Annual report pursuant to Section 13 and 15(d)

Business Acquisitions

v3.21.1
Business Acquisitions
12 Months Ended
Dec. 31, 2020
Business Combinations [Abstract]  
Business Acquisitions

Note 4. Business Acquisitions

LEEDS

On November 24, 2020, the Company completed the acquisition of 100% of the membership interests in LEEDS for a purchase consideration of $21.6 million in cash, subject to working capital adjustments, and $2.0 million in 63,901 units of ShotSpotter common stock. The purchase consideration also included a contingent earnout agreement. Up to $2.5 million in contingent earnout will be payable based on LEEDS' revenues generated during 2021. An additional amount up to $2.5 million contingent earnout will be payable based on LEEDS' revenues during 2022. The amounts will be determined and paid within approximately 90 days after the end of 2021 and 2022, respectively. The preliminary fair value of the contingent earnout is $0.2 million, resulting in a total estimated purchase consideration of $23.8 million. The acquisition will enable the Company to broaden its suite of precision policing solutions to offer its customers.

The following table summarizes the allocation of the purchase price as of the acquisition date, November 24, 2020 (in thousands):

 

Cash and cash equivalents

 

$

7,044

 

Accounts receivable and contract asset, net

 

 

1,060

 

Property and equipment, net

 

 

161

 

Operating lease right-of-use asset

 

 

225

 

Goodwill

 

 

1,432

 

Customer relationship

 

 

14,410

 

Other asset

 

 

45

 

Accrued expenses and other current liabilities

 

 

(458

)

Other liabilities

 

 

(98

)

         Total estimated consideration

 

$

23,821

 

 

 

 

 

 

 

The purchase price allocation above is final except for measure period adjustments which may be required in the future following purchase price adjustments related to working capital true-up.

 

Goodwill primarily represents the value of the employee workforce as well as cash flows from future customers. The Company expects to deduct the amortization of goodwill and intangible assets for tax purposes. A portion of the amortization deduction will commence upon settlement of contingent consideration and contingent liabilities.

The Company valued the customer relationship asset using the income approach. Significant assumptions include forecasts of revenues, cost of revenues, research and development expense, sales and marketing expense, general and administrative expense and estimated customer attrition rates. The Company discounted the cash flows at 7%, reflecting the risk profile of the asset. The customer relationship asset will be amortized over an estimated useful life of 15 years.

Acquisition-related expenses totaled $0.6 million, which were included in general and administrative expense for the year ended December 31, 2020.

The unaudited pro forma combined revenue and net income presented below have been prepared as if the Company had acquired LEEDS on January 1, 2019. The unaudited pro forma financial information has been derived from the consolidated statements of operations of the Company and LEEDS for the below periods. The historical financial information has been adjusted in the unaudited combined pro forma information based upon currently available information and certain estimates and assumptions. The actual effect of the transactions ultimately may differ from the pro forma adjustments included herein. However, management believes that the assumptions used to prepare the pro forma adjustments provide a reasonable basis for presenting the significant effects of the transactions

as currently contemplated and that the pro forma adjustments are factually supportable, give appropriate effect to the expected impact of events that are directly attributable to the transactions, and reflect those items expected to have a continuing impact on the Company. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2019.

The unaudited pro forma combined revenue and net income (loss) for the years ended December 31, 2020 and 2019 are as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

Revenues

 

$

59,196

 

 

$

50,630

 

Net income (loss)

 

$

5,014

 

 

$

(145

)

 

HunchLab

On October 3, 2018, the Company acquired certain technology, referred to as HunchLab, and related assets from Azavea Inc. The acquisition provides an opportunity to increase the Company’s revenue per customer with a related and value-added technology that helps deter crime through strategically planned patrols. 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. The Company determined the acquisition-date fair value of the contingent consideration liability based on the likelihood of meeting revenues forecasts.  

The following table presents the purchase price allocation (in thousands):

 

 

 

 

 

 

Accounts receivable

 

$

114

 

Prepaid expense

 

 

4

 

Deferred revenue, short term

 

 

(120

)

Accounts payable

 

 

(26

)

Software technology

 

 

950

 

Customer relationships

 

 

160

 

Goodwill

 

 

1,379

 

Total purchase consideration

 

$

2,461

 

 

Goodwill primarily represents the value of cash flows from future customers. The Company expects to deduct goodwill and identifiable technology and intangible assets for tax purposes, a portion of which will commence upon settlement of contingent consideration and contingent liabilities.

The following table presents the components of the identifiable technology and intangible assets and the estimated useful lives (in thousands):

 

 

 

Fair Value

 

 

Useful

Life

Software technology

 

$

950

 

 

5 years

Customer relationships

 

160

 

 

7 years

Total identifiable technology and intangible assets

 

$

1,110

 

 

 

 

The Company valued customer relationships and the software technology using the income approach. Significant assumptions include forecasts of revenues, cost of revenues, research and development expense, sales and marketing expense, general and administrative expense and estimated customer attrition rates. The Company discounted the cash flows at 25.5%, reflecting the risk profile of the assets.

Acquisition-related expenses totaled $0.2 million, which were included in general and administrative expense for the year ended December 31, 2018.

The Company has not presented separate results of operations since closing or combined pro forma financial information of the Company and HunchLab since the beginning of fiscal 2017, as results of operations for HunchLab are immaterial.