UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to

Commission File Number: 001-38107

 

ShotSpotter, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

47-0949915

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

7979 Gateway Blvd., Suite 210

Newark, California

94560

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (510) 794-3100

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 8, 2018, the registrant had 10,821,747 shares of common stock, $0.005 par value per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

2

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

2

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017

3

 

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2018 and 2017

4

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3.

Qualitative and Quantitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

Item 6.

Exhibits

54

Exhibit Index

55

Signatures

56

 

 

 

i


 

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

ShotSpotter, Inc.

Condensed Consolidated Balance Sheets  

(In thousands)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,348

 

 

$

19,567

 

Accounts receivable and unbilled revenue

 

 

7,400

 

 

 

3,928

 

Prepaid expenses and other current assets

 

 

1,598

 

 

 

839

 

Restricted cash

 

 

60

 

 

 

30

 

Total current assets

 

 

25,406

 

 

 

24,364

 

Property and equipment, net

 

 

15,668

 

 

 

11,596

 

Intangible assets, net

 

 

91

 

 

 

95

 

Other assets

 

 

2,079

 

 

 

143

 

Total assets

 

$

43,244

 

 

$

36,198

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,342

 

 

$

1,627

 

Deferred revenue, short-term

 

 

19,170

 

 

 

15,780

 

Accrued expenses and other current liabilities

 

 

4,691

 

 

 

3,815

 

Total current liabilities

 

 

26,203

 

 

 

21,222

 

Deferred revenue, long-term

 

 

1,177

 

 

 

2,710

 

Other liabilities

 

 

85

 

 

 

104

 

Total liabilities

 

 

27,465

 

 

 

24,036

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock

 

 

54

 

 

 

48

 

Additional paid-in capital

 

 

113,458

 

 

 

109,708

 

Accumulated deficit

 

 

(97,598

)

 

 

(97,595

)

Accumulated other comprehensive income (loss)

 

 

(135

)

 

 

1

 

Total stockholders' equity

 

 

15,779

 

 

 

12,162

 

Total liabilities and stockholders' equity

 

$

43,244

 

 

$

36,198

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

2


 

ShotSpotter, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

$

9,211

 

 

$

6,846

 

 

$

25,045

 

 

$

17,244

 

Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

3,898

 

 

 

2,791

 

 

 

10,795

 

 

 

8,154

 

Impairment of property and equipment

 

 

271

 

 

 

666

 

 

 

632

 

 

 

666

 

Total costs

 

 

4,169

 

 

 

3,457

 

 

 

11,427

 

 

 

8,820

 

Gross profit

 

 

5,042

 

 

 

3,389

 

 

 

13,618

 

 

 

8,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

2,453

 

 

 

1,792

 

 

 

6,202

 

 

 

4,269

 

Research and development

 

 

1,196

 

 

 

1,063

 

 

 

3,687

 

 

 

3,024

 

General and administrative

 

 

2,912

 

 

 

1,305

 

 

 

6,764

 

 

 

3,206

 

Total operating expenses

 

 

6,561

 

 

 

4,160

 

 

 

16,653

 

 

 

10,499

 

Operating loss

 

 

(1,519

)

 

 

(771

)

 

 

(3,035

)

 

 

(2,075

)

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remeasurement of convertible preferred stock warrant liability

 

 

 

 

 

 

 

 

 

 

 

(3,725

)

Loss on early extinguishment of debt

 

 

 

 

 

(479

)

 

 

 

 

 

(479

)

Interest income (expense), net

 

 

23

 

 

 

(358

)

 

 

72

 

 

 

(1,167

)

Other expense, net

 

 

(21

)

 

 

(3

)

 

 

(96

)

 

 

(31

)

   Total other income (expense), net

 

 

2

 

 

 

(840

)

 

 

(24

)

 

 

(5,402

)

Loss before income taxes

 

 

(1,517

)

 

 

(1,611

)

 

 

(3,059

)

 

 

(7,477

)

Provision (benefit) for income taxes

 

 

(76

)

 

 

 

 

 

(32

)

 

 

 

Net loss

 

$

(1,441

)

 

$

(1,611

)

 

$

(3,027

)

 

$

(7,477

)

Net loss per share, basic and diluted

 

$

(0.13

)

 

$

(0.17

)

 

$

(0.29

)

 

$

(1.49

)

Weighted average shares used in computing net loss per

   share, basic and diluted

 

 

10,780,996

 

 

 

9,619,659

 

 

 

10,481,901

 

 

 

5,016,825

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

ShotSpotter, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(1,441

)

 

$

(1,611

)

 

$

(3,027

)

 

$

(7,477

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

(32

)

 

 

(2

)

 

 

(136

)

 

 

(21

)

Comprehensive loss

 

$

(1,473

)

 

$

(1,613

)

 

$

(3,163

)

 

$

(7,498

)

 

See accompanying notes to condensed consolidated financial statements.


4


 

ShotSpotter, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(3,027

)

 

$

(7,477

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,766

 

 

 

2,274

 

Impairment of property and equipment

 

 

632

 

 

 

666

 

Stock-based compensation

 

 

1,823

 

 

 

306

 

Amortization of debt issuance costs

 

 

 

 

 

132

 

Remeasurement of convertible preferred stock warrant liability

 

 

 

 

 

3,725

 

Loss on early extinguishment of debt

 

 

 

 

 

479

 

Provision for doubtful accounts

 

 

 

 

 

140

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable and unbilled revenue

 

 

(3,472

)

 

 

(3,735

)

Prepaid expenses and other assets

 

 

(891

)

 

 

(263

)

Accounts payable

 

 

715

 

 

 

429

 

Accrued expenses and other current liabilities

 

 

860

 

 

 

486

 

Deferred revenue

 

 

3,109

 

 

 

4,398

 

Net cash provided by operating activities

 

 

2,515

 

 

 

1,560

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(7,426

)

 

 

(4,547

)

Investment in intangible and other assets

 

 

(36

)

 

 

(55

)

Net cash used in investing activities

 

 

(7,462

)

 

 

(4,602

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from initial public offering, net of commissions and discounts

 

 

 

 

 

32,426

 

Proceeds from notes payable

 

 

 

 

 

1,500

 

Repayment of notes payable

 

 

 

 

 

(13,500

)

Payment of debt issuance costs

 

 

 

 

 

(30

)

Payment of line of credit costs

 

 

(10

)

 

 

 

Payment of debt extinguishment costs

 

 

 

 

 

(149

)

Payment of offering costs

 

 

 

 

 

(1,858

)

Proceeds from exercise of stock options

 

 

523

 

 

 

41

 

Proceeds from exercise of warrants

 

 

988

 

 

 

 

Proceeds from employee stock purchase plan

 

 

421

 

 

 

 

Net cash provided by financing activities

 

 

1,922

 

 

 

18,430

 

Increase (decrease) in cash, cash equivalents and restricted cash

 

 

(3,025

)

 

 

15,388

 

Effect of exchange rate on cash and cash equivalents

 

 

(164

)

 

 

2

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

19,597

 

 

 

3,895

 

Cash, cash equivalents and restricted cash at end of period

 

$

16,408

 

 

$

19,285

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

 

$

1,235

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

 

 

 

Conversion of convertible preferred stock into common stock

 

$

 

 

$

42,575

 

Reclassification of convertible preferred stock warrant liability into

   additional paid-in capital

 

$

 

 

$

5,711

 

Issuance of warrants in connection with the issuance of notes payable to a

   financial institution

 

$

 

 

$

111

 

Deferred offering costs included in other assets

 

$

249

 

 

$

13

 

Line of credit costs included in other assets

 

$

91

 

 

$

 

 

See accompanying notes to condensed consolidated financial statements.

5


 

ShotSpotter, Inc.

Notes to Condensed Consolidated Financial Statements

Note 1. Organization and Description of Business

ShotSpotter, Inc. (the “Company”) provides precision-policing solutions for law enforcement to help deter gun violence and make cities, campuses and facilities safer. The company’s flagship product, ShotSpotter Flex, is the leading gunshot detection, location and forensic system trusted by more than 90 cities. ShotSpotter Missions (formerly HunchLab) uses artificial intelligence-driven analysis to help strategically plan patrol missions and tactics for maximum crime deterrence. The Company offers its software solutions on a SaaS-based subscription model to its customers.

The Company’s principal executive offices are located in Newark, California. The Company has one subsidiary, ShotSpotter (Pty) Ltd. formed in South Africa.

Note 2. Initial Public Offering

In June 2017, the Company completed its initial public offering (“IPO”) in which the Company sold 3,220,000 shares of its common stock at a price of $11.00 per share. The Company received net proceeds of $32.4 million, after underwriting discounts and commissions, which was recorded to additional paid-in capital. The Company’s common stock commenced trading on the NASDAQ Capital Market on June 7, 2017 under the trading symbol “SSTI.”

 

Immediately prior to the IPO, all outstanding Series B-1 convertible preferred stock warrants were remeasured at fair value using the Black-Scholes model, resulting in a loss of $3.7 million, which was recorded in other expense, net.

 

Upon the closing of the IPO, the entire balance of $5.7 million in convertible preferred stock warrant liability was reclassified to additional paid-in capital. All preferred stock warrants were converted into common stock warrants. In addition, the Company issued to the lead underwriter in the IPO a warrant to purchase up to 84,000 shares of its common stock. See Note 8, Convertible Preferred Stock Warrants and Common Stock Warrants, for further details regarding the warrants.

 

Upon the closing of the IPO, all shares of the then-outstanding convertible preferred stock were converted into 4,689,753 shares of common stock. This resulted in a reclassification of $42.1 million to additional paid-in capital.

 

Offering costs incurred by the Company were approximately $1.9 million, excluding underwriting commissions and discounts, which was recorded to additional paid-in capital.

Note 3. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated financial statements include the results of the Company and its wholly-owned subsidiary, ShotSpotter (Pty) Ltd. All significant intercompany transactions have been eliminated during consolidation.

The condensed consolidated balance sheet as of December 31, 2017, included herein, was derived from the audited consolidated financial statements as of that date, but does not include all disclosures including certain notes required by U.S. GAAP on an annual reporting basis.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2018 or any future period.

6


 

 

June 2017 Amended and Restated Certificate of Incorporation

 

Prior to the IPO, the Company’s Board of Directors (the “Board”) and stockholders approved an amendment (the “Charter Amendment”) to the Pre-IPO Certificate (as defined below) and an amended and restated certificate of incorporation (“Post-IPO Certificate”) that became effective on June 12, 2017. The Charter Amendment increased the number of authorized shares of common stock from 8,600,000 to 500,000,000. Under the Post-IPO Certificate, the Company is authorized to issue two classes of stock to be designated Common Stock and Preferred Stock. See Note 6, Capital Stock, for further details regarding these classes of stock.

 

March 2017 Amendment and Restatement of Certificate of Incorporation

On March 27, 2017, the Company’s Board and stockholders approved an amendment and restatement of the Company’s then-existing certificate of incorporation (as so amended and restated, the “Pre-IPO Certificate”) to provide, among other changes, that each share of Series A-2 convertible preferred stock would automatically convert into 0.715548 shares of common stock upon the consummation of an initial public offering of the Company’s capital stock. All share and per share data related to balance sheet and net loss information in the accompanying condensed consolidated financial statements and their related notes have been retroactively adjusted to give effect to the application of this conversion feature when presenting the Series A-2 convertible preferred stock on an as-converted basis.

The Pre-IPO Certificate also provided for (1) an increase in the total number of authorized shares to 14,550,000 and (2) an increase in the number of authorized shares of common stock to 8,600,000, in each case to accommodate the new conversion feature for the outstanding shares of Series A-2 convertible preferred stock.

 

All share and per share data in the accompanying condensed consolidated financial statements and their related notes for all periods presented have been retroactively adjusted to give effect to the reverse stock split.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its significant estimates including the valuation of accounts receivable, the lives of tangible and intangible assets, stock-based compensation expense, preferred stock warrant liabilities, and accounting for revenue recognition and income taxes. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions it believes to be reasonable under the circumstances. Actual results could differ from those estimates and such differences could be material to the Company’s financial position and results of operations.

Revenue Recognition

The Company generates substantially all of its revenues from the sale of gunshot detection subscription services, in which gunshot data generated by Company-owned sensors and software is sold to customers through a cloud-based hosting application for a specified contract period. Typically, the initial contract period is one to five years in length. The subscription contract is generally noncancelable without cause. Generally, these service arrangements do not provide the customer with the right to take possession of the hardware or software supporting the subscription service at any time. A small portion of the Company’s revenues are generated from the delivery of setup services to install Company-owned sensors in the customer’s coverage area and other services including training and license to integrate with third-party applications.

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

7


 

Prior to the adoption of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), the Company recognized revenue in accordance with Accounting Standard Codification (“ASC”) 605, Revenue Recognition, and, accordingly, when all of the following criteria were met:

 

Persuasive evidence of an arrangement exists;

 

 

Delivery has occurred or services have been rendered;

 

The sales price is fixed or determinable; and

 

 

Collection of the related receivable is reasonably assured.

Under ASC 605, the Company recognized subscription revenues ratably over the subscription period committed by the customer and commencing when the subscription service was fully operational and ready to go live, that is, upon completion of all deliverables stated in the signed customer acceptance form, assuming all other revenue recognition criteria were met. The Company recognized revenues from setup fees ratably based on the expected customer relationship period, typically over five years, which could extend beyond the initial contract period. In determining the expected customer relationship period, the Company considered specific customer details and renewal history with similar customers. If a customer declined to renew its subscription prior to the end of five years, then the remaining setup fees were immediately recognized.

Effective January 1, 2018, after the adoption of Topic 606, the Company recognizes revenue upon the satisfaction of performance obligations. At contract inception, the Company assesses the services promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the customer a good or service (or bundle of services) that is distinct. To identify the performance obligations, the Company considers all of the services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. The Company determined that the subscription services, training, and licenses to integrate with third-party applications are each distinct services that represent separate performance obligations. The setup activities are not distinct from the subscription service and are combined into the subscription service performance obligation. However, setup fees may provide a material right to the customer that has influence over the customers' decision to renew. All setup fees are assessed on a quantitative and qualitative basis to determine whether they represent a distinct performance obligation. The total contract value is allocated to each performance obligation identified based on the standalone selling price of the service. Discounts are allocated pro-rata to the identified performance obligations.

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

Subscription renewal fees are recognized ratably over the term of the renewal, which is typically one year. While most customers elect to renew their agreements, in some cases, they may not be able to obtain the proper approvals or funding to complete the renewal prior to expiration. For these customers, the Company stops recognizing subscription revenues at the end of the current contract term, even though services may continue to be provided for a period of time until the renewal process is completed. Once the renewal is complete, the Company recognizes subscription revenues for the period between the expiration of the term of the agreement and the completion of the renewal process in the month in which the renewal is executed. If a customer declines to renew its subscription prior to the end of three years, then the remaining fees from material rights, if any, are immediately recognized.

 

As of January 1, 2018, upon the adoption of Topic 606, the Company had total short-term and long-term deferred revenue of $17.3 million. During the three months ended September 30, 2018, the Company recognized $5.9 million in revenue from the beginning deferred revenue of $17.4 million and $3.1 million from new billings, and added $12.1 million to total short-term and long-term deferred revenue from new billings. During the nine months ended September 30, 2018, the Company recognized $13.9 million in revenue from the beginning deferred revenue of $18.5 million and $10.8 million from new billings, and added $27.9 million to total short-term and long-term deferred revenue from new billings.  

As of September 30, 2018, the Company has estimated remaining performance obligations for contractually committed revenues of $9.0 million, $27.0 million, $20.8 million, $14.2 million, and $600,000 that will be recognized during the remainder of the year ended December 31, 2018, and years ended December 31, 2019, 2020, 2021, and 2022 through 2024, respectively. The timing of revenue recognition includes estimates of go live dates for contracts not yet

8


 

live. Contractually committed revenue includes deferred revenue as of September 30, 2018 and amounts under contract that will be invoiced after September 30, 2018. 

During the three months ended September 30, 2018, the Company recognized revenues of $9.0 million from customers in the United States and $0.2 million from a customer in South Africa.  

During the nine months ended September 30, 2018, the Company recognized revenues of $24.3 million from customers in the United States and $0.7 million from a customer in South Africa.  

Topic 606 also requires the capitalization of certain incremental costs of obtaining a contract, which impacts the period in which the Company records sales commissions expense. Historically, the Company recognized sales commissions expense upfront. Under Topic 606, the Company is required to capitalize these expenses. As there are not commensurate commissions earned on renewals of the subscription services, the Company concluded that the capitalized commissions are related to subscription services provided under both the initial contract and renewal periods. Therefore, the amortization period for the capitalized commissions is the customer life, which is determined to be five years. As the capitalized commissions are related to subscription services that are transferred over the customer's life, the Company amortizes the capitalized commissions on a straight-line basis of five years. For commissions that are earned on renewal contracts with an original duration of one year or less, the Company uses the practical expedient applicable to such commissions and recognizes the commissions immediately as expense instead of capitalizing.

Accounts Receivable, net

Accounts receivable, net consist of trade accounts receivables from the Company’s customers, net of allowance for doubtful accounts if deemed necessary. Accounts receivable may include unbilled amounts which are under contract but are not yet billable. Accounts receivables are recorded at the invoiced amount. The Company does not require collateral or other security for accounts receivable. The Company periodically evaluates the collectability of its accounts receivable and provides an allowance for potential credit losses based on the historical experience. At September 30, 2018 and December 31, 2017, the Company did not have an allowance for potential credit losses as there were no estimated credit losses.

Concentrations of Risk

Credit Risk – Financial instruments that potentially subject the Company to concentration of credit risk consisted primarily of restricted cash, cash and cash equivalents and accounts receivable from trade customers. The Company maintains its cash deposits at two domestic financial institutions. The Company is exposed to credit risk in the event of default by a financial institution to the extent that cash and cash equivalents are in excess of the amount insured by the Federal Deposit Insurance Corporation. The Company generally places its cash and cash equivalents with high-credit quality financial institutions. To date, the Company has not experienced any losses on its cash and cash equivalents

Concentration of Accounts Receivable –As of September 30, 2018, one customer accounted for 58% of the Company’s accounts receivable. Fluctuations in accounts receivable result from timing of the Company’s execution of contracts and collection of related payments. As of December 31, 2017, three customers accounted for 18%, 18% and 14% of the Company’s accounts receivable.

Concentration of Revenues –For the three months ended September 30, 2018, two customers accounted for 23% and 15% of the Company’s total revenues. For the three months ended September 30, 2017, two customers accounted for 17% and 14% of the Company’s total revenues.    

For the nine months September 30, 2018, two customers accounted for 22% and 15% of the Company’s total revenues. For the nine months ended September 30, 2017, two customers accounted for 18% and 10% of the Company’s total revenues.

Accounting Pronouncements Recently Adopted

Effective January 1, 2018, the Company adopted Topic 606. This standard outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Topic 606 was adopted on a modified

9


 

retrospective basis and the new standard was applied only to new contracts entered into after January 1, 2018, and contracts that were not completed as of January 1, 2018. The cumulative effect of this adoption of Topic 606 as of January 1, 2018 resulted in a reduction to accumulated deficit of $3.0 million, a reduction of short-term and long-term deferred revenue of $1.2 million and the capitalization of commissions in assets of $1.8 million.

The impact from the adoption of Topic 606 was as follows:

 

 

 

Three Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2018

 

 

 

As Reported

 

 

Effect of Change Increase/ (Decrease)

 

 

Amounts Without Adoption of Topic 606

 

 

As Reported

 

 

Effect of Change Increase/ (Decrease)

 

 

Amounts Without Adoption of Topic 606

 

Revenues

 

$

9,211

 

 

$

174

 

 

$

9,037

 

 

$

25,045

 

 

$

296

 

 

$

24,749

 

Costs

 

 

4,169

 

 

 

 

 

 

4,169

 

 

 

11,427

 

 

 

 

 

 

11,427

 

Gross profit

 

 

5,042

 

 

 

174

 

 

 

4,868

 

 

 

13,618

 

 

 

296

 

 

 

13,322

 

Sales and marketing expense

 

 

2,453

 

 

 

(200

)

 

 

2,653

 

 

 

6,202

 

 

 

(457

)

 

 

6,659

 

Operating loss

 

 

(1,519

)

 

 

(374

)

 

 

(1,893

)

 

 

(3,035

)

 

 

(753

)

 

 

(3,788

)

Net loss

 

 

(1,441

)

 

 

(374

)

 

 

(1,815

)

 

 

(3,027

)

 

 

(753

)

 

 

(3,780

)

 

 

 

 

 

 

As of September 30, 2018

 

 

 

 

 

 

 

 

 

As Reported

 

 

Effect of Change Increase/ (Decrease)

 

 

Amounts Without Adoption of Topic 606

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

 

 

 

 

 

$

1,598

 

 

$

614

 

 

$

984

 

Other assets

 

 

 

 

 

 

 

 

2,079

 

 

 

1,599

 

 

 

480

 

Total assets

 

 

 

 

 

 

 

 

43,244

 

 

 

2,213

 

 

 

41,031

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue, short term

 

 

 

 

 

 

 

 

19,170

 

 

 

(558

)

 

 

19,728

 

Total current liabilities

 

 

 

 

 

 

 

 

26,203

 

 

 

(558

)

 

 

26,761

 

Deferred revenue, long term

 

 

 

 

 

 

 

 

1,177

 

 

 

(900

)

 

 

2,077

 

Total liabilities

 

 

 

 

 

 

 

 

27,465

 

 

 

(1,458

)

 

 

28,923

 

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides targeted improvements to the recognition, measurement, presentation and disclosure of financial assets and financial liabilities. Specific accounting areas addressed include equity investments and financial liabilities reported under the fair value option and valuation allowance assessment resulting from unrealized losses on available-for-sale securities. This ASU also changes certain presentation and disclosure requirements for financial instruments. This ASU is to be applied by means of a cumulative effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company adopted this ASU as of January 1, 2018. The adoption of this ASU did not have any impact on the Company’s condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, addressing eight specific cash flow issues in an effort to reduce diversity in practice. This ASU is effective for the Company as of January 1, 2018. Early adoption is permitted. The adoption of this ASU did not have any material impact on its condensed consolidated statements of cash flows.

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. The guidance requires entities to recognize the income tax impact of an inter-entity sale or transfer of an asset other than inventory when the sale or transfer occurs, rather than when the asset has been sold to an outside party. The guidance will require a modified retrospective application with a cumulative catch-up adjustment to opening retained earnings. The

10


 

Company adopted this ASU as of January 1, 2018. The adoption of this ASU did not have any impact on the Company’s condensed consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this ASU as of January 1, 2018. The adoption of this ASU did not have any material impact on the Company’s condensed consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718, Compensation – Stock Compensation. The Company adopted this ASU as of January 1, 2018. The adoption of this ASU did not have any impact on the Company’s condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Effective

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize right-of-use assets and corresponding liabilities for all leases with an initial term in excess of 12 months. This ASU is to be adopted using a modified retrospective approach, including a number of practical expedients, that requires leases to be measured and recognized under the new guidance at the beginning of the earliest period presented. This ASU is effective for the Company as of January 1, 2019. Early adoption is permitted. The Company is currently evaluating the effect this ASU will have on its condensed consolidated financial statements and related disclosures. The Company expects the asset leased under its headquarters office operating lease will be capitalized on the balance sheet upon adoption of this ASU.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this ASU change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. The amendments in Part I of this ASU are effective for the Company as of January 1, 2019. The amendments in Part II of this ASU replace the indefinite deferral of certain guidance in Topic 480 with a scope exception. The amendments in Part II of this ASU do not require any transition guidance. The Company is currently evaluating the effect this ASU will have on its condensed consolidated financial statements.

 

Note 4. Details of Certain Condensed Consolidated Balance Sheet Accounts

 

Prepaid expenses and other current assets (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Prepaid software and licenses

 

$

298

 

 

$

407

 

Prepaid insurance

 

 

436

 

 

 

211

 

Other prepaid expenses

 

 

175

 

 

 

137

 

Deferred commissions

 

 

614

 

 

 

 

Other

 

 

75

 

 

 

84

 

 

 

$

1,598

 

 

$

839

 

 

11


 

Other assets (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Deferred commissions

 

$

1,599

 

 

$

 

Other

 

 

480

 

 

 

143

 

 

 

$

2,079

 

 

$

143

 

 

Accrued expenses and other current liabilities (in thousands):

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Payroll liabilities

$

1,618

 

 

$

1,697

 

Accrued employee paid time off

 

580

 

 

 

469

 

Accrued commissions

 

109

 

 

 

199

 

Accrued ESPP

 

383

 

 

 

115

 

Royalties payable

 

108

 

 

 

125

 

Professional fees

 

283

 

 

 

328

 

Use and other taxes

 

256

 

 

 

406

 

Other

 

1,354

 

 

 

476

 

 

$

4,691

 

 

$

3,815

 

 

Note 5. Impairment of Property and Equipment

During the three months ended September 30, 2018, the Company recognized impairment expense of $0.3 million for the impairment of property and equipment relating to the remaining book value of indoor sensor inventory.

During the nine months ended September 30, 2018, the Company recognized impairment expense of $0.6 million for the impairment of property and equipment relating to the remaining book value of indoor sensor inventory and indoor sensor networks installed at certain security customers.

During the three and nine months ended September 30, 2017, the Company recognized impairment expense of $0.7 million for the impairment of property and equipment primarily relating to the remaining book value of deployed equipment in Puerto Rico and the U.S. Virgin Islands. Management concluded that the impairment charges were required because the equipment was presumed destroyed by the hurricanes in September 2017. The Company also recognized $0.9 million in revenues relating to the remaining deferred set-up fees to be recognized on contracts with customers in Puerto Rico and the U.S. Virgin Islands. Management concluded that the revenues associated with these contracts were required to be accelerated because the contracts with customers in Puerto Rico and the U.S. Virgin Islands were expired at the time of the hurricanes and all subscription services were fully delivered.

 

Note 6. Capital Stock

Convertible Preferred Stock

Immediately prior to the IPO, the Company had the following outstanding convertible preferred stock:

 

 

 

Shares

Authorized

 

 

Shares

Issued and

Outstanding

 

 

Aggregate

Liquidation

Preference

(in thousands)

 

Series B-1

 

 

4,773,000

 

 

 

3,848,023

 

 

$

22,575

 

Series A-2

 

 

1,177,000

 

 

 

1,176,423

 

 

 

20,000

 

 

 

 

 

 

 

 

 

 

 

$

42,575

 

 

12


 

Upon the closing of the IPO, all shares of convertible preferred stock then outstanding were automatically converted into an aggregate of 4,689,753 shares of common stock, resulting in the reclassification of the related redeemable convertible preferred stock into $23,000 of common stock and $42.1 million into additional paid-in capital.  

 

As of September 30, 2018, there were no shares of convertible preferred stock outstanding.

Common Stock

The Company is authorized to issue 500,000,000 shares of common stock, with a par value of $0.005 and each outstanding share of common stock is entitled to one vote, as provided in the Post-IPO Certificate.

At September 30, 2018, there were 10,803,710 shares of common stock issued and outstanding. At December 31, 2017, there were 9,827,129 shares of common stock issued and outstanding.

Preferred Stock

The Company is authorized to issue 20,000,000 shares of preferred stock, with a par value of $0.005, as provided in the Post-IPO Certificate. As of September 30, 2018 and December 31, 2017, there were no shares of preferred stock issued and outstanding.

Note 7. Net Loss per Share

The following table summarizes the computation of basic and diluted net loss per share (in thousands, except share and per share data):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(1,441

)

 

$

(1,611

)

 

$

(3,027

)

 

$

(7,477

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding, basic and diluted

 

 

10,780,996

 

 

 

9,619,659

 

 

 

10,481,901

 

 

 

5,016,825

 

Net loss per share

 

$

(0.13

)

 

$

(0.17

)

 

$

(0.29

)

 

$

(1.49

)

 

The following potentially dilutive shares outstanding at the end of the periods presented were excluded in the calculation of diluted net loss per share as the effect would have been anti-dilutive:

 

 

 

As of September 30,

 

 

 

2018

 

 

2017

 

Options to purchase common stock

 

 

824,481

 

 

 

1,287,977

 

Unvested restricted stock units

 

 

110,764

 

 

 

44,238

 

Warrants to purchase common stock

 

 

166,014

 

 

 

714,596

 

Total

 

 

1,101,259

 

 

 

2,046,811

 

 

Note 8. Convertible Preferred Stock Warrants and Common Stock Warrants

 Immediately prior to the Company’s IPO, all outstanding Series B-1 convertible preferred stock warrants were remeasured to their fair value, using the Black-Scholes model. Refer to Note 3, Summary of Significant Accounting Policies, to the notes to the consolidated financial statement included in the final prospectus for our initial public offering dated as of on June 8, 2017 and filed with the SEC pursuant to Rule 424(b)(4) for a description of the valuation method. The final remeasurement of the convertible preferred stock warrant liability resulted in a $3.7 million loss, which was recorded to other expense, net.

13


 

Upon the closing of the IPO, the entire balance of $5.7 million in convertible preferred stock warrant liability was reclassified to additional paid-in capital. All convertible preferred stock warrants were converted into common stock warrants. In addition, the Company issued to the lead underwriter in the IPO a warrant to purchase up to 84,000 shares of its common stock.

As of September 30, 2018, the Company had the following common stock warrants issued and outstanding (in thousands, except share and per share data):

 

Warrant Class

 

Shares

 

 

Issuance

Date

 

Price

per Share

 

 

Expiration

Date

Common stock warrant

 

 

3,766

 

 

July 2012

 

$

5.8667

 

 

July 2019

Common stock warrant

 

 

27,532

 

 

August 2012

 

$

5.8667

 

 

August 2019

Common stock warrant

 

 

50,716

 

 

February 2014

 

$

0.1700

 

 

February 2021

Common stock warrant (1)

 

 

84,000

 

 

June 2017

 

$

13.2000

 

 

June 2020

 

 

 

166,014

 

 

 

 

 

 

 

 

 

 

 

(1)

This warrant was issued to the Company’s lead underwriter in connection with the IPO.    

Note 9. Equity Incentive Plans

2017 Equity Incentive Plan

In May 2017, the Board and the Company’s stockholders approved the 2017 Equity Incentive Plan (the “2017 Plan”), which became effective in connection with the IPO. The 2017 Plan provides for the issuance of stock options, restricted stock units and other awards to employees, directors and consultants of the Company. A total of 2,413,659 shares of the Company’s common stock were initially reserved for issuance under the 2017 Plan, which is the sum of (1) 900,000 shares, (2) the number of shares reserved for issuance under the 2005 Plan at the time the 2017 Plan became effective and (3) shares subject to stock options or other stock awards under the 2005 Plan that would have otherwise been returned to the 2005 Plan (up to a maximum of 1,314,752 shares). Under an “evergreen” provision, the number of shares of common stock reserved for issuance under the 2017 Plan will automatically increase on January 1 of each year, beginning on January 1, 2018 and ending on and including January 1, 2027, by of 5% of the total number of shares of our capital stock outstanding on December 31 of the preceding calendar year or a lesser number of shares determined by our Board of Directors. In accordance with the evergreen provision, the number of shares of common stock reserved for issuance under our 2017 Plan was automatically increased on January 1, 2018 by 491,356 shares, which was equal to 5% of the total number of shares of capital stock outstanding on December 31, 2017.

 

2005 Stock Plan

In February 2005, the Company adopted the 2005 Stock Plan, as amended in January 2010 and November 2012 (the “2005 Plan”). Under the 2005 Plan provisions, the Company was authorized to grant incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units, and shares of restricted stock.

Following the effectiveness of the 2017 Plan in connection with the IPO, no further grants will be made under the 2005 Plan.

14


 

A summary of option activities under the 2005 Plan and 2017 Plan during the nine months ended September 30, 2018 is as follows:

 

 

 

Number

of Options

Outstanding

 

 

Weighted

Average

Exercise

Price

 

Outstanding as of December 31, 2017

 

 

1,294,128

 

 

$

1.79

 

Granted

 

 

140,746

 

 

$

33.82

 

Exercised

 

 

(591,038

)

 

$

0.88

 

Canceled

 

 

(19,355

)

 

$

5.34

 

Outstanding as of September 30, 2018

 

 

824,481

 

 

$

7.83

 

 

During the nine months ended September 30, 2018, the Company granted executive management restricted stock unit (“RSU”) awards totaling 92,883 shares of common stock, with vesting terms of 35% upon the first anniversary and 21.667% on each of the three subsequent anniversaries. The weighted average fair value of $17.87 per unit was calculated using the closing stock price on the grant dates.

 

During the nine months ended September 30, 2018, the Company granted directors RSU awards totaling 17,881 shares of common stock. The fair value of $28.45 per unit was calculated using the closing price on the grant date.

Our 2017 Plan include stock options, restricted stock units and other stock awards. The number of shares available for grant under these plans was 1,263,076 as of September 30, 2018.

2017 Employee Stock Purchase Plan

In May 2017, the Board and the Company’s stockholders adopted the 2017 Employee Stock Purchase Plan (“2017 ESPP”), which became effective in connection with the Company’s IPO. The 2017 ESPP allows eligible employees to purchase shares of the Company’s common stock in an offering at a discount of the then-current trading price, up to the lesser of (1) 85% of the fair market value of the common stock on the first day of the IPO or (2) 85% of the fair market value of the common stock on the purchase date. The 2017 ESPP permits the maximum discounted purchase price permitted under U.S. tax rules, including a “lookback.”

The 2017 ESPP initial offering period runs for approximately 24 months in length, and contains four 6-month purchase periods. An employee’s purchase rights terminate immediately upon termination of employment or other withdrawal from the 2017 ESPP. No participant will have the right to purchase shares of common stock in an amount that has a fair market value of more than $25,000 determined as of the first day of the applicable purchase period, for each calendar year.

There are 200,000 shares of common stock reserved for issuance under the 2017 ESPP. In addition, the 2017 ESPP contains an “evergreen” provision which provides for an automatic annual share increase on January 1 of each year, in an amount equal to the lesser of (1) 2% of the total number of shares of common stock outstanding on December 31st of the preceding calendar year, (2) 150,000 shares or (3) such number of shares as determined by the Board. In accordance with the evergreen provision, the number of shares of common stock reserved for issuance under our 2017 ESPP was automatically increased on January 1, 2018 by 150,000 shares.

The Company accounts for employee stock purchases made under its 2017 ESPP using the estimate grant date fair value of accounting in accordance with ASC 718, Stock Compensation. The Company values ESPP shares using the Black-Scholes model.

There were 43,624 shares issued under the 2017 ESPP during the nine months ended September 30, 2018.

15


 

Total stock-based compensation expense associated with the 2005 Plan, 2017 Plan and 2017 ESPP is recorded in the condensed consolidated statements of operations and was allocated as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cost of revenues

 

$

97

 

 

$

33

 

 

$

229

 

 

$

43

 

Sales and marketing

 

 

273

 

 

 

54

 

 

 

538

 

 

 

74

 

Research and development

 

 

98

 

 

 

26

 

 

 

206

 

 

 

42

 

General and administrative

 

 

280

 

 

 

118

 

 

 

850

 

 

 

147

 

Total

 

$

748

 

 

$

231

 

 

$

1,823

 

 

$

306

 

 

Note 10. Commitments and Contingencies

Operating Lease

The Company leases its principal executive offices in Newark, California, under a non-cancelable operating lease which expires in 2021. The Company recognizes rent expense on a straight-line basis over the expected lease term. The difference between cash payments required and rent expense is recorded as deferred rent. Rent expense for the Company’s facilities was $0.1 million for both the three months ended September 30, 2018 and 2017. Rent expense for the Company’s facilities was $0.3 million for both the nine months ended September 30, 2018 and 2017.

The following is a schedule of future minimum lease payments under the non-cancelable operating lease at September 30, 2018 (in thousands):

 

2018 (remainder of year)

 

$

93

 

2019

 

 

352

 

2020

 

 

357

 

2021

 

 

304

 

2022

 

 

 

Total

 

$

1,106

 

 

Contingencies

On November 6, 2017, three individuals, Ken Fisher, Kevin Baxter and Fred Holmes (the “Contractors”), filed a complaint with the Superior Court of California, County of Alameda, alleging breach of contract, a breach of the implied covenant of good faith and fair dealing and violation of Section 17200 et seq. of the California Business and Professions Code, purportedly predicated on an alleged breach of Section 10b-5 of the Securities Exchange Act of 1934. On October 4, 2018, the parties reached a binding settlement pursuant to which the Company paid a cash amount to the Contractors. The Company recognized the settlement payment in general and administrative expense during the three and nine months ended September 30, 2018, as the amount was both probable and could be estimated. The Contractors filed a Notice of Unconditional Settlement on October 9, 2018, which gives them 45 days from October 4, 2018 to file a request for dismissal.

On August 28, 2018, Silvon S. Simmons (the "Plaintiff") amended a complaint against the City of Rochester, New York and various city employees, with the United States District Court, Western District of New York, to add the Company and employees as a defendant alleging conspiracy to violate plaintiff's civil rights, denial of the right to a fair trial, and malicious prosecution.   The Plaintiff claims that the Company colluded with the City of Rochester to fabricate and create gunshot alert evidence to secure Plaintiff's conviction. On the basis of the allegations, the Plaintiff has petitioned for compensatory and punitive damages and other costs and expenses, including attorney's fees.  The Company believes that the Plaintiff's claims are without merit and are disputing them vigorously. 

The Company may become subject to legal proceedings, as well as demands and claims that arise in the normal course of our business. Such claims, even if not meritorious, could result in the expenditure of significant financial and management resources. The Company makes a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed

16


 

and adjusted to include the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel, and other information and events pertaining to a particular matter.

An unfavorable outcome on any such matters could require us to pay substantial damages, or, in connection with any intellectual property infringement claims, could require us to pay ongoing royalty payments or could prevent us from selling certain of our products. As a result, a settlement of, or an unfavorable outcome on, any of the matters referenced above or other litigation matters could have a material adverse effect on our business, operating results, financial condition and cash flows.

 

Note 11. Debt