its
interpretation remain unclear at this time. We cannot fully predict the impact of the CCPA on our business or operations, but it may require us to modify our data processing
practices and policies and to incur substantial costs and expenses in an effort to comply.
Some proposed laws or regulations concerning privacy, data protection and information security are in their early stages, and we cannot yet determine how these laws
a nd regulations may be interpreted nor can we determine the impact these proposed laws and regulations, may have on our business. Such proposed laws and regulations may
require companies to implement privacy and security policies, permit users to access, correct and delete personal information stored or maintained by such companies, inform
individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use personal information for certain purposes. In
addition, a foreign government could require that any personal information collected in a country not be disseminated outside of that country, and we may not be currently
equipped to comply with such a requirement. Our failure to comply with federal, state and international data privacy laws and regulators could harm our ability to successfully
operate our business and pursue our business goals.
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Our quarterly results of operations may fluctuate significantly due to a wide range of factors, which makes our future results difficult to predict.
Our revenues and results of operations could vary significantly from quarter to quarter as a result of various factors, many of which are outside of our control,
including:
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the expansion or contraction of our customer base;
the renewal or nonrenewal of subscription agreements with, and expansion of coverage areas by, existing customers;
the size, timing, terms and deployment schedules of our sales to both existing and new customers;
the introduction of products or services that may compete with us for the limited funds available to our customers, and changes in the cost of such products
or services;
changes in our customers’ and potential customers’ budgets;
our ability to control costs, including our operating expenses;
our ability to hire, train and maintain our direct sales force;
the timing of satisfying revenues recognition criteria in connection with initial deployment and renewals;
fluctuations in our effective tax rate; and
general economic and political conditions, both domestically and internationally.
Any one of these or other factors discussed elsewhere in this report may result in fluctuations in our revenues and operating results, meaning that quarter-to-quarter
comparisons of our revenues, results of operations and cash flows may not necessarily be indicative of our future performance.
Because of the fluctuations described above, our ability to forecast revenues is limited and we may not be able to accurately predict our future revenues or results of
operations. In addition, we base our current and future expense levels on our operating plans and sales forecasts, and our operating expenses are expected to increase in the short
term. Accordingly, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues, and even a small shortfall in revenues could
disproportionately and adversely affect our financial results for that quarter. The variability and unpredictability of these and other factors could result in our failing to meet or
exceed financial expectations for a given period.
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.
Our revenues are primarily generated from subscriptions to our solutions. With the exception of a small number of legacy customers, our customers do not have the
right to take possession of our equipment or software platform. Revenues from subscriptions to our software platform is recognized ratably over the subscription period
beginning on the date that the subscription is made available to the customer, which we refer to as the “go-live” date. Our agreements with our customers typically range from
one to five years. As a result, much of the revenues that we report in each quarter are attributable to agreements entered into during previous quarters. Consequently, a decline in
sales, customer renewals or market acceptance of our solutions in any one quarter would not necessarily be fully reflected in the revenues in that quarter, and would negatively
affect our revenues and profitability in future quarters. This ratable revenues recognition also makes it difficult for us to rapidly increase our revenues through additional sales in
any period, as revenues from new customers generally are recognized over the applicable agreement term. Our subscription-based approach may result in uneven recognition of
revenues.
We recognize subscription revenues over the term of a subscription agreement. Once we enter into a contract with a customer, there is a delay until we begin
recognizing revenues while we survey the coverage areas, obtain any required consents for installation, and install our sensors, which together can take up to several months or
more. We begin recognizing revenues from a sale only when all of these steps are complete and the solution is live.
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While most of our customers elect to renew their subscription agreements following the expiration of a term, in some cases, they may not be able to obtain the proper
approvals or funding to complete the renewal prior to such expiration. For these customers, we stop recognizing subscription revenues at the end of the current term, even
though we may continue to provide services for a period of time while 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.
The variation in the timeline for deploying our solutions and completing renewals may result in fluctuations in our revenues, which could cause our results to differ
from projections. Additionally, while we generally invoice for 50% of the contract cost upon a customer’s go-live date, our cash flows may be volatile and will not match our
revenues recognition.
We are in the process of expanding our international operations, which exposes us to significant risks.
We currently operate in limited number of locations outside the United States. A key component to our business strategy is to expand our international operations to
increase our revenues from customers outside of the United States as part of our growth strategy. Operating in international markets requires significant resources and
management attention and will subject us to regulatory, economic and political risks in addition to those we already face in the United States. In addition, we will need to invest
time and resources in understanding the regulatory framework and political environments of our potential customers overseas in order to focus our sales efforts. Because such
regulatory and political considerations are likely to vary across jurisdictions, this effort will require additional time and attention from our sales team and could lead to a sales
cycle that is longer than our typical process for sales in the United States. We also may need to hire additional employees and otherwise invest in our international operations in
order to reach new customers. Because of our limited experience with international operations as well as developing and managing sales in international markets, our
international expansion efforts may be delayed or may not be successful.
In addition, we face and will continue to face risks in doing business internationally that could adversely affect our business, including:
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the potential impact of currency exchange fluctuations;
the need to comply with local data residency requirements;
the availability and reliability of local data centers and internet bandwidth providers;
the difficulty of staffing and managing international operations and the increased operations, travel, shipping and compliance costs associated with having
customers in numerous international locations;
potentially greater difficulty collecting accounts receivable and longer payment cycles;
the availability of coverage by wireless carriers in international markets;
higher or more variable costs associated with wireless carriers and other service providers;
the need to offer customer support in various languages;
challenges in understanding and complying with local laws, regulations and customs in foreign jurisdictions, including laws regarding privacy and
government surveillance;
export controls and economic sanctions administered by the Department of Commerce Bureau of Industry and Security and the Treasury Department’s
Office of Foreign Assets Control;
compliance with various anti-bribery and anti-corruption laws such as the Foreign Corrupt Practices Act and United Kingdom Bribery Act of 2010;
tariffs and other non-tariff barriers, such as quotas and local content rules;
more limited protection for our intellectual property in some countries;
adverse or uncertain tax consequences as a result of international operations;
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currency control regulations, which might restrict or prohibit our conversion of other currencies into U.S. dollars;
restrictions on the transfer of funds;
deterioration of political relations between the United States and other countries; and
political or social unrest or economic instability in a specific country or region in which we operate, which could have an adverse impact on our operations
in that location.
Also, we expect that due to costs related to our international expansion efforts and the increased cost of doing business internationally, we will incur higher costs to
secure sales to international customers than the comparable costs for domestic customers. As a result, our financial results may fluctuate as we expand our operations and
customer base worldwide.
Our failure to manage any of these risks successfully could harm our international operations, and adversely affect our business, operating results and financial
condition.
We are dependent on the continued services and performance of our senior management and other key personnel, the loss of any of whom could adversely affect our
business.
Our future success depends in large part on the continued contributions of our senior management and other key personnel. In particular, the leadership of key
management personnel is critical to the successful management of our company, the development of our products, and our strategic direction. We also depend on the
contributions of key technical personnel.
We do not maintain “key person” insurance for any member of our senior management team or any of our other key employees. Our senior management and key
personnel are all employed on an at-will basis, which means that they could terminate their employment with us at any time, for any reason and without notice. The loss of any
of our key management personnel could significantly delay or prevent the achievement of our development and strategic objectives and adversely affect our business.
If we are unable to attract, integrate and retain additional qualified personnel, including top technical talent, our business could be adversely affected.
Our future success depends in part on our ability to identify, attract, integrate and retain highly skilled technical, managerial, sales and other personnel. We face intense
competition for qualified individuals from numerous other companies, including other software and technology companies, many of whom have greater financial and other
resources than we do. Some of these characteristics may be more appealing to high-quality candidates than those we have to offer. In addition, new hires often require
significant training and, in many cases, take significant time before they achieve full productivity. We may incur significant costs to attract and retain qualified personnel,
including significant expenditures related to salaries and benefits and compensation expenses related to equity awards, and we may lose new employees to our competitors or
other companies before we realize the benefit of our investment in recruiting and training them. Moreover, new employees may not be or become as productive as we expect, as
we may face challenges in adequately or appropriately integrating them into our workforce and culture. If we are unable to attract, integrate and retain suitably qualified
individuals who are capable of meeting our growing technical, operational and managerial requirements, on a timely basis or at all, our business will be adversely affected.
Volatility or lack of positive performance in our stock price may also affect our ability to attract and retain our key employees. Many of our senior management
personnel and other key employees have become, or will soon become, vested in a substantial amount of stock or stock options. Employees may be more likely to leave us if
the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise
prices of the options, or, conversely, if the exercise prices of the options that they hold are significantly above the market price of our common stock. If we are unable to
appropriately incentivize and retain our employees through equity compensation, or if we need to increase our compensation expenses in order to appropriately incentivize and
retain our employees, our business, operating results and financial condition would be adversely affected.
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We may be subject to additional obligations to collect and remit certain taxes, and we may be subject to tax liability for past activities, which could harm our business.
State, local and foreign jurisdictions have differing rules and regulations governing sales, use, value added and other taxes, and these rules and regulations are subject
to varying interpretations that may change over time, particularly with respect to software-as-a-service products like our solutions. Further, these jurisdictions’ rules regarding
tax nexus are complex and vary significantly. If one or more jurisdictions were to assert that we have failed to collect taxes for sales of our solutions, we could face the
possibility of tax assessments and audits. A successful assertion that we should be collecting additional sales, use, value added or other taxes in those jurisdictions where we
have not historically done so and do not accrue for such taxes could result in substantial tax liabilities and related penalties for past sales or otherwise harm our business and
operating results.
Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.
As of December 31, 2019, we had federal net operating loss carryforwards (“NOLs”) of approximately $85.6 million, of which $80.6 million will expire between 2026
through 2038, if not utilized. As of December 31, 2019, we also had state NOLs of approximately $55.1 million, which will expire, if not utilized, in 2019 through 2038. These
federal and state NOLs may be available to reduce future income subject to income taxes. In general, under Section 382 of the Internal Revenue Code of 1986, as amended
(“the Code”), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Past or future
changes in our stock ownership, some of which are outside of our control, may have resulted or could result in an ownership change. State NOLs generated in one state cannot
be used to offset income generated in another state.
We may be subject to litigation for a variety of claims or to other legal requests, which could adversely affect our results of operations, harm our reputation or otherwise
negatively impact our business.
We may be subject to litigation for a variety of claims arising from our normal business activities. These may include claims, suits, and proceedings involving labor
and employment, wage and hour, commercial and other matters. The outcome of any litigation, regardless of its merits, is inherently uncertain. Any claims and lawsuits, and the
disposition of such claims and lawsuits, could be time-consuming and expensive to resolve, divert management attention and resources, and lead to attempts on the part of other
parties to pursue similar claims. Any adverse determination related to litigation could adversely affect our results of operations, harm our reputation or otherwise negatively
impact our business. In addition, depending on the nature and timing of any such dispute, a resolution of a legal matter could materially affect our future operating results, our
cash flows or both.
An unfavorable outcome on any litigation matters could require us to pay substantial damages, or, in connection with any intellectual property infringement claims,
could require us to pay ongoing royalty payments or could prevent us from selling certain of our products. As a result, a settlement of, or an unfavorable outcome on, any of the
matters referenced above or other litigation matters could have a material adverse effect on our business, operating results, financial condition and cash flows.
We, or our customers, may be subject to requests for our data or information concerning our techniques and processes, pursuant to state or federal law (for example,
public-records requests or subpoenas to provide information or to testify in court). This data and information, some of which we may deem to be confidential or trade secrets,
could therefore become a matter of public record and also become accessible by competitors, which could negatively impact our business.
Changes in financial accounting standards may cause adverse and unexpected revenues fluctuations and impact our reported results of operations.
The accounting rules and regulations that we must comply with are complex and subject to interpretation by the Financial Accounting Standards Board (“FASB”), the
Securities and Exchange Commission and various bodies formed to promulgate and interpret appropriate accounting principles. In addition, many companies’ accounting
disclosures are being subjected to heightened scrutiny by regulators and the public. Further, the accounting rules and regulations are continually changing in ways that could
impact our financial statements.
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Cha nges to accounting principles or our accounting policies on our financial statements going forward are difficult to predict, could have a significant effect on our
reported financial results, and could affect the reporting of transactions completed before the announcement of the change. In addition, were we to change our critical accounting
estimates, including the timing of recognition of subscription and professional services revenues and other revenues sources, our results of operations could be significantly
impacted.
Risks Related to Our Intellectual Property
Failure to protect our intellectual property rights could adversely affect our business.
Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop or license under patent and other intellectual property laws
of the United States, as well as our brands, so that we can prevent others from them. We rely on a combination of contractual and intellectual property rights, including non-
disclosure agreements, patents, trade secrets, copyrights and trademarks, to establish and protect our intellectual property rights in our names, services, innovations,
methodologies and related technologies. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology and our business
might be adversely affected.
As of December 31, 2019, we had 32 U.S. patents directed to our technologies, as well as one granted patent in Israel and one granted patent in Mexico. The issued
patents expire on various dates from 2022 to 2034. We also license one patent from a third party, which expires in 2023. We have patent applications pending for examination
in the United States, Europe, Mexico and Brazil, but we cannot guarantee that these patent applications will be granted. We also license one other U.S. patent from one third
party. The patents that we own or those that we license from others (including those that may be issued in the future) may not provide us with any competitive advantages or
may be challenged by third parties.
The process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a
reasonable cost or in a timely manner. Even if issued, there can be no assurance that these patents will adequately protect our intellectual property, as the legal standards relating
to the validity, enforceability and scope of protection of patent and other intellectual property rights are uncertain.
Any patents that are issued may subsequently be invalidated or otherwise limited, allowing other companies to develop offerings that compete with ours, which could
adversely affect our competitive business position, business prospects and financial condition. In addition, issuance of a patent does not guarantee that we have a right to
practice the patented invention. Patent applications in the United States are typically not published until 18 months after their earliest priority date or, in some cases, not at all,
and publications of discoveries in industry-related literature lag behind actual discoveries. We cannot be certain that third parties do not have blocking patents that could be
used to prevent us from marketing or practicing our software or technology.
Effective patent, trademark, copyright and trade secret protection may not be available to us in every country in which our software is available. The laws of some
foreign countries may not be as protective of intellectual property rights as those in the United States (in particular, some foreign jurisdictions do not permit patent protection
for software), and mechanisms for enforcement of intellectual property rights may be inadequate. Additional uncertainty may result from changes to intellectual property
legislation enacted in the United States, including the recent America Invents Act, or to the laws of other countries and from interpretations of the intellectual property laws of
the United States and other countries by applicable courts and agencies. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or
misappropriating our intellectual property.
We rely in part on trade secrets, proprietary know-how and other confidential information to maintain our competitive position. Although we endeavor to enter into
non-disclosure agreements with our employees, licensees and others who may have access to this information, we cannot assure you that these agreements or other steps we
have taken will prevent unauthorized use, disclosure or reverse engineering of our technology. Moreover, third parties may independently develop technologies or products that
compete with ours, and we may be unable to prevent this competition. Third parties also may seek access to our trade secrets, proprietary know-how and other confidential
information through legal measures (for example, public-records requests or subpoenas to provide information or to testify in court) and it could be expensive to defend against
those requests. Disclosure of our trade secrets, proprietary know-how and other confidential information could negatively impact our business.
38
We might be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation against third parties for
infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation also puts our patents at risk of being invalidated or interpreted narrowly
and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert counterclaims against us. We may not prevail in any la wsuits that we
initiate, and the damages or other remedies awarded, if any, may not be commercially viable. Any litigation, whether or not resolved in our favor, could result in significant
expense to us and divert the efforts of our technical and management personnel, which may adversely affect our business, operating results, financial condition and cash flows.
We may be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit
our ability to use certain technologies.
Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks
and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, many of these companies
have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. The litigation
may involve patent holding companies or other adverse patent owners that have no relevant product revenues and against which our patents may therefore provide little or no
deterrence. We may have previously received, and may in the future receive, notices that claim we have misappropriated, misused, or infringed other parties’ intellectual
property rights, and, to the extent we gain greater market visibility, we face a higher risk of being the subject of intellectual property infringement claims.
39
There may be third-party intellectual property rights, including issued or pending patents that cover significant aspects of our technologies or business methods. Any
intellectual property claims, with or without merit, could be very time-consuming, could be expensive to settle or litigate and could divert our management’s attention and other
resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or
copyrights. These claims could also result in our having to stop using technology found to be in violation of a third party’s rights. We might be required to seek a license for the
intellectual property, which may not be available on a timely basis, on reasonable terms or at all. We also may be required to modify our products, services, internal systems or
technologies. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required
to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any infringing aspect of our
business, we would be forced to limit or stop sales of our software and may be unable to compete effectively. Any of these results would adversely affect our business,
operating results, financial condition and cash flows.
Our use of open source software could subject us to possible litigation.
A portion of our technologies incorporates open source software, and we expect to continue to incorporate open source software into our platform in the future. Few of
the licenses applicable to open source software have been interpreted by courts, and their application to the open source software integrated into our proprietary technology
platform may be uncertain. If we fail to comply with these licenses, then pursuant to the terms of these licenses, we may be subject to certain requirements, including
requirements that we make available the source code for our software that incorporates the open source software. We cannot assure you that we have not incorporated open
source software in our software in a manner that is inconsistent with the terms of the applicable licenses or our current policies and procedures. If an author or other third party
that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could incur significant legal expenses
defending against such allegations. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition or require us to devote
additional research and development resources to change our technology platform.
Risks Related to the Ownership of Our Common Stock
Our stock price may be volatile or may decline regardless of our operating performance, resulting in substantial losses for investors.
The market price of our common stock has fluctuated and may continue to fluctuate significantly in response to numerous factors, many of which are beyond our
control, including the factors listed below and other factors described in this “Risk Factors” section:
•
•
•
•
•
•
•
•
•
actual or anticipated fluctuations in our operating results;
the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any securities analysts who follow our
company, or our failure to meet these estimates or the expectations of investors;
ratings changes by any securities analysts who follow our company;
changes in the availability of federal funding to support local law enforcement efforts, or local budgets;
announcements by us of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
changes in operating performance and stock market valuations of other software companies generally;
price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
changes in our board of directors or management;
40
•
•
•
•
•
•
sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
lawsuits threatened or filed against us;
short sales, hedging and other derivative transactions involving our capital stock;
general economic conditions in the United States and abroad;
other events or factors, including those resulting from war, incidents of terrorism or responses to these events; and
media misperception of our sales and customer relationships, including press announcements or media mentions of future sales that may be misleading or
inaccurate.
In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of
many software companies. Stock prices of many software companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those
companies. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our
common stock. In the past, stockholders have instituted securities action litigation following periods of market volatility. If we were to become involved in securities litigation, it
could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, operating results, financial condition
and cash flows.
Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.
Certain holders of our shares of common stock have the right, subject to various conditions and limitations, to include their shares of our common stock in registration
statements relating to our securities, including approximately 3.3 million shares that were registered in connection with the Registration Statement on Form S-3 that became
effective on July 27, 2018, of which approximately 136,000 were sold in an underwritten registered secondary offering in March 2019. If the offer and sale of these shares are
registered, they will be freely tradable without restriction under the Securities Act. In addition, non-affiliates have the ability to sell shares of our common stock in the open
market or through block trades without subject to volume restrictions under Rule 144 of the Securities Act. In addition, in the future we may issue common stock or other
securities if we need to raise additional capital. The number of new shares of our common stock issued in connection with raising additional capital could constitute a material
portion of the then outstanding shares of our common stock. In the event a large number of shares of common stock are sold in the public market, such share sales could reduce
the trading price of our common stock.
Stock repurchases could increase the volatility of the trading price of our common stock and diminish our cash reserves, and we cannot guarantee that our stock
repurchase program will enhance long-term stockholder value.
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. The timing and actual number of shares repurchased under the
stock repurchase program will depend on a variety of factors, including the acquisition price of the shares, our liquidity position, general market and economic conditions, legal
and regulatory requirements and other considerations. Our ability to repurchase shares may also be limited by restrictive covenants in our existing credit agreement or in future
borrowing arrangements we may enter into from time to time.
Repurchases of our shares could increase the volatility of the trading price of our stock, which could have a negative impact on the trading price of our stock.
Similarly, the future announcement of the termination or suspension of the stock repurchase program, or our decision not to utilize the full authorized repurchase amount under
the stock repurchase program, could result in a decrease in the trading price of our stock. In addition, the stock repurchase program could have the impact of diminishing our
cash reserves, which may impact our ability to finance
41
our growth, complete acquisitions and execute our strategic plan. There can be no assurance that any shares repurchases we do elect to make will enhance stockholder value
because the market price of our common stock may decline below the levels at which we repurchased our shares. Although our stock repurchase program is intend ed to
enhance long-term stockholder value, we cannot guarantee that it will do so and short-term stock price fluctuations could reduce the effectiveness of the stock repurchase
program.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume
could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business, our market
and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares of common stock or change their
opinion of our shares of common stock, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports
on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common
stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), and we take advantage of certain exemptions from
various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to
comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic
reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden
parachute payments not previously approved. We will remain an “emerging growth company” for up to five years, although we will cease to be an “emerging growth company”
upon the earliest of (i) the last day of fiscal year 2022, (ii) the last day of the first fiscal year in which our annual gross revenues are $1.07 billion or more, (iii) the date on which
we have, during the previous rolling three-year period, issued more than $1 billion in non-convertible debt securities or (iv) the date on which we are deemed to be a “large
accelerated filer” as defined in the Securities Exchange Act of 1934, or the Exchange Act. We cannot predict if investors will find our common stock less attractive or our
company less comparable to certain other public companies because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there
may be a less active trading market for our common stock and our stock price may be more volatile.
We incur substantial costs as a result of being a public company.
As a public company, we are incurring significant levels of legal, accounting, insurance and other expenses that we did not incur as a private company. We are subject
to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the Nasdaq Capital Market, and other applicable
securities rules and regulations. Compliance with these rules and regulations increases our legal and financial compliance costs, makes some activities more difficult, time-
consuming or costly and increases demand on our systems and resources as compared to when we operated as a private company. The Exchange Act requires, among other
things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we
maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and
procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s
attention may be diverted from other business concerns, which could adversely affect our business and operating results. Although we have already hired additional corporate
employees to comply with these requirements, we may need to hire more corporate employees in the future or engage outside consultants, which would increase our costs and
expenses.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing
legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many
cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This
could result in continuing uncertainty regarding
42
compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws,
regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-
generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing
bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.
As a result of disclosure of information in this report and in the filings that we are required to make as a public company, our business, operating results and financial
condition have become more visible, which has resulted in, and may in the future result in threatened or actual litigation, including by competitors and other third parties. If any
such claims are successful, our business, operating results and financial condition could be adversely affected, and even if the claims do not result in litigation or are resolved in
our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, operating results
and financial condition.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we
will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at
the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to
realize any future gains on their investments.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to
replace or remove our current management and limit the market price of our common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our
certificate of incorporation and bylaws include provisions that:
•
•
•
•
•
•
•
•
•
establish a classified board of directors so that not all members of our board of directors are elected at one time;
permit the board of directors to establish the number of directors and fill any vacancies and newly-created directorships;
provide that directors may only be removed for cause;
require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;
eliminate the ability of our stockholders to call special meetings of stockholders;
prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and
establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders
at annual stockholder meetings.
In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits stockholders owning 15% or more
of our outstanding voting stock from merging or otherwise combining with us for a period of three years following the date on which the stockholder became a 15% stockholder
without the consent of our board of directors. These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by
making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management, and otherwise
discourage management takeover attempts.
43
Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our
stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Pursuant to our certificate of incorporation, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the
sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our
directors, officers or other employees to us or our stockholders, (3) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our
certificate of incorporation or our bylaws or (4) any action asserting a claim governed by the internal affairs doctrine. Our certificate of incorporation further provides that any
person or entity purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have notice of and consented to the foregoing provision. The forum
selection clause in our certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Our certificate of incorporation further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint
asserting a cause of action arising under the Securities Act. However, on December 19, 2018, the Delaware Chancery Court issued an opinion invalidating this provision in the
certificates of incorporation of Delaware corporations. The Chancery Court held that a Delaware corporation can only use its constitutive documents to bind a plaintiff to a
particular forum where the claim involves rights or relationships established by or under Delaware’s corporate law. This case may be appealed to the Delaware Supreme Court.
In light of this recent court decision, on December 21, 2018 we announced that we do not currently intend to enforce the foregoing federal forum selection provision unless the
relevant court decision is appealed and the Delaware Supreme Court reverses the decision. If there is no appeal or if the Delaware Supreme Court affirms the Chancery Court’s
decision, then we intend to seek approval by our stockholders to amend our certificate of incorporation at our next regularly-scheduled annual meeting of stockholders to
remove the invalid provision.
Item 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
Item 2. PROPERTIES
Our principal facilities consist of office space for our corporate headquarters in Newark, California, where we occupy approximately 12,020 square feet of space under
a lease that expires in October 2021.
We lease our facilities and do not own any real property. We may procure additional space as we add employees and expand geographically. We believe that our
facilities are adequate to meet our needs for the immediate future and that should it be needed, suitable additional space will be available to accommodate expansion of our
operations.
Item 3. LEGAL PROCEEDINGS
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 us and employees as a defendant. The amended complaint alleges conspiracy to violate the Plaintiff's civil
rights, denial of the right to a fair trial, and malicious prosecution. The Plaintiff claims that we 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. We believe that the Plaintiff’s claims are without merit and are disputing them vigorously.
44
We may become subject to legal proceedings, as well as demands and claims that arise in the normal course of our business, including claims of alleged infringement
of third-party patents and other intellectual property rights, breach of contract, employment law violations, and other matters and matters involving requests for information
from us or our customers under federal or state law. Such claims, even if not meritorious, could result in the expenditure of significant financial and management resources. We
make 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 us to pay ongoing royalty payments or could prevent us from selling certain of our products. As a result, a settlement of, or an unfavorable outcome on, any of the
matters referenced above or other litigation matters or legal proceedings could have a material adverse effect on our business, operating results, financial condition and cash
flows.
Item 4. MINE SAFETY DISCLOSURES
Not Applicable.
45
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information of Common Stock
Our common stock has been listed on the Nasdaq Capital Market under the symbol “SSTI” since June 7, 2017. Prior to that date, there was no public trading market for
our common stock.
On February 28, 2020, the last reported sale price of our common stock as reported on the Nasdaq Capital Market was $35.60 per share. As of February 28, 2020, we
had approximately 90 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders, and includes stockholders who
are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose
shares may be held in trust by other entities.
Dividend Policy
We have never declared or paid any dividends on our capital stock. We currently intend to retain all available funds and any future earnings for the operation and
expansion of our business and, therefore, we do not anticipate declaring or paying cash dividends in the foreseeable future. The payment of dividends will be at the discretion of
our board of directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on payment of
dividends present in our future debt agreements, and other factors that our board of directors may deem relevant.
Sale of Unregistered Securities and Use of Proceeds
(a)
Unregistered Sales of Equity Securities
None.
(b)
Issuer Purchases of Equity Securities
The following table sets forth stock repurchases of our common stock during the quarter ended December 31, 2019.
Total Number of
Shares
Purchased(1)
Average Price
Paid per Share
Total Number of
Shares Purchased
as part of Publicly
Announced
Program
—
137,824 $
—
137,824
—
23.58
—
— $
137,824 $
— $
137,824
Dollar Value of
Shares that May
Yet Be Purchased
Under the
Program
(in thousands)
11,534
8,282
8,282
October 1, 2019- October 31, 2019
November 1, 2019- November 30, 2019
December 1, 2019- December 31, 2019
Total
(1)
All repurchases were made as part of our publicly announced stock repurchase program. In May 2019, we announced that our board of directors approved a stock
repurchase program, under which we were authorized to repurchase up to $15 million of our common stock. The repurchase program has no expiration date and may
be modified, suspended or discontinued at any time. For further information regarding our stock repurchase program, see Note 13 of the accompanying notes to the
consolidated financial statements.
46
(c)
Use of Proceeds from Public Offering of Common Stock
Our initial public offering of common stock (the “IPO”) was effected through a Registration Statement on Form S-1 (File No. 333-217603), which was declared
effective on June 6, 2017. There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to
Rule 424(b) and other periodic reports previously filed with the SEC.
We used $13.7 million of the net proceeds from our IPO to repay outstanding indebtedness of $13.5 million, including early termination fees of $0.2 million, during
the quarter ending September 30, 2017. On October 3, 2018, we used $1.7 million of our IPO proceeds to fund the acquisition of HunchLab.
Securities Authorized for Issuance under Equity Compensation Plans
Information about securities authorized for issuance under our equity compensation plan is incorporated herein by reference to Item 12 of Part III of this Annual
Report on Form 10-K.
47
Item 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA.
The following selected consolidated financial data should be read together with our consolidated financial statements and related notes, as well as the information
found under the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form
10-K. We derived the selected consolidated financial data as of and for the years ended December 31, 2019, 2018, and 2017 from our audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results to be expected in the future.
Consolidated Statements of Operations Data:
Revenues
Costs
Cost of revenues (1)
Impairment of property and equipment
Total costs
Gross profit
Operating expenses
Sales and marketing (1)
Research and development (1)
General and administrative (1)
Total operating expenses
Income (loss) from operations
Other income (expense), net
Remeasurement of convertible preferred stock
warrant liability
Loss on early extinguishment of debt
Interest income (expense), net
Other expense, net
Income (loss) before income taxes
Provision for (benefit from) income taxes
Net income (loss)
Net income (loss) per share, basic
Net income (loss) per share, diluted
Weighted average shares used in computing net income
(loss) per share, basic
Weighted average shares used in computing net
income (loss) per share, diluted
2019
Year Ended December 31,
2018
(in thousands, except per share data)
2017
$
40,752 $
34,753 $
16,409
—
16,409
24,343
9,989
5,344
7,415
22,748
1,595
—
—
440
(278 )
1,757
(41 )
1,798 $
0.16 $
0.15 $
14,846
686
15,532
19,221
8,377
4,987
8,425
21,789
(2,568 )
—
—
82
(252 )
(2,738 )
(13 )
(2,725 ) $
(0.26 ) $
(0.26 ) $
$
$
$
23,763
11,370
793
12,163
11,600
6,179
4,159
5,595
15,933
(4,333 )
(3,725 )
(479 )
(1,114 )
(169 )
(9,820 )
160
(9,980 )
(1.61 )
(1.61 )
11,302,780
10,569,007
6,197,775
11,846,348
10,569,007
6,197,775
(1)
Includes stock-based compensation expense and depreciation and amortization expense as follows:
48
Stock-based compensation expense:
Cost of revenues
Sales and marketing
Research and development
General and administrative
Total stock-based compensation expense
Depreciation and amortization expense:
Cost of revenues
Sales and marketing
Research and development
General and administrative
Total depreciation and amortization expense
Select Consolidated Balance Sheets Data:
Cash and cash equivalents
Accounts receivable and contract assets
Total assets
Deferred revenue, current and non-current
Working capital (deficit)
Total stockholders' equity
2019
Year Ended December 31,
2018
(in thousands)
2017
$
$
$
$
670 $
955
365
1,067
3,057 $
4,787 $
61
88
46
4,982 $
316 $
770
272
1,110
2,468 $
3,752 $
65
63
37
3,917 $
As of December 31,
2019
2018
(in thousands)
$
$
$
$
$
$
24,550 $
13,883 $
60,571 $
26,958 $
7,773 $
27,251 $
75
133
69
351
628
3,027
37
35
22
3,121
10,218
15,267
47,119
24,162
(1,764 )
17,147
49
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 deter gun violence and make cities, campuses and facilities
safer. Our flagship public safety solution, ShotSpotter Flex, is the leading outdoor gunshot detection, location and alerting system. Our patrol management software,
ShotSpotter Missions (formerly HunchLab), creates crime forecasts designed to enable more precise and effective use of patrol resources to deter crime. In 2019, we created a
new technology innovation unit, ShotSpotter Labs, to expand our efforts supporting innovative uses of our technology to help protect wildlife and the environment. Our
security solutions, ShotSpotter SecureCampus and ShotSpotter SiteSecure, are designed to help law enforcement and security personnel serving universities, corporate
campuses and key infrastructure or transportation centers mitigate risk and enhance security by notifying authorities of a potential outdoor gunfire incident, saving critical
minutes for first responders to arrive. Our gunshot detection solutions are trusted by law enforcement agencies in over 100 cities as of December 31, 2019.
Our gunshot detection solutions consist of highly-specialized, cloud-based software integrated with proprietary, internet-enabled sensors designed to detect outdoor
gunfire. The speed and accuracy of our gunfire alerts enable law enforcement and security personnel to reduce their response times to shooting events, which can increase the
chances of apprehending the shooter, providing timely aid to victims, and identifying witnesses before they scatter, as well as aid in evidentiary collection and serve as an
overall deterrent. When a potential gunfire incident is detected by our sensors, our system applies machine classification combined with human review to analyze and validate
the incident and precisely locate where the incident occurred. An alert containing a location on a map and critical information about the incident is sent directly to subscribing
law enforcement or security personnel through any internet-connected computer and to iPhone or Android mobile devices.
Our software sends validated gunfire data along with the audio of the triggering sound to our Incident Review Center (“IRC”), where our trained acoustic experts are
on duty 24 hours a day, seven days a week, 365 days a year to screen and confirm actual gunfire incidents. Our acoustic experts can supplement alerts with additional tactical
information, such as the potential presence of multiple shooters or the use of high-capacity weapons. Gunshot incidents reviewed by our IRC result in alerts typically sent
within 45 seconds of the receipt of the gunfire incident.
We generate annual subscription revenues from the deployment of ShotSpotter Flex on a per-square-mile basis. Our security solutions, ShotSpotter SecureCampus and
ShotSpotter SiteSecure, are typically sold on a subscription basis, each with a customized deployment plan. Our ShotSpotter Missions solution is also sold on a subscription
basis. As of December 31, 2019, we had ShotSpotter Flex, ShotSpotter SecureCampus and ShotSpotter SiteSecure coverage areas under contract for approximately 760 square
miles, of which 730 square miles had gone live. Coverage areas under contract included 104 cities and 12 campuses/sites across the United States, South Africa and the
Bahamas, including three of the ten largest cities in the United States. During the year ended December 31, 2019, one ShotSpotter SiteSecure customer became ShotSpotter
Flex customer. For the year ended December 31, 2019, substantially all of our revenues are attributable to customers based in the United States.
50
While we intend to continue to devote resources to increase sales of our ShotSpotter SecureCampus, ShotSpotter SiteSecure, ShotSpotter Labs and ShotSpotter
Missions solutions, we expect that revenues from our ShotSpotter Flex solution will continue to 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
Flex solutions.
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 $40.8 million, $34.8 million and $23.8 million for the years ended December 31, 2019, 2018, and 2017, respectively, representing a year-
over-year increases of 17% and 46%. For 2019, 2018, and 2017, revenues from ShotSpotter Flex represented approximately 96%, 97% and 98% of total revenues, respectively.
Our two current largest customers, The City of Chicago and the City of New York, each accounted for 20% and 14%, respectively, of our total revenues for the year ended
December 31, 2019. The 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. The City of New York and Puerto Rico Housing Administration accounted for 18% and 7%, respectively, of our total revenues for the year ended December 31, 2017.
Substantially all of our revenues for the years ended December 31, 2019, 2018, and 2017 were derived from customers within the United States (including Puerto Rico and the
U.S. Virgin Islands).
We had net income of $1.8 million for the year ended December 31, 2019, and had net losses of $2.7 million and $10.0 million for the years ended December 31,
2018, and 2017, respectively. Our accumulated deficit was $95.6 million and $97.4 million as of December 31, 2019 and 2018, respectively.
In September 2017, we used $13.7 million from the net proceeds of our initial public offering to voluntarily repay outstanding indebtedness of $13.5 million and $0.2
million in prepayment fees under a promissory note (the “2015 Term Note”). In connection with this early extinguishment of debt, we wrote off $0.3 million of unamortized
debt issuance costs.
During the years ended December 31, 2019, 2018, and 2017, we went “live” on 82, 168 and 114 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. During the year ended December 31, 2017, the 114 net new square miles included the impact of a 33 coverage mile
reduction as a result of our discontinuation in service of Puerto Rico and the U.S Virgin Islands due to devastation caused by hurricanes.
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In connection with the cessation of our service with Puerto Rico and the U.S. Virgin Islands, we classified our contracts with them expired, stopped recognizing
revenues and accelerated the deferred revenues related to setup fees under these contracts. Puerto Rico has returned as a customer with 16 miles already gone live at the end of
2019.
We have focused on rapidly growing our business and believe that its future growth is dependent on many factors, including our ability to increase our customer base,
expand the coverage of our solutions among our existing customers, expand our international presence and increase sales of our security solutions. Our future growth will
primarily depend on the market acceptance for outdoor gunshot detection solutions. Challenges we face in this regard include our target customers not having access to adequate
funding sources, the fact that contracting with government entities can be complex, expensive, and time-consuming and the fact that our typical sales cycle is often very long,
difficult to estimate accurately and can be costly. We expect international sales cycles to be even longer than our domestic sales cycles. To combat these challenges, we invest
in research and development, increase awareness of our solutions, invest in new sales and marketing campaigns, often in different languages for international sales, and hire
additional sales representatives to drive sales in order to continue to maintain our position as a market leader. In addition, we believe that entering into strategic partnerships with
other service providers to cities and municipalities offers another potential avenue for expansion, particularly for our ShotSpotter Flex solution.
We will also focus on expanding our business by introducing new products and services to existing customers such as ShotSpotter Missions and gaining new customers
for ShotSpotter Labs. We believe that developing and acquiring products for law enforcement in adjacent categories is a path for additional growth given our large and growing
installed base of police departments who trust ShotSpotter’s products, support and way of doing business. The ability to cross-sell new products provides an opportunity to grow
revenues per customer and lifetime value. Challenges we face in this area include ensuring our new products are reliable, integrated well with other ShotSpotter solutions and
priced and serviced appropriately. In some cases, we will need to bring in new skills sets to properly develop, market, sell or service these new products depending on the
categories they represent.
In October 2018, we acquired the HunchLab technology and related assets that underline our ShotSpotter Missions solution. ShotSpotter Missions applies risk
modeling and artificial intelligence to help forecast when and where crimes are likely to emerge and recommends specific patrol missions and tactics that can deter these events.
The HunchLab technology provides a proven, high-value, and complementary solution we can immediately offer to our existing law enforcement customers. We believe our
investment will democratize the sharing of important intelligence with patrol officers who currently have limited direct access to crime analysts.
With respect to international sales, we believe that we have the potential to expand our coverage within South Africa and the Bahamas, and to pursue opportunities in
Latin America and other regions of the world. 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.
Initial Public Offering
In June 2017, we completed our IPO in which we sold 3,220,000 shares of our common stock at a price of $11.00 per share. We received net proceeds of $32.4
million, excluding underwriting discounts and commissions, which was recorded to additional paid-in capital.
52
As a result of the IPO:
•
•
•
•
all outstanding Series B-1 convertible preferred stock warrants were remeasured at fair value using the Black-Scholes model, resulting in a loss of $3.7
million, which was recorded in other expense, net.
the entire balance of $5.7 million in convertible preferred stock warrant liability was reclassified to additional paid-in capital. All preferred stock warrants
were converted into common stock warrants. In addition, we issued to the lead underwriter in the IPO a warrant to purchase up to 84,000 shares of our
common stock. See Note 15, Convertible Preferred Stock Warrants and Common Stock Warrants, to our consolidated financial statements included
elsewhere in this Annual Report on Form 10-K for further details regarding the warrants.
all shares of the then-outstanding convertible preferred stock were converted into 4,689,753 shares of common stock. This resulted in a reclassification of
$42.1 million to additional paid-in capital.
offering costs incurred by us were approximately $1.9 million, excluding underwriting commissions and discounts, which was recorded to additional paid-in
capital.
Key Business Metrics
We focus primarily on three key business metrics in order to measure our operational performance and inform strategic decisions. Revenue retention rate and sales and
marketing spend per $1.00 of new annualized contract value are each calculated annually. Net new “go-live” square miles is calculated on a quarterly basis. All of these metrics
are delivered using internal data and may be calculated in a manner different than similar metrics used by other companies.
Revenue retention rate
Sales and marketing spend per $1.00 of new annualized
contract value
Net new "go-live" square miles
Revenue Retention Rate
2019
Year Ended December 31,
2018
(in thousands)
111 %
139 %
2017
$
$
0.43
82
$
0.30
168
141 %
0.34
114
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 Flex model in 2011, we have added over 70 new ShotSpotter Flex customers, but only ten such customers have
terminated service, two of which were terminated due to hurricane damage. One of the two customers who terminated due to hurricane damage has returned as a customer with
16 miles already gone live at the end of 2019. We do not anticipate maintaining our revenue retention rate at the levels observed in 2018 and 2017. For example, in 2018, our
revenue retention rate excluding our largest customer, Chicago, for which we had a large expansion deployment in 2018, would have been 118%.
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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 that were formally approved by customers during the quarter, both from initial and
expanded customer deployments, net of square miles that ceased to be “live” during the quarter due to customer cancellations. New square miles include deployed square miles
that may have been sold, or booked, in prior quarters. We focus on net new “go-live” miles as a key business metric to measure our operational performance and inform
strategic decisions.
Components of Results of Operations
Presentation of Financial Statements
Our consolidated financial statements include the accounts of our wholly-owned Colombian and South African subsidiaries, ShotSpotter Colombia S.A.S. and
ShotSpotter (Pty) Ltd. All intercompany balances and transactions have been eliminated in consolidation.
Revenues
We derive substantially all of our revenues from subscription services. We recognize subscription fees ratably, on a straight-line basis, over the term of the
subscription, which for new customers is typically initially one to three years in length. Customer contracts include one-time set-up fees for the set-up of our sensors in the
customer’s coverage areas, training and third-party integration licenses. If the set-up fees are deemed to be a material right, they are recognized ratably over three years.
Training and third-party integration license fees are recognized upon delivery.
For ShotSpotter Flex, we generally invoice customers for 50% of the total contract value when the contract is fully executed and for the remaining 50% when the
subscription service is operational and ready to go live – that is, when the customer has acknowledged the completion of all the deliverables in the signed customer acceptance
form. All fees billed in advance of services being delivered are recorded as deferred revenue. The timing of when new miles go live can be uncertain and, as a result, can have a
significant impact on the levels of revenues and deferred revenue from quarter to quarter. For our ShotSpotter Flex solution, our pricing model is based on a per-square-mile
basis. For our ShotSpotter Missions solution, pricing is currently customized, generally tied to the number of sworn police officers in a particular city. For ShotSpotter
SecureCampus and ShotSpotter SiteSecure, our pricing model is on a customized-site basis. We may also offer discounts or other incentives in conjunction with ShotSpotter
Missions sales in an effort to introduce the product and accelerate sales. As a result of our process for invoicing contracts and renewals upon execution, our cash flow from
operations and accounts receivable can fluctuate due to timing of contract execution and timing of deployment.
We generally invoice subscription service renewals for 100% of the total contract value when the renewal contract is executed. Renewal fees are recognized ratably
over the term of the renewal, which is typically one year. While most of our customers elect to renew their agreements, in some cases, they may not be able to obtain the proper
approvals or funding to complete the renewal prior to expiration. For these customers, we stop recognizing subscription revenues at the end of the current contract term, even
though we may continue to provide services for a period of time until the renewal process is completed. Once the renewal is complete, we then recognize subscription revenues
for the period between the expiration of the term of the agreement and the completion of the renewal process in the month in which the renewal is executed. If a customer
declines to renew its subscription prior to the end of three years, then the remaining setup fees are immediately recognized.
54
ShotSpotter Labs projects may or may not be revenue-producing. When they are revenue-producing, they will generally be sold on a cost-plus basis.
It is likely that international deployments may have different payment and billing terms due to their local laws, restrictions or other customary terms and conditions.
Costs
Costs include the cost of revenues and charges for impairment of property and equipment. Cost of revenues primarily includes depreciation expense associated with
capitalized customer acoustic sensor networks, communication expenses, costs related to hosting our service applications, costs related to operating our Incident Review Center
(the “IRC”), providing remote and on-site customer support and maintenance and forensic services, certain personnel and related costs of operations, stock-based compensation
and allocated overheads, which includes IT, facility and equipment depreciation costs.
Impairment of property and expense is primarily attributable to our write-off of the remaining book value of indoor sensor inventory and indoor sensor networks
installed in certain security customers during the year ended December 31, 2018 and write-off for deployed equipment in Puerto Rico and U.S. Virgin Islands that was destroyed
by the hurricanes in September 2017.
We will have to upgrade our sensors that use third-generation (“3G”) cellular communications to the fourth-generation Long-Term Evolution wireless technology,
which will increase our cost of revenues. Originally, we had expected to start incurring costs in 2021 through 2022. We have begun plans to replace sensors in certain
geographic areas starting in early 2021. Accelerated bandwidth changes by our carriers may require us to accelerate the upgrade of our 3G sensors prior to 2021, which would
accelerate the costs associated with the upgrade, which are estimated to be between $4.0 million and $6.0 million in total. We may to re-use and re-deploy the old 3G sensors
that have a remaining serviceable life where it makes sense to do so.
In the near term, we expect our cost of revenues to increase as our installed base increases, although certain of our costs of revenues are fixed and do not need to
increase commensurate with increases in revenues. In addition, depreciation expense associated with deployed equipment is recognized only over the first five years from the
go-live date. We also expect cost of revenues to increase as we continue to invest in our customer success capabilities to drive growth and value for our customers.
Operating Expenses
Operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Salaries, bonuses, stock-based compensation
expense and other personnel costs are the most significant components of each of these expense categories. We include stock-based compensation expense incurred in
connection with the grant of stock options and restricted stock units to the applicable operating expense category based on the equity award recipient’s functional area.
We are focused on executing on our growth strategy. As a result, in the near term we expect our total operating expenses to increase in absolute dollars as we incur
additional expenses due to growth and as a result of operating as a public company. Although our operating expenses will fluctuate, we expect that over time, they will generally
decrease as a percentage of revenues.
Sales and Marketing
Sales and marketing expenses primarily consist of personnel-related costs attributable to our sales and marketing personnel, commissions earned by our sales
personnel, marketing expenses for trade shows, conferences and conventions, consulting fees, travel and facility-related costs and allocated overhead.
55
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 will include adding sales and 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 the ShotSpotter Missions crime forecasting software. The focus of this effort will be in the
areas of data science modeling, user experience, core application functionality and backend infrastructure improvements, including integration of ShotSpotter gunshot data to
enhance forecasting of gun violence.
We are also investing research and development resources in conjunction with our ShotSpotter Labs projects and initiatives. The initial focus of these efforts is to
develop new underwater sensor applications as well as to test and expand the functionality of our outdoor sensors in challenging environmental conditions.
In the near term, we expect our research and development expenses to increase in absolute dollars as we increase our research and development headcount to further
strengthen our software and invest in the development of our service.
We will continue to invest in research and development to leverage our large and growing database of acoustic events, which includes those from both gunfire and
non-gunfire. We also intend to leverage third-party AI and our own evolving cognitive and analytical applications to improve the efficiency of our solutions, which may include
internal software applications, data analysis, event routing and customer outputs. Certain of these applications and outputs may expand the platform of services that we will be
able to offer our customers.
General and Administrative
General and administrative expenses primarily consist of personnel-related costs attributable to our executive, finance, and administrative personnel, legal, accounting
and other professional services fees, other corporate expenses and allocated overhead. We have recently incurred additional expenses in expanding our operations, including
increased personnel, legal, insurance and accounting expenses, and the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act
and other regulations.
In the near term, we expect our general and administrative expenses to increase significantly in absolute dollars as we grow our business, support our operations as a
public company and increase our headcount.
Other Income (Expense), Net
Other income (expense), net, consisted primarily of interest income and local and franchise tax expenses. In addition, in 2017, it included expense on our outstanding
debt, and losses from the remeasurement of our convertible preferred stock warrant liability and losses from early extinguishment of debt.
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.
56
Results of Operations
Comparison of Years Ended December 31, 2019 and 2018
The following table sets forth our consolidated statements of operations data for the years ended December 31, 2019 and 2018 (in thousands):
Revenues
Costs
Cost of revenues
Impairment of property and equipment
Total costs
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Income (loss) from operations
Other income (expense), net
Benefit (provision) for income taxes
Net income (loss)
Revenues
2019
As a % of
Revenues
2018
As a % of
Revenues
Change
$
%
$
40,752
100 % $
34,753
100 % $
5,999
17 %
16,409
—
16,409
24,343
9,989
5,344
7,415
22,748
1,595
162
41
1,798
$
40 %
—
40 %
60 %
25 %
13 %
18 %
56 %
4 %
—
—
4 % $
14,846
686
15,532
19,221
8,377
4,987
8,425
21,789
(2,568 )
(170 )
13
(2,725 )
43 %
2 %
45 %
55 %
24 %
14 %
24 %
63 %
(7 %)
(1 %)
—
(8 %) $
1,563
(686 )
877
5,122
1,612
357
(1,010 )
959
4,163
332
28
4,523
11 %
(100 %)
6 %
27 %
19 %
7 %
(12 %)
4 %
(162 %)
(195 %)
215 %
(166 %)
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.
57
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.
Comparison of Years Ended December 31, 2018 and 2017
The following table sets forth our selected consolidated statements of operations data for the years ended December 31, 2018 and 2017 (in thousands):
Revenues
Costs
Cost of revenues
Impairment of property and equipment
Total costs
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Loss from operations
Other expense, net
Provision for income taxes
Net loss
Revenues
$
$
14,846
686
15,532
19,221
8,377
4,987
8,425
21,789
(2,568 )
(170 )
13
(2,725 )
As a % of
Revenues
2018
34,753
As a % of
Revenues
2017
23,763
100 % $
43 %
2 %
45 %
55 %
24 %
14 %
24 %
63 %
(7 %)
(0 %)
0 %
(8 %) $
11,370
793
12,163
11,600
6,179
4,159
5,595
15,933
(4,333 )
(5,487 )
(160 )
(9,980 )
Change
$
10,990
%
46 %
3,476
(107 )
3,369
7,621
2,198
828
2,830
5,856
1,765
5,317
173
7,255
31 %
100 %
28 %
66 %
36 %
20 %
51 %
37 %
(41 %)
(97 %)
(100 %)
(73 %)
100 % $
48 %
—
51 %
49 %
26 %
18 %
24 %
67 %
(18 %)
(23 %)
—
(42 %) $
The increase of $11.0 million in revenues was primarily attributable to $5.2 million from expansions of existing customer coverage areas, $1.9 million of new
customer solutions that went live during 2018, and $4.8 million related primarily to customer deployments that went live in 2017 and for which we recognized a full year of
revenues in 2018.
58
Costs
The increase in costs of $3.4 million was due primarily to a $1.4 million increase in overhead expenses resulting from an increase in employee headcount, a $0.8
million increase in operating costs, which includes costs incurred in providing remote and on-site customer support and maintenance services, infrastructure hosting for our
service application and costs related to operating our IRC, and a $0.6 million increase in depreciation offset by $0.4 million decrease in telecommunication fees and $0.1 million
in lower impairment charges. 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. During 2017, we recognized impairment expense of $0.8 million for
the impairment of property and equipment primarily related to the remaining net book value for deployed equipment that was presumed destroyed by hurricanes in September
2017.
Gross margin for 2018 increased six percentage points from gross margin for 2017 because certain costs of revenues are fixed and did not increase commensurate with
the increase in subscription revenues.
Operating Expenses
Sales and Marketing Expense
The increase in sales and marketing expense of $2.2 million was primarily due to an increase of $1.3 million in salaries, commissions, recruiting, and stock-based
compensation expense, and a $0.7 million increase in consulting and outside services associated with expansion of our sales, marketing and customer success organization.
Research and Development Expense
The increase in research and development expense of $0.8 million was due primarily due to a $0.7 million increase in salaries, benefits and bonuses for research and
development personnel, and stock-based compensation expense and a $0.1 million increase in consulting fees related to the development of our mobile applications and next-
generation sensors.
General and Administrative Expense
The increase in general and administrative expense of $2.8 million from 2017 to 2018 was due to a $2.0 million increase in legal, accounting and other outside services
fees associated with litigation and settlement expenses, business acquisition expenses, and operating as a public company, a $0.4 million increase in non-employee director
compensation, and a $0.4 million increase in personnel expense primarily due to stock-based compensation expense.
Other Expense, Net
The decrease in other expense, net of $5.3 million was due to a $3.7 million decrease in expense related to the remeasurement of the preferred stock warrant liability
due to a final remeasurement upon our IPO in the second quarter of 2017, a $1.6 million decrease in interest expense due to the termination of debt in the third quarter of 2017, a
$0.2 million in prepayment fees in connection with the early extinguishment of debt, and a write-off of $0.3 million of unamortized debt issuance costs due to the termination of
debt in the third quarter on 2017.
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, 2018 and 2017, our provision for income taxes consisted of a benefit
(provision) for foreign income taxes only.
59
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 $24.6 million as of December 31, 2019. We also have a $10.0 million credit facility, of which no amounts were
outstanding as of December 31, 2019.
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.
On October 3, 2018, we acquired certain technology, referred to as HunchLab, and related assets from Azavea Inc. The purchase consideration totaled $2.5 million,
consisting of $1.7 million in cash and a contingent earnout payable in cash for up to $750,000 based on HunchLab’s revenues generated over the three-year period following the
acquisition date.
In September 2017, we voluntarily repaid our outstanding borrowing of $13.5 million under the 2015 Term Note. This resulted in a loss on early extinguishment of
debt of $0.2 million for prepayment fees and other miscellaneous fees, and $0.3 million for the write-off of a portion of our unamortized debt issuance costs.
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, 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.
60
Credit Facility
On September 27, 2018, we entered into the Umpqua Credit Agreement, which allows us to borrow up to $10.0 million under a revolving loan facility. We intend to
use the revolving loan facility for general working capital purposes.
Prior to the repayment of all our outstanding indebtedness under the 2015 Term Note in September 2017, we were a party to a Loan and Security Agreement with Orix
Growth Capital, LLC (the “Orix Loan Agreement”), which allowed us to borrow up to $15.0 million. In September 2017, our credit facility with Orix Growth Capital, LLC
pursuant to the Orix Loan Agreement was terminated in connection with such repayment.
Cash Flows
Comparison of Years Ended December 31, 2019, 2018 and 2017
The following table presents a summary of our cash flows for the years ended December 31, 2019, 2018 and 2017:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net change in cash and cash equivalents
2019
Year Ended December 31,
2018
(in thousands)
2017
$
$
13,692 $
(4,909 )
5,482
14,265 $
(1,386 )
(10,203 )
2,437
(9,152 )
$
$
3,387
(6,506 )
18,751
15,632
As of December 31, 2019, 2018 and 2017, $0.8 million, $1.1 million and $1.0 million in cash was held by our consolidated foreign subsidiaries. In the year ended
December 31, 2017, we used $0.5 million of these funds to pay our U.S. parent company for services delivered in the year ended December 31, 2016 under an intercompany
license agreement.
Operating Activities
For standard customer deployments, we typically achieve cash flow breakeven, on a direct variable cost-basis, in less than a year from the date of execution of the
contract. Our net income (loss) and cash flows provided by operating activities are significantly influenced by our increase in headcount to support our growth, increase in legal,
outside services fees, and sales and marketing expenses, and our ability to bill and collect in a timely manner.
Operating activities provided $13.7 million in 2019, used $1.4 million in 2018, and provided $3.4 million in 2017.
The net cash provided by operating activities in the year ended December 31, 2019 was primarily driven by higher collections of accounts receivable driven by new
customer contracts and expansions of existing customer coverage.
The use of cash for 2018 was primarily driven by changes in accounts receivable and our net loss of $2.7 million and offset by changes in deferred revenue, stock-
based compensation, and depreciation and amortization.
The generation of cash for 2017 was primarily driven by changes in accrued expenses and deferred revenue, depreciation and amortization and remeasurement of
warrant liability, partially offset by changes in accounts receivable and our net loss of $10.0 million.
61
Investing Activities
Our investing activities consist primarily of capital expenditures to install our solutions in customer coverage areas, purchases of property and equipment, and
investment in intangible assets.
Investing activities used $4.9 million, $10.2 million, and $6.5 million in the years ended December 31, 2019, 2018 and 2017, respectively, primarily for property and
equipment expenditures to install our solutions in customer coverage areas. We completed our acquisition of the HunchLab assets for approximately $1.7 million in cash at
closing during the year ended December 31, 2018.
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 provided $5.5 million in cash during the year ended December 31, 2019 from $10.8 million in net proceeds from the issuance of common stock
upon our secondary offering, $0.9 million proceeds from ESPP purchase and $0.5 million in proceeds from the exercise of options and warrants, partially offset by $6.7 million
in payments for repurchases of our common stock.
Financing activities provided $2.4 million in the year ended December 31, 2018, primarily from $1.5 million from the exercise of stock options and warrants, and $0.9
million proceeds from employee stock purchase plan.
Financing activities provided $18.8 million in the year ended December 31, 2017, primarily from $32.4 million in net proceeds, excluding underwriting discounts and
commissions, from our IPO and $1.5 million in borrowing under our 2015 Term Note (see Note 10, Financing Arrangements, to our consolidated financial statements included
elsewhere in this Annual Report in Form 10-K, for details regarding the 2015 Term Note), offset in part by $13.5 million in repayment of our 2015 Term Note and $1.9 million
in payments for costs associated with our IPO.
Contractual Obligations and Commitments
The following table summarizes our commitments to settle contractual obligations as of December 31, 2019.
Operating lease (1)
Data center arrangements (2)
Less than
1 Year
1 to
3 Years
3 to
5 Years
(in thousands)
More than
5 Years
Total
$
$
328 $
76 $
304 $
— $
— $
— $
— $
— $
632
76
(1)
(2)
Operating lease payments include total future minimum rent payments under a non-cancelable operating lease agreement as described in Note 19, Commitments and
Contingencies.
Data center arrangements include total future minimum payments under the non-cancelable contracts as described in Note 19, Commitments and Contingencies.
The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed
or minimum services to be used, fixed, minimum or variable price provisions and the approximate timing of the actions under the contracts. The table does not include purchase
obligations that we can cancel without a significant penalty. These purchase obligations are cancellable at any time, however, we may be required to pay costs incurred through
the cancellation date. Historically, we have rarely cancelled these agreements.
62
Off-Balance Sheet Arrangements
As of December 31, 2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose
entities, that were established for the purpose of facilitating off-balance sheet arrangements. We do not engage in off-balance sheet financing arrangements. 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 — 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 invoices customers for 50% of the total contract value when the contract is fully executed and for the remaining 50% when the subscription service is
operational and ready to go live – that is, when the customer has acknowledged the completion of all the deliverables in the signed customer acceptance form. We generally
invoices subscription service renewals for 100% of the total contract value when the renewal contract is executed. 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 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,
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 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 and these amounts are
immaterial.
63
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.
Stock-Based Compensation — We recognize stock-based compensation expense for stock-based compensation awards granted to our employees, directors, and
consultants that can be settled in shares of our common stock. Compensation expense for stock-based compensation awards granted is based on the grant date fair value estimate
for each award as determined by our board of directors. We recognize these compensation costs on a straight-line basis over the requisite service period of the award, which is
generally four years.
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 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. 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, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation
of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. The estimates used to calculate the fair value of a reporting unit
change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination
of fair value and goodwill impairment. We performed our annual test for goodwill and long-lived assets impairment as of October 1, 2019 and concluded that no impairment
charge was necessary.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). There have been further amendments, including practical expedients, with the issuance of ASU
2018-01 in January 2018, ASU 2018-11 in July 2018 and ASU 2018-20 in December 2018. The amended guidance requires the recognition of lease assets and lease liabilities
on the balance sheet for those leases with terms in excess of 12 months and currently classified as operating leases. Disclosure of key information about leasing arrangements is
required. Effective January 1, 2019, we adopted Topic 842. We elected the optional transition method which allows entities to continue to apply historical accounting guidance
in the comparative periods presented in the year of adoption.
64
At transition, lessees and lessors may elect to apply a package of practical expedients permitting entities not to reassess: (i) whether any expired or existing contracts
are or contain leases; (ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any expired or existing leases qualify for capitalization
under the amended guidance. These practical expedients must be elected as a package and consistently applied. We have elected to apply the package of practical expedients
upon adoption.
Our operating lease for our corporate headquarters office is impacted by the new standard and upon adoption, we recognized a right-of-use asset of $0.9 million
and related lease liabilities totaling $0.9 million. See Note 18, Leases.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic
815). The amendments in Part I of ASU 2017-11 change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round
features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity
classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified
instruments. We adopted this ASU as of January 1, 2019 and the adoption did not have any impact on the consolidated financial statements.
Item 7A. QUALITATIVE AND QU ANTITATIVE 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 of $24.6 million as of December 31, 2019, which consists entirely of bank deposits. To date, fluctuations in interest income have not been significant.
We 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. For example, if the average
value of the South African Rand had been 10% higher relative to the U.S. dollar during 2019, 2018 or 2017, it would not have resulted in a significant impact to our results of
operations for the years ended December 31, 2019, 2018 or 2017. 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.
65
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity/(Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
66
67
68
69
70
71
72
73
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, 2019 and 2018, the related consolidated statements of
operations, comprehensive income (loss), convertible preferred stock and stockholders’ equity/(deficit), and cash flows, for each of the three years in the period ended December
31, 2019, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
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 Virchow Krause, LLP
We have served as the Company's auditor since 2016.
Minneapolis, Minnesota
March 12, 2020
67
ShotSpotter, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
December 31,
2019
2018
Assets
Current assets
Cash and cash equivalents
Accounts receivable and contract asset
Prepaid expenses and other current assets
Restricted cash
Total current assets
Property and equipment, net
Operating lease right-of-use asset
Goodwill
Intangible assets, net
Other assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable
Deferred revenue, short-term
Accrued expenses and other current liabilities
Total current liabilities
Deferred revenue, long-term
Other liabilities
Total liabilities
Commitments and contingencies (Note 19)
Stockholders' equity
Common stock: $0.005 par value; 500,000,000 shares authorized;
11,314,150 and 10,864,722 shares issued and outstanding as of
December 31, 2019 and 2018, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
$
$
24,550 $
13,883
1,764
—
40,197
16,556
556
1,379
249
1,634
60,571 $
1,179 $
26,360
4,885
32,424
598
298
33,320
57
122,907
(95,579 )
(134 )
27,251
60,571 $
10,218
15,267
1,527
60
27,072
16,504
—
1,379
242
1,922
47,119
1,307
23,102
4,427
28,836
1,060
76
29,972
55
114,618
(97,377 )
(149 )
17,147
47,119
See accompanying notes to consolidated financial statements.
68
ShotSpotter, Inc.
Consolidated Statements of Operations
(In thousands, except share and per share data)
Revenues
Costs
Cost of revenues
Impairment of property and equipment
Total costs
Gross profit
Operating expenses
Sales and marketing
Research and development
General and administrative
Total operating expenses
Operating loss
Other income (expense), net
Remeasurement of convertible preferred stock warrant liability
Loss on early extinguishment of debt
Interest income (expense), net
Other expense, net
Total other income (expense), net
Income (loss) before income taxes
Provision (benefit) for income taxes
Net income (loss)
Net income (loss) loss per share, basic
Net income (loss) loss per share, diluted
Weighted average shares used in computing net income (loss) per
share, basic
Weighted average shares used in computing net income (loss) per
share, diluted
2019
Year Ended December 31,
2018
2017
$
40,752
$
34,753
$
16,409
—
16,409
24,343
9,989
5,344
7,415
22,748
1,595
—
—
440
(278 )
162
1,757
(41 )
1,798
0.16
0.15
$
$
$
14,846
686
15,532
19,221
8,377
4,987
8,425
21,789
(2,568 )
—
—
82
(252 )
(170 )
(2,738 )
(13 )
(2,725 )
(0.26 )
(0.26 )
$
$
$
$
$
$
23,763
11,370
793
12,163
11,600
6,179
4,159
5,595
15,933
(4,333 )
(3,725 )
(479 )
(1,114 )
(169 )
(5,487 )
(9,820 )
160
(9,980 )
(1.61 )
(1.61 )
11,302,780
10,569,007
6,197,775
11,846,348
10,569,007
6,197,775
See accompanying notes to consolidated financial statements.
69
ShotSpotter, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Net income (loss)
Other comprehensive income (loss):
Change in foreign currency translation adjustment
Comprehensive income (loss)
2019
Year Ended December 31,
2018
2017
1,798
$
(2,725 )
$
15
1,813 $
(150 )
(2,875 ) $
(9,980 )
3
(9,977 )
$
$
See accompanying notes to consolidated financial statements.
70
Consolidated Statements of Convertible P referred Stock and Stockholders’ Equity/(Deficit)
(In thousands, except share data)
ShotSpotter, Inc.
Balance at December 31, 2016
Issuance of common stock upon IPO, net
$3.0 million in commissions and discounts
IPO costs
Conversion of convertible preferred stock
of common stock upon IPO
Reclassification of preferred stock warrant
liability into additional paid in capital upon IPO
Exercise of stock options
Issuance of common stock in connection
with cashless exercise of warrants
Issuance of common stock from ESPP purchase
Stock-based compensation
Foreign currency translation gain
Net loss
Balance at December 31, 2017
Exercise of stock options
Issuance of common stock in connection
with exercise of warrants
Issuance of common stock from ESPP purchase
Issuance of common stock from RSU's vested
Stock-based compensation
Foreign currency translation loss
Cumulative effect of change in accounting principle
Net loss
Balance at December 31, 2018
Exercise of stock options
Issuance of common stock in connection
with exercise of warrants
Issuance of common stock upon secondary offering,
net of costs
Repurchase of common stock and retirement
Issuance of common stock from ESPP purchase
Issuance of common stock from RSU's vested
Stock-based compensation
Foreign currency translation gain
Net income
Balance at December 31, 2019
Series B-1
Convertible
Preferred Stock
Series A-2
Convertible
Preferred Stock
Shares
Amount
Shares
Amount
3,848,023 $ 22,075 1,176,423 $ 20,000
Common Stock
Shares
1,616,996 $
Par Value
Additional
Paid-in
Capital
8 $ 30,403 $
Accumulated
Deficit
(87,615 ) $
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders'
Equity/
(Deficit)
(2 ) $
(57,206 )
—
—
—
—
3,220,000
16
32,410
(1,870 )
—
—
—
—
32,426
(1,870 )
(3,848,023 ) (22,075 ) (1,176,423 ) (20,000 )
4,689,753
23
42,052
—
—
42,075
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
74,984
—
—
5,711
55
—
—
—
—
5,711
55
191,263
34,133
—
—
—
9,827,129 $
609,985
296,691
83,605
47,312
—
—
—
—
10,864,722 $
307,365
—
1
319
—
628
—
—
—
—
—
48 $ 109,708 $
547
3
987
1
909
—
(1 )
3
2,468
—
—
—
—
—
—
—
55 $ 114,618 $
452
2
—
—
—
—
(9,980 )
(97,595 ) $
—
—
—
—
—
—
2,943
(2,725 )
(97,377 ) $
—
—
—
—
3
—
1 $
—
—
—
—
—
(150 )
—
—
(149 ) $
—
1
319
628
3
(9,980 )
12,162
550
988
909
2
2,468
(150 )
2,943
(2,725 )
17,147
454
26,098
—
71
—
—
71
250,000
(257,824 )
1
(2 )
10,553
(6,716 )
—
—
65,639
58,150
—
—
—
11,314,150 $
872
1
—
—
3,057
—
—
—
—
—
57 $ 122,907 $
—
—
—
—
1,798
(95,579 ) $
—
—
—
—
—
15
—
(134 ) $
10,554
(6,718 )
873
-
3,057
15
1,798
27,251
See accompanying notes to consolidated financial statements.
71
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization
Impairment of property and equipment
Stock-based compensation
Amortization of debt issuance costs
Remeasurement of convertible preferred stock warrant liability
Loss on early extinguishment of debt
Loss on disposal of property and equipment
Changes in operating assets and liabilities:
Accounts receivable and contract asset
Prepaid expenses and other assets
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchase of property and equipment
Investment in intangible and other assets
Business acquisition
Cash flows from financing activities:
Net cash used in investing activities
Proceeds from initial public offering, net of commissions and
discounts
Proceeds from notes payable
Repayment of notes payable
Payment of debt issuance costs
Payment on debt extinguishment costs
Payment of line of credit costs
Payments of initial public offering costs
Proceeds from issuance of common stock upon secondary offering
Payments of secondary offering costs
Proceeds from exercise of stock options
Repurchases of common stock
Proceeds from exercise of warrants
Proceeds from employee stock purchase plan
Net cash provided by financing activities
Increase (decrease) in cash, cash equivalents and restricted cash
Effect of exchange rate on cash and cash equivalents
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of year
Supplemental cash flow disclosures:
Cash paid for income taxes
Cash paid for interest
Supplemental disclosure of non-cash financing activities:
Property and equipment purchases included in accounts payable
Estimated fair value of contingent consideration
Conversion of convertible preferred stock into common stock
Reclassification of convertible preferred stock warrant liability
into additional paid-in capital
Deferred offering costs included in other assets
Line of credit costs included in other assets
Issuance of warrants in connection with the issuance of notes
payable
ShotSpotter, Inc.
Consolidated Statements of Cash Flows
(In thousands)
2019
2018
2017
Year Ended December 31,
$
1,798
$
(2,725 ) $
(9,980 )
4,982
—
3,057
—
—
—
—
1,383
(192 )
(243 )
108
2,799
13,692
(4,823 )
(86 )
—
(4,909 )
—
—
—
—
—
—
—
11,247
(445 )
454
(6,718 )
71
873
5,482
14,265
7
10,278
24,550
$
51
—
$
$
311
—
—
$
$
$
—
—
—
$
$
$
—
$
3,917
686
2,468
—
—
—
4
(11,224 )
(766 )
(346 )
(246 )
6,846
(1,386 )
(8,444 )
(48 )
(1,711 )
(10,203 )
—
—
—
—
—
(10 )
—
—
—
550
—
988
909
2,437
(9,152 )
(167 )
19,597
10,278
$
79
—
$
$
205
750
—
$
$
$
—
249
91
$
$
$
—
$
3,121
793
628
132
3,725
479
—
(1,518 )
(247 )
291
1,535
4,428
3,387
(6,430 )
(76 )
—
(6,506 )
32,426
1,500
(13,500 )
(30 )
(149 )
—
(1,870 )
—
—
55
—
—
319
18,751
15,632
70
3,895
19,597
—
1,235
227
—
42,075
5,711
—
—
111
$
$
$
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
72
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 to help deter gun violence and make cities, campuses and facilities safer.
The company’s flagship product, ShotSpotter Flex, is the leading outdoor gunshot detection, location and forensic system trusted by over 100 cities. ShotSpotter Missions uses
machine learning-driven analysis to help strategically plan directed patrol missions and tactics for maximum crime deterrence. ShotSpotter Labs is the Company’s effort to
support innovative uses of its technology to help protect wildlife and the environment. The Company offers its solutions on a SaaS-based subscription model to its customers.
The Company’s principal executive offices are located in Newark, California. The Company has two wholly-owned subsidiaries, ShotSpotter (Pty) Ltd. formed in
South Africa and ShotSpotter Colombia S.A.S. which was formed in Colombia in March 2019.
Note 2. Initial Public Offering
In June 2017, the Company completed its initial public offering (“IPO”) in which the Company sold 3,220,000 shares of its common stock at a price of $11.00 per
share. The Company received net proceeds of $32.4 million, excluding underwriting discounts and commissions, which was recorded to additional paid-in capital. The
Company’s common stock commenced trading on the Nasdaq Capital Market on June 7, 2017 under the trading symbol “SSTI.”
•
•
•
•
Immediately prior to the IPO, all outstanding Series B-1 convertible preferred stock warrants were remeasured at fair value using the Black-Scholes model,
resulting in a loss of $3.7 million, which was recorded in other expense, net.
Upon the closing of the IPO, the entire balance of $5.7 million in convertible preferred stock warrant liability was reclassified to additional paid-in capital.
All preferred stock warrants were converted into common stock warrants. In addition, the Company issued to the lead underwriter in the IPO a warrant to
purchase up to 84,000 shares of its common stock. See Note 15, Convertible Preferred Stock Warrants and Common Stock Warrants, for further details
regarding the warrants.
Upon the closing of the IPO, all shares of the then-outstanding convertible preferred stock were converted into 4,689,753 shares of common stock. This
resulted in a reclassification of $42.1 million to additional paid-in capital.
Offering costs incurred by the Company were approximately $1.9 million, excluding underwriting commissions and discounts, which was recorded to
additional paid-in capital.
Note 3. 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 subsidiary, ShotSpotter (Pty) Ltd and ShotSpotter Colombia S.A.S. All significant intercompany transactions have
been eliminated during consolidation.
In the opinion of management, the accompanying consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial
position, results of operations, comprehensive loss, equity statement and cash flows for the full year 2019.
73
June 2017 Amended and Restated Certificate of Incorporation
Prior to the IPO, the Company’s Board of Directors (the “Board”) and stockholders approved an amendment (the “Charter Amendment”) to the Pre-IPO Certificate (as
defined below) and an amended and restated certificate of incorporation (“Post-IPO Certificate”) that became effective on June 12, 2017. The Charter Amendment increased the
number of authorized shares of common stock from 8,600,000 to 500,000,000. Under the Post-IPO Certificate, the Company is authorized to issue two classes of stock to be
designated Common Stock and Preferred Stock. See Note 13, Capital Stock, for further details regarding these classes of stock.
March 2017 Amendment and Restatement of Certificate of Incorporation
On March 27, 2017, the Company’s Board and stockholders approved an amendment and restatement of the Company’s then-existing certificate of incorporation (as
so amended and restated, the “Pre-IPO Certificate”) to provide, among other changes, that each share of Series A-2 convertible preferred stock would automatically convert into
0.715548 shares of common stock upon the consummation of an initial public offering of the Company’s capital stock. All share and per share data related to balance sheet and
net loss information in the accompanying consolidated financial statements and their related notes have been retroactively adjusted to give effect to the application of this
conversion feature when presenting the Series A-2 convertible preferred stock on an as-converted basis.
The Pre-IPO Certificate also provided for (1) an increase in the total number of authorized shares to 14,550,000 and (2) an increase in the number of authorized shares
of common stock to 8,600,000, in each case to accommodate the new conversion feature for the outstanding shares of Series A-2 convertible preferred stock.
Use of Estimates
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
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 and renewals
upon execution, cash flows from operations and accounts receivable can fluctuate due to timing of contract execution and timing of deployment.
74
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 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, 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 and these amounts are
immaterial.
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 $0.5 million for the year ended December 31, 2019 and was included in sales and marketing expense in the
consolidated statements of operations.
Costs
Costs include the cost of revenues and charges for impairment of property and equipment. Cost of revenues primarily includes depreciation expense associated with
capitalized customer acoustic sensor networks, communication expenses, costs related to hosting our service application, costs related to operating our Incident Review Center
(the “IRC”), providing remote and on-site customer support and maintenance and forensic services, certain personnel and related costs of operations, stock-based compensation
and allocated overhead, which includes information technology, facility and equipment depreciation costs.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred. Advertising and promotion costs were $0.5 million, $0.6 million and $0.5 million for the year ended
December 31, 2019, 2018 and 2017, and were included in sales and marketing expense in the consolidated statements of operations.
75
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.
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, 2019 and 2018, 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, ShotSpotter (Pty) Ltd. and ShotSpotter Colombia S.A.S, is the local currency (South African Rand
and Colombian Peso respectively). 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. The Company does not require collateral or other security for accounts receivable. Contract asset consist of revenues recognized
in advance of invoicing the customer.
The Company periodically evaluates the collectability of its accounts receivable and provides an allowance for potential credit losses based on the Company’s
historical experience. At December 31, 2019 and 2018, the Company did not have an allowance for potential credit losses as there were no estimated credit losses.
Concentrations of Risk
Credit Risk — Financial instruments that potentially subject the Company to concentration of credit risk consisted primarily of restricted cash, cash and cash equivalents
and accounts receivable from trade customers. The Company maintains its cash deposits at three domestic and two international financial institutions. The Company 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 — At December 31, 2019, one customer accounted for 55% of the Company’s total accounts receivable. At December 31, 2018
one customer accounted for 77%, 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, 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. For the year ended December 31, 2017, one customer accounted for 18%
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.
76
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
Following the acquisition of HunchLab (see Note 8, Business Acquisitions), the Company recorded goodwill for the first time in October 2018. Goodwill is tested for
impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (October 1) and between annual tests if an event occurs
or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. 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 first annual test for goodwill impairment as of October 1, 2019 and concluded that no goodwill impairment charge was necessary. Since inception
through December 31, 2019, the Company did not have any goodwill impairment.
Intangible Assets
Intangible assets consisted of acquired patents and capitalized legal fees related to obtaining patents, as well as customer relationships as a result from the Company’s
acquisition of HunchLab in 2018 (see Note 8, Business Acquisitions). Patent assets are stated at costs, less accumulated amortization. Customer relationships are recorded at fair
value as of the date of the acquisition. Intangible assets are amortized on a straight-line basis, over their expected useful lives, which range from three years for patents and
seven years for customer relationships.
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 2019, 2018, and 2017,
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.
77
The royalty fee due for each license sold to a customer is capitalized as property and equipment and amortized over the estimated useful life. The difference in royalty
fees capitalized in property and equipment and the minimum annual payment is classified as general and administrative expense in the consolidated statements of operations and
was $30,000, $35,000 and $60,000 for the years ended December 31, 2019, 2018, and 2017, respectively.
Convertible Preferred Stock Warrants
The Company issued warrants exercisable for shares of Series B-1 convertible preferred stock, or for shares of common stock upon the automatic conversion of all
outstanding series of preferred stock into common stock. These warrants were classified as a preferred stock warrant liability in the consolidated balance sheets, rather than
stockholders’ equity, as they met the criteria to be classified as a derivative liability. The convertible preferred stock warrants were subject to remeasurement to fair value at
each balance sheet date and any change in fair value is recognized as a component of other expense, net, in the consolidated statements of operations. The Company estimated
the fair value of the warrants using an option pricing method (“OPM”) or probability weighed expected return method (“PWERM”) that incorporates the use of OPM, to allocate
the estimated value of the Company. Upon the closing of the IPO in 2017, the convertible preferred stock warrant liability was reclassified to additional paid-in capital. All
preferred stock warrants were converted into common stock warrants.
Fair Value Measurements
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. Fair value is determined by the Board. All stock option grants are accounted for using the fair
value method, and stock-based compensation expense is recognized as the underlying options vest which is the requisite service period. The Company uses the Black-Scholes
option pricing model to measure the fair value of its stock options.
Prior to the IPO, given the absence of a public trading market for the Company’s common stock, the Board considered numerous objective and subjective factors to
determine the fair value of the Company’s common stock each time stock option grants were approved. The factors include, but are not limited to: (i) the valuation of the
Company’s common stock by an unrelated third party; (ii) the Company’s results of operations, financial position and capital resources; (iii) current economic indicators and
outlook; (iv) competition for the Company’s solutions; and (v) the Company’s marketing methods.
78
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.
Subsequent to the IPO, the Company uses the market closing price of its common stock as traded on the Nasdaq Capital Market to determine fair value.
The Company 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.
Forfeitures are recognized as and when they occur.
Segment Information
The Company has one operating segment with one business activity, providing gunshot detection systems. The Company’s chief operating decision maker is its Chief
Executive Officer, who manages operations on a consolidated basis for purposes of allocating resources.
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.
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.
79
Accounting Pronouncements Recently Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). There have been further amendments, including practical expedients, with the issuance of ASU
2018-01 in January 2018, ASU 2018-11 in July 2018 and ASU 2018-20 in December 2018. The amended guidance requires the recognition of lease assets and lease liabilities
on the balance sheet for those leases with terms in excess of 12 months and currently classified as operating leases. Disclosure of key information about leasing arrangements is
required. Effective January 1, 2019, the Company adopted Topic 842. The Company elected the optional transition method which allows entities to continue to apply historical
accounting guidance in the comparative periods presented in the year of adoption.
At transition, lessees and lessors may elect to apply a package of practical expedients permitting entities not to reassess: (i) whether any expired or existing contracts
are or contain leases; (ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any expired or existing leases qualify for capitalization
under the amended guidance. These practical expedients must be elected as a package and consistently applied. The Company has elected to apply the package of practical
expedients upon adoption.
The Company determines if an arrangement is a lease at inception. The Company’s operating lease for its corporate headquarters office is impacted by the new
standard and upon adoption, the Company recognized a right-of-use asset of $0.9 million and related lease liabilities totaling $0.9 million. See Note 18, Leases.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic
815). The amendments in Part I of ASU 2017-11 change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round
features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity
classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified
instruments. The Company adopted this ASU as of January 1, 2019 and the adoption did not have any impact on the consolidated financial statements.
Recent Accounting Pronouncements Not Yet Effective
In 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 4. Revenue Related Disclosures
As of December 31, 2018, the Company had total short-term and long-term deferred revenue of $24.2 million. During the year ended December 31, 2019, the
Company recognized $23.1 million in revenue from the beginning deferred revenue balance and $17.2 million from new billings, and added $43.1 million to total short-term
and long-term deferred revenue from new billings.
As of January 1, 2018, upon the adoption of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”), the
Company had total short-term and long-term deferred revenue of $17.3 million. During the year ended December 31, 2018, the Company recognized $9.7 million in revenue
from the beginning deferred revenue balance and $24.8 million from new billings, and added $41.4 million to total short-term and long-term deferred revenue from new
billings.
As of December 31, 2019, the Company has estimated remaining performance obligations for contractually committed revenues of $34.9 million, $21.6 million,
$5.5 million, and $0.7 million that will be recognized during the year ending December 31, 2020, 2021, 2022, and 2023 through 2025, respectively. 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, 2019 and amounts
under contract that will be invoiced after December 31, 2019.
80
During the year ended December 31, 2019, the Company recognized revenues of $39.7 million from customers in the United States, and $1.0 million from customers
in South Africa and the Bahamas.
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 5. Fair Value Measurements
Prior to the IPO, the Company’s convertible preferred stock warrant liability was measured on a recurring basis and was classified within Level III of the fair value
hierarchy because some of the inputs used in its measurement were neither directly or indirectly observable. The valuation methodology and underlying assumptions in the fair
value determination are discussed in Note 3, Basis of Presentation and Summary of Significant Accounting Policies, and Note 15, Convertible Preferred Stock Warrants and
Common Stock Warrants.
Immediately prior to the IPO, the convertible preferred stock warrant liability was remeasured to fair value, resulting in a loss of $3.7 million which was recorded in
other expense, net. Upon the closing of the IPO, the entire balance of $5.7 million in convertible preferred stock warrant liability was reclassified to additional paid-in capital.
There were no transfers into or out of Level III during the year ended December 31, 2019. The changes in the fair value of the convertible preferred stock warrant
liability and changes in the fair value of contingent consideration are summarized below (in thousands):
Fair value at December 31, 2016
Issuance of convertible preferred stock warrants
Change in fair value recorded in other expense,
net
Reclassification of unexercised warrant into
additional paid-in capital upon the IPO
Fair value at December 31, 2017
Contingent consideration from business
combination
Fair value at December 31, 2018 and
December 31, 2019
Fair Value
Measurements at
Reporting Date
Using Level III Inputs
1,875
111
$
3,725
(5,711 )
—
750
750
$
$
As of the acquisition date of HunchLab (see Note 8, Business Acquisitions) and as of December 31, 2018, the Company estimated, based on (i) the probability of
achieving the relevant revenues targets and (ii) the timing of achieving such targets, that the fair value of the contingent consideration approximates the maximum amount
payable. There was no change in fair value during the year ended December 31, 2019. In February 2020, subsequent to December 31, 2019, the Company made its first
payment of $0.3 million to Azavea, Inc.
81
Note 6. Intangible Assets, net
Intangible assets, net, consisted of the following (in thousands):
Patents
Customer relationship
Patents
Customer relationship
Gross
1,092 $
160
1,252 $
December 31, 2019
Accumulated
Amortization
(974 ) $
(29 )
(1,003 ) $
Gross
997 $
160
1,157 $
December 31, 2018
Accumulated
Amortization
(909 ) $
(6 )
(915 ) $
$
$
$
$
Net
Net
118
131
249
88
154
242
Amortization expense during the years ended December 31, 2019, 2018 and 2017 was $88,000, $61,000 and $47,000, respectively.
The following table presents future intangible asset amortization as of year-end 2019 (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total
Note 7. Details of Certain Consolidated Balance Sheet Accounts
Prepaid expenses and other current assets (in thousands):
Prepaid software and licenses
Prepaid insurance
Other prepaid expenses
Deferred commissions
Other
Other assets (in thousands):
Deferred commissions
Other
$
$
85
63
38
23
23
17
249
December 31,
2019
2018
321 $
473
94
753
123
1,764 $
388
275
169
629
66
1,527
December 31,
2019
2018
1,579 $
55
1,634 $
1,560
362
1,922
$
$
$
$
82
Property and equipment, net (in thousands):
Deployed equipment
Computer equipment
Software
Furniture and fixtures
Leasehold improvements
Vehicles
Construction in progress
Accumulated depreciation and amortization
December 31,
2019
2018
$
$
$
$
28,930
1,141
1,314
169
234
124
1,209
$
33,121
(16,565 )
$
16,556
24,767
1,272
1,239
210
234
—
953
28,675
(12,171 )
16,504
Depreciation expense during the years ended December 31, 2019, 2018 and 2017 was $4.9 million, $3.9 million and $3.1 million, respectively.
Accrued expenses and other current liabilities (in thousands):
Personnel-related accruals
Royalties payable
Professional fees
Sales/ use tax payable
Contingent consideration
Operating lease liability
Deferred rent
Other
December 31,
2019
2018
2,883
115
317
91
750
302
—
427
4,885
$
$
2,603
130
396
273
750
—
25
250
4,427
$
$
Note 8. Business Acquisitions
On October 3, 2018, the Company acquired certain technology, referred to as HunchLab, and related assets from Azavea Inc. The acquisition provides an opportunity
to increase the Company’s revenue per customer with a related and value-added technology that helps deter crime through strategically planned patrol missions. The 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.
83
The following table presents the purchase price allocation (in thousands):
Accounts receivable
Prepaid expense
Deferred revenue, short term
Accounts payable
Software technology
Customer relationships
Goodwill
Total purchase consideration
$
$
114
4
(120 )
(26 )
950
160
1,379
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):
Software technology
Customer relationships
Total identifiable technology and intangible assets
Fair Value
950
160
1,110
$
$
Useful
Life
5 years
7 years
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.
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 9. Impairment of Property and Equipment
During the year ended December 31, 2019, the Company did not recognize any impairment.
During the year ended December 31, 2018, the Company recognized impairment expense of $0.7 million for the impairment of property and equipment primarily
related to the remaining book value of indoor sensor inventory and indoor sensor networks installed at certain security customers. Management concluded that the impairment
charges were required because the Company made the strategic decision to no longer include indoor coverage as part of its service offering.
During the year ended December 31, 2017, the Company recognized impairment expense of $0.8 million for the impairment of property and equipment primarily
relating to the remaining net book value of deployed equipment in Puerto Rico and the U.S. Virgin Islands. Management concluded that the impairment charges were required
because the equipment was presumed destroyed by the hurricanes in September 2017.
84
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”). 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.
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, 2020 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, 2019 and 2018.
Notes Payable- 2015 Term Note
Borrowings under the 2015 Term Note bore interest at the greater of: (i) the average prime rate in effect during each month or (ii) the average three-month LIBOR rate
during such month, plus 2.5% per annum, plus 7.5% with a minimum rate of 11%, with interest only payments through October 2017, followed by 36 equal monthly
installments of principal and interest through October 2020, the maturity date. The weighted average interest rate during the year ended December 31, 2017 was and 11.54%.
For the year ended December 31, 2017 the Company recognized interest expense of $1.1 million, based on the outstanding balance during the period.
During the year ended December 31, 2017, amortization of debt issuance costs was $132,000. Amortization of debt issuance costs is recorded in interest expense in the
consolidated statements of operations.
Borrowings under the 2015 Term Note were secured by substantially all of the assets of the Company. Additionally, the terms of the 2015 Term Note included certain
financial covenants and various negative covenants.
In March 2017, the Company amended the 2015 Term Note. In connection with the amendment of the 2015 Term Note, the Company issued a warrant to purchase
76,704 shares of Series B-1 preferred stock at an exercise price of $5.8667 per share; however, the terms of the warrant provided that upon the completion of a public offering
in which the Company raises at least $25.0 million in net proceeds, the number of shares underlying the warrant would be reduced to 61,363 shares. Consistent with these
terms, upon the closing of the IPO, the number of shares underlying this warrant was reduced to 61,363 shares, and the warrant became exercisable for common stock.
85
In September 2017, the Company voluntarily repaid all outstanding borrowings under the 2015 Term Note. The Company recorded to other expense, net, a loss of
$0.2 million, consisting of prepayment fees and miscellaneous fees, and wrote-off $0.3 million of unamortized debt issuance costs from the early extinguishment of debt.
Note 11. Related Party Transactions
During the year ended December 31, 2019, the Company recognized $0.6 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, 2018, the Company did not
have any related party transactions. During the year ended December 31, 2017, the Company recognized approximately $0.7 million, in revenues from a reseller who was also
an investor. As of December 31, 2017, the amount of accounts receivable due from this reseller was immaterial.
Note 12. Income Taxes
The domestic and foreign components of net income (loss) before income tax expense were as follows (in thousands):
Domestic
Foreign
Net income (loss)
The provision (benefit) for income tax consists of the following (in thousands):
Current:
Federal
State
Foreign
Total
Deferred:
Federal
State
Foreign
Total
Total tax expense (benefit)
86
2019
Year Ended December 31,
2018
2017
1,743 $
14
1,757 $
(3,083 ) $
345
(2,738 ) $
(10,125 )
305
(9,820 )
Year Ended December 31,
2019
2018
2017
— $
—
7
7
—
—
(48 )
(48 )
(41 ) $
— $
—
(13 )
(13 )
—
—
—
—
(13 ) $
—
—
160
160
—
—
—
—
160
$
$
$
$
A reconciliation of income taxes at the statutory federal income tax rate to net income (loss) taxes included in the accompanying consolidated statements of operations
is as follows (in thousands):
Income tax at statutory rate
Change in valuation allowance
Change in tax rate
Change in deferreds
State tax
Mark-to-market on warrants
Stock-based compensation
Research and development credit
Foreign rate differential
Subpart F - GILTI
Subpart F- transition tax
Lobbying
Other
Total
2019
$
$
December 31,
2018
2017
369 $
(17 )
—
100
(133 )
—
(420 )
(82 )
(43 )
17
—
102
66
(41 ) $
(575 ) $
1,595
—
7
(309 )
—
(615 )
(220 )
(86 )
81
—
78
31
(13 ) $
(3,339 )
(8,354 )
9,788
(39 )
536
1,267
84
(62 )
56
—
68
79
76
160
Temporary differences that gave rise to significant portions of the Company’s deferred tax assets and liabilities as of December 31, 2019 and 2018 were as follows (in
thousands):
Deferred tax assets:
Net operating losses
Credits
Accruals and reserves
Deferred revenue and contract costs
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Fixed assets and intangibles
Total deferred tax liabilities, net
Year Ended December 31,
2019
2018
$
$
21,556 $
2,055
767
116
24,494
(23,693 )
801
(836 )
(35 ) $
21,461
1,969
285
458
24,173
(23,710 )
463
(545 )
(82 )
Realization of deferred tax assets is dependent upon future taxable income, if any, the timing and amount of which are uncertain. Management has determined that the
deferred tax assets are not realizable on a more likely than not basis. Accordingly, deferred tax assets have been fully offset by a valuation allowance. The valuation allowance
increased by $17,000 during the year ended December 31, 2019.
As of December 31, 2019, the Company had federal net operating loss carryforwards of approximately $85.6 million, of which $80.6 million will expire between 2026
through 2038, if not utilized, and $5.0 million which do not expire. As of December 31, 2019, the Company also had state NOLs of approximately $55.1 million, which will
expire, if not utilized, in 2019 through 2038.
As of December 31, 2019, the Company had available for carryover research and experimental credits for federal and California income tax purposes of approximately
$1.4 million and $1.7 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.
87
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. The Company classifies interest and penalties as a component of
tax expense as a result of the full valuation allowance.
The Company had unrecognized tax benefits of approximately $0.8 million as of December 31, 2019, all of which was offset by a full valuation allowance. No interest
or penalties have been accrued as of December 31, 2019.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):
Balance as of December 31, 2017
Increases for current year tax positions
Increases for prior year tax positions
Balance as of December 31, 2018
Increases for current year tax positions
Decrease for prior year tax positions
Balance as of December 31, 2019
$
$
620
114
—
734
75
(37 )
772
Unrecognized tax benefits may change during the next 12 months for items that arise in the ordinary course of business. The Company does not anticipate a material
change to its unrecognized tax benefits over the next 12 months that would affect the Company’s effective tax rate as a result of the full valuation allowances.
The Company files income tax returns in federal, various state and U.S. territory jurisdictions, and South Africa. The statute of limitations remains open for fiscal
years 2005 through 2019 in the United States and the various state and the U.S. territory jurisdictions. Years beyond the normal statute of limitations remain open to audit by tax
authorities due to tax attributes generated in earlier years which are being carried forward and may be audited in subsequent years when utilized.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible low-taxed income ("GILTI") provisions of the Act. The GILTI
provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance indicates that either accounting for deferred
taxes related to GILTI inclusions or treating any taxes on GILTI inclusions as period cost are both acceptable methods subject to an accounting policy election. For the year
ended December 31, 2019, the Company has elected to treat any potential GILTI inclusions as a period cost.
88
Note 13. Capital Stock
Convertible Preferred Stock
Immediately prior to the IPO, the Company had the following outstanding convertible preferred stock:
Series B-1
Series A-2
Shares
Authorized
4,773,000
1,177,000
Shares
Issued and
Outstanding
Aggregate
Liquidation
Preference
(in thousands)
3,848,023 $
1,176,423
$
22,575
20,000
42,575
Upon the closing of the IPO, all shares of convertible preferred stock then outstanding were automatically converted into an aggregate of 4,689,753 shares of common
stock, resulting in the reclassification of the related redeemable convertible preferred stock into $23,000 of common stock and $42.1 million into additional paid-in capital.
Since the closing of the IPO in 2017, there were no shares of convertible preferred stock outstanding.
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, 2019 and 2018, there were
11,314,150 and 10,864,722 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.
Prior to the IPO, common stock was subordinate to Series B-1 convertible preferred stock with respect to dividend rights and subordinate to Series B-1 and A-2
convertible preferred stock with respect to rights upon certain deemed liquidation events of the Company.
At December 31, 2019, shares of common stock reserved for future issuance were as follows:
Options outstanding
Shares available for future grant
Unvested restricted stock units
Warrants to purchase common stock
Total
December 31,
2019
617,493
1,632,636
114,996
134,716
2,499,841
Preferred Stock
The Company is authorized to issue 20,000,000 shares of preferred stock, with a par value of $0.005, as provided in the Post-IPO Certificate. Since the closing of the
IPO, there were no shares of preferred stock issued and outstanding.
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.
89
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):
Numerator:
Net income (loss)
Denominator:
Weighted-average shares outstanding, basic
Weighted-average shares outstanding, diluted
Net income (loss) per share, basic
Net income (loss) per share, diluted
2019
Year Ended December 31,
2018
2017
$
1,798 $
(2,725 ) $
(9,980 )
11,302,780
11,846,348
10,569,007
10,569,007
$
$
0.16 $
0.15 $
(0.26 ) $
(0.26 ) $
6,197,775
6,197,775
(1.61 )
(1.61 )
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:
Options to purchase common stock
Unvested restricted stock units
Warrants to purchase Series B-1 convertible
preferred or common stock
Total
2019
Year Ended December 31,
2018
269,202
54,620
—
323,822
820,186
110,764
163,713
1,094,663
2017
1,294,128
47,312
468,278
1,809,718
Note 15. Convertible Preferred Stock Warrants and Common Stock Warrants
Immediately prior to the Company’s IPO, all outstanding Series B-1 convertible preferred stock warrants were remeasured to their fair value, using the Black-Scholes
model. Refer to Note 3, Basis of Presentation and Summary of Significant Accounting Policies, for a description of the valuation method. The final remeasurement of the
convertible preferred stock warrant liability resulted in a $3.7 million loss which was recorded to other expense, net.
Upon the closing of the IPO, the entire balance of $5.7 million in convertible preferred stock warrant liability was reclassified to additional paid-in capital. All
convertible preferred stock warrants were converted into common stock warrants. In addition, the Company issued to the lead underwriter in the IPO a warrant to purchase up to
84,000 shares of its common stock.
During the year ended December 31, 2019, certain warrants were exercised on a cashless basis and converted into 13,865 shares of common stock.
90
At December 31, 2019, 2018 and 2017, the Company had the following common stock warrants issued and outstanding:
Warrant Class
Common stock warrant
Common stock warrant
Common stock warrant
Common stock warrant (1)
2019
—
—
50,716
84,000
134,716
Shares
2018
3,766
25,231
50,716
84,000
163,713
Issuance
2017
Date
$
165,925 July 2012
61,502 August 2012
$
156,851 February 2014 $
84,000 June 2017
$
468,278
Price
per Share
Expiration
Date
5.8667 July 2019
5.8667 August 2019
0.1700 February 2021
13.2000 June 2020
(1)
This warrant was issued to the Company’s lead underwriter in connection with the IPO.
In March 28, 2017, in connection with the amendment of the 2015 Term Note (see Note 10, Financing Arrangements for details regarding the amendment of the 2015
Term Note), the Company issued a warrant to purchase 76,704 shares of Series B-1 preferred stock at an exercise price of $5.8667 per share which was reduced to 61,363
shares upon the completion of the Company’s IPO because greater than $25 million in proceeds were raised. The Company determined the fair value of the warrants on the date
of issuance to be $111,000. The warrants were immediately exercisable.
In June 2017, in connection with its public offering, the Company issued a warrant to purchase 84,000 shares of common stock to its lead underwriter (the “June 2017
Warrant”). The Company determined the fair value of the June 2017 Warrant on the date of issuance to be $0.3 million. The June 2017 Warrant was immediately exercisable.
Note 16. Equity Incentive Plans
2017 Equity Incentive Plan
In May 2017, the Board and the Company’s stockholders approved the 2017 Equity Incentive Plan (the “2017 Plan”), which became effective in connection with the
IPO. The 2017 Plan provides for the issuance of stock options, restricted stock units and other awards to employees, directors and consultants of the Company. A total of
2,413,659 shares of the Company’s common stock were initially reserved for issuance under the 2017 Plan, which is the sum of (1) 900,000 shares, (2) the number of shares
reserved for issuance under the 2005 Plan at the time the 2017 Plan became effective and (3) shares subject to stock options or other stock awards under the 2005 Plan that
would have otherwise been returned to the 2005 Plan (up to a maximum of 1,314,752 shares). The number of shares of common stock reserved for issuance under the 2017 Plan
will automatically increase on January 1 of each year, beginning on January 1, 2018 by the lesser of (1) 5% of the number of shares of the Company’s capital stock outstanding
on December 31st of the preceding calendar year or (2) such number of shares as determined by the Board. In accordance with the evergreen provision, the number of shares of
common stock reserved for issuance under our 2017 Plan was automatically increased on January 1, 2019 by 543,236 shares, which was equal to 5% of the total number of
shares of capital stock outstanding on December 31, 2018. As a result of the adoption of the 2017 Plan, no further grants may be made under the 2005 Plan.
Incentive Stock Options may only be granted to Company employees and may only be granted with an exercise price not less than the fair value of the common stock,
or not less than 110% of fair value when the grant is issued to a person who, at the time of grant, owns stock representing more than 10% of the voting power of all classes of
stock. Non-statutory stock options may be granted to Company employees, directors and consultants, and may be granted at a price per share not less than fair value on the date
of the grant. The Board determines the fair value of the Company’s common stock.
91
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. The Company records proceeds from early exercises as a liability and reclassifies the amount to equity as the
repurchase right lapses. At December 31, 2019, 2018, and 2017, there were no unvested options resulting from early exercises.
Aggregate intrinsic value represents the difference between the Company’s estimated or actual fair value of its common stock and the exercise price of outstanding “in-
the-money” options. The aggregate intrinsic value of options exercised was $12.1 million, $12.6 million and $0.8 million during the years ended December 31, 2019, 2018 and
2017, respectively. Based on the fair market value of the Company’s common stock at December 31, 2019, 2018 and 2017, the total intrinsic value of all outstanding options
was $7.8 million, $19.3 million and $15.9 million, respectively.
At December 31, 2019, 2018 and 2017, total unrecognized stock-based compensation cost related to unvested stock options was $4.4 million, $3.3 million and $0.8
million, respectively, which will be recognized ratably over a weighted-average period of 2.9 years, 3.3 years and 3.2 years for each period.
Cash received from the exercise of stock options during the years ended December 31, 2019, 2018 and 2017 was $0.5 million, $0.6 million and $55,000, respectively.
No income tax benefits from stock-based compensation arrangements have been recognized in the consolidated statements of operations.
The fair value of stock option grants is set forth below and was determined using the Black-Scholes option pricing model with the following assumptions:
Fair value of common stock
Expected term (in years)
Risk-free interest rate
Expected volatility
Expected dividend yield
2019
$20.07-$44.95
6
1.71%-2.49%
64%-67%
—
Year Ended December 31,
2018
$23.72-$47.39
6
2.60%-3.00%
64%-67%
—
2017
$3.06-$19.56
5-6
1.85%-2.29%
55%
—
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.
Following the effectiveness of the 2017 Plan in connection with the IPO, no further grants will be made under the 2005 Plan.
92
A summary of stock option activities under the 2005 Plan and 2017 Plan during 2017, 2018 and 2019 is as follows:
Outstanding at December 31, 2016
Granted
Exercised
Canceled
Outstanding at December 31, 2017
Granted
Exercised
Canceled
Outstanding at December 31, 2018
Granted
Exercised
Canceled
Outstanding at December 31, 2019
Stock options outstanding, exercisable and vested were as follows:
Outstanding at
December 31,
2019
617,493
Outstanding at
December 31,
2018
820,186
Outstanding at
December 31,
2017
1,294,128
Weighted-
average
Remaining
Contractual Life
(years)
7.36
Weighted-
average
Remaining
Contractual Life
(years)
7.17
Weighted-
average
Remaining
Contractual Life
(years)
6.22
Exercisable
and
Vested as of
December 31,
2019
308,217
Exercisable
and
Vested as of
December 31,
2018
439,927
Exercisable
and
Vested as of
December 31,
2017
883,959
Number
of Options
Outstanding
Weighted
Average
Exercise
Price
0.86
5.52
0.74
1.52
1.79
33.70
0.90
6.78
8.44
35.76
1.47
24.80
17.13
1,130,141 $
261,476 $
(74,984 ) $
(22,505 ) $
1,294,128 $
157,078 $
(609,985 ) $
(21,035 ) $
820,186 $
138,200 $
(307,365 ) $
(33,528 ) $
617,493 $
Weighted-
average
Remaining
Contractual Life
(years)
6.22
Weighted-
average
Remaining
Contractual Life
(years)
5.99
Weighted-
average
Remaining
Contractual Life
(years)
5
Weighted-
average
Exercise
Price
8.06
Weighted-
average
Exercise
Price
1.66
Weighted-
average
Exercise
Price
0.85
During the year ended December 31, 2019, the company granted non-employee directors restricted stock unit (“RSU”) awards totaling 14,755 shares of common
stock, with vesting terms of approximately 2 months to 12 months. The weighted average fair value of $41.90 per unit was calculated using the closing stock price on the date of
grants.
During the year ended December 31, 2018, the company granted non-employee RSU awards totaling 17,881 shares of common stock, with vesting terms of
approximately 12 months. The fair value of $28.45 per unit was calculated using the closing stock price on the date of grants.
During the year ended December 31, 2019, the Company granted executive management RSU awards totaling 39,597 shares of common stock, with vesting terms of
6.25% vest quarterly for the next four years. The fair value of $44.95 per unit was calculated using the closing stock price on the grant dates.
93
During the year ended December 31, 2018, the Company granted executive management RSU awards totaling 92,883 shares of common stock, with vesting terms of
35% upon the first anniversary and 21.667% on each of the three subsequent anniversaries. The weighted average fair value of $17.87 per unit was calculated using the closing
stock price on the grant dates.
During the year ended December 31, 2017, the company granted non-employee directors RSU awards totaling 47,312 shares of common stock, with vesting terms of
approximately seven to ten months. The fair value of $11.50 to $16.96 per unit was calculated using the closing stock price on the date of grants.
The following table summarizes the activity of RSU awards during 2019:
Unvested RSUs at December 31, 2018
Granted
Vested
Unvested RSUs at December 31, 2019
Number
of Restricted Stock
Units
Weighted
Average
Grant Date Fair
Value
110,764 $
54,351 $
(58,150 ) $
106,965 $
19.58
44.12
24.75
29.24
During the year ended December 31, 2019, the Company granted certain executive management RSU awards, subject to certain financial milestones, totaling 8,031
shares of common stock, with vesting terms 100% upon the first anniversary, if the Compensation Committee of the Board of Directors of the Company believes that the
associated financial milestones were met. The weighted average fair value of $43.58 per unit was calculated using the closing stock price on the grant date. At the end of the
year the associated milestones were not met and the expense was reversed.
At December 31, 2019, 2018 and 2017, total unrecognized stock-based compensation cost related to RSUs was $2.4 million, $1.4 million, and $0.3 million,
respectively, which will be recognized ratably over a weighted-average period of 2.6 years, 2.7 years and 0.4 years, respectively. The fair values of RSUs that vested during the
years ended December 31, 2019 and 2018 totaled $1.4 million and $0.6 million respectively. No RSUs vested during the year ended December 31, 2017.
Our equity-based incentive plans include stock options, restricted stock units and other stock awards. The number of shares available for grant under these plans was
1,632,636 as of December 31, 2019.
2017 Employee Stock Purchase Plan
In May 2017, the Board and the Company’s stockholders adopted the 2017 Employee Stock Purchase Plan (“2017 ESPP”), which became effective in connection with
the Company’s IPO. The 2017 ESPP allows eligible employees to purchase shares of the Company’s common stock in an offering at a discount of the then-current trading price,
up to the lesser of (1) 85% of the fair market value of the common stock on the first day of the IPO or (2) 85% of the fair market value of the common stock on the purchase
date. The 2017 ESPP permits the maximum discounted purchase price permitted under U.S. tax rules, including a “lookback.”
The 2017 ESPP initial offering period runs for approximately 24 months in length, and contains four 6-month purchase periods. An employee’s purchase rights
terminate immediately upon termination of employment or other withdrawal from the 2017 ESPP. No participant will have the right to purchase shares of common stock in an
amount that has a fair market value of more than $25,000 determined as of the first day of the applicable purchase period, for each calendar year.
There are 200,000 shares of common stock reserved for issuance under the 2017 ESPP. In addition, the 2017 ESPP contains a provision which provides for an
automatic annual share increase on January 1 of each year, in an amount equal to the lesser of (1) 2% of the total number of shares of common stock outstanding on December
31st of the preceding calendar year, (2) 150,000 shares or (3) such number of shares as determined by the Board. In
94
accordance with the evergreen provision, the number of shares of common stock reserved for issuance under our 2017 ESPP was automatically increased on January 1, 2019 by
150,000 shares.
The Company accounts for employee stock purchases made under its 2017 ESPP using the estimate grant date fair value of accounting in accordance with ASC 718,
Stock Compensation. The Company values ESPP shares using the Black-Scholes model.
There were 65,639 shares issued during 2019 and 316,623 shares available under the 2017 ESPP as of December 31, 2019.
Total stock-based compensation expense associated with the 2005 Plan, 2017 Plan and 2017 ESPP is recorded in the consolidated statements of operations and was
allocated as follows (in thousands):
Cost of revenues
Sales and marketing
Research and development
General and administrative
Total
2019
Year Ended December 31,
2018
2017
$
$
670 $
955
365
1,067
3,057 $
316 $
770
272
1,110
2,468 $
75
133
69
351
628
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 2019 up to a maximum of 2% of compensation; the match will be deposited to
the employees’ 401(k) accounts in 2020. During the year ended December 31, 2019, the Company recorded $0.2 million of matching contribution expense. These matching
contributions are subject to additional vesting criteria. The Company did not make any contributions to the plan during the years ended December 31, 2018 and 2017.
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. The operating lease cost recognized for the year
ended December 31, 2019 was $0.3 million. Rent expense recognized for the years ended December 31, 2018 and 2017 was $0.6 million and $0.4 million, respectively.
95
Supplemental information related to the operating lease as follows (in thousands):
Assets
Operating lease right-of-use asset
Liabilities
Lease liability (short-term) (presented within Accrued expenses and other
current liabilities)
Lease liability (long-term) (presented within Other liabilities)
Total operating lease liability
Cash paid for amounts included in the measurement of lease liabilities
(presented within Operating cash flows)
Maturities of the lease liability at December 31, 2019 are as follows (in thousands):
2020
2021
Total lease payments, undiscounted
Less: imputed interest
Total
The Company does not have any finance leases.
96
As of December 31,
2019
$
$
$
556
302
296
598
Year ended
December 31,
2019
$
347
$
$
328
304
632
(34 )
598
The following table is shown for comparative purposes only. The future minimum lease payments under the non-cancelable lease at December 31, 2018 are as follows
(in thousands):
2019
2020
2021
Total
$
$
352
357
304
1,013
Note 19. Commitments and Contingencies
The company has non-cancelable data center arrangements in which the original term exceeds one year.
The following is a schedule of future minimum payments under the non-cancelable data center arrangements at December 31, 2019 (in thousands):
2020
2021
Total
Contingencies
Data Center
Arrangements
$
$
76
—
76
On November 6, 2017 three individuals, Ken Fisher, Kevin Baxter and Fred Holmes (the “Contractors”), filed a complaint with the Superior Court of California,
County of Alameda, alleging breach of contract, a breach of the implied covenant of good faith and fair dealing and violation of Section 17200 et seq. of the California Business
and Professions Code, purportedly predicated on an alleged breach of Section 10b-5 of the Securities Exchange Act of 1934. On October 4, 2018, the parties reached a binding
settlement.
On August 28, 2018, Silvon S. 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, 2019 or 2018.
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 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
For the audited consolidated financial statements, management evaluated subsequent events through March 12, 2020, which is the date these consolidated financial
statements were issued.
97
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures (as defined in Rules 13-a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2019, our disclosure controls and procedures were effective to
provide reasonable assurance that the information we are required to file or submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended December 31, 2019 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal
control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and Rule 15d-15(f) of
the Exchange Act. Internal control over financial reporting consists of policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of our assets; (2) are designed and operated to provide reasonable assurance regarding the reliability of our financial reporting
and our process for the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and that our receipts and
expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Our management evaluated the effectiveness
of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control -
Integrated Framework (2013). Based on the results of our evaluation, our management has concluded that our internal control over financial reporting was effective as of
December 31, 2019.
Item 9B. OTHER INFORMATION
None.
98
PART III.
We will file a definitive Proxy Statement for our Annual Meeting (our “Proxy Statement”) with the SEC, pursuant to Regulation 14A, not later than 120 days after the
end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of the Proxy
Statement that specifically address the items set forth herein are incorporated by reference.
Item 10. DIRECTORS , EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 is incorporated herein by reference to the sections of our Proxy Statement under the captions “Information Regarding the
Board of Directors and Corporate Governance”, “Executive Officers”.
Item 11. E XECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference to the sections of our Proxy Statement under the caption “Executive and Director
Compensation”.
Item 12. S ECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 is incorporated herein by reference to the sections of our Proxy Statement under the caption “Security Ownership of Certain
Owners and Management”.
Item 13. CERTAI N RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is incorporated herein by reference to the sections of our Proxy Statement under the captions “Transactions with Related
Persons and Indemnification”, “Information Regarding The Board of Directors and Corporate Governance”.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is incorporated herein by reference to the section of our Proxy Statement under the caption “Principal Accountant Fees and
Services”.
99
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Consolidated Financial Statements
PART IV.
We have filed the consolidated financial statements listed in the Index to Consolidated Financial Statements, Schedules, and Exhibits included in Part II, Item 8,
“Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
(a)(2) Financial Statements Schedules
All financial statements schedules have been omitted because they are not applicable, not material, or the required information is shown in the Index to Consolidated
Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
(a)(3) Exhibits
See the Exhibit Index below in this Annual Report on Form 10-K. The exhibits listed in the Exhibit Index below are filed or incorporated by reference as part of this
Annual Report on Form 10-K.
Item 16. FORM 10-K SUMMARY
None.
100
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
Exhibit Index
Exhibit
Description
Form
Incorporated by Reference
File No.
Exhibit
Filing Date
Herewith
Filed
Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws
Form of Common Stock Certificate
Investors' Rights Agreement, by and among ShotSpotter, Inc. and the investors listed
on Exhibit A thereto, dated July 12, 2012
Form of Warrant to purchase shares of Series B-1 Preferred Stock issued to certain
stockholders in connection with the sale of Series B-1 Preferred Stock in February
2014
8-K 001-38107
8-K 001-38107
S-1/A 333-217603
S-1
333-217603
3.1
3.2
4.1
4.2
June 13, 2017
June 13, 2017
May 19, 2017
May 2, 2017
S-1
333-217603
4.6
May 2, 2017
Form of Warrant to Purchase Shares of Common Stock issued to Roth Capital
Partners, LLC in June 2017
10-Q 001-38107
10.1
August 14,
2017
4.5
Description of Capital Stock
10.1(#)
ShotSpotter, Inc. Nonemployee Director Compensation Policy
10.2(#)
ShotSpotter, Inc. Amended and Restated 2005 Stock Plan
10.3(#)
Forms of Option Agreement and Option Grant Notice under the Amended and
Restated 2005 Stock Plan
X
X
S-1
S-1
333-217603
10.1
May 2, 2017
333-217603
10.2
May 2, 2017
10.4(#)
ShotSpotter, Inc. 2017 Equity Incentive Plan
S-1/A 333-217603
10.3
May 19, 2017
10.5(#)
10.6(#)
Forms of Option Agreement and Option Grant Notice under the 2017 Equity Incentive
Plan
S-1/A 333-217603
10.4
May 19, 2017
Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Restricted
Terms and Conditions under the 2017 Equity Incentive Plan
S-1/A 333-217603
10.5
May 19, 2017
10.7(#)
ShotSpotter, Inc. 2017 Employee Stock Purchase Plan
S-1/A 333-217603
10.6
May 19, 2017
10.8(#)
Form of Restricted Stock Unit Grant Notice for Directors
10-Q 001-38107
10.6
August 14,
10.9(#)
Form of Indemnification Agreement by and between ShotSpotter, Inc.
10.10(#)
Offer Letter between ShotSpotter, Inc. and Ralph A. Clark, dated March 13, 2017
10.11(#)
Offer Letter between ShotSpotter, Inc. and Alan R. Stewart, dated March 13, 2017
101
2017
S-1
S-1
S-1
333-217603
10.7
May 2, 2017
333-217603
10.8
May 2, 2017
333-217603
10.9
May 2, 2017
Exhibit
Number
Exhibit
Description
Form
Incorporated by Reference
File No.
Exhibit
Filing Date
Herewith
Filed
10.12(#)
Offer Letter between ShotSpotter, Inc. and Joseph O. Hawkins, dated March 13, 2017
10.13(#)
Offer Letter between ShotSpotter, Inc. and Paul S. Ames, dated March 13, 2017
10.14(#)
Offer Letter between ShotSpotter, Inc. and Gary T. Bunyard, dated March 13, 2017
S-1
S-1
S-1
333-217603
10.10
May 2, 2017
333-217603
10.11
May 2, 2017
333-217603
10.12
May 2, 2017
10.15(#)
Offer Letter between ShotSpotter, Inc. and Sam Klepper, dated March 2, 2018
10-Q 333-217603
10.1
May 10, 2018
10.16(#)
Offer Letter between ShotSpotter, Inc. and Nasim Golzadeh, dated February 20, 2019
10-K 333-217603
10.16
March 4, 2019
10.17
10.18
10.19
10.20
10.21
23.1
31.1
31.2
32.1*
32.2*
Lease Agreement between BMR-Pacific Research Center LP and ShotSpotter, Inc.,
dated August 14, 2012
S-1
333-217603
10.14
May 2, 2017
First Amendment to Lease Agreement between BMR-Pacific Research Center LP and
ShotSpotter, Inc., dated September 3, 2014
S-1
333-217603
10.15
May 2, 2017
Second Amendment to Lease Agreement between BMR-Pacific Research Center LP
and ShotSpotter, Inc., dated December 15, 2016
S-1
333-217603
10.16
May 2, 2017
Credit Agreement between Umpqua Bank and ShotSpotter, Inc., dated September 27,
2018
10-Q 333-217603
10.1
November 14,
2018
First Amendment to Credit Agreement between Umpqua Bank and ShotSpotter, Inc.,
dated May 21, 2019
8-K
333-217603
10.1
May 24, 2019
Consent of Baker Tilly Virchow Krause, LLP, Independent Registered Public
Accounting Firm for ShotSpotter, Inc.
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
102
X
X
X
X
X
X
X
Exhibit
Number
Exhibit
Description
Form
Incorporated by Reference
File No.
Exhibit
Filing Date
Herewith
Filed
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Indicates management contract or compensatory plan.
X
X
X
X
Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and shall not
be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act (whether made before or after the date
of the Form 10-K), irrespective of any general incorporation language contained in such filing.
103
#
*
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
SIGNATURES
Date: March 12, 2020
Date: March 12, 2020
SHOTSPOTTER, INC.
By:
By:
/s/ Ralph A. Clark
Ralph A. Clark
President and Chief Executive Officer
/s/ Alan R. Stewart
Alan R. Stewart
Chief Financial Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ralph A. Clark and Alan R. Stewart,
jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this report, and to file the same, with
exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-
fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
/s/ Ralph A. Clark
Ralph A. Clark
/s/ Alan R. Stewart
Alan R. Stewart
/s/ Pascal Levensohn
Pascal Levensohn
/s/ Thomas T. Groos
Thomas T. Groos
/s/ Randall Hawks, Jr.
Randall Hawks, Jr.
/s/ Marc Morial
Marc Morial
/s/ William J. Bratton
William J. Bratton
Title
President, Chief Executive Officer and a
Director (Principal Executive Officer)
Chief Financial Officer (Principal Financial
and Accounting Officer)
Director
Director
Director
Director
Director
104
Date
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
March 12, 2020
DESCRIPTION OF CAPITAL STOCK
Exhibit 4.5
The following description of our capital stock, certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws, and certain provisions of Delaware
law are summaries. You should also refer to the amended and restated certificate of incorporation and the amended and restated bylaws, which are filed as exhibits to the Annual Report on
Form 10-K of which this Exhibit 4.6 is part.
General
Our amended and restated certificate of incorporation authorizes us to issue up to 500,000,000 shares of common stock, $0.001 par value per share, and 20,000,000 shares of preferred stock,
$0.001 par value per share, all of which shares of preferred stock are undesignated.
Common Stock
Voting Rights
Each holder of our common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. Under our amended and
restated certificate of incorporation and amended and restated bylaws, our stockholders do not have cumulative voting rights. Because of this, the holders of a majority of the shares of
common stock entitled to vote in any election of directors are able to elect all of the directors standing for election, if they should so choose.
Dividends
Subject to preferences that may be applicable to any then-outstanding preferred stock, holders of common stock are entitled to receive ratably those dividends, if any, as may be declared from
time to time by the board of directors out of legally available funds.
Liquidation
In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the
payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then-outstanding shares of preferred stock.
Rights and Preferences
Holders of common stock have no preemptive, conversion or subscription rights and there are no redemption or sinking fund provisions applicable to the common stock. The rights,
preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may
designate in the future.
Preferred Stock
Our board of directors has the authority, without further action by our stockholders, to issue up to 20,000,000 shares of preferred stock in one or more series, to establish from time to time the
number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any qualifications, limitations or restrictions
thereon, and to increase or decrease the number of shares of any such series, but not below the number of shares of such series then outstanding.
Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of our common
stock. The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific
issuances. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of
delaying, deferring or preventing a change in control of us and may adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock.
It is not possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of common stock until the board of directors determines the specific rights
attached to that preferred stock.
We have no present plans to issue any shares of preferred stock.
Warrants
As of December 31, 2019, warrants to purchase an aggregate of 134,716 shares of our common stock at a weighted-average exercise price of $8.2306 per share were outstanding. The warrants
contain a provision for the adjustment of the exercise price and the number of shares issuable upon the exercise of the applicable warrant in the event of certain stock dividends, stock splits,
reorganizations, reclassifications and consolidations. For more information, see Note 15,“Convertible Preferred Stock Warrants and Common Stock Warrants" to the Notes to the Consolidated
Financial Statements for more information.
Registration Rights
Certain holders of shares of our common stock are entitled to certain rights with respect to registration of such shares under the Securities Act pursuant to the terms of an investors' rights
agreement. These shares are collectively referred to herein as registrable securities.
The investors' rights agreement provides the holders of registrable securities with demand, piggyback and S-3 registration rights as described more fully below.
Demand Registration Rights
The holders of a majority of the registrable securities then outstanding have the right to make up to two demands that we file a registration statement under the Securities Act covering the
registration of the registrable securities then outstanding and with an anticipated aggregate offering price of at least $10.0 million, net of underwriting discounts and expenses, subject to
specified exceptions.
Piggyback Registration Rights
If we register any securities for public sale, the holders of our registrable securities then outstanding will each be entitled to notice of the registration and will have the right to include their
shares in the registration statement. The underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to be included in the registration
statement, provided that the registration does not include shares of any other selling stockholder. If the registration does not include shares of any other selling stockholder, any or all of the
registrable securities may be excluded from such registration.
Registration on Form S-3
If we are eligible to file a registration statement on Form S-3, the holders have the right to demand that we file registration statements on Form S-3; provided, that at least 10% of the
registrable securities then outstanding make the demand request and the aggregate amount of securities to be sold under the registration statement is at least $3.0 million, net of underwriting
discounts and commissions. We are not obligated to effect a demand for registration on Form S-3 by holders of our registrable securities more than twice during any 12-month period. The
right to have such shares registered on Form S-3 is further subject to other specified conditions and limitations.
Expenses of Registration
We will pay all expenses relating to any demand, piggyback or Form S-3 registration, other than underwriting discounts and commissions, subject to specified conditions and limitations.
Termination of Registration Rights
The registration rights will terminate upon the earlier of the following to occur: (i) such time after this offering in which the holder of registrable securities holds one percent or less of our
common stock and all registrable securities held by such holder (and together with any affiliate of the holder with whom such holder must aggregate its sales under Rule 144 of the Securities
Act) can be sold in any three-month period without registration in compliance with Rule 144 of the Securities Act or (ii) after the consummation of a "deemed liquidation event", as described
and defined in our amended and restated certificate of incorporation, as amended from time to time.
Anti-Takeover Provisions
Anti-Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a publicly held Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years after the date that such stockholder became an interested stockholder, with the following exceptions:
•
•
•
before such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested
stockholder;
upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction began, excluding for purposes of determining the voting stock outstanding, but not the outstanding voting stock owned by
the interested stockholder, those shares owned (1) by persons who are directors and also officers and (2) employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
on or after such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of the stockholders, and not by written
consent, by the affirmative vote of at least 662/3% of the outstanding voting stock that is not owned by the interested stockholder.
In general, Section 203 defines a "business combination" to include the following:
•
any merger or consolidation involving the corporation and the interested stockholder; any sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder; any transaction involving the corporation that has the effect of increasing the proportionate share of the stock or any class or series of
the corporation beneficially owned by the interested stockholder; or the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other
financial benefits by or through the corporation.
In general, Section 203 defines an "interested stockholder" as an entity or person who, together with the person's affiliates and associates, beneficially owns, or within three years prior to the
time of determination of interested stockholder status did own, 15% or more of the outstanding voting stock of the corporation.
Anti-Takeover Effects of Certain Provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws
Our amended and restated certificate of incorporation provides for our board of directors to be divided into three classes with staggered three-year terms. Only one class of directors is elected
at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Because our stockholders do not have cumulative voting
rights, stockholders holding a majority of the shares of common stock outstanding will be able to elect all of our directors. Our amended and restated certificate of incorporation and amended
and restated bylaws also provide that directors may be removed by the stockholders only for cause upon the vote of a majority of our outstanding common stock. Furthermore, the authorized
number of directors may be changed only by resolution of the board of directors, and vacancies and newly created directorships on the board of directors may, except as otherwise required by
law or determined by the board, only be filled by a majority vote of the directors then serving on the board, even though less than a quorum.
Our amended and restated certificate of incorporation and amended and restated bylaws also provide that all stockholder actions must be effected at a duly called meeting of stockholders. Our
amended and restated bylaws also provides that only our chairman of the board, chief executive officer or the board of directors pursuant to a resolution adopted by a majority of the total
number of authorized directors may call a special meeting of stockholders.
Our amended and restated bylaws also provides that stockholders seeking to present proposals before our annual meeting of stockholders or to nominate candidates for election as directors at
a meeting of stockholders must provide timely advance notice in writing, and, subject to applicable law, will specify requirements as to the form and content of a stockholder's notice.
Our amended and restated certificate of incorporation and amended and restated bylaws also provide that the stockholders cannot amend many of the provisions described above except by a
vote of a majority of our outstanding common stock.
The combination of these provisions make it more difficult for our existing stockholders to replace our board of directors as well as for another party to obtain control of us by replacing our
board of directors. Since our board of directors has the power to retain and discharge our officers, these provisions could also make it more difficult for existing stockholders or another party
to effect a change in management. In addition, the authorization of undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights
or preferences that could impede the success of any attempt to change our control.
These provisions are intended to enhance the likelihood of continued stability in the composition of our board of directors and its policies and to discourage coercive takeover practices and
inadequate takeover bids. These provisions are also designed to reduce our vulnerability to hostile takeovers and to discourage certain tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from making tender offers for our shares and may have the effect of delaying changes in our control or management. As a consequence,
these provisions may also inhibit fluctuations in the market price of our stock that could result from actual or rumored takeover attempts. We believe that the benefits of these provisions,
including increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure our company, outweigh the
disadvantages of discouraging takeover proposals, because negotiation of takeover proposals could result in an improvement of their terms.
Choice of Forum
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for: (i) any derivative action or proceeding
brought on our behalf; (ii) any action asserting a breach of fiduciary duty; (iii) any action asserting a claim against us arising under the Delaware General Corporation Law; (iv) any action
regarding our amended and restated certificate of incorporation or our amended and restated bylaws; or (v) any action asserting a claim against us that is governed by the internal affairs
doctrine. Our amended and restated certificate of incorporation further provides that the federal district courts of the United States of America will be the exclusive forum for resolving any
complaint asserting a cause of action arising under the Securities Act; provided however, that in light of the Delaware Chancery Court’s opinion issued on December 19, 2018 in Sciabacucchi
v. Salzberg, C.A. No. 2017-0931-JTL, which is currently being appealed to the Delaware Supreme Court, the Company does not intend to enforce this federal forum selection provision while
the appeal is in process.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Computershare Limited.
Listing
Our common stock is currently listed on the NASDAQ Capital Market under the trading symbol "SSTI."
SHOTSPOTTER, INC.
AMENDED AND RESTATED NONEMPLOYEE DIRECTOR COMPENSATION POLICY
ADOPTED BY THE BOARD OF DIRECTORS: MARCH 6, 2020
EXHIBIT 10.1
1.
GENERAL
This ShotSpotter, Inc. Amended and Restated Nonemployee Director Compensation Policy (the “ Policy”) is designed to provide for the
compensation of each member of the board of directors (the “Board”) of ShotSpotter, Inc. (the “ Company”) who is not an employee of the Company or
any of its subsidiaries (each, a “Nonemployee Director”). The Policy is effective as of January 1, 2020 and will continue in effect until its termination
by the Board. The Policy replaces and supersedes any and all compensation policies or programs previously established or maintained by the Company
with respect to Nonemployee Directors; provided, however, that any options or restricted stock units (“RSUs”) outstanding on such effective date shall
not be affected by this Policy and shall continue to be governed by the grant notice, agreement and equity incentive plan relating to such options or
RSUs.
2.
ADMINISTRATION
The Board, or any committee to whom the Board delegates the requisite authority, will administer the Policy. The Board (or such committee)
will have the sole discretion and authority to administer, interpret, amend and terminate the Policy, and the decisions of the Board (or such committee)
will be final and binding on all persons having an interest in the Policy.
3.
ELIGIBILITY
Each Nonemployee Director will be eligible to receive the compensation set forth in the Policy in accordance with the terms of the
Policy. Such compensation will be paid or granted, as applicable, automatically and without further action of the Board or any Board committee to each
Nonemployee Director.
4.
CASH RETAINERS
Commencing as of January 1, 2020, each Nonemployee Director is eligible to receive cash retainers at the applicable rates set forth in the
following table for each full year of service as (i) a chairperson and/or member of the Board and (ii) a chairperson of a committee of the Board
(“Committee”):
Role
Board
Audit Committee
Compensation Committee
Nominating and Corporate Governance Committee
Chair
Member (not Chair)
Chair
Member (not Chair)
Chair
Member (not Chair)
Chair
Member (not Chair)
Annual Retainer Rate
$55,000
$35,000
$15,000
$7,000
$10,000
$5,000
$7,500
$3,000
Each Nonemployee Director will be eligible to receive each type of retainer set forth in the table above that is applicable to such Nonemployee
Director. Retainer payments will be made quarterly in arrears on or before the
148746438 v4
last business day of each calendar qu arter and will be pro-rated for partial quarters of service based on the number of days served in the quarter divided
by the number of days in the quarter.
5.
RSU AWARDS
(a)
Initial AwardS. Each Nonemployee Director elected to the Board after this Policy is adopted, other than at an annual meeting of
stockholders (a “New Director”), will be eligible to receive an RSU award (an “ Initial Award”) based on the dollar amounts set forth in the following
table, multiplied by a fraction, the numerator of which is the number of days that will elapse between and including the date of his or her appointment
and the first anniversary of the previous annual meeting of stockholders, and the denominator of which is 365:
Board
Role
Chair
Member (not Chair)
Dollar Value of Initial Award
$150,000, subject to reduction as provided below
$100,000
If a New Director is appointed as the chairperson of the Board and the chairperson of any Committee(s) in connection with his or her initial election to
the Board, the dollar value of his or her Initial Award in respect of being chairperson of the Board will be decreased by the cash retainer amount(s)
applicable to the chairperson role(s) of such Committee(s) (e.g., if the chairperson of the Board is also the chairperson of the Compensation Committee,
the dollar value of the Annual Award associated with serving on as the chairperson of the Board will be reduced from $150,000 to $140,000). The date
of grant of Initial Awards will be the effective date of such New Director’s appointment to the Board or, if such date is within a closed trading window
under the Company’s Policy Regarding Stock Trading by Officers, Directors and Other Designated Employees, the next business day on which the
trading window is open.
(b)
ANNUAL AWARDS . On the date of each annual meeting of stockholders, each Nonemployee Director in office immediately after
such meeting will be eligible to receive an RSU award (an “Annual Award ”) for service as a Nonemployee Director based on the dollar amounts set
forth in the following table:
Board
Role
Chair
Member (not Chair)
Dollar Value of Annual Award
$150,000, subject to reduction as provided below
$100,000
If, on the date of grant of an Annual Award, the chairperson of the Board is also the chairperson of any Committee(s), the dollar value of his or her
Annual Award in respect of being chairperson of the Board will be decreased by the cash retainer amount(s) applicable to the chairperson role(s) of such
Committee(s) (e.g., if the chairperson of the Board is also the chairperson of the Compensation Committee, the dollar value of the Annual Award
associated with serving on as the chairperson of the Board will be reduced from $150,000 to $140,000). The date of grant of Annual Awards will be the
date of the applicable annual meeting of stockholders.
(c)
NUMBER OF SHARES SUBJECT TO RSU AWARDS. The number of shares subject to an Initial Award or Annual Award (either, an
“RSU Award”) will be equal to (i) the applicable dollar amount determined pursuant to Section 5(a) or 5(b) above, divided by (ii) the closing price of the
Company’s common stock on the date of grant, rounded down to the nearest whole share; provided, however, that the number of shares subject to any
RSU Award may be reduced to the extent necessary to ensure that the Company’s compensation of Nonemployee Directors does not exceed the limit set
forth in Section 3(e) of the Company’s 2017 Equity Incentive Plan (the “Plan”).
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2
(d)
Other Terms of RSU Awards. Each RSU Award will be granted under the Plan and will be subject to the terms of the Plan, the
applicable award agreement and this Policy. Each RSU Award will vest on the earlier of (i) the first anniversary of the date of grant and (ii) the date of
the next annual meeting of stockholders. In addition, the vesting of all RSU Awards will accelerate in full upon a Change in Control (as defined in the
Plan) or immediately prior to the effectiveness of a Nonemployee Director’s resignation or removal (and contingent upon the effectiveness of a Change
in Control) in the event that the Nonemployee Director is required to resign his or her position as a Nonemployee Director as a condition of the Change
in Control or the Nonemployee Director is removed from his or her position as a Nonemployee Director in connection with the Change in
Control. Vesting will cease upon the termination of the Nonemployee Director’s service as a member of the Board and any RSUs subject to such RSU
Award that are unvested on the date of such termination will be automatically forfeited by such Nonemployee Director on such date.
6.
EXPENSES
Each Nonemployee Director will be eligible for reimbursement from the Company for all reasonable out-of-pocket expenses incurred in
connection with attending in-person meetings of the Board or any Committee. To the extent that any taxable reimbursements are provided to any
Nonemployee Director, they will be provided in accordance with Section 409A of the Internal Revenue Code of 1986, including, but not limited to, the
following provisions: (i) the amount of any such expenses eligible for reimbursement during such individual’s taxable year may not affect the expenses
eligible for reimbursement in any other taxable year; (ii) the reimbursement of an eligible expense must be made no later than the last day of such
individual’s taxable year that immediately follows the taxable year in which the expense was incurred; and (iii) the right to any reimbursement may not
be subject to liquidation or exchange for another benefit.
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3
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Forms S‑8 (File Nos. 333‑226053 and 333‑218712) and Form S‑3 (File No.
333‑226052) of ShotSpotter, Inc. of our report dated March 12, 2020, relating to the consolidated financial statements, which appears in this annual report on
Form 10‑K for the year ended December 31, 2019.
Exhibit 23.1
/s/ BAKER TILLY VIRCHOW KRAUSE, LLP
Minneapolis, Minnesota
March 12, 2020
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Ralph A. Clark, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of ShotSpotter, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter
(the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 12, 2020
/s/ Ralph A. Clark
Ralph A. Clark
Chief Executive Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Alan Stewart, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of ShotSpotter, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter
(the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 12, 2020
/s/ Alan Stewart
Alan Stewart
Chief Financial Officer
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Ralph A. Clark, certify pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and Section 1350 of Chapter 63 of
Title 18 of the United States Code (18 U.S.C. §1350), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of
ShotSpotter, Inc. for the year ended December 31, 2019, fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that information contained in
such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of ShotSpotter, Inc.
Date: March 12, 2020
/s/ Ralph A. Clark
Ralph A. Clark
Chief Executive Officer
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
I, Alan Stewart, certify pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and Section 1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. §1350), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of ShotSpotter,
Inc. for the year ended December 31, 2019, fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that information contained in such Annual
Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of ShotSpotter, Inc.
Date: March 12, 2020
/s/ Alan Stewart
Alan Stewart
Chief Financial Officer