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 otherSEC 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 andShotSpotter 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 ofShotSpotter 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 ofDecember 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 acrossthe United States ,South Africa 54 --------------------------------------------------------------------------------
and the
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 acquiredLEEDS, LLC ("LEEDS") inNovember 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 proprietaryShotSpotter 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 endedDecember 31, 2021 , 2020, and 2019, respectively, representing year-over-year increases of 27% and 12%. For the years endedDecember 31, 2021 , 2020, and 2019, revenues from ShotSpotter Respond represented approximately 82%, 94% and 96% of total revenues, respectively. Our two current largest customers, theCity of New York and theCity of Chicago , each accounted for 28% and 14%, respectively, of our total revenues for the year endedDecember 31, 2021 . TheCity of Chicago and theCity of New York , each accounted for 18% and 15%, respectively, of our total revenues for the year endedDecember 31, 2020 . TheCity of Chicago and theCity of New York , each accounted for 20% and 14%, 55 -------------------------------------------------------------------------------- respectively, of our total revenues for the year endedDecember 31, 2019 . Substantially all of our revenues for the years endedDecember 31, 2021 , 2020, and 2019 were derived from customers withinthe United States (includingPuerto Rico and theU.S. Virgin Islands ). We had a net loss of$4.4 million for the year endedDecember 31, 2021 , net income of$1.2 million for the year endedDecember 31, 2020 , and net income of$1.8 million for the year endedDecember 31, 2019 . Our accumulated deficit was$98.8 million and$94.4 million as ofDecember 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 forShotSpotter 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 trustShotSpotter'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 otherShotSpotter 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. InJanuary 2022 , we acquiredForensic Logic LLC ("Forensic Logic"), a leading provider of cloud-based data services toU.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 ourShotSpotter Investigate case management can accelerate crime solving and improve clearance rates. InOctober 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 inLatin 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 ofthe 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 bothPuerto Rico andU.S. Virgin Islands have returned as customers before the end of 2020.
Sales and Marketing Spend per
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" 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 onJanuary 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 afterJanuary 1st , but for which GAAP revenue recognition startsJanuary 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 inthe 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;
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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;
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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;
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the impact of the pandemic and social unrest on economic activity and actions taken in response;
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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.
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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. ForShotSpotter Respond, our pricing model is based on a per-square-mile basis. ForShotSpotter 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 allShotSpotter 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.
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 endedDecember 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 ofShotSpotter gunshot data to enhance forecasting of gun violence. We are also investing research and development resources in conjunction with ourShotSpotter 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
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
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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 onNovember 24, 2020 . We went live with 101 net new square miles during the year endedDecember 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 inNovember 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
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
Other Income (Expense), Net
The decrease of
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 endedDecember 31, 2021 and 2020, our provision (benefit) for income taxes related to foreign income taxes only.
Comparison of Years Ended
The following table sets forth our consolidated statements of operations data
for the years ended
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
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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 endedDecember 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 toShotSpotter 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 andLEEDS -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 endedDecember 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 endedDecember 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 ofDecember 31, 2021 . We also have a$20.0 million credit facility, of which no amounts were outstanding as ofDecember 31, 2021 . InDecember 2021 , we obtained a waiver for the financial covenant tied to our profitability.
In
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. OnNovember 24, 2020 , we completed the acquisition ofLEEDS for a purchase consideration of$21.6 million in cash, subject to working capital adjustments, and the issuance of 63,901 shares ofShotSpotter common stock worth$2.0 million . The purchase consideration also included a contingent earnout payable based onLEEDS' revenues generated during the years endedDecember 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. OnOctober 3, 2018 , we acquired certain technology, referred to as HunchLab, and related assets fromAzavea 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. InJanuary 2020 , we paid$0.3 million based on revenues generated over the first year of the contingent earnout period. InFebruary 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
InMay 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 endedDecember 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 endedDecember 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
OnSeptember 27, 2018 , we entered into the Umpqua Credit Agreement for$10.0 million , which was amended inAugust 2020 to increase the size of our available loan facility to$20.0 million , which allows us to borrow up to$20.0 million under a revolving loan facility. We intend to use the revolving loan facility for general working capital purposes. 66 --------------------------------------------------------------------------------
Cash Flows
Comparison of Years Ended
The following table presents a summary of our cash flows for the years ended
Year Ended December 31, 2021 2020 2019 (in thousands) Net cash provided by (used in): Operating activities$ 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
As of
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
The net cash provided by operating activities of$11.2 million in the year endedDecember 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 endedDecember 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 endedDecember 31, 2021 , 2020 and 2019, respectively. We completed our acquisition ofLEEDS for approximately$14.6 million in cash, net of$7.0 million cash acquired at closing during the year endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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 ofDecember 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 ofLEEDS , 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 ofOctober 1, 2021 and concluded that no impairment charge was necessary. 70
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