You should read the following discussion and analysis of our financial condition
and results of operations together with our unaudited condensed consolidated
financial statements and accompanying notes included in this Quarterly Report on
Form 10-Q and the financial statements and accompanying notes and other
financial information in the Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2021, filed with the Securities and
Exchange Commission ("SEC") on March 29, 2022. This Quarterly Report on Form
10-Q 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 II, Item 1A of this Quarterly Report on Form
10-Q 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 and COPLINK X add case
management and leads generation, respectively, to our expanding suite of
precision policing technology solutions and provide 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 June 30, 2022, we had ShotSpotter
Respond, ShotSpotter SecureCampus and ShotSpotter SiteSecure coverage areas
under contract for approximately 980 square miles, of which 929 square miles had
gone live. Coverage areas under contract included over 135 cities and 18
campuses/sites across the United States, South Africa and the Bahamas, including
some of the largest cities in the United States. Most of our revenue is
attributable to customers based in the United States.
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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.

We acquired Forensic Logic, LLC ("Forensic Logic") in January 2022, 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 solution can accelerate crime solving solutions and
improve clearance rates.

Since our founding over 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 them better engage and
strengthen the police-community relationships in fulfilling their sworn
obligation equally to serve and protect all. Our inspiration comes from our
principal founder, Dr. Bob Showen, who believes that the highest and best use of
technology is to promote social good. We are committed to developing
comprehensive, respectful, and engaged partnerships with law enforcement
agencies, elected officials and communities focused on making a positive
difference in the world.

We enter into subscription agreements 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 Item 1A, Risk
Factors, included in this Quarterly Report on Form 10-Q.

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 Item 1A, Risk Factors, and the subsection
titled "Impact of COVID-19 and Social Unrest on our Business" included in this
Quarterly Report on Form 10-Q.

We generated revenues of $20.0 million and $14.6 million for the three months
ended June 30, 2022 and 2021, respectively, a year-over-year increase of 37%.
Revenues from ShotSpotter Respond during the three months ended June 30, 2022
and 2021 represented approximately 67% and 79% of total revenues, respectively.
Our two current largest customers, the City of New York and the City of Chicago,
accounted for 32% and 10% respectively, of our total revenues for the three
months ended June 30, 2022, and 30% and 14%, respectively, of our total revenues
for the three months ended June 30, 2021.
                                       18
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We generated revenues of $41.2 million and $29.6 million for the six months
ended June 30, 2022 and 2021, respectively, a year-over-year increase of 39%.
Revenues from ShotSpotter Respond during the six months ended June 30, 2022 and
2021, represented approximately 65% and 77% of total revenues, respectively. Our
two current largest customers, the City of New York and the City of Chicago,
accounted for 35% and 10% respectively, of our total revenues for the six months
ended June 30, 2022, and 32% and 14%, respectively, of our total revenues for
the six months ended June 30, 2021.

For the three months ended June 30, 2022 and 2021, revenues generated within the
United States (including Puerto Rico and the U.S. Virgin Islands) accounted for
$19.8 million and $14.4 million, respectively, or 99% of total revenues for both
periods.

For the six months ended June 30, 2022 and 2021, revenues generated within the
United States (including Puerto Rico and the U.S. Virgin Islands) accounted for
$40.7 million and $29.3 million, respectively, or 99% of total revenues for both
periods.

We had net income (loss) of $3.0 million and $(0.03) million for the three
months ended June 30, 2022 and 2021, respectively, and net income (loss) of $3.4
million and $(0.02) million for the six months ended June 30, 2022 and 2021,
respectively. Our accumulated deficit was $95.4 million and $98.8 million at
June 30, 2022 and December 31, 2021, respectively.

During the three months ended June 30, 2022, the fair value of the contingent
consideration, which we recorded on the acquisition of Forensic Logic, was
decreased by $3.4 million based upon revised estimated 2022 and 2023 revenue
targets that were utilized in our fair value methodology.

We have focused on rapidly growing our business and believe that our 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. Consistent with this strategy, we
expanded our suite of solutions with the acquisitions of LEEDS and Forensic
Logic.
                                       19
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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 and the use of third-party integrations and consultants. Moreover, we
anticipate that different political and regulatory considerations that vary
across different jurisdictions could extend or make more difficult to predict
the length of what is already a lengthy sales cycle.

Key Business Metrics

                                          Three Months Ended June
                                                    30,                 Six Months Ended June 30,
                                           2022            2021           2022            2021
Net new "go-live" cities                       3*                 2          11*                 8


* We went live with four and twelve new cities for three and six months ended
June 30, 2022. The net go live numbers above reflect the loss of one city, with
a contract value of less than $18,000 per annum.

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. During the three
and six months ended June 30, 2022, we also went live with one pilot project
that is not included in the table above.

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. We expect that the evolving COVID-19 pandemic,
including the potential for periods of increases in case numbers and the
emergence and spread of virus variants in communities in which we and our
customers operate, may 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. Although the negativity of some
of these events has been reduced, some of these events may still 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 may experience higher
costs to procure the sensors required for our solutions. While we believe these
delays are temporary and we have taken steps to mitigate the impact of these
delays, if supply chain issues become worse, 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.

While we feel positive with progress to date, it is currently not possible to
fully 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:
                                       20
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•


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 people working from home, or restrictions on access to our potential customers;

•

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

•

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

•

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

Components of Results of Operations

Presentation of Financial Statements

Our condensed consolidated financial statements include the accounts of our wholly-owned subsidiaries. All significant 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 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. For COPLINK X, we generally invoice customers
100% of the total contract value when the subscription service is operational.
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
                                       21
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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.

With the acquisition of LEEDS, we generate ShotSpotter Investigate revenues through the sale of (i) 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.



With the acquisition of Forensic Logic, we also generate revenues from
subscriptions for COPLINK X, cloud-based data services for advanced search and
analysis tools, with revenue recognition being similar to our Respond products.
We also provide access to this technology platform to an intermediary to either
be resold or combined with their own materials, software and/or services, to
create an integrated solution that is provided to their end-user customers. We
recognize this revenue net of margins paid to the intermediary. We recently
introduced ShotSpotter GCM™ (Gun Crime Management), a first-of-its-kind digital
case management solution that automates the process by which key information is
inputted, captured and used to identify associated gun crime cases leading to
the identification of persons of interest. We generate revenues from
subscriptions for GCM, with revenue recognition being similar to our Respond and
COPLINK X products.

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 and rising costs due to inflation, 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 three and six months ended June 30, 2021. There was no impairment recorded
in the three and six months ended June 30, 2022.

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. By June 30, 2022, we had already
upgraded over 85 percent of our 3G sensors. We expect to complete all required
upgrades by the end of 2022. Additionally, we are and may continue to re-use and
re-deploy some of 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.
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Cost of revenues for ShotSpotter Investigate generally relate 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.

The cost of revenues for COPLINK X is generally related to employee compensation costs and datacenter hosting services, both of which are relatively fixed.

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 remote work
policies and reduced travel, our sales and marketing expense decreased. As
travel has increased in 2022 compared to 2021, our sales and marketing expenses
have 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, ShotSpotter Investigate and COPLINK X. 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 in 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.
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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, and other corporate expenses and allocated overhead.

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 that 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

Comparison of Three Months Ended June 30, 2022 and 2021



The following table sets forth our selected condensed consolidated statements of
operations data for the three months ended June 30, 2022 and 2021 (in
thousands):

                                           As a % of                     As a % of              Change
                               2022        Revenues          2021        Revenues           $            %
Revenues                     $ 20,016             100 %    $ 14,624             100 %    $  5,392           37 %
Costs
Cost of revenues                8,367              42 %       6,317              43 %       2,050           32 %
Total costs                     8,367              42 %       6,317              43 %       2,050           32 %
Gross profit                   11,649              58 %       8,307              57 %       3,342           40 %
Operating expenses:
Sales and marketing             5,794              29 %       3,928              27 %       1,866           48 %
Research and development        2,534              13 %       1,740              12 %         794           46 %
General and administrative      3,555              18 %       2,812              19 %         743           26 %
Contingent consideration       (3,437 )           (17 %)          -               -        (3,437 )          -
Total operating expenses        8,446              42 %       8,480              58 %         (34 )          -
Operating income (loss)         3,203              16 %        (173 )            (1 %)      3,376        1,951 %
Other expense, net               (193 )            (1 %)        (77 )             -          (116 )        151 %
Net income (loss)            $  3,010              15 %    $   (250 )            (2 %)   $  3,260        1,304 %


Revenues
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The increase in revenues of $5.4 million was primarily attributable to a $2.0
million increase in revenue from new customers and expansions of existing
customer coverage areas, a $1.8 million increase in revenues from monthly
support revenue contracts, and a $1.6 million increase in revenues from Forensic
Logic, which we acquired in the first quarter of 2022. We went live in four new
Respond cities, secured three new security customers and expanded in six current
customer sites

Costs

The increase in cost of revenues of $2.1 million was due primarily to a $1.2
million increase in products costs due to the increase in our customer base, a
$0.5 million increase in personnel costs as a result of increased headcount due
to continued growth and the acquisition of Forensic Logic in January 2022, a
$0.2 million increase in third-party labor costs, a $0.1 million increase in
travel costs relating to customer deployments, and a $0.1 million increase in
amortization of intangibles following our acquisition of Forensic Logic.

Operating Expenses

Sales and Marketing Expense



Sales and marketing expense increased by $1.9 million and was primarily due to a
$1.3 million increase in salaries, commissions and other personnel costs, a $0.3
million increase in amortization expense related to customer relationship and
tradename assets, and a $0.2 million increase in travel costs due to continued
growth in our customer base.

Research and Development Expense

Research and development expense increased by $0.8 million and was primarily due to increased personnel and headcount costs.

General and Administrative Expense

General and administrative expense increased by $0.7 million and was due primarily to a $0.5 million increase in personnel-related costs and a $0.2 million increase in other costs including advertising and promotion expense.

Contingent Consideration



Contingent consideration expense decreased by $3.4 million during the three
months ended June 30, 2022 based upon revised estimated 2022 and 2023 revenue
targets for Forensic Logic that were utilized in the our fair value methodology,
which resulted in a decrease in the fair value of the contingent consideration
liability.

Other Income (Expense), Net

The increase in other expense, net was due primarily to increased state and franchise tax expense.

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. There
was no provision for income taxes recorded in the three months ended June 30,
2022 and 2021.
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Comparison of Six Months Ended June 30, 2022 and 2021



The following table sets forth our selected condensed consolidated statements of
operations data for the six months ended June 30, 2022 and 2021 (in thousands):


                                        As a % of                     As a % of              Change
                            2022        Revenues          2021        Revenues           $            %
Revenues                  $ 41,230             100 %    $ 29,637             100 %    $ 11,593           39 %
Costs
Cost of revenues            16,657              40 %      12,617              43 %       4,040           32 %
Impairment of property
and equipment                    -               -            25               -           (25 )       (100 %)
Total costs                 16,657              40 %      12,642              43 %       4,015           32 %
Gross profit                24,573              60 %      16,995              57 %       7,578           45 %
Operating expenses:
Sales and marketing         11,370              28 %       7,863              27 %       3,507           45 %
Research and
development                  5,161              13 %       3,453              12 %       1,708           49 %
General and
administrative               7,844              19 %       5,683              19 %       2,161           38 %
Contingent
consideration               (3,437 )            (8 %)          -               -        (3,437 )          -
Total operating
expenses                    20,938              51 %      16,999              57 %       3,939           23 %
Operating income (loss)      3,635               9 %          (4 )             -         3,639       90,975 %
Other expense, net            (238 )            (1 %)       (118 )             -          (120 )        102 %
Provision (benefit)
from income taxes                -               -            49               -           (49 )       (100 %)
Net income                $  3,397               8 %    $   (171 )            (1 %)   $  3,568        2,087 %


Revenue

The increase in revenues of $11.6 million was primarily attributable a $4.5
million increase in revenue from monthly support revenue contracts, a $4.0
million increase in revenues from new customers and expansions of existing
customer coverage areas, and a $3.1 million increase in revenues from Forensic
Logic, which was acquired in the first quarter of 2022. We went live in eight
new Respond cities, secured four new security customers and expanded in eight
current customer cities.

Costs

The increase in costs of $4.0 million was due primarily to a $1.9 million
increase in product costs due to the increase in our customer base, a $1.2
million increase in personnel costs as a result of increased headcount due to
continued growth and the acquisition of Forensic Logic in the first quarter of
fiscal 2022, a $0.3 million increase in amortization of intangibles following
our acquisition of Forensic Logic, an increase of $0.2 million in travel costs
relating to customer deployments, an increase of $0.2 million in other costs,
and an increase of $0.1 million in third-party labor costs.

Operating Expenses

Sales and Marketing Expense



Sales and marketing expense increased by $3.5 million and was primarily due to a
$1.7 million increase in personnel costs, a $0.9 million increase in consulting
and commission expenses, a $0.5 million increase to amortization of customer
relationship and tradename assets related to Forensic Logic, a $0.2 million
increase in travel costs due to continued growth in our customer base and a $0.2
million increase in marketing and other costs.

Research and Development Expense



Research and development expense increased by $1.7 million and was primarily due
to increased personnel and headcount costs as a result of the Forensic Logic
acquisition.
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General and Administrative Expense



General and administrative expense increased by $2.1 million and was due
primarily to a $0.9 million increase in personnel costs, a $0.7 million increase
in legal expense, a $0.1 million increase in travel costs, a $0.1 million
increase in amortization of intangibles following our acquisition of Forensic
Logic and a $0.3 million increase in other costs.

Contingent Consideration



Contingent consideration expense decreased by $3.4 million during the six months
ended June 30, 2022 based upon revised estimated 2022 and 2023 revenue targets
for Forensic Logic that were utilized in the our fair value methodology, which
resulted in a decrease in the fair value of the contingent consideration
liability.

Other Income (Expense), Net

The increase in other expense, net was due primarily to increased state and franchise tax expense.

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. There
was no provision for income taxes recorded in the six months ended June 30,
2022. For the six months ended June 30, 2021, as a result of net operating loss
carryforwards, our recorded income taxes consisted of foreign 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 $3.4 million
as of June 30, 2022. During the three months ended June 30, 2022, we utilized
$5.0 million of our loan facility for a letter of credit related to a customer
contract requirement. Our available loan facility at June 30, 2022 was
approximately $15.0 million, and as of June 30, 2022, no amounts were
outstanding on our loan facility. We had accounts receivable of $28.0 million as
of June 30, 2022, of which we subsequently collected over $17.5 million. In
December 2021, we obtained a waiver for the financial covenants tied to our
profitability through June 30, 2022.

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 despite our negative working capital, the costs to perform the
short-term deferred revenue is relatively low compared to the balance of $32.9
million. However, should additional working capital be needed, we can utilize
our unused loan facility. Our loan facility expires September 2022, but we
expect the facility to be renewed under similar terms. 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 revenue 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. Additionally, there is no guarantee debt or equity
financing will be available to us on terms that are favorable to us, or at all.

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

                                       27
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connection with contingent earnouts, our stock repurchase program and repayment
of any outstanding debt obligations under our credit facility, each as described
below.

In January 2022, we acquired Forensic Logic for a purchase consideration of
$31.6 million, consisting of $4.9 million in cash, subject to working capital
adjustments, and 464,540 shares of our common stock valued at $14.3 million. The
purchase consideration also included a contingent earnout payable up to $20.0
million based on Forensic Logic's revenues generated during the years ended
December 31, 2022 and 2023. Up to $9.5 million in contingent earnout will be
payable based on Forensic Logic's revenues generated during 2022. An additional
amount up to $10.5 million contingent earnout will be payable based on Forensic
Logic's revenues during 2023. The amounts are payable within approximately 120
days after the end of 2022 and 2023, respectively. During the three months ended
June 30, 2022, we recorded an adjustment of $3.4 million to decrease the
estimated Forensic Logic contingent earnout payable, which was reduced for 2022
but increased for 2023.

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 six months ended June 30, 2022, we repurchased 106,992 shares of our
common stock at an average price of $28.81 per share for $3.1 million, utilizing
the remaining balance available for repurchase under our stock repurchase
program. The repurchases were made in open market transactions using cash on
hand, and all of the shares repurchased were retired.

Credit Facility



On September 27, 2018, we entered into the Umpqua Credit Agreement 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, as needed. During the three months ended
June 30, 2022, we utilized $5.0 million of our loan facility for a letter of
credit related to a customer contract requirement.

Cash Flows

Comparison of Six Months Ended June 30, 2022 and 2021

The following table presents a summary of our cash flows for the six months ended June 30, 2022 and 2021:



                                            Six Months Ended June 30,
                                               2022              2021
                                                  (in thousands)
Net cash provided by (used in):
Operating activities                      $         (220 )     $   5,136
Investing activities                              (9,388 )        (3,590 )
Financing activities                              (2,580 )        (2,039 )

Net change in cash and cash equivalents $ (12,188 ) $ (493 )

Operating Activities



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

Net cash used in operating activities increased $5.3 million for the six months
ended June 30, 2022 compared to net cash provided in the same period of 2021,
primarily due to an increase of $4.1 million in payments for personnel costs, an
increase of $0.9 million in prepaid expenses including insurance, and an
increase of $0.2 million in accounts payable.
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Investing Activities



Our investing activities consist of business acquisition expenditures, capital
expenditures to install our solutions in customer coverage areas and purchases
of property.

Investing activities used $9.4 million and $3.6 million in the six months ended
June 30, 2022 and 2021, respectively. During the six months ended June 30, 2022,
this was primarily driven by the acquisition of Forensic Logic for $4.6 million
as well as investments in property and equipment installed for new deployments
and our solutions in customer coverage areas of $4.8 million. Investing
activities used $3.6 million in the six months ended June 30, 2021 primarily for
property and equipment installed for our solutions in customer coverage areas.

Financing Activities



Cash generated by financing activities includes net proceeds from the exercise
of stock options and warrants, proceeds from the employee stock purchase plan
purchases offset by payments for repurchases of our common stock and contingent
earnout liabilities.

Financing activities used $2.6 million in cash during the six months ended June
30, 2022, which was driven by $3.1 million in payments for repurchases of our
common stock, offset by $0.5 million in proceeds from our employee stock
purchase plan purchases. Financing activities used $2.0 million in cash during
the six months ended June 30, 2021. This was primarily driven by $2.7 million in
payments for repurchases of our common stock and $0.4 million in payments for
HunchLab's contingent consideration, partially offset by $0.6 million in
proceeds from the exercise of options and warrants and $0.5 million in proceeds
from employee stock purchase plan purchases.

Critical Accounting Estimates



Our condensed 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 critical accounting estimates are described under the heading "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Critical Accounting Estimates" in our 2021 Annual Report on Form 10-K
and the notes to the audited consolidated financial statements appearing in our
2021 Annual Report on Form 10-K. For the significant or material changes in our
critical accounting policies during the three months ended June 30, 2022, see
Note 2, Summary of Significant Accounting Policies, to the notes of our
condensed consolidated financial statements included in this Quarterly Report on
Form 10-Q.

Recently Issued Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, to the notes to our consolidated financial statements included in our 2021 Annual Report on Form 10-K for a summary of recently issued accounting pronouncements.


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