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 of 1933, as amended (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, those discussed in the subsection titled
"Impact of Covid-19 and Social Unrest on our Business" below, as well as the
section titled "Risk Factors" set forth in Part I, Item 1A of this Annual Report
on Form 10-K and in our other SEC filings. You should not rely upon
forward-looking statements as predictions of future events. Furthermore, such
forward-looking statements speak only as of the date of this report. Except as
required by law, we undertake no obligation to update any forward-looking
statements to reflect events or circumstances after the date of such statements.

Overview



We provide precision-policing and security solutions for law enforcement and
security personnel to help prevent and reduce gun violence and make cities,
campuses and facilities safer. Our flagship public safety solution, ShotSpotter
Respond, is the leading outdoor gunshot detection, location and alerting system.
Our patrol management software, ShotSpotter Connect, creates crime forecasts
designed to enable more precise and effective use of patrol resources to deter
crime. Our security solutions, ShotSpotter SecureCampus and ShotSpotter
SiteSecure, are designed to help law enforcement and security personnel serving
universities and corporations mitigate risk and enhance security by notifying
authorities of a potential outdoor gunfire incident, saving critical minutes for
first responders to arrive. ShotSpotter Investigate adds case management to our
expanding suite of precision policing technology solutions and provides agencies
with a cloud-based investigative digital case folder and analytical and
collaboration tools to improve case closure rates. Our technology innovation
unit, ShotSpotter Labs, supports innovative uses of our technology to help
protect wildlife and the environment

Our gunshot detection solutions consist of highly-specialized, cloud-based
software integrated with proprietary, internet-enabled sensors designed to
detect outdoor gunfire. The speed and accuracy of our gunfire alerts enable law
enforcement and security personnel to consistently and quickly respond to
shooting events including those unreported through 911, which can increase the
chances of apprehending the shooter, providing timely aid to victims, and
identifying witnesses before they scatter, as well as aid in evidence collection
and serve as an overall deterrent. When a potential gunfire incident is detected
by our sensors, our system precisely locates where the incident occurred and
applies machine classification combined with human review to analyze and
validate the incident. An alert containing a location on a map and critical
information about the incident is sent directly to subscribing law enforcement
or security personnel through any internet-connected computer and to iPhone or
Android mobile devices.

Our software sends gunfire data along with the audio of the triggering sound to
our Incident Review Center ("IRC"), where our trained incident review
specialists are on duty 24 hours a day, seven days a week, 365 days a year to
screen and confirm actual gunfire incidents. Our trained incident review
specialists can supplement alerts with additional tactical information, such as
the potential presence of multiple shooters or the use of high-capacity weapons.
Gunshot incidents reviewed by our IRC result in alerts typically sent within
approximately 45 seconds of the receipt of the gunfire incident.

We generate annual subscription revenues from the deployment of ShotSpotter
Respond on a per-square-mile basis. Our security solutions, ShotSpotter
SecureCampus and ShotSpotter SiteSecure, are typically sold on a subscription
basis, each with a customized deployment plan. Our ShotSpotter Connect solution
is also sold on a subscription basis. As of December 31, 2021, we had
ShotSpotter Respond, ShotSpotter SecureCampus and ShotSpotter SiteSecure
coverage areas under contract for 911 square miles, of which 881 square miles
had gone live. Coverage areas under contract included over 125 cities and 14
campuses/sites across the United States, South Africa

                                       54
--------------------------------------------------------------------------------

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.



While we intend to continue to devote resources to increase sales of our
solutions, we expect that revenues from our ShotSpotter Respond solution will
continue to comprise a majority of our revenues for the foreseeable future.
ShotSpotter Labs projects are generally conducted in coordination with a
sponsoring charitable organization and may or may not be revenue-producing. When
they are revenue-producing, they will generally be sold on a cost-plus basis. As
such, ShotSpotter Labs projects will normally produce gross margins
significantly lower than our ShotSpotter Respond solutions. Additionally, in
early 2020, we added new pricing programs for Tier 4 and 5 law enforcement
agencies (those with fewer than 100 sworn officers) that allow them to contract
for our gunshot detection solutions to cover a footprint of less than three
square miles, using standardized coverage parameters, at a discounted annual
subscription rate.

We acquired LEEDS, LLC ("LEEDS") in November 2020 to expand our suite of
solutions and introduce ShotSpotter Investigate. ShotSpotter Investigate is our
case management solution that helps automate investigative work and improve case
clearance rates - addressing an inefficiency problem for many agencies that have
had to rely on multiple disparate systems to work cases. Using the software,
investigators benefit from a single digital case folder that includes all
elements related to a case. Analytical and collaboration tools help
investigators connect the dots and share information faster while reporting
helps package cases for command staff and prosecutors. With the launch of
ShotSpotter Investigate in the second quarter of fiscal 2021, we now offer a
more complete precision policing platform to enable intelligence-driven
prevention, response to, and investigation of crime for local, state and federal
agencies.

Since our founding 26 years ago, ShotSpotter has been and continues to be a
purpose-led company. We are a mission-driven organization that focuses on
improving public safety outcomes. We accomplish this by earning the trust of law
enforcement and providing them solutions to help better engage and strengthen
the police-community relationships in fulfilling their sworn obligation equally
to serve and protect all. Our inspiration comes from our principal founder,
Dr. Bob Showen, who believes that the highest and best use of technology is to
promote social good. We are committed to developing comprehensive, respectful,
and engaged partnerships with law enforcement agencies, elected officials and
communities focused on making a positive difference in the world.

We enter into subscription agreements that typically range from one to three
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 Part I. 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 portion
of the components required by our solutions are available off the shelf. For a
discussion of the risks associated with our limited number of suppliers, see
risks 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 Part I. Item 1A, Risk Factors, and the
subsection titled, "Impact of COVID-19 and Social Unrest on our Business" below
included in this Annual Report on Form 10-K.

We generated revenues of $58.2 million, $45.7 million and $40.8 million for the
years ended December 31, 2021, 2020, and 2019, respectively, representing
year-over-year increases of 27% and 12%. For the years ended December 31, 2021,
2020, and 2019, revenues from ShotSpotter Respond represented approximately 82%,
94% and 96% of total revenues, respectively. Our two current largest customers,
the City of New York and the City of Chicago, each accounted for 28% and 14%,
respectively, of our total revenues for the year ended December 31, 2021. The
City of Chicago and the City of New York, each accounted for 18% and 15%,
respectively, of our total revenues for the year ended December 31, 2020. The
City of Chicago and the City of New York, each accounted for 20% and 14%,

                                       55
--------------------------------------------------------------------------------


respectively, of our total revenues for the year ended December 31, 2019.
Substantially all of our revenues for the years ended December 31, 2021, 2020,
and 2019 were derived from customers within the United States (including Puerto
Rico and the U.S. Virgin Islands).

We had a net loss of $4.4 million for the year ended December 31, 2021, net
income of $1.2 million for the year ended December 31, 2020, and net income of
$1.8 million for the year ended December 31, 2019. Our accumulated deficit was
$98.8 million and $94.4 million as of December 31, 2021 and 2020, respectively.

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. The challenges we are facing in this regard
as a result of the COVID-19 pandemic are summarized in the subsection below
entitled "Impact of COVID-19 and Social Unrest on our Business." Other
challenges we face in this regard include our target customers not having access
to adequate funding sources, the fact that contracting with government entities
can be complex, expensive and time-consuming, and the fact that our typical
sales cycle is often very long, difficult to estimate accurately and can be
costly, and the fact that negative publicity about our company can and has
caused current and potential future customers to evaluate the sales of our
solutions more than in the past. 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 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.

We will also focus on expanding our business by introducing new products and
services, such as ShotSpotter Connect, to existing customers 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
skill sets to properly develop, market, sell or service these new products
depending on the categories they represent.

In January 2022, we acquired Forensic Logic LLC ("Forensic Logic"), a leading
provider of cloud-based data services to U.S. law enforcement and public safety
to enable powering the industry's most advanced search and analysis technology.
We believe combining lead generation from Forensic Logic with our ShotSpotter
Investigate case management can accelerate crime solving and improve clearance
rates.

In October 2018, we acquired the HunchLab technology and related assets that
underlie our ShotSpotter Connect solution. ShotSpotter Connect applies risk
modeling and artificial intelligence to help forecast when and where crimes are
likely to emerge and recommends directed patrols that can deter these events. We
believe our investment will democratize the sharing of important intelligence
with patrol officers who currently have limited direct access to crime analysts.

With respect to international sales, we believe that we have the potential to
expand our coverage within existing areas, and to pursue opportunities in Latin
America and other regions of the world. By adding additional sales resources in
strategic locations, we believe we will be better positioned to reach these
markets. However, we recognize that we have limited international operational
experience and currently operate in a limited number of regions outside of the
United States. Operating successfully in international markets will require
significant resources and management attention and will subject us to additional
regulatory, economic and political risks. We may face additional challenges that
may delay contract execution related to negotiating with governments in
transition, the use of third-party integrations and consultants. Moreover, we
anticipate that different political and regulatory considerations that vary
across different jurisdictions could extend or make more difficult to predict
the length of what is already a lengthy sales cycle.

                                       56
--------------------------------------------------------------------------------



Key Business Metrics


                                                           December 31,
                                                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


Net new "go-live" cities                             11             10      

6


Annual recurring revenue ("ARR") (in
millions)                                     $    63.2      $    46.3      $    42.9


Revenue Retention Rate

We calculate our revenue retention rate annually by dividing the (a) total
revenues for such year from those customers who were customers during the
corresponding prior year by (b) the total revenues from all customers in the
corresponding prior year. For the purposes of calculating our revenue retention
rate, we count as customers all entities with which we had contracts in the
applicable year. Revenue retention rate for any given period does not include
revenues attributable to customers first acquired during such period. We focus
on our revenue retention rate because we believe that this metric provides
insight into revenues related to and retention of existing customers. If our
revenue retention rate for a year exceeds 100%, as it did in the years presented
above, this indicates a low churn and means that the revenues retained during
the year, including from customer expansions, more than offset the revenues that
we lost from customers that did not renew their contracts during the year. As
further evidence of our low churn, since transitioning our public safety
business to the ShotSpotter Respond model in 2011, we have added over 90 new
ShotSpotter Respond customers, but only 14 customers have terminated service,
two of which were terminated due to hurricane damage in 2017, and both Puerto
Rico and U.S. Virgin Islands have returned as customers before the end of 2020.

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



We calculate sales and marketing spend annually as the total sales and marketing
expense during a year divided by the first 12 months of contract value for
contracts entered into during the same year. We use this metric to measure the
efficiency of our sales and marketing efforts in acquiring customers, renewing
customer contracts and expanding their coverage areas.

Net New "Go-Live" Miles



Net new "go-live" square miles represent the square miles covered by deployments
of our gunshot detection solutions that were formally approved by customers
during the year, both from initial and expanded customer deployments, net of
square miles that ceased to be "live" during the year due to customer
cancellations. New square miles include deployed square miles that may have been
sold, or booked, in prior years. We focus on net new "go-live" square miles as a
key business metric to measure our operational performance and inform strategic
decisions.

Net New "Go-Live" Cities

Net new "go-live" cities represent the number of cities covered by deployments
of our gunshot detection solutions that were formally approved by customers
during the year, both from initial and expanded customer deployments, net of
cities that ceased to be "live" during the year due to customer cancellations.
New cities include deployed coverage areas that may have been sold, or booked,
in a prior period. We focus on net new "go-live" cities as a key business metric
to measure our operational performance and market penetration

Annual Recurring Revenue ("ARR")



We calculate our ARR for a year based on the expected GAAP revenue for the year
from contracts that are in effect on January 1st of such year, assuming all such
contracts that are due for renewal during the year renew as expected on or near
their renewal date, and including contracts executed during the year after
January 1st, but for which GAAP revenue recognition starts January 1st of the
year.

                                       57
--------------------------------------------------------------------------------

Impact of COVID-19 and Social Unrest on our Business



The COVID-19 pandemic resulted in a substantial curtailment of business
activities worldwide and caused ongoing economic uncertainty, both in the United
States and many countries abroad. In connection with efforts to contain the
spread of COVID-19, many companies and state, local and foreign governments
imposed restrictions, including shelter-in-place orders and travel bans that
were in effect for most or all of 2020 and during the first half of 2021. While
some of these companies and jurisdictions have relaxed or ended such
restrictions, some restrictions remain and others may be put back in place after
having been lifted. We expect that the evolving COVID-19 pandemic, associated
travel restrictions and social distancing requirements will continue to have an
adverse impact on our results of operations. While the ultimate economic impact
of the COVID-19 pandemic is highly uncertain, we expect that our business and
results of operations, including our revenues, earnings and cash flows from
operations, may continue to be adversely impacted in the future.

We may be adversely affected by increasing social unrest, protests against
racial inequality, protests against police brutality and movements such as
"Defund the Police" and such unrest may be exacerbated by inaccurate information
or negative publicity regarding our solutions. These events may directly or
indirectly affect police agency budgets and funding available to current and
potential customers. Participants in these events may also attempt to create the
perception that our solutions are contributing to the perceived problems, which
may adversely affect us, our business and results of operations, including our
revenues, earnings and cash flows from operations.

In addition, the global supply chain for semiconductor chips, including the type
of chips used in the sensors integrated into our gunshot detection solutions,
has been disrupted by events related to the COVID-19 pandemic, including
business shutdowns and increased demand. As a result, we are experiencing delays
in the delivery of sensors needed for new deployments and updates or repairs of
existing assets, and we may experience higher costs to procure the sensors
required for our solutions. While we believe these delays are temporary and we
are able to take some steps to mitigate the impact of these delays, we may not
be able to deploy, update or repair our gunshot detection solutions as expected.
If we are unable to deliver our solutions or update or repair existing assets or
if we incur higher than expected costs to do so, our revenues may not grow as
expected and our business may be adversely impacted.

It is currently not possible to predict the magnitude or duration of the
COVID-19 pandemic's impact on our business or the future impact of the recent,
ongoing and possible future unrest. The extent to which these events impact our
business will depend on numerous evolving factors that we may not be able to
control or accurately predict, including without limitation:


the impact of possible disruption to our supply chain caused by distribution and
other logistical issues, including delays in manufacturing chips used in our
sensors, which could delay our ability to deploy new go-live miles or update our
currently deployed technology;

the impact of increased sensor costs and unforeseen operating expenses, difficulties, delays and other additional deployment expenses created by the pandemic, resulting in business disruptions and global supply chain issues;

the duration and scope of the challenges created by the pandemic or by ongoing social unrest;

governmental, business and individuals' actions that have been and continue to be taken in response to these events;

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

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


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

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

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

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


                                       58
--------------------------------------------------------------------------------

Components of Results of Operations

Presentation of Financial Statements



Our consolidated financial statements include the accounts of our wholly-owned
subsidiaries. All intercompany balances and transactions have been eliminated in
consolidation.

Revenues

We derive the majority of our revenues from subscription services. We recognize
subscription fees ratably, on a straight-line basis, over the term of the
subscription, which for new customers is typically initially one to three years
in length. Customer contracts include one-time set-up fees for the set-up of our
sensors in the customer's coverage areas, training and third-party integration
licenses. If the set-up fees are deemed to be a material right, they are
recognized ratably over three to five years depending on the contract term.
Training and third-party integration license fees are recognized upon delivery.

For ShotSpotter Respond, we generally invoice customers for 50% of the total
contract value when the contract is fully executed and for the remaining 50%
when the subscription service is operational and ready to go live - that is,
when the customer has acknowledged the completion of all the deliverables in the
signed customer acceptance form. All fees billed in advance of services being
delivered are recorded as deferred revenue. The timing of when new miles go live
can be uncertain and, as a result, can have a significant impact on the levels
of revenues and deferred revenue from quarter to quarter. For ShotSpotter
Respond, our pricing model is based on a per-square-mile basis. For ShotSpotter
SecureCampus, ShotSpotter SiteSecure and ShotSpotter Investigate, our pricing
model is on a customized-site basis. For ShotSpotter Connect, pricing is
currently customized, generally tied to the number of sworn police officers in a
particular city. We may also offer discounts or other incentives in conjunction
with all ShotSpotter sales in an effort to introduce the product, accelerate
sales or extend renewals for a longer contract term. 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 original term of the
agreement and the completion of the renewal process in the month in which the
renewal is executed. If a customer declines to renew its subscription prior to
the end of the contract term, then the remaining setup fees, if any, are
immediately recognized.

                                       59
--------------------------------------------------------------------------------


With the acquisition of LEEDS, we also generate revenues through the sale of (i)
a software license to our proprietary software technology and related
maintenance and support services and (ii) professional software development
services to a single customer, through a sales channel intermediary. The sales
channel intermediary contract includes an annual, renewable subscription for
software and related maintenance and support services. The contract also
provides for the procurement of professional services, such as for software
development and testing for product feature enhancements, by executing
supplementary work orders.

It is likely that international deployments may have different payment and billing terms due to their local laws, restrictions or other customary terms and conditions.

ShotSpotter Labs projects may or may not be revenue-producing. When they are revenue-producing, they will generally be sold on a cost-plus basis.



We anticipate that, due to the COVID-19 pandemic, our customers may still face
budget shortfalls due to the increased expenditures our customers have had to
endure to address the pandemic.

Costs



Costs include the cost of revenues and 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 IRC,
providing remote and on-site customer support and maintenance and forensic
services, providing customer training and onboarding services, certain personnel
and related costs of operations, stock-based compensation and allocated
overheads that include information technology, facility and equipment
depreciation costs.

Impairment of property and equipment is primarily attributable to our write-off
of the remaining book value of sensor networks related to customers lost during
the year ended December 31, 2021.

We are upgrading our sensors that use third-generation ("3G") cellular
communications to the fourth-generation Long-Term Evolution wireless technology,
which will increase our cost of revenues. Originally, we had expected to start
incurring these upgrade costs in 2021 through 2022 only, but we accelerated
these plans and began to replace sensors in certain geographic areas starting in
the second half of 2020 to optimize personnel utilization since new deployments
were limited as a result of pandemic-related restrictions. Current delays in the
supply chain for semiconductor chips are impacting the timely delivery to us of
the sensors required to make these upgrades and could increase the cost to us of
such upgrades. We may re-use and re-deploy the old 3G sensors, or components
within them that have a remaining serviceable life where it makes sense to do
so.

In the near term, we expect our cost of revenues to increase in absolute dollars
as our installed base increases, although certain of our costs of revenues are
fixed and do not need to increase commensurate with increases in revenues. In
addition, depreciation expense associated with deployed equipment is recognized
over the first five years from the go-live date. We also expect cost of revenues
to increase in absolute dollars as we continue to invest in our customer success
capabilities to drive growth and value for our customers.

With the acquisition of LEEDS, we have costs relating to revenues generated
through the sale of proprietary software licenses and related maintenance and
support services and professional software development services. Costs of these
professional services include employee compensation costs that are relatively
fixed, third-party contractor costs, allocated facility costs and overhead, and
the costs of billable expenses such as travel and lodging. The unpredictability
of the timing of entering into significant professional services agreements may
cause significant fluctuations in our costs which, in turn, may impact our
quarterly financial results.

                                       60
--------------------------------------------------------------------------------

Operating Expenses



Operating expenses consist of sales and marketing, research and development, and
general and administrative expenses. Consultants, 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. Although our operating expenses will
fluctuate, we expect that over time, as a whole, 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 and lead generation programs, consulting fees, travel and facility-related costs and allocated overhead.



During the duration of the COVID-19 pandemic with associated shelter-in-place
orders, remote work policies and travel bans, our sales and marketing expense
decreased. As travel increased in 2021 compared to 2020, our sales and marketing
expenses increased in absolute dollars due to the growth in our sales and
marketing organization. This growth has included adding sales and/or marketing
personnel and expanding our marketing and strategic communications activities to
continue to generate additional leads. Sales and marketing expense may fluctuate
from quarter to quarter based on the timing of commission expense, marketing
campaigns and tradeshows.

Research and Development

Research and development expenses primarily consist of personnel-related costs
attributable to our research and development personnel, consulting fees and
allocated overhead. We have devoted our product development efforts primarily to
develop new lower-cost sensor hardware, develop new features, improve
functionality of our solutions and adapt to new technologies or changes to
existing technologies.

We are investing in engineering resources to support further development of
ShotSpotter Connect and ShotSpotter Investigate. The focus of this effort will
be in the areas of data science modeling, user experience, core application
functionality and backend infrastructure improvements, including integration of
ShotSpotter gunshot data to enhance forecasting of gun violence.

We are also investing research and development resources in conjunction with our
ShotSpotter Labs projects and initiatives. The initial focus of these efforts is
to develop innovative sensor applications as well as to test and expand the
functionality of our outdoor sensors in challenging environmental conditions.

In the near term, we expect our research and development expenses to increase in absolute dollars as we increase our research and development headcount to further strengthen our software and invest in the development of our services.



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 artificial intelligence and
our own evolving cognitive and analytical applications to improve the efficiency
of our solutions. Certain of these applications and outputs may expand the
platform of services that we will be able to offer our customers.

General and Administrative



General and administrative expenses primarily consist of personnel-related costs
attributable to our executive, finance, and administrative personnel, legal,
litigation, strategic communications, accounting and other professional services
fees, other corporate expenses and allocated overhead.

                                       61
--------------------------------------------------------------------------------


In the near term, we expect our general and administrative expenses to increase
in absolute dollars as we grow our business, support our operations as a public
company, cover increased legal, litigation and strategic communications costs,
and increase our headcount.

Other Income (Expense), Net

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

Income Taxes

Our income taxes are based on the amount of our income before tax and enacted federal, state and foreign tax rates, adjusted for allowable credits and deductions, as applicable.



We continually monitor all positive and negative evidence regarding the
realization of our deferred tax assets and may record assets when it becomes
more likely than not, than they will be realized, which may impact the expense
or benefit from income taxes.

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. We regularly assess the likelihood that the
deferred tax assets will be recovered from future taxable income. We consider
projected future taxable income and ongoing tax planning strategies, then record
a valuation allowance to reduce the carrying value of the net deferred taxes to
an amount that is more likely than not able to be realized. Based upon our
assessment of all available evidence, including the previous three years of
income before tax after permanent items, estimates of future profitability, and
our overall prospects of future business, we have determined that it is more
likely than not that we will not be able to realize a portion of the deferred
tax assets in the future. We will continue to assess the potential realization
of deferred tax assets on an annual basis, or an interim basis if circumstances
warrant. If our actual results and updated projections vary significantly from
the projections used as a basis for this determination, we may need to change
the valuation allowance against the gross deferred tax assets.

Results of Operations

The following table sets forth our consolidated statements of operations data for the years ended December 31, 2021 and 2020 (in thousands):




                                            As a % of                     As a % of            Change
                                2021        Revenues          2020        Revenues          $           %
Revenues                      $ 58,155             100 %    $ 45,734             100 %   $ 12,421         27 %
Costs
Cost of revenues                25,611              44 %      18,525              41 %      7,086         38 %
Impairment of property and
equipment                           25               -           234               -         (209 )      (89 %)
Total costs                     25,636              44 %      18,759              41 %      6,877         37 %
Gross profit                    32,519              56 %      26,975              59 %      5,544         21 %
Operating expenses:
Sales and marketing             15,479              27 %      10,328              23 %      5,151         50 %
Research and development         7,035              12 %       5,614              12 %      1,421         25 %
General and administrative      14,074              24 %       9,740              21 %      4,334         44 %
Total operating expenses        36,588              63 %      25,682              56 %     10,906         42 %
Income (loss) from
operations                      (4,069 )            (7 %)      1,293               3 %     (5,362 )     (415 %)
Other expense, net                (306 )            (1 %)       (158 )             -         (148 )       94 %
Provision (benefit) from
income taxes                        56               -           (90 )             -          146       (162 %)
Net income (loss)             $ (4,431 )            (8 %)   $  1,225               3 %   $ (5,656 )     (462 %)




                                       62

--------------------------------------------------------------------------------

Revenues



The increase of $12.4 million was primarily attributable to new customers and
expansions of existing customer coverage areas and contributions from the
acquisition of LEEDS, which was completed on November 24, 2020. We went live
with 101 net new square miles during the year ended December 31, 2021.

Costs



The increase in costs of $6.9 million was due primarily to a $4.5 million
increase in overall personnel-related costs related to professional services, a
$2.2 million increase in personnel costs related to non-professional services
customers, an increase of $0.5 million in third-party labor costs, and a $0.3
million increase in depreciation expense. These increases were offset by a $0.2
million decrease in product and equipment costs related to customer projects, a
decrease of $0.2 million in telecommunications fees, and a $0.2 million decrease
in impairment costs related to customer systems.

Gross Profit



Gross profit as a percentage of revenues decreased compared with the prior year
primarily as a result of decreased margins from LEEDS, due to our incurring
costs in the fourth quarter for which revenue will be recognized in the first
quarter of 2022 per the contract terms.

Operating Expenses

Sales and Marketing Expense



The increase in sales and marketing expense of $5.2 million was primarily due to
a $1.9 million increase in commissions expense related to professional services,
a $1.5 million increase in personnel costs primarily due to a full year of
professional services headcount expense, a $0.9 million increase in amortization
of the customer relationship intangible asset, a $0.6 million increase in trade
show and conference expenses, a $0.2 million increase in travel expenses and a
$0.1 million increase in other expenses. As the acquisition of LEEDs occurred in
November 2020, we incurred a full year of related costs in 2021 compared to
slightly more than one month in 2020.

Research and Development Expense

The increase in research and development expense of $1.4 million was primarily due to an increase of $1.3 million in personnel related expenses, and an increase of $0.1 million in outside consulting fees.

General and Administrative Expense



The increase of $4.3 million was due primarily to an increase of $1.3 million in
legal and litigation costs, a $1.3 million increase in contingent consideration
expense related to the estimated 2022 LEEDS earnout, a $0.4 million increase in
public relations costs, a $0.4 million increase in consulting and outside
services expense primarily

                                       63
--------------------------------------------------------------------------------

associated with acquisition-related services, a $0.4 million increase in personnel expense, a $0.2 million increase in recruiting costs, a $0.2 million increase in insurance costs and a $0.1 million increase in other costs.

Other Income (Expense), Net

The decrease of $0.1 million was due primarily to a decrease in interest income as interest rates have decreased over the year.

Income Taxes



Our income taxes are based on the amount of our taxable income and enacted
federal, state and foreign tax rates, adjusted for allowable credits, deductions
and the valuations allowance against deferred tax assets, as applicable. For the
years ended December 31, 2021 and 2020, our provision (benefit) for income taxes
related to foreign income taxes only.

Comparison of Years Ended December 31, 2020 and 2019

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




                                             As a % of                    As a % of            Change
                                 2020        Revenues         2019        Revenues          $          %
Revenues                       $ 45,734             100 %   $ 40,752             100 %   $ 4,982         12 %
Costs
Cost of revenues                 18,525              41 %     16,409              40 %     2,116         13 %
Impairment of property and
equipment                           234               -            -               -         234          -
Total costs                      18,759              41 %     16,409              40 %     2,350         14 %
Gross profit                     26,975              59 %     24,343              60 %     2,632         11 %
Operating expenses:
Sales and marketing              10,328              23 %      9,989              25 %       339          3 %
Research and development          5,614              12 %      5,344              13 %       270          5 %
General and administrative        9,740              21 %      7,415              18 %     2,325         31 %
Total operating expenses         25,682              56 %     22,748              56 %     2,934         13 %
Income from operations            1,293               3 %      1,595               4 %      (302 )      (19 %)
Other income (expense), net        (158 )             -          162               -        (320 )     (198 %)
Benefit from income taxes           (90 )             -          (41 )             -          49        120 %
Net income                     $  1,225               3 %   $  1,798               4 %   $  (573 )      (32 %)




                                       64

--------------------------------------------------------------------------------

Revenues



The increase of $5.0 million was primarily attributable to new customers and
expansions of existing customer coverage areas, LEEDS' revenue contribution for
a partial quarter, partially offset by a normal rate of customer attrition. We
went live with 49 net new square miles during the year ended December 31, 2020.

Costs



The increase of $2.4 million was due primarily to a $2.0 million increase in
overall personnel-related costs. including a partial quarter of costs related to
LEEDS. The increase also includes a reallocation of certain resources as we
formalized our customer success organization. There was also a $0.4 million
increase in depreciation expense, a $0.2 million increase in repairs and
maintenance costs, as well as a $0.2 million write-off related to sensor assets
due to customer attrition. These increases are partially offset by a $0.4
million decrease in costs related to ShotSpotter Labs projects, for which
revenues and costs vary depending on the phase of the projects.

Operating Expenses

Sales and Marketing Expense



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

Research and Development Expense



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

General and Administrative Expense



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

Other Income (Expense), Net



The decrease of $0.3 million was due primarily to a decrease in interest income
as interest rates significantly decreased during the year ended December 31,
2020.

Income Taxes

Our income taxes are based on the amount of our taxable income and enacted
federal, state and foreign tax rates, adjusted for allowable credits, deductions
and the valuations allowance against deferred tax assets, as applicable. For the
years ended December 31, 2020 and 2019, our income tax benefits relate to
foreign income taxes only.

Liquidity and Capital Resources

Sources of Funds



Our operations have been financed primarily through net proceeds from the sale
of equity, debt financing arrangements and cash from operating activities. Our
principal source of liquidity is cash and cash equivalents totaling $15.6
million as of December 31, 2021. We also have a $20.0 million credit facility,
of which no amounts were outstanding as of December 31, 2021. In December 2021,
we obtained a waiver for the financial covenant tied to our profitability.

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.


                                       65
--------------------------------------------------------------------------------


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. We
believe that we will meet longer term expected future working capital and
capital expenditure requirements, through a combination of cash flows from
operating activities, available cash balances and our available credit facility.
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. Our
expected material cash requirements are similar to our historical uses of cash
as well as in connection with contingent earnouts, our stock repurchase program
and repayment of any outstanding debt obligations under our credit facility,
each as described below.

On November 24, 2020, we completed the acquisition of LEEDS for a purchase
consideration of $21.6 million in cash, subject to working capital adjustments,
and the issuance of 63,901 shares of ShotSpotter common stock worth $2.0
million. The purchase consideration also included a contingent earnout payable
based on LEEDS' revenues generated during the years ended December 31, 2021 and
2022. The earnout for 2021 was not earned, but we estimate a contingent earnout
of $1.5 million to be paid in 2023 based on 2022 forecasted revenues.

On October 3, 2018, we acquired certain technology, referred to as HunchLab, and
related assets from Azavea Inc. The purchase consideration totaled $2.5 million,
consisting of $1.7 million in cash and a contingent earnout payable in cash for
up to $750,000 based on HunchLab's revenues generated over the three-year period
following the acquisition date. In January 2020, we paid $0.3 million based on
revenues generated over the first year of the contingent earnout period. In
February 2021, we paid the remaining $0.4 million of the contingent earnout
based on revenues generated over the second year of the contingent earnout
period.

Stock Repurchase Program



In May 2019, we announced that our Board of Directors had approved a stock
repurchase program for up to $15 million of our common stock. The shares may be
repurchased from time to time in open market transactions, in privately
negotiated transactions or by other methods in accordance with federal
securities laws. The actual timing, number and value of shares repurchased under
the program will be determined by management in its discretion and will depend
on a number of factors, including the market price of our common stock, general
market and economic conditions and applicable legal requirements. The stock
repurchase program does not obligate us to purchase any particular amount of
common stock and may be suspended or discontinued at any time.

During the year ended December 31, 2021, we repurchased 95,151 shares of our
common stock at an average price of $37.82 per share for $3.6 million. During
the year ended December 31, 2020, we repurchased 74,520 shares of our common
stock at an average price of $21.65 per share for $1.6 million. These
repurchases were made in open market transactions using cash on hand, and all of
the shares repurchased were retired.

Credit Facility



On September 27, 2018, we entered into the Umpqua Credit Agreement for $10.0
million, which was amended in August 2020 to increase the size of our available
loan facility to $20.0 million, which allows us to borrow up to $20.0 million
under a revolving loan facility. We intend to use the revolving loan facility
for general working capital purposes.

                                       66
--------------------------------------------------------------------------------

Cash Flows

Comparison of Years Ended December 31, 2021, 2020 and 2019

The following table presents a summary of our cash flows for the years ended December 31, 2021, 2020 and 2019:




                                                Year Ended December 31,
                                            2021         2020          2019
                                                    (in thousands)
Net cash provided by (used in):
Operating activities                      $  9,822     $  11,209     $ 13,692
Investing activities                        (7,884 )     (18,758 )     (4,909 )
Financing activities                        (2,266 )        (956 )      5,482

Net change in cash and cash equivalents $ (328 ) $ (8,505 ) $ 14,265

As of December 31, 2021, 2020 and 2019, $1.0 million, $1.3 million and $0.8 million in cash was held by our consolidated foreign subsidiaries.

Operating Activities



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

The net cash provided by operating activities of $9.8 million in the year ended December 31, 2021 was primarily driven by decreased deferred revenue and increased collections of accounts receivable driven by new customer contracts.



The net cash provided by operating activities of $11.2 million in the year ended
December 31, 2020 was primarily driven by collections of accounts receivable
driven by new customer contracts and expansions of existing customer coverage.

The net cash provided by operating activities of $13.7 million in the year ended
December 31, 2019 was primarily driven by decreased deferred revenue and
increased collections of accounts receivable driven by new customer contracts
and expansions of existing customer coverage.

Investing Activities



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

Investing activities used $7.9 million, $18.8 million, and $4.9 million in the
years ended December 31, 2021, 2020 and 2019, respectively. We completed our
acquisition of LEEDS for approximately $14.6 million in cash, net of $7.0
million cash acquired at closing during the year ended December 31, 2020. The
remaining use of cash was primarily for property and equipment expenditures to
install our solutions in customer coverage areas.

Financing Activities



Cash generated by financing activities includes proceeds from our secondary
offering in 2019, net proceeds from the exercise of stock options and warrants,
proceeds from the employee stock purchase plan ("ESPP") purchases, offset by
payment for repurchases of our common stock, payment of indebtedness, and debt
issuance and financing costs.

Financing activities used $2.3 million in cash during the year ended December
31, 2021. This was primarily due to $3.6 million in payments for repurchases of
our common stock, $0.4 million in payments for contingent consideration,
partially offset by $0.9 million in proceeds from the exercise of options and
$0.8 million in proceeds from ESPP purchases.

                                       67
--------------------------------------------------------------------------------


Financing activities used $1.0 million in cash during the year ended December
31, 2020, primarily for $1.6 million in payments for repurchases of our common
stock and a $0.3 million payment for HunchLab's contingent consideration,
partially offset by $0.7 million proceeds from ESPP purchases and $0.3 million
in proceeds from the exercise of options and warrants.

Financing activities provided $5.5 million in cash during the year ended
December 31, 2019 from $10.8 million in net proceeds from the issuance of common
stock upon our secondary offering, $0.9 million proceeds from ESPP purchases,
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.

Off-Balance Sheet Arrangements



As of December 31, 2021, we did not have any relationships, material commitments
or obligations with unconsolidated organizations or financial partnerships, such
as structured finance or special purpose entities, that were established for the
purpose of facilitating off-balance sheet arrangements. We do not engage in
off-balance sheet financing arrangements. In addition, we do not engage in
trading activities involving non-exchange traded contracts.

Critical Accounting Estimates



Our consolidated financial statements are prepared in accordance with United
States Generally Accepted Accounting Principles. The preparation of our
consolidated financial statements requires us to make estimates, assumptions and
judgments that affect the reported amounts of revenues, assets, liabilities,
costs and expenses. We base our estimates and assumptions on historical
experience and other factors that we believe to be reasonable under the
circumstances and 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 2, Summary of Significant Accounting
Policies, to our consolidated financial statements included elsewhere in this
Annual Report on Form 10-K for a description of our other significant accounting
policies.

Revenue Recognition

Revenue Recognition - Gunshot Detection Services



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

We generally invoice customers for 50% of the total contract value when the
contract is fully executed and for the remaining 50% when the subscription
service is operational and ready to go live - that is, when the customer has
acknowledged the completion of all the deliverables in the signed customer
acceptance form. We generally invoice subscription service renewals for 100% of
the total contract value when the renewal contract is executed. For the public
safety solution, the pricing model is based on a per-square-mile basis. For
security solutions, the pricing model is on a customized-site basis. As a result
of the process for invoicing contracts and renewals upon execution, cash flows
from operations and accounts receivable can fluctuate due to timing of contract
execution and timing of deployment.

We recognize revenues upon the satisfaction of performance obligations. At
contract inception, we assess the services promised in our contracts with
customers and identify a performance obligation for each promise to transfer a
good or service (or bundle of services) to the customer 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

                                       68
--------------------------------------------------------------------------------


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 and any discounts are allocated
pro-rata to the identified performance obligations. For contracts that have an
original duration of one year or less, we use the practical expedient applicable
to such contracts and do not consider the time value of money. We believe
revenue recognition for gunshot detection services is subject to uncertainty
because of the timing of renewal contracts or work orders.

Revenues from subscription services are recognized ratably, on a straight-line
basis, over the term of the subscription. Revenues from material rights are
recognized ratably over the period in which they are determined to provide a
material right to the customer, which is generally three years. Revenues from
training and licenses to integrate with third-party applications are recognized
upon delivery which generally occurs when the subscription service is
operational and ready to go live.

Subscription renewal fees are recognized ratably over the term of the renewal,
which is typically one year. While most customers elect to renew their
agreements, in some cases, they may not be able to obtain the proper approvals
or funding to complete the renewal prior to expiration. For these customers, 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 original 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, the
remaining fees from material rights, if any, are immediately recognized.

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



With the acquisition of LEEDS, we also generate revenues from the sale of (i) a
software license and related maintenance and support services of our proprietary
software technology and (ii) professional software development services to a
single customer, through a sales channel intermediary. We have been serving this
customer for more than ten years. The sales channel intermediary contract
includes an annual, renewable subscription for software and related maintenance
and support services. The contract also provides for the procurement of
professional services, such as for software development and testing for product
feature enhancements, by executing supplementary work orders

We recognize revenue from the license of our software license and related
maintenance and support services revenues upon the satisfaction of performance
obligations. We determined that the term-based software license should be
combined with the maintenance and support services as a single performance
obligation. The nature of the maintenance and support services, inclusive of our
obligation to provide additional, unspecified software functionality over the
license term, in allowing this single customer to be flexible in utilizing the
customized software to respond to the changing regulatory environment, are
critical to the customer's ability to derive benefit and value from the license.
Contractually, we provide continuous access to the software, maintenance and
support services, helpdesk and technical support over the contract term, hence a
time-elapsed method is used to recognize revenue. Revenues from the software
license and maintenance and support services are recognized ratably over the
term of the contract because our obligation to provide the license and related
support services is uniform over the license term. We generally invoice for
these services a month in arrears. If a customer does not renew prior to the
contract term expiring, 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 the revenues for the period between the expiration of the
original contract term and the completion of the renewal process in the month in
which the renewal is executed.

Professional services revenue consists of fees typically associated with the
design, development and testing of
product feature enhancements requested by the customer. The customer procures
additional development services as
needed, and generally based upon annual development plans negotiated by and
between the customer and us. Professional services do not result in significant
customization of the maintenance and support services and are considered
distinct services. All, and any part of the output, of our professional services
towards such product feature enhancements, belong to the customer. Accordingly,
we satisfy the performance obligations over time as the performance of work
typically creates or enhances an asset that the customer controls as the asset
is created or enhanced. As these product feature enhancements each have a fixed
contract fee, we recognize revenue over time proportionally as work is
performed, based on cumulative resource costs incurred as a percentage of total
forecast

                                       69
--------------------------------------------------------------------------------


costs for the project. Management uses significant judgement in making these
estimates, which affect the timing of revenue recognition, including how much
revenue to recognize in each period, and in estimating the timing of revenue
recognition for remaining performance obligations. The contract price and
billing schedule are stated in each work order and we generally invoice in
monthly installments upon the commencement of each work order.

Stock-Based Compensation - We recognize stock-based compensation expense for
equity awards granted to our employees, directors, and consultants that can be
settled in shares of our common stock. Stock-based compensation expense is based
on the grant date fair value estimate for each award as determined by our board
of directors. We recognize these compensation costs on a straight-line basis
over the requisite service period of the award.

Restricted stock unit awards are valued using the grant date market closing price of our common stock as traded on the Nasdaq Capital Market .



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 represents the excess of amounts paid over the fair value of
net assets acquired from a business acquisition. 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. We have
concluded there is only one reporting unit for purposes of performing the
goodwill impairment test. The fair value of each reporting unit is estimated
primarily through the use of a discounted cash flow methodology. This analysis
requires significant judgments, and may include estimation of future cash flows,
which is dependent on internal forecasts, estimation of the long-term rate of
growth for our business, estimation of the useful life over which cash flows
will occur, and determination of our weighted-average cost of capital. The
estimates used to calculate the fair value of a reporting unit change from year
to year based on operating results, market conditions, and other factors.
Changes in these estimates and assumptions could materially affect the
determination of fair value and goodwill impairment. We performed our annual
test for goodwill impairment as of October 1, 2021 and concluded that no
impairment charge was necessary.

                                       70

--------------------------------------------------------------------------------

© Edgar Online, source Glimpses