SoundThinking(SSTI) - 2021 Q4 - Annual Report

Part I Business ShotSpotter provides precision-policing technology, including gunshot detection, AI-driven patrol, and case management, primarily serving law enforcement via subscriptions - The company's flagship public safety solution, ShotSpotter Respond, is the leading outdoor gunshot detection, location, and alerting system, trusted by law enforcement in over 125 cities as of December 31, 2021[16] - ShotSpotter generates revenue through annual subscriptions for its solutions, with coverage areas under contract for 911 square miles as of December 31, 2021[17] - The company has expanded its product suite to include ShotSpotter Connect (patrol management), ShotSpotter Investigate (case management), and security solutions like SecureCampus and SiteSecure[16] Overview and Industry Background ShotSpotter addresses critical public safety gaps by providing precision-policing solutions to combat underreported gunfire and improve case clearance rates - The majority of urban gunfire goes unreported. A Brookings Institute report suggests approximately 80% of gunshots detected by ShotSpotter are not reported to 911 by residents[20] - The company aims to solve three key problems: the violent crime problem exacerbated by unreported gunfire, the inefficiency of 'gut-based' police patrolling, and low case closure rates for homicides[19][23][24] - Homicide clearance rates in the U.S. averaged 61% in 2020, indicating a significant number of suspects are not held accountable, which ShotSpotter's solutions aim to improve[24] Our Solutions ShotSpotter offers a Precision Policing Platform including Respond for gunfire detection, Connect for AI-driven patrol, and Investigate for case management - ShotSpotter Respond alerts are typically sent within 45 seconds of a gunfire incident, providing precise location, number of shots, and other tactical data to first responders[29][35] - The system uses an array of 20-25 intelligent sensors per square mile, which send data to cloud servers for multilateration analysis, followed by human review at the Incident Review Center (IRC)[33][40] - ShotSpotter Investigate, launched in July 2021, provides a complete digital case management solution to help detectives consolidate evidence, collaborate, and improve case closure rates[65][70][71] - The company's forensic evidence and expert witness testimony have been admitted in over 200 criminal prosecutions across numerous states under both Frye and Daubert standards[50] Our Markets and Growth Strategy The company targets law enforcement and security markets, with a growth strategy focused on customer acquisition, expansion, international growth, and new product development - The domestic market for the public safety solution (ShotSpotter Respond) is estimated at approximately 1,400 cities[73] - The domestic market for security solutions (SecureCampus/SiteSecure) includes an estimated 5,000 college campuses and airports[74] - A key growth strategy is "land and expand," with approximately 43% of Respond customers having expanded their coverage areas from their initial deployments as of year-end 2021[81] - The company's overall revenue retention rate was 125% for 2021, indicating strong customer retention and expansion[81] Competition ShotSpotter operates in a fragmented market, facing limited direct competition for wide-area gunshot detection but broader competition in policing technology - The company is not aware of any direct competitors offering wide-area solutions comparable to ShotSpotter Respond[98] - Competitors for security solutions (SiteSecure/SecureCampus) include Alarm.com, Safety Dynamics Inc., V5 Systems, EAGL, and Flock Safety[101] - Competitors for the ShotSpotter Connect solution include Geolitica, Inc. and potentially CAD providers like CentralSquare Technologies and Motorola Solutions, Inc[102] - For its case management solution, competitors include RMS providers like Mark43 and Tyler, as well as purpose-built solutions such as Kaseware and CaseClosed[104] Human Capital As of December 2021, ShotSpotter employed 167 people with low attrition, emphasizing diversity and offering competitive compensation and COVID-19 support - As of December 31, 2021, the company employed 167 people, all in the United States, with a total attrition rate below 17% in 2021[110] - The company reports strong diversity metrics: women comprise 31% of employees and underrepresented minorities 47%. At the board level, women represent 33% and underrepresented minorities 56%[112][116] - In response to COVID-19, the company implemented work-from-home policies, provided flexible hours, additional paid time off, and a work-from-home fund for employees[118] Risk Factors The company faces significant risks including COVID-19 supply chain impacts, profitability challenges, government funding sensitivity, operational dependencies, and legal/regulatory issues - The COVID-19 pandemic has materially and adversely affected the business, with ongoing risks related to supply chain disruptions, particularly an industry-wide chip shortage impacting sensor delivery[129][132] - The company has not been profitable recently, reporting a net loss of $4.4 million for the year ended December 31, 2021, and may not achieve or maintain profitability in the future[144] - Ongoing social unrest, protests, and movements like "Defund the Police" may adversely affect police agency budgets and funding available to current and potential customers[149] - The company relies on a single contract manufacturer for its proprietary ShotSpotter sensors, creating risk in the event of an interruption in supply[220] - Real or perceived false positive or false negative alerts could damage the company's reputation and adversely affect growth prospects and results of operations[165] Properties ShotSpotter leases its main offices in Fremont, Washington D.C., and Newark, believing current facilities are adequate for immediate needs - The company's principal facilities are leased office spaces in Fremont, CA; Washington, DC; and Newark, NJ[288] - ShotSpotter does not own any real property and believes its current leased facilities are adequate for the immediate future[289] Legal Proceedings The company is involved in a civil rights lawsuit and filed a defamation lawsuit against VICE Media, seeking over $300 million in damages - The company is a defendant in a civil rights lawsuit filed by Silvon S. Simmons against the City of Rochester, alleging collusion to fabricate gunshot alert evidence. The company believes the claims are without merit[290] - On October 12, 2021, ShotSpotter filed a defamation lawsuit against VICE Media, LLC, seeking over $200 million in compensatory and $100 million in punitive damages[291] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[295] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ShotSpotter's common stock trades on Nasdaq, with no cash dividends paid or planned, as earnings are retained for business expansion - The company's common stock has been listed on the Nasdaq Capital Market under the symbol "SSTI" since June 7, 2017[298] - The company has never declared or paid cash dividends and does not intend to in the foreseeable future, retaining funds for business expansion[300] - Proceeds from the IPO were used to repay debt ($13.7 million), fund the acquisition of HunchLab ($1.7 million), and fund the acquisition of LEEDS ($14.6 million)[304] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, revenues grew 27% to $58.2 million, but the company reported a $4.4 million net loss due to increased operating expenses, while maintaining solid liquidity | Metric | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenue retention rate | 125% | 107% | 111% | | Sales and marketing spend per $1.00 of new annualized contract value | $0.37 | $0.51 | $0.43 | | Net new "go-live" square miles | 101 | 49 | 82 | | Annual recurring revenue ("ARR") (in millions) | $63.2 | $46.3 | $42.9 | - Revenues increased by 27% to $58.2 million in 2021 from $45.7 million in 2020[318] - The company reported a net loss of $4.4 million in 2021, a significant decrease from the $1.2 million net income in 2020[320] - Two customers, the City of New York and the City of Chicago, accounted for 28% and 14% of total revenues in 2021, respectively[318] Results of Operations Revenues increased 27% in 2021, but rising operating expenses, particularly in sales, marketing, and G&A, led to an operating loss | (In thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Revenues | $58,155 | $45,734 | | Gross Profit | $32,519 | $26,975 | | Gross Margin | 56% | 59% | | Total Operating Expenses | $36,588 | $25,682 | | Operating Income (Loss) | $(4,069) | $1,293 | | Net Income (Loss) | $(4,431) | $1,225 | - The $12.4 million revenue increase in 2021 was primarily from new customers, expansions of existing coverage, and contributions from the LEEDS acquisition[365] - Sales and marketing expenses increased by $5.2 million (50%) in 2021, mainly due to higher commissions, personnel costs from a full year of LEEDS headcount, and increased trade show expenses[368] - General and administrative expenses increased by $4.3 million (44%) in 2021, driven by a $1.3 million increase in legal/litigation costs and a $1.3 million increase in contingent consideration expense for the LEEDS earnout[370] Liquidity and Capital Resources As of December 2021, ShotSpotter had $15.6 million in cash and an undrawn $20.0 million credit facility, with operating cash flow of $9.8 million - As of December 31, 2021, the company had $15.6 million in cash and cash equivalents and an available, undrawn $20.0 million revolving credit facility[382] | (In thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash from Operating activities | $9,822 | $11,209 | $13,692 | | Net cash used in Investing activities | $(7,884) | $(18,758) | $(4,909) | | Net cash from (used in) Financing activities | $(2,266) | $(956) | $5,482 | - In 2021, the company repurchased 95,151 shares of its common stock for $3.6 million under its stock repurchase program[389] - The company estimates a contingent earnout payment of $1.5 million to be paid in 2023 related to the 2020 acquisition of LEEDS[386] Critical Accounting Estimates Critical accounting estimates involve significant judgment in revenue recognition for subscriptions and professional services, business acquisitions, and stock-based compensation - Revenue Recognition: Subscription revenues are recognized ratably over the contract term. Setup fees, if deemed a material right, are recognized over a period of three to five years[338][409] - Professional services revenue from the LEEDS acquisition is recognized over time based on cumulative resource costs incurred as a percentage of total forecast costs, requiring significant management judgment[413][415] - Business Acquisitions: The allocation of purchase price to acquired assets, particularly intangible assets like customer relationships and developed technology, requires critical estimates of future cash flows and discount rates[419] - Goodwill: Goodwill is tested for impairment annually or when trigger events occur. The fair value of the reporting unit is estimated using a discounted cash flow methodology, which requires significant judgment[420] Financial Statements and Supplementary Data The audited consolidated financial statements present the company's financial position and results, showing a net loss of $4.4 million in 2021 | (In thousands) | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Total Current Assets | $34,274 | $31,136 | | Total Assets | $72,304 | $66,320 | | Liabilities & Equity | | | | Total Current Liabilities | $34,502 | $30,979 | | Total Liabilities | $38,489 | $32,015 | | Total Stockholders' Equity | $33,815 | $34,305 | | (In thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenues | $58,155 | $45,734 | $40,752 | | Gross Profit | $32,519 | $26,975 | $24,343 | | Net (Loss) Income | $(4,431) | $1,225 | $1,798 | - The independent auditor, Baker Tilly US, LLP, issued an unqualified opinion on the consolidated financial statements[429] Notes to Consolidated Financial Statements Notes detail revenue recognition, the LEEDS acquisition, goodwill, financing, tax carryforwards, equity plans, legal contingencies, and the Forensic Logic acquisition - The company acquired LEEDS in November 2020 for a total consideration of $23.8 million, which included cash, stock, and a contingent earnout[512] - As of Dec 31, 2021, the company had federal net operating loss carryforwards of approximately $78.4 million to offset future taxable income, subject to limitations[540] - The company has a stock repurchase program of up to $15 million; during 2021, it repurchased 95,151 shares for $3.6 million[552][553] - Subsequent to year-end, on January 3, 2022, the company acquired Forensic Logic, LLC for $5.0 million in cash, $15.0 million in common stock, and additional contingent consideration[583] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 2021, noting LEEDS integration as a material change - Management concluded that as of December 31, 2021, the company's disclosure controls and procedures were effective[585] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021[588] - The integration of internal controls from the LEEDS acquisition, completed in November 2020, is considered a material change to the company's internal control over financial reporting[586] Other Information No other information is reported for this item - None[589] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement - Information for this item is incorporated by reference from the company's definitive Proxy Statement[593] Executive Compensation Executive and director compensation information is incorporated by reference from the company's definitive Proxy Statement - Information for this item is incorporated by reference from the company's definitive Proxy Statement[594] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management is incorporated by reference from the company's definitive Proxy Statement - Information for this item is incorporated by reference from the company's definitive Proxy Statement[595] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the company's definitive Proxy Statement - Information for this item is incorporated by reference from the company's definitive Proxy Statement[596] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the company's definitive Proxy Statement - Information for this item is incorporated by reference from the company's definitive Proxy Statement[597] Part IV Exhibits and Financial Statement Schedules This section lists consolidated financial statements and refers to the Exhibit Index for all filed or incorporated exhibits - This section contains the consolidated financial statements and a list of exhibits filed with the report[600][602] Form 10-K Summary No Form 10-K summary was provided - None[603]