UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended: June 30, 2016

 

Or

 

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

 

Commission File Number: 001-36280

 

SharpSpring, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		05-0502529
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
304 West University Avenue Gainesville, FL		32601
(Address of principal executive offices)		(Zip Code)

 

877-705-9362

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

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 [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted 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 and post such files). Yes [X] No [  ]

 

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

 

Large accelerated filer	[  ]	Accelerated filer	[  ]
Non-accelerated filer	[  ]	Smaller reporting company	[X]

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,348,030 shares of common stock as of August 10, 2016.

 

 

 

SharpSpring, Inc.

 

Table of Contents

 

	Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements:.	4
Consolidated Balance Sheets— June 30, 2016 (unaudited) and December 31, 2015	4
Consolidated Statements of Comprehensive Income (Loss) (unaudited)	5
Consolidated Statements of Cash Flows (unaudited)	6
Notes to Consolidated Financial Statements (unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosure About Market Risk	27
Item 4. Controls and Procedures	27
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.	28
Item 1A. Risk Factors.	28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3. Defaults Upon Senior Securities	28
Item 4. Mine Safety Disclosures	28
Item 5. Other Information.	28
Item 6. Exhibits	29
SIGNATURES	30

 

 

PART I – FINANCIAL INFORMATION

 

Forward-Looking Information

 

This report on Form 10-Q contains forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “will,” “could” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.

 

Examples of forward-looking statements include:

 

	●	the timing of the development of future products;
	●	projections of costs, revenue, earnings, capital structure and other financial items;
	●	statements of our plans and objectives;
	●	statements regarding the capabilities of our business operations;
	●	statements of expected future economic performance;
	●	statements regarding competition in our market; and
	●	assumptions underlying statements regarding us or our business.

 

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

 

	●	strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses;
	●	the occurrence of hostilities, political instability or catastrophic events;
	●	changes in customer demand;
	●	the extent to which we are successful in gaining new long-term relationships with customers or retaining existing ones and the level of service failures that could lead customers to use competitors’ services;
	●	the extent to which we are successful in utilizing the cash proceeds from the sale of our SMTP email relay business to expand and develop our marketing automation solution;
	●	developments and changes in laws and regulations, including increased regulation of our industry through legislative action and revised rules and standards; and
	●	disruptions to our technology network including computer systems and software, as well as natural events such as severe weather, fires, floods and earthquakes or man-made or other disruptions of our operating systems, structures or equipment.

 

The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. We discuss our known material risks under Item 1.A “Risk Factors” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and under Part II- Item 1.A “Risk Factors” contained in this report on Form 10-Q. Many factors could cause our actual results to differ materially from the forward-looking statements. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

The forward-looking statements speak only as of the date on which they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 

 

Item 1. Financial Statements.

 

SharpSpring, Inc.

CONSOLIDATED BALANCE SHEETS

 

		June 30, 2016				December 31, 2015
		(unaudited)
Assets
Cash and cash equivalents		$	15,335,363			$	4,158,646
Restricted cash			250,000				-
Accounts receivable			817,827				794,123
Deferred income taxes			91,356				16,645
Income taxes receivable			554,670				793,189
Other current assets			1,432,663				205,143
Assets held for sale			-				45,697
Total current assets			18,481,879				6,013,443
Property and equipment, net			670,149				565,481
Goodwill			8,865,209				8,881,933
Other intangible assets, net			4,910,152				5,518,305
Deposits and other			42,254				11,280
Assets held for sale			-				251,565
Total assets		$	32,969,643			$	21,242,007
Liabilities and Shareholders’ Equity
Accounts payable		$	584,585			$	609,454
Accrued expenses and other current liabilities			622,625				1,098,790
Deferred revenue			497,278				525,217
Current portion of earn out liabilities			-				5,191,116
Income taxes payable			5,103,035				36,469
Deferred income taxes			-				7,598
Liabilities held for sale			-				369,941
Total current liabilities			6,807,523				7,838,585
Shareholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued or outstanding at June 30, 2016 and December 31, 2015			-				-
Common stock, $0.001 par value, Authorized shares-50,000,000; issued shares-8,356,989 at June 30, 2016 and 7,233,035 at December 31, 2015; outstanding shares-8,336,989 at June 30, 2016 and 7,233,035 at December 31, 2015			8,356				7,233
Additional paid in capital			27,175,931				22,607,290
Accumulated other comprehensive income (loss)			(232,878	)			(142,613	)
Accumulated deficit			(705,289	)			(9,068,488	)
Treasury stock			(84,000	)			-
Total shareholders’ equity			26,162,120				13,403,422
Total liabilities and shareholders’ equity		$	32,969,643			$	21,242,007

 

See accompanying notes to the consolidated financial statements.

 

 

SharpSpring, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Revenue		$	2,891,641			$	2,268,492			$	5,678,416			$	4,193,100
Cost of services			1,010,436				647,385				2,081,523				1,104,561
Gross profit			1,881,205				1,621,107				3,596,893				3,088,539
Operating expenses:
Sales and marketing			1,318,210				1,074,801				2,639,294				2,144,144
Research and development			562,583				453,215				1,039,692				811,413
General and administrative			925,726				883,689				1,938,056				1,767,122
Change in earn out liability			99,000				1,667,332				219,473				2,371,332
Intangible asset amortization			286,719				382,679				770,016				761,574
Total operating expenses			3,192,238				4,461,716				6,606,531				7,855,585
Operating loss			(1,311,033	)			(2,840,609	)			(3,009,638	)			(4,767,046	)
Other income (expense), net			38,428				(15,623	)			369,879				(65,646	)
Loss before income taxes			(1,272,605	)			(2,856,232	)			(2,639,759	)			(4,832,692	)
Benefit for income tax			(603,501	)			(655,433	)			(815,507	)			(1,204,815	)
Net loss from continuing operations			(669,104	)			(2,200,799	)			(1,824,252	)			(3,627,877	)
Net income from discontinued operations, net of tax			9,742,401				334,148				10,187,451				591,189
Net income (loss)		$	9,073,297			$	(1,866,651	)		$	8,363,199			$	(3,036,688	)
Net loss per share from continuing operations
Basic net loss per share		$	(0.09	)		$	(0.38	)		$	(0.25	)		$	(0.64	)
Diluted net loss per share		$	(0.09	)		$	(0.38	)		$	(0.25	)		$	(0.64	)
Net income per share from discontinued operations
Basic net income per share		$	1.28			$	0.06			$	1.37			$	0.10
Diluted net income per share		$	1.28			$	0.06			$	1.37			$	0.10
Net income (loss) per share
Basic net income (loss) per share		$	1.19			$	(0.32	)		$	1.12			$	(0.54	)
Diluted net income (loss) per share		$	1.19			$	(0.32	)		$	1.12			$	(0.54	)
Shares used in computing basic net income (loss) per share			7,625,833				5,871,445				7,439,152				5,664,090
Shares used in computing diluted net income (loss) per share			7,636,581				5,871,445				7,449,756				5,664,090
Other comprehensive income (loss):
Foreign currency translation adjustment			(91,587	)			196,210				(90,265	)			132,739
Comprehensive income (loss)		$	8,981,710			$	(1,670,441	)		$	8,272,934			$	(2,903,949	)

 

See accompanying notes to the consolidated financial statements.

 

 

SharpSpring, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended
		June 30,
		2016				2015
Cash flows from operating activities:
Net income (loss)		$	8,363,199			$	(3,036,688	)
Deduct: Income from discontinued operations, net of income taxes			10,187,451				591,189
Net loss from continuing operations			(1,824,252	)			(3,627,877	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			814,017				799,645
Non-cash stock compensation			335,828				433,440
Deferred income taxes			(82,974	)			3,794
Loss on disposal of property and equipment			8,753				2,491
Non-cash change in value of earn out liability			219,473				2,371,332
Non-cash gain from escrow claim			(84,000	)			-
Unearned foreign currency gain/loss			(81,926	)			-
Changes in operating assets and liabilities:
Accounts receivable			(43,014	)			(120,488	)
Other assets			(255,622	)			(55,446	)
Income taxes, net			(291,526	)			(904,301	)
Accounts payable			(52,998	)			(65,906	)
Accrued expenses and other current liabilities			(101,544	)			(80,148	)
Deferred revenue			(37,419	)			(78,159	)
Net cash provided by (used in) operating activities - Continuing operations			(1,477,204	)			(1,321,623	)
Net cash provided by (used in) operating activities - Discontinued operations			785,830				568,356
Net cash used in operating activities			(691,374	)			(753,267	)
Cash flows from investing activities:
Purchases of property and equipment			(151,281	)			(187,711	)
Acquisitions of customer assets from resellers			(476,514	)			-
Changes in restricted cash			(250,000	)			-
Net cash provided by (used in) investing activities - Continuing operations			(877,795	)			(187,711	)
Net cash provided by (used in) investing activities - Discontinued operations			13,945,548				(135,290	)
Net cash provided by (used in) investing activities			13,067,753				(323,001	)
Cash flows from financing activities:
Payment to reduce earn out liabilities			(1,207,929	)			(2,000,000	)
Proceeds from exercise of stock options			1,125				81,139
Proceeds from issuance of common stock			-				1,977,003
Net cash provided by (used in) financing activities - Continuing operations			(1,206,804	)			58,142
Net cash provided by (used in) financing activities - Discontinued operations			-				-
Net cash provided by (used in) financing activities			(1,206,804	)			58,142
Effect of exchange rate on cash			7,142				10,158
Change in cash and cash equivalents			11,176,717				(1,007,968	)
Cash and cash equivalents, beginning of period			4,158,646				2,825,520
Cash and cash equivalents, end of period		$	15,335,363			$	1,817,552
Supplemental information on consolidated statements of cash flows:
Cash paid for income taxes		$	28,972			$	38,325
Supplemental information on non-cash investing and financing activities:
Receipt of common stock for escrow claim		$	84,000			$	-
Settlement of earn out liabilities with common stock		$	(4,207,929	)		$	(3,000,000	)
Other receivable created for sale of SMTP email relay business		$	(1,000,000	)		$	-

 

See accompanying notes to the consolidated financial statements.

 

 

SharpSpring, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1: Organization

 

We were incorporated in Massachusetts in October 1998 as EMUmail, Inc. and we changed our name in April 2010 to SMTP.com, Inc. In November 2010 we reincorporated in the State of Delaware and changed our name to SMTP, Inc. In December 2013 we effected a 1-for-5 reverse stock split of our common stock whereby every five shares of our pre-reverse stock split common stock was combined and reclassified into one share of post-reverse stock split common stock.

 

On August 15, 2014, we acquired substantially all the assets and assumed the liabilities of SharpSpring LLC, and on October 17, 2014, we acquired all of the outstanding equity of the GraphicMail, group companies. See Note 3 for details of these acquisitions.

 

On December 1, 2015, our Company changed its parent company name from SMTP, Inc. to SharpSpring, Inc. and changed the name of its SharpSpring product U.S. operating subsidiary from SharpSpring, Inc. to SharpSpring Technologies, Inc.

 

On June 27, 2016, we sold the assets related to our SMTP email relay product to the Electric Mail Company, a Nova Scotia company. See Note 5 for details of this disposition.

 

Our Company focuses on providing cloud-based marketing automation solutions and email marketing solutions to its customers. Our SharpSpring marketing automation solution is designed to increase the rate businesses generate leads and convert more leads to sales by improving the way businesses communicate with customers and prospects. Our products are marketed directly by the Company and through reseller partners. Prior to June 27, 2016, the Company also provided cloud-based email relay delivery services to its customers.

 

Note 2: Summary of Significant Accounting Policies

 

Basis of Presentation and Consolidation

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). Our consolidated financial statements include the accounts of SharpSpring, Inc. and our subsidiaries (all collectively, the “Company”). Our consolidated financial statements reflect the elimination of all significant inter-company accounts and transactions.

 

The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 2016. The year-end balance sheet data was derived from audited financial statements, but this Form 10-Q does not include all disclosures required under U.S. GAAP. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been omitted under the rules and regulations of the SEC.

 

These interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2016. There have been no changes in the Company’s significant accounting policies from those that were disclosed in the Company’s Annual Report on Form 10-K that have had a material impact on our consolidated financial statements and related notes.

 

Use of Estimates

 

The preparation of the 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 disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 

Foreign Currencies

 

The Company’s subsidiaries utilize the U.S. Dollar, Swiss Franc, South African Rand and British Pound as their functional currencies. The assets and liabilities of these subsidiaries are translated at ending exchange rates for the respective periods, while revenues and expenses are translated at the average rates in effect for the period. The related translation gains and losses are included in other comprehensive income or loss within the Consolidated Statements of Comprehensive Income (Loss).

 

Cash and Cash Equivalents

 

Cash equivalents are short-term, liquid investments with remaining maturities of three months or less when acquired. Cash and cash equivalents are deposited or managed by major financial institutions and at most times are in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits.

 

Restricted Cash

 

The Company separates restricted cash when arrangements with third parties legally restrict the use of funds. As of June 30, 2016, the Company had $250,000 deposited with a major financial institution that was legally restricted and pledged as collateral against its credit card program.

 

Fair Value of Financial Instruments

 

U.S. GAAP establishes a fair value hierarchy which has three levels based on the reliability of the inputs to determine the fair value. These levels include: Level 1, defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, deposits and accounts payable. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of the short-term nature of these items.

 

Accounts Receivable

 

Accounts receivable are carried at the original invoiced amount less an allowance for doubtful accounts based on the probability of future collection. Management reviews accounts receivable on a periodic basis to determine if any receivables will potentially be uncollectible. The Company reserves for receivables that are determined to be uncollectible, if any, in its allowance for doubtful accounts. After the Company has exhausted all collection efforts, the outstanding receivable is written off against the allowance.

 

Intangibles

 

Finite-lived intangible assets include trade names, developed technologies and customer relationships and are amortized based on the estimated economic benefit over their estimated useful lives, with periods ranging from 5 to 11 years. We continually evaluate the reasonableness of the useful lives of these assets. Finite-lived intangibles are tested for recoverability whenever events or changes in circumstances indicate the carrying amounts may not be recoverable. Impairment losses are measured as the amount by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. Judgment is used when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of an asset group. The dynamic economic environment in which the Company operates and the resulting assumptions used to estimate future cash flows impact the outcome of these impairment tests. During the fourth quarter and year ended December 31, 2015, the Company recorded an impairment loss of $1,310,386 related to the impaired recovery of its GraphicMail technology and trade name assets.

 

 

Goodwill and Impairment

 

As of June 30, 2016 and December 31, 2015, we had recorded goodwill of $8,865,209 and $8,881,933, respectively. Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired in the SharpSpring and GraphicMail acquisitions (See Note 3). Under FASB ASC 350, “Intangibles - Goodwill and Other” deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests, and tests between annual tests in certain circumstances, based on estimated fair value in accordance with FASB ASC 350-10, and written down when impaired.

 

Income Taxes

 

Provision for income taxes are based on taxes payable or refundable for the current year and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in FASB ASC 740, Accounting for Income Taxes. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.

 

The Company applies the authoritative guidance in accounting for uncertainty in income taxes recognized in the consolidated financial statements. This guidance prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. There are no material uncertain tax positions taken by the Company on its tax returns. Tax years subsequent to 2013 remain open to examination by U.S. federal and state tax jurisdictions.

 

In determining the provision for income taxes, the Company uses statutory tax rates and tax planning opportunities available to the Company in the jurisdictions in which it operates. This includes recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns to the extent pervasive evidence exists that they will be realized in future periods. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which are expected to be in effect in the years in which the temporary differences are expected to reverse. In accordance with the Company’s income tax policy, significant or unusual items are separately recognized in the period in which they occur. The Company is subject to routine examination by domestic and foreign tax authorities and frequently faces challenges regarding the amount of taxes due. These challenges include positions taken by the Company related to the timing, nature and amount of deductions and the allocation of income among various tax jurisdictions. Currently, the IRS is examining our 2014 U.S. income tax return.

 

Property and Equipment

 

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful life of the assets. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred. Depreciation expense related to property and equipment was $45,767 and $45,694 for the three months ended June 30, 2016 and 2015, respectively, and $112,860 and $92,798 for the six months ended June 30, 2016 and 2015, respectively.

 

Property and equipment as of June 30, 2016 and December 31, 2015 is as follows:

 

		June 30, 2016				December 31, 2015
Property and equipment, net:
Leasehold improvements		$	1,909			$	1,909
Furniture and fixtures			129,415				126,929
Computer equipment and software			726,010				295,613
Construction in progress			-				280,000
Total			857,334				704,451
Accumulated depreciation and amortization			(187,185	)			(138,970	)
Property and equipment, net		$	670,149			$	565,481

 

 

Useful lives are as follows:

 

Leasehold improvements	3-5 years
Furniture and fixtures	3-5 years
Computing equipment	3 years
Software	3-5 years

 

Revenue Recognition

 

The Company recognizes revenue from its services when it is probable that the economic benefits associated with the transactions will flow to the Company and the amount of revenue can be measured reliably. This is normally demonstrated when: (i) persuasive evidence of an arrangement exists; (ii) the fee is fixed or determinable; (iii) performance of service has been delivered; and (iv) collection is reasonably assured.

 

For the Company’s internet-based SMTP email delivery product (which was sold on June 27, 2016) and GraphicMail email product, the services are offered over various contractual periods for a fixed fee that varies based on a maximum volume of transactions. Revenues are typically paid by clients via credit card, check or wire payments at the inception of the contractual period. Revenue is recognized on a straight-line basis over the contractual period. If the customer’s transactions exceed contractual volume limitations, overages are charged and recorded in the periods in which the transaction overages occur.

 

Certain of the Company’s GraphicMail customers are sold through third party resellers. In some cases, we allow the third party resellers to collect the funds directly from the customer, withhold their own reseller fee, and remit the net amount owed back to the Company. In those situations, because the Company is the primary obligor in the arrangement, the Company records the gross revenue and expenses such that 100% of the end customer revenue is reported by the Company and a corresponding expense is recorded for the reseller fee.

 

For the Company’s internet-based SharpSpring marketing automation solution, the services are typically offered on a month-to-month basis with a fixed fee charged each month depending on the size of the engagement with the customer. Monthly fees are recorded as revenue during the month they are earned. Some customers are charged annually, for which revenues are deferred and recorded ratably over the subscription period. The Company also charges transactional-based fees if monthly email volume limitations are reached or other chargeable activity occurs. Additionally, some of our customers are charged an upfront implementation and training fee. The upfront implementation and training fees represent short-term “use it or lose it” services offered for a flat fee. Such flat fees are recognized over the service period, which is 60 days.

 

The Company offers refunds on a pro-rata basis at any time during the contractual period. The Company also experiences credit card chargebacks relating to cardholder disputes that are commonly experienced by businesses that accept credit cards. The Company makes estimates for refunds and credit card chargebacks based on historical experience.

 

Deferred Revenue

 

Some of the Company’s customers pay for services in advance on a periodic basis (such as monthly, quarterly, annually or bi-annually). Also, the Company charges an upfront implementation and training fee for its SharpSpring marketing automation solution that is paid in advance, for which services are performed over a 60-day period. Deferred revenue consists of payments received in advance of the Company’s providing the services. Deferred revenues are amortized on a straight-line basis in connection with the contractual period or recorded when the services are used.

 

 

Accrued Revenue

 

In cases where our customers pay for services in arrears, we accrue for revenue in advance of billings as long as the criteria for revenue recognition is met. A portion of our accounts receivable balance is therefore unbilled at the balance sheet date.

 

Concentration of Credit Risk and Significant Customers

 

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents. At June 30, 2016 and December 31, 2015, the Company had cash balances at financial institutions that exceed federally insured limits. The Company maintains its cash balances with accredited financial institutions. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

 

For the three and six month periods ended June 30, 2016, and 2015, there were no customers that accounted for more than 10% of total revenue.

 

Cost of Services

 

Cost of services consists primarily of the direct labor costs, technology hosting costs, software license costs, and fees paid to resellers of the Company’s product.

 

Credit Card Processing Fees

 

Credit card processing fees are included as a component of general and administrative expenses and are expensed as incurred.

 

Advertising Costs

 

The Company expenses advertising costs as incurred.

 

Research and Development Costs and Capitalized Software Costs

 

We capitalize certain costs associated with internal use software during the application development stage, mostly related to software that we use in providing our hosted solutions. We expense costs associated with preliminary project phase activities, training, maintenance and any post-implementation period costs as incurred. For the three months ended June 30, 2016 and 2015, we capitalized zero and $31,538 in software development costs, respectively. For the six months ended June 30, 2016 and 2015, we capitalized $6,642 and $52,419 in software development costs, respectively. We amortize capitalized software costs over the estimated useful life of the software, which has been estimated to be 3 years, once the related project has been completed and deployed for customer use. At June 30, 2016, the net carrying value of capitalized software costs was $95,996.

 

All other software development costs are charged to expenses when incurred, and generally consist of salaries, software development tools and personnel-related costs for those engaged in research and development activities.

 

Stock Compensation

 

We account for stock based compensation in accordance with FASB ASC 718, which requires companies to measure the cost of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period.

 

 

Net Income (Loss) Per Share

 

Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period.

 

Comprehensive Income or Loss

 

Comprehensive income or loss includes all changes in equity during a period from non-owner sources, such as net income or loss and foreign currency translation adjustments.

 

Recently Issued Accounting Standards

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. The guidance also allows for the employer to repurchase or sell more shares than required under local statutory regulation without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The guidance is effective in 2017 with early adoption permitted. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.

 

In February 2016, the FASB issued guidance that requires lessees to recognize most leases on their balance sheets but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance is effective in 2019 with early adoption permitted. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.

 

In May 2014, the FASB issued updated guidance and disclosure requirements for recognizing revenue. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB approved the deferral of the new standard’s effective date by one year. The new standard now is effective for annual and interim reporting periods beginning December 15, 2017. The FASB will permit companies to adopt the new standard early, but not before the original effective date of December 15, 2016. The Company is evaluating the potential impact of adopting this new accounting guidance.

 

Note 3: Acquisitions

 

During 2014, the Company pursued strategic acquisitions to further extend its product offerings. Such acquisitions have been accounted for as business combinations pursuant to ASC 805 “Business Combinations.” Under this ASC, acquisition and integration costs are not included as components of consideration transferred, but are accounted for as expenses in the period in which the costs are incurred.

 

SharpSpring

 

On August 15, 2014, the Company acquired substantially all the assets and assumed the liabilities of SharpSpring LLC, a Delaware limited liability company for a cash payment of $5,000,000 plus potential earn out consideration of $10,000,000 that was contingent on the SharpSpring product achieving certain levels of revenue in 2015. SharpSpring is a cloud-based marketing automation platform that enables users to connect with customers and build relationships to drive revenue through marketing automation, call tracking and customer relationship management.

 

 

The SharpSpring earn out was initially $10,000,000, payable 60% in cash and 40% in stock, depending on SharpSpring achieving certain revenue levels in 2015. At the time of the acquisition, the Company utilized the income approach to estimate the fair value of the earn out. The Company analyzed scenarios and determined a probability weighting for each scenario. The Company calculated the earn out payments based on the respective revenues for each scenario and then weighted the resulting payment by the probabilities of achieving each scenario. In order to calculate an appropriate risk-adjusted discount rate for the earn out, the Company calculated the weighted average cash-flows of the business based on the three scenarios and their respective weightings. The Company then calculated an implied internal rate of return (“IRR”) of 18.9%, which is the discount rate necessary in order to reconcile the weighed cash-flows of the three scenarios to the total purchase price including the earn out payment. The earn out payment was then discounted by the 18.9% IRR. Based on these methods and the Company’s original assessment of meeting those revenue levels in 2015, an earn out liability of $6,963,000 was originally recorded as a liability during purchase accounting. This was re-measured in each subsequent quarter since the transaction, resulting in additional charges of $682,000 in the quarter ended December 31, 2014, $704,000 in the quarter ended March 31, 2015, $1,030,000 in the quarter ended June 30, 2015, $195,000 in the quarter ended September 30, 2015, $204,000 in the quarter ended December 31, 2015, $123,000 in the quarter ended March 31, 2016 and $99,000 in the quarter ended June 30, 2016. These earn out adjustments have been recorded on the consolidated statement of comprehensive income (loss) for the respective periods.

 

The Company entered into a transaction with RCTW, LLC, a Delaware limited liability company, f/k/a SharpSpring, LLC (“RCTW”) during May 2015 to pay a portion of the cash-based earn out early, as well as to agree that the future earn out for the SharpSpring assets would be paid in its entirety. Although the Company was obligated to pay the full earn out for the SharpSpring assets, the earn out liability value was increased over time as a result of the discount factor applied to the liability. The final payments against the earn out of $1.0 million in cash and $4.0 million in common stock occurred in the quarter ended June 30, 2016 and there was no remaining liability as of June 30, 2016.

 

As of June 30, 2016, management had completed its evaluation of the fair value of certain intangible and other net assets acquired and there will be no future changes.

 

GraphicMail

 

On October 17, 2014, we acquired 100% of the equity interest owned, directly or indirectly, in GraphicMail group companies (“GraphicMail”) consisting of InterInbox SA, a Swiss corporation, InterCloud Limited, a Gibraltar limited company, ERNEPH 2012A (Pty) Ltd. dba ISMS, a South African limited company, ERNEPH 2012B (Pty) Ltd. dba GraphicMail South Africa, a South African limited company, and Quattro Hosting LLC, a Delaware limited liability company. The acquisition consideration consisted of $5.3 million, $2.6 million of which was paid in cash and $2.7 million of which was paid in stock, plus potential earn out consideration of up to $0.8 million based on achieving certain revenue levels in 2015 (paid 50% in cash and 50% in stock). GraphicMail operates as a campaign management solution, enabling customers to create content and manage emails being sent to customers and distribution lists.

 

 

Pursuant to the equity interest purchase agreement, the Company was liable for an earn out of up to $0.8 million, related to GraphicMail achieving certain revenue levels in 2015. The Company utilized the income approach to estimate the fair value of the earn out. The Company analyzed scenarios and determined a probability weighting for each scenario. The Company calculated the earn out payments based on the respective revenues for each scenario and then weighted the resulting payment by the probabilities of achieving each scenario. In order to calculate an appropriate risk-adjusted discount rate for the earn out, the Company calculated the weighted average cash-flows of the business based on the three scenarios and their respective weightings. The Company then calculated an implied internal rate of return (“IRR”) of 29.8%, which is the discount rate necessary in order to reconcile the weighed cash-flows of the three scenarios to the total purchase price including the earn out payment. The earn out payment was then discounted by the 29.8% IRR. Based on these methods and the Company’s initial assessment of meeting those revenue levels in 2015, an earn out liability of $36,000 was recorded as a liability during purchase accounting. This was re-measured in the subsequent quarters, resulting in additional charges of $637,332 during the quarter ended June 30, 2015 and $75,065 during the quarter ended September 30, 2015, and a reduction to expense of $288,085 during the quarter ended December 31, 2015, resulting in a earn out liability of $413,116 at December 31, 2015 for GraphicMail. During the quarter ended March 31, 2016, the Company paid $415,858 in the form of $207,929 in cash and 53,924 shares of common stock in full settlement of the earn out liability to the former GraphicMail shareholders.

 

Additionally, in March 2016, the Company received $175,970 in cash and 20,000 shares of stock (valued at $84,000) from the GraphicMail escrow fund related to an indemnified claim for unrecorded liabilities at the time of the acquisition. The total value of the claim of $259,970 was recorded as a gain in other income (expense), net during the three months ended March 31, 2016.

 

Note 4: Asset Acquisitions

 

In the fourth quarter of 2015 and the first six months of 2016, the Company entered into separation agreements with several third-party GraphicMail resellers to terminate the reseller arrangements and for the Company to purchase the customer relationships that each had accumulated as a GraphicMail reseller. Pursuant to the terms of the separation agreements, the Company will make cash payments to the resellers in exchange for the rights to the customer relationships. The Company accounted for these purchases as intangible asset acquisitions. The aggregate estimated purchase price for the intangible assets acquired during the quarters ended December 31, 2015, March 31, 2016 and June 30, 2016 is approximately $554,000, $26,000 and $102,000, respectively, combining for an aggregate total of $682,000. As of June 30, 2016, $505,000 of the consideration had been paid and $177,000 was included in accrued liabilities on the consolidated balance sheet.

 

Note 5: Dispositions

 

On June 27, 2016, the Company completed the sale of the assets and deferred revenue liabilities of its SMTP email relay business (“SMTP”) to the Electric Mail Company for approximately $15.0 million. Of the total proceeds from the sale of SMTP, approximately $1.0 million in cash is held in escrow to be received in July 2017. In conjunction with the sale, the Company also entered into a transition services agreement with the buyer to assist in the transition of operations over a six month period, with an option to extend for an additional six months. Pursuant to the terms of the transition services agreement, in exchange for assisting in the transfer of operations, the Company may continue utilizing the SMTP email relay platform for its email sending needs at no cost. Also, in conjunction with the sale, the company abandoned a software asset that was not acquired, but will not be utilized by the company in the future. The Company recorded a gain on the sale of SMTP of approximately $9.4 million, net of tax of $5.6 million in the second quarter of 2016.

 

Pursuant to the reporting requirements of ASC 205-20, Presentation of Financial Statements – Discontinued Operations, the Company has reclassified the assets and liabilities of the SMTP business as held for sale in the accompanying Consolidated Balance Sheets and the operating results of SMTP for periods prior to the sale, net of tax, as discontinued operations in the accompanying Consolidated Statements of Comprehensive Loss and Consolidated Statements of Cash Flows.

 

 

Financial information for the SMTP email relay business for the three and six months ended June 30, 2016 and 2015, are presented in the following table:

  

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Revenue		$	1,339,102			$	1,323,062			$	2,746,378			$	2,683,956
Cost of services			335,166				276,898				642,013				610,688
Gross profit			1,003,936				1,046,164				2,104,365				2,073,268
Operating expenses:
Sales and marketing			103,516				240,038				177,265				543,056
Research and development			79,845				83,936				152,898				196,952
General and administrative			231,137				188,578				474,048				389,170
Total operating expenses			414,498				512,552				804,211				1,129,178
Operating income (loss)			589,438				533,612				1,300,154				944,090
Other income (expense), net, before gain on sale			-				-				-				-
Income (loss) before income taxes, before gain on sale			589,438				533,612				1,300,154				944,090
Income tax expense (benefit)			220,332				199,464				485,998				352,901
Net income (loss), before gain on sale		$	369,106			$	334,148			$	814,156			$	591,189
Gain on sale of discontinued operations, net of tax expense of $5,595,237			9,373,295				-				9,373,295				-
Income from discontinued operations, net of income taxes		$	9,742,401			$	334,148			$	10,187,451			$	591,189

 

The selected financial information above includes the financial results for the SMTP email relay business through June 27, 2016, plus any residual costs incurred after June 27, 2016 related to the transition of the business to the buyer. The results are comprised of revenue and costs directly attributable to the SMTP email relay business as well as allocated costs for resources that have historically had shared roles in our consolidated operations. For resources performing shared roles, cost allocations have been created based on estimated work performed and job activities. Although our SharpSpring and GraphicMail products have historically utilized the SMTP email relay sending platform, we have not reflected any revenues in the SMTP email relay business operating results related to the use of the email sending platform by our other product lines.

 

The assets and liabilities of discontinued operations are stated separately as of December 31, 2015, in the Condensed Consolidated Statements of Financial Position (Unaudited) and are comprised of the following items:

 

		December 31, 2015
Assets
Other current assets		$	45,697
Total current assets held for sale			45,697
Property and equipment, net			251,565
Total assets held for sale		$	297,262
Liabilities and Shareholders’ Equity
Deferred revenue			369,941
Total liabilities held for sale		$	369,941

 

Note 6: Intangible Assets

 

Intangible assets are as follows:

 

		As of June 30, 2016
		Gross								Net
		Carrying				Accumulated				Carrying
		Amount				Amortization				Value
Amortized intangible assets:
Trade names		$	342,449			$	(258,447	)		$	84,002
Technology			3,802,485				(1,998,985	)			1,803,500
Customer relationships			4,363,460				(1,340,810	)			3,022,650
Unamortized intangible assets:			8,508,394				(3,598,242	)			4,910,152
Goodwill											8,865,209
Total intangible assets										$	13,775,361

 

 

Estimated amortization expense for the remainder of 2016 and subsequent years is as follows:

 

Remainder of 2016			$	592,015
2017				997,862
2018				871,937
2019				670,416
2020				500,380
Thereafter				1,277,543
Total			$	4,910,152

 

Amortization expense for the three months ended June 30, 2016 and 2015 was $286,719 and $382,679, respectively. Amortization expense for the six months ended June 30, 2016 and 2015 was $770,016 and $761,574, respectively.

 

Note 7: Credit Facility

 

In March 2016, the Company entered into a $2.5 million revolving loan agreement (the “Loan Agreement”) with Western Alliance Bank. The facility matures on March 21, 2018 and has no mandatory amortization provisions and is payable in full at maturity. Loan proceeds accrue interest at the higher of Western Alliance Bank’s Prime interest rate or 3.5%, plus 1.75%. The Loan Agreement is collateralized by a lien on substantially all of the existing and future assets of the Company and secured by a pledge of 100% of the capital stock of SharpSpring Technologies, Inc. and Quattro Hosting, LLC and a 65% pledge of the Company’s foreign subsidiaries’ stock. The Loan Agreement subjects the Company to a number of restrictive covenants, including financial and non-financial covenants customarily found in loan agreements for similar transactions. During June 2016, the Company amended the Loan Agreement to modify its financial covenants and allow for the sale of the SMTP business assets. There are no amounts outstanding under the Loan Agreement as of June 30, 2016 and no events of default have occurred to date.

 

Note 8: Shareholders’ Equity

 

On, January 28, 2015, the Company transferred 30,000 warrants issued on August 1, 2013 in connection with a consulting agreement in exchange for the Company issuing 5,000 shares of Company common stock.

 

In February 2015, the Company announced it was suspending its quarterly dividends with no dividends being paid during 2015. For the year ended December 31, 2014, the Company paid aggregate dividends of $2,459,711.

 

On May 18, 2015, the Company entered into a subscription agreement with investors for the sale of an aggregate of 363,909 shares of the Company’s common stock, at a price of $5.50 per share, which shares have been registered with the Securities and Exchange Commission on the Company’s registration statement on Form S-3. The closing occurred on May 21, 2015.

 

On May 18, 2015, the Company entered into a subscription agreement with RCTW for the issuance of 545,455 shares of common stock to RCTW for an aggregate value of $3,000,000, which is in satisfaction of an equal amount of the earn-out due and payable by the Company to RCTW under the Asset Purchase Agreement dated August 12, 2014 between the Company and RCTW. The closing occurred on May 21, 2015.

 

In August 2015 the Company completed a registered public offering, which raised $3.4 million (net of expenses) by offering 800,000 shares of common stock for sale.

 

In March 2016, the Company issued 53,924 shares of common stock to the former owners of GraphicMail in satisfaction of the stock-based earn out. Additionally, in March 2016, the Company received 20,000 shares of stock from the GraphicMail escrow fund related to an indemnified claim.

 

In June 2016, the Company issued 1,039,636 shares of common stock to the RCTW, LLC shareholders to satisfy the remaining stock-based portion of the SharpSpring earn out.

 

 

Note 9: Changes in Accumulated Other Comprehensive Income (Loss)

 

		Foreign Currency
		Translation
		Adjustment
Balance as of December 31, 2015		$	(142,613	)
Other comprehensive income (loss) prior to reclassifications			-
Amounts reclassified from accumulated other comprehensive income			-
Tax effect			-
Net current period other comprehensive loss			(90,265	)
Balance as of June 30, 2016		$	(232,878	)

 

Note 10: Net Loss Per Share

 

Computation of net loss per share is as follows:

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Net income (loss)		$	9,073,297			$	(1,866,651	)		$	8,363,199			$	(3,036,688	)
Basic weighted average common shares outstanding			7,625,833				5,871,445				7,439,152				5,664,090
Add incremental shares for:
Warrants			-				-				-				-
Stock options			10,748				-				10,604				-
Diluted weighted average common shares outstanding			7,636,581				5,871,445				7,449,756				5,664,090
Net loss per share:
Basic		$	1.19			$	(0.32	)		$	1.12			$	(0.54	)
Diluted		$	1.19			$	(0.32	)		$	1.12			$	(0.54	)

 

For the three and six months ended June 30, 2015, 984,490 stock options and 170,973 warrants were excluded from diluted net loss per share, because the effect of including these potential shares was anti-dilutive.

 

Note 11: Income Taxes

 

The income tax expense we record in any interim period is based on our estimated effective tax rate for the year for each jurisdiction that we operate in. The calculation of our estimated effective tax rate requires an estimate of pre-tax income by tax jurisdiction, as well as total tax expense for the fiscal year. Accordingly, this tax rate is subject to adjustment if, in subsequent interim periods, there are changes to our initial estimates of total tax expense, pre-tax income, or pre-tax income by jurisdiction. Currently, the IRS is examining our 2014 U.S. income tax return, the outcome of which is currently unknown.

 

During the three months ended June 30, 2016 and 2015, the Company recorded income tax benefits of $603,501 and $655,433, respectively, from continuing operations. During the six months ended June 30, 2016 and 2015, the Company recorded income tax benefits of $815,507 and $1,204,815, respectively, from continuing operations. The blended effective tax rate for the three months ending June 30, 2016 and 2015 was 47% and 23%, respectively, and the blended effective tax rate for the six months ending June 30, 2016 and 2015 was 31% and 25%, respectively. The effective blended tax rate varies from our statutory U.S. tax rate due to the valuation allowance placed on certain U.S. deferred tax assets described below and due to income generated in certain other jurisdictions at various tax rates. Additionally, in 2016, we did not benefit our income tax expense in Q1 from U.S. operating losses due to our valuation allowance. However, as a result of offsetting income recorded in Q2 2016 from the sale of the SMTP business, we have recorded the benefit for these 2016 year-to-date losses in the quarter ended June 30, 2016.

 

 

Valuation Allowance

 

We record a deferred tax asset if we believe that it is more likely than not that we will realize a future tax benefit. Ultimate realization of any deferred tax asset is dependent on our ability to generate sufficient future taxable income in the appropriate tax jurisdiction before the expiration of carryforward periods, if any. Our assessment of deferred tax asset recoverability considers many different factors including historical and projected operating results, the reversal of existing deferred tax liabilities that provide a source of future taxable income, the impact of current tax planning strategies and the availability of future tax planning strategies. We establish a valuation allowance against any deferred tax asset for which we are unable to conclude that recoverability is more likely than not. This is inherently judgmental, since we are required to assess many different factors and evaluate as much objective evidence as we can in reaching an overall conclusion. The particularly sensitive component of our evaluation is our projection of future operating results since this relies heavily on our estimates of future revenue and expense levels by tax jurisdiction.

 

At June 30, 2016 we have established a $3.6 million valuation allowance against certain deferred tax assets given the uncertainty of recoverability of these amounts.

 

In making our assessment of U.S. deferred tax asset recoverability, we considered our historical financial results, our projected future financial results, the planned reversal of existing deferred tax liabilities and the impact of any tax planning actions. Based on our analysis we noted both positive and negative factors relative to our ability to support realization of certain U.S. deferred tax assets. However, based on the weighting of all the evidence, including the near term effect on our U.S. income projections of investments we are making in our team, product and systems infrastructure, we concluded that it was more likely than not that the majority of our U.S. deferred tax assets related to temporary differences may not be recovered. The establishment of a valuation allowance has no effect on our ability to use the underlying deferred tax assets prior to expiration to reduce cash tax payments in the future to the extent that we generate U.S. taxable income.

 

Note 12: Stock-Based Compensation

 

From time to time, the Company grants stock option awards to officers and employees and grants stock awards to directors as compensation for their service to the Company.

 

In November 2010, the Company adopted the 2010 Stock Incentive Plan (“the Plan”) which was amended in April 2011, August 2013, April 2014 and February 2016. As amended, up to 1,650,000 shares of common stock are available for issuance under the Plan. The Plan provides for the issuance of stock options and other stock-based awards.

 

Stock Options

 

Stock option awards under the Plan have a 10-year maximum contractual term and must be issued at an exercise price of not less than 100% of the fair market value of the common stock at the date of grant. The Plan is administered by the Board of Directors, which has the authority to determine to whom options may be granted, the period of exercise and what other restrictions, if any, should apply. Vesting for awards granted to date under the Plan is principally over four years from the date of the grant, with 25% of the award vesting after one year with monthly vesting thereafter.

 

Option awards are valued based on the grant date fair value of the instruments, net of estimated forfeitures, using a Black-Scholes option pricing model with the following assumptions:

 

			Six Months Ended June 30,
			2016				2015
Volatility			38% - 50	%			69% - 76	%
Risk-free interest rate			1.12% - 1.65	%			1.34% - 1.75	%
Expected term			6.25 years				6.25 years

 

The weighted average grant date fair value of stock options granted during the six months ended June 30, 2016 was $1.51.

 

 

For grants prior to January 1, 2015, the volatility assumption was based on historical volatility of similar sized companies due to lack of historical data of the Company’s stock price. For all grants subsequent to January 1, 2015, the volatility assumption reflects the Company’s historic stock volatility for the period of February 1, 2014 forward, which is the date the Company’s stock started actively trading. The risk free interest rate was determined based on treasury securities with maturities equal to the expected term of the underlying award. The expected term was determined based on the simplified method outlined in Staff Accounting Bulletin No. 110.

 

Stock option awards are expensed on a straight-line basis over the requisite service period. During the three months ended June 30, 2016 and 2015, the Company recognized expense of $120,762 and $174,995, respectively, associated with stock option awards. During the six months ended June 30, 2016 and 2015, the Company recognized expense of $256,428 and $331,863, respectively, associated with stock option awards. At June 30, 2016, future stock compensation expense associated with stock options (net of estimated forfeitures) not yet recognized was $1,248,663 and will be recognized over a weighted average remaining vesting period of 2.85 years. The following summarizes stock option activity for the six months ended June 30, 2016:

 

						Weighted				Weighted				Aggregate
		Number of				Average				Average Remaining				Intrinsic
		Options				Exercise Price				Contractual Life				Value
Outstanding at December 31, 2015			1,066,360			$	5.37				7.4			$	64,500
Granted			153,850				3.57
Exercised			(900	)			1.25
Forfeited			(84,566	)			5.27
Outstanding at June 30, 2016			1,134,744			$	5.14				7.2			$	478,593
Exercisable at June 30, 2016			414,943			$	5.30				4.8			$	162,717

 

The total intrinsic value of stock options exercised during the three months ended June 30, 2016 was $1,854.

 

Stock Awards

 

During the three months ended June 30, 2016 and 2015, the Company issued 13,566 and 8,546 shares, respectively, to non-employee directors as compensation for their service on the board. During the six months ended June 30, 2016 and 2015, such awards totaled 29,479 and 20,914 shares, respectively. Such stock awards are immediately vested.

 

Stock awards are valued based on the closing price of our common stock on the date of grant, and compensation cost is recorded on a straight line basis over the share vesting period. The total fair value of stock awards granted, vested and expensed during the three months ended June 30, 2016 and 2015 was $51,619 and $45,000, respectively. The total fair value of stock awards granted, vested and expensed during the six months ended June 30, 2016 and 2015 was $104,282 and $90,012, respectively. As of June 30, 2016, there was no unrecognized compensation cost related to stock awards.

 

Note 13: Warrants

 

On January 30, 2014, in connection with an $11.5 million financing transaction, the Company issued 80,000 warrants to purchase common stock at an exercise price of $7.81 per share with a term of 5 years. The fair value of the warrants was determined using the Black-Scholes option valuation model. The warrants expire on January 30, 2020 and have a remaining contractual life of 3.6 years as of June 30, 2016. These warrants became exercisable on January 30, 2015.

 

On January 28, 2015, the Company cancelled 30,000 warrants originally issued on August 1, 2013 in connection with a consulting agreement in exchange for the Company issuing 5,000 shares of restricted Company common stock.

 

 

The following table summarizes information about the Company’s warrants at June 30, 2016:

 

						Weighted				Weighted
		Number of				Average				Average Remaining				Intrinsic
		Units				Exercise Price				Contractual Term				Value
Outstanding at December 31, 2015			170,973			$	6.26				2.5			$	-
Granted			-				-
Cancelled			-				-
Outstanding at June 30, 2016			170,973			$	6.26				2.5			$	-
Exercisable at June 30, 2016			170,973			$	6.26				2.5			$	-

 

No warrants were issued in 2015 or 2016 to date.

 

Note 14: Commitments and Contingencies

 

Litigation

 

The Company may from time to time be involved in legal proceedings arising from the normal course of business. The Company is not a party to any litigation of a material nature.

 

Operating Leases and Service Contracts

 

The Company rents its facilities with leases ranging from month-to-month to several years in duration. Most of its service contracts are on a month-to-month basis, however, some contracts and agreements extend out to longer periods. Future minimum lease payments and payments due under non-cancelable service contracts are as follows as of June 30, 2016:

 

Remainder of 2016			$	360,828
2017				312,408
2018				299,578
2019				308,599
2020				317,909
Thereafter				243,790
Total			$	1,843,112

 

Employment Agreements

 

The Company has employment agreements with several members of its leadership team and executive officers.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management. This information should also be read in conjunction with our audited historical consolidated financial statements which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the Securities and Exchange Commission on March 30, 2016.

 

Overview

 

We provide SaaS based marketing technologies to customers around the world. Our focus is on marketing automation tools that enable customers to interact with a lead from an early stage and nurture that potential customer using advanced features until it becomes a qualified sales lead or customer. We offer our premium SharpSpring marketing automation solution as well as SharpSpring Mail+, which is a subset of the full suite solution that is focused on more traditional email marketing while also including some of the advanced functionality available in our premium offering. During 2016, we discontinued the GraphicMail email marketing product and migrated those customers to the SharpSpring Mail+ product. On June 27, 2016, we sold our SMTP email relay service which provided customers with the ability to increase the deliverability of email with less time, cost and complexity than handling it themselves.

 

In addition to our growth through strategic acquisitions in 2014, we believe our recent growth has been driven by the strong demand for marketing automation technology solutions, particularly in the small and mid-size business market. Our products are offered at competitive prices with unlimited multi-lingual customer support. We employ a subscription-based revenue model. We also earn revenues from additional usage charges that may come into effect when a customer exceeds a transactional quota, as well as fees earned for additional products and services.

 

On August 15, 2014, we acquired substantially all the assets and assumed certain liabilities of SharpSpring LLC, a Delaware limited liability company, which were assigned to our wholly owned subsidiary SharpSpring Technologies, Inc. (formerly called SharpSpring, Inc.). The SharpSpring product engages in the business of creating, marketing, and selling software that provides marketing automation, call tracking, and website traffic analysis and customer relationship management. It is a cloud-based marketing automation platform that enables users to connect with customers and build relationships to drive revenue.

 

On October 17, 2014, we acquired the GraphicMail group companies (“GraphicMail”) consisting of InterInbox SA, a Swiss corporation, InterCloud Ltd, a Gibraltar limited company, ERNEPH 2012A (Pty) Ltd. dba ISMS, a South African limited company, ERNEPH 2012B (Pty) Ltd. dba GraphicMail South Africa, a South African limited company, and Quattro Hosting LLC, a Delaware limited liability company. GraphicMail operates as an email service provider, enabling customers to create content and manage emails being sent to customers and distribution lists.

 

On December 1, 2015, we changed our name from SMTP, Inc. to SharpSpring, Inc., and we changed the name of our SharpSpring operating subsidiary from SharpSpring, Inc. to SharpSpring Technologies, Inc.

 

On June 27, 2016, we sold the assets related to the SMTP email relay service.

 

Unless the context otherwise requires, in this section titled Management’s Discussion and Analysis Of Financial Condition and Results of Operations all references to “SharpSpring” relate to the SharpSpring product, while all references to “our Company,” “we,” “our” or “us” and other similar terms means SharpSpring, Inc., a Delaware corporation, and all subsidiaries as of the dates of their respective acquisitions.

 

 

Results of Operations

 

Three Months Ended June 30, 2016 Compared to the Three Months Ended June 30, 2015

 

Unless otherwise noted, all figures and comparisons relate to our continuing operations.

 

														Percent
										Change				Change
		Three Months Ended June 30,								from				from
		2016				2015				Prior Year				Prior Year
Revenues and Cost of Sales:
Revenues		$	2,891,641			$	2,268,492			$	623,149				27	%
Cost of Sales			1,010,436				647,385				363,051				56	%
Gross Profit		$	1,881,205			$	1,621,107			$	260,098				16	%

 

Revenues increased for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015, primarily due to growth in our SharpSpring marketing automation customer base. We continue to acquire new customers that add to the base of customers paying us monthly for using the SaaS marketing automation platform. This growth in revenues was offset by reduced revenue from our email service offerings (SharpSpring Mail+ and GraphicMail). We experienced higher attrition related to the migration of customers from the GraphicMail platform to the SharpSpring Mail+ platform during the second quarter of 2016. Currency had an approximate $48,000 negative impact on our second quarter 2016 revenues compared to our second quarter in 2015.

 

Cost of services increased for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015 primarily due to costs to support increased revenues and incremental business from new customer additions to SharpSpring. As a percentage of revenues, cost of services were 35% and 29% of revenues for the three months ended June 30, 2016 and 2015, respectively. This reflects a lower gross margin for our SharpSpring product, which has become a much larger percent of the overall business, as we invest in resources to support the future growth of that product. Additionally, we added infrastructure costs during the first half of 2016 related to our planned migration of GraphicMail customers to the SharpSpring platform.

 

														Percent
										Change				Change
		Three Months Ended June 30,								from				from
		2016				2015				Prior Year				Prior Year
Operating expenses:
Sales and marketing		$	1,318,210			$	1,074,801			$	243,409				23	%
Research and development			562,583				453,215				109,368				24	%
General and administrative			925,726				883,689				42,037				5	%
Change in earn out liability			99,000				1,667,332				(1,568,332	)			-94	%
Intangible asset amortization			286,719				382,679				(95,960	)			-25	%
		$	3,192,238			$	4,461,716			$	(1,269,478	)			-28	%

 

Sales and marketing expenses increased for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. The increase was primarily due to an increase in marketing program spending for events and other lead generation activities. Additionally, we experienced an increase in sales and marketing headcount-related costs due to recent hires and expanded benefits programs offered to our team members. These increases were somewhat offset by lower partner reseller fees related to the fact that the Company acquired the customer sets from several resellers during the last nine months, and ceased paying reseller fees to those partners following the acquisitions.

 

 

Research and development expenses increased for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015 primarily due to additional hiring of development and quality assurance staff focused on our premium SharpSpring offering since last year.

 

General and administrative expenses increased slightly for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015 primarily due to higher facility-related costs, recruiting fees and other costs related to general business growth.

 

The acquisitions of SharpSpring and GraphicMail included liability-based contingent consideration which is re-measured during each reporting period until the ultimate settlement in the first and second quarters of 2016. These re-measurements resulted in additional charges that are recorded on the consolidated statements of comprehensive income (loss). During the three months ended June 30, 2016 and 2015, we incurred charges of $99,000 and $1,667,332, respectively, related to the adjustment to the earn out liabilities for SharpSpring and GraphicMail. The charge in the quarter ended June 30, 2015 includes an accelerated charge for the early settlement of $5 million of SharpSpring earn out liability in May 2015. The GraphicMail earn out was fully settled during the quarter ended March 31, 2016 and the SharpSpring earn out was fully settled during the quarter ended June 30, 2016. As of June 30, 2016, there are no remaining earn out related charges.

 

Amortization of intangible assets decreased for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015 due to the reduction of amortization related to the GraphicMail trade name and technology intangibles. Due to the elimination of the GraphicMail product and the Company’s decision to cease using the GraphicMail name brand, the Company accelerated the amortization expense of the associated intangible values to become fully amortized as of March 31, 2016. The Company did not record any amortization expense related to these intangibles during the three months ended June 30, 2016. This reduction was offset by increased amortization of intangibles acquired as part of the SharpSpring acquisition related to expected benefit derived in each period, and the acquisition of intangible assets related to the buy-out of several country partners during late 2015 and early 2016 which are now being amortized.

 

														Percent
										Change				Change
		Three Months Ended June 30,								from				from
		2016				2015				Prior Year				Prior Year
Other
Other income (expense), net		$	38,428			$	(15,623	)		$	54,051				-346	%
Provision (benefit) for income tax			(603,501	)			(655,433	)		$	51,932				-8	%

 

Other income (expense) is generally related to foreign exchange gains and losses derived from owing amounts or having amounts owed in currencies other than the entity’s functional currency.

 

During the three months ended June 30, 2016, our income tax benefit related to a benefit derived from net operating losses from our U.S. operations offset by a small amount of income derived in foreign jurisdictions at the applicable statutory tax rates. During the three months ended June 30, 2015, our income tax expense primarily related to a benefit derived from net operating losses from our U.S. operations. The tax expense related to the gain on the sale of the SMTP email relay business is shown in discontinued operations, net of tax, for the three months ended June 30, 2016.

 

														Percent
										Change				Change
		Three Months Ended June 30,								from				from
		2016				2015				Prior Year				Prior Year
Discontinued operations
Income from discontinued operations, net of tax		$	9,742,401			$	334,148			$	9,408,253				2816	%

 

Discontinued operations, net of tax, represents revenue, offset by expenses and taxes, related to our SMTP email relay business that was sold on June 27, 2016 to an unrelated third party.

 

 

Six Months Ended June 30, 2016 Compared to the Six Months Ended June 30, 2015

 

Unless otherwise noted, all figures and comparisons relate to our continuing operations.

 

														Percent
										Change				Change
		Six Months Ended June 30,								from				from
		2016				2015				Prior Year				Prior Year
Revenues and Cost of Sales:
Revenues		$	5,678,416			$	4,193,100			$	1,485,316				35	%
Cost of Sales			2,081,523				1,104,561				976,962				88	%
Gross Profit		$	3,596,893			$	3,088,539			$	508,354				16	%

 

Revenues increased for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015, primarily due to growth in our SharpSpring marketing automation customer base. We continue to acquire new customers that add to the base of customers paying us monthly for using the SaaS marketing automation platform. Currency had an approximate $131,000 negative impact on our year to date revenues for the period ending June 30, 2016 compared to the same period in 2015.

 

Cost of services increased for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015 primarily due to costs to support increased revenues and incremental business from new customer additions to SharpSpring. As a percentage of revenues, cost of services were 37% and 26% of revenues for the six months ended June 30, 2016 and 2015, respectively. This reflects a lower gross margin for our SharpSpring product, which has become a much larger percent of the overall business, as we invest in resources to support the future growth of that product. Additionally, we added infrastructure costs during the six months ended June 30, 2016 related to our planned migration of GraphicMail customers to the SharpSpring platform.

 

														Percent
										Change				Change
		Six Months Ended June 30,								from				from
		2016				2015				Prior Year				Prior Year
Operating expenses:
Sales and marketing		$	2,639,294			$	2,144,144			$	495,150				23	%
Research and development			1,039,692				811,413				228,279				28	%
General and administrative			1,938,056				1,767,122				170,934				10	%
Change in earn out liability			219,473				2,371,332				(2,151,859	)			-91	%
Intangible asset amortization			770,016				761,574				8,442				1	%
		$	6,606,531			$	7,855,585			$	(1,249,054	)			-16	%

 

Sales and marketing expenses increased for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The increase was primarily due to an increase in marketing program spending for events and other lead generation activities. Additionally, we experienced an increase in sales and marketing headcount-related costs due to recent hires and expanded benefits programs offered to our team members. These increases were somewhat offset by lower partner reseller fees related to the fact that the Company acquired the customer bases for several resellers during the last nine months, and ceased paying reseller fees to those partners following the acquisitions.

 

 

Research and development expenses increased for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015 primarily due to additional hiring of development and quality assurance staff since last year. Headcount-related costs for this group increased by approximately $183,000 in the six months ended June 30, 2016 compared to the same period in 2015.

 

General and administrative expenses increased for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015 primarily due to higher facility-related costs, professional fees, credit card fees and other costs related to general business growth.

 

The acquisitions of SharpSpring and GraphicMail included liability-based contingent consideration which is re-measured during each reporting period until the ultimate settlement in the first and second quarters of 2016. These re-measurements resulted in additional charges that are recorded on the consolidated statements of comprehensive income (loss). During the six months ended June 30, 2016 and 2015, we incurred charges of $219,473 and $2,371,332, respectively, related to the adjustment to the earn out liabilities for SharpSpring and GraphicMail. The charge in the six months ended June 30, 2015 includes an accelerated charge for the early settlement of $5 million of SharpSpring earn out liability in May 2015. The GraphicMail earn out was fully settled during the quarter ended March 31, 2016 and the SharpSpring earn out was fully settled during the quarter ended June 30, 2016. As of June 30, 2016, there are no remaining earn out related charges.

 

Amortization of intangible assets increased slightly for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015 due to an offsetting increase and decrease in this expense category. Amortization expense increased due higher SharpSpring intangible amortization for an increased expected benefit derived in each the 2016 period compared to 2015. Additionally, we incurred additional amortization expense from the acquisition of intangible assets related to the buy-out of several country partners during late 2015 and early 2016 which are now being amortized. Amortization expense decreased due to the reduction of amortization related to the GraphicMail trade name and technology intangibles. Due to the elimination of the GraphicMail product and the Company’s decision to cease using the GraphicMail name brand, the Company accelerated the amortization expense of the associated intangible values to become fully amortized as of March 31, 2016. The Company did not record any amortization expense related to these intangibles during the three months ended June 30, 2016.

 

														Percent
										Change				Change
		Six Months Ended June 30,								from				from
		2016				2015				Prior Year				Prior Year
Other
Other income (expense), net		$	369,879			$	(65,646	)		$	435,525				-663	%
Provision (benefit) for income tax			(815,507	)			(1,204,815	)			389,308				-32	%

 

Other income (expense) is generally related to foreign exchange gains and losses derived from owing amounts or having amounts owed in currencies other than the entity’s functional currency. However, during the six months ended June 30, 2016, the Company recorded a gain related to a favorable claim from the GraphicMail escrow hold-back account of $259,760.

 

During the six months ended June 30, 2016, our income tax benefit related to losses incurred by our consolidated U.S. entities offset by a small amount of expense related to income derived in foreign jurisdictions at the applicable statutory tax rates. During the six months ended June 30, 2015, our income tax expense primarily related to a benefit derived from net operating losses from our U.S. operations. The tax expense related to the gain on the sale of the SMTP email relay business is shown in discontinued operations, net of tax, for the three months ended June 30, 2016.

 

 

														Percent
										Change				Change
		Six Months Ended June 30,								from				from
		2016				2015				Prior Year				Prior Year
Discontinued operations
Income from discontinued operations, net of tax		$	10,187,451			$	591,189			$	9,596,262				1623	%

 

Discontinued operations, net of tax, represents revenue, offset by expenses and taxes, related to our SMTP email relay business that was sold on June 27, 2016 to an unrelated third party.

 

Liquidity and Capital Resources

 

Sources and Uses of Cash

 

On June 27, 2016, we sold our SMTP email relay business for approximately $15.0 million, approximately $14.0 million of which was received during the second quarter of 2016 with $1.0 million scheduled to be received at the one year anniversary of the disposition, pursuant to the terms of the asset purchase agreement. Our primary source of operating cash inflows are net remittances from customers for our services. Such payments are sometimes received in advance of providing the services, yielding a deferred revenue liability on our consolidated balance sheet. From time to time, we also raise funds from offering our common stock for sale to new and existing investors. Additionally, in March 2016, the Company obtained a $2.5 million revolving credit facility to provide additional financing flexibility in the future. No amounts have been borrowed under the facility to date.

 

As a result of the sale of the SMTP email relay business, we expect our largest cash outflow for the 2016 year to relate to a payment of U.S. income taxes from the gain on the asset sale. Although no payment has been made to date, we expect to make a preliminary U.S. tax payment of approximately $2.6 million in the third quarter of 2016 related to this gain (offset by other operating losses) and may make additional payments as the year progresses or in conjunction with the filing of our tax return. Our other primary sources of cash outflows include payroll and payments to vendors and third party service providers. During 2016, we also acquired customer relationship assets for cash from several former GraphicMail third party resellers. Additionally, we also disbursed $1,000,000 of cash in April 2016 for an earn out payment to the former SharpSpring shareholders and $207,929 of cash in March 2016 for an earn out payment to the former GraphicMail shareholders.

 

Analysis of Cash Flows

 

Net cash used in operating activities from our continuing operations increased by $155,581 to $1,477,204 for the six months ended June 30, 2016, compared to $1,321,623 for the six months ended June 30, 2015. The increase in cash used in operating activities was attributable primarily to an increase in investments in our SharpSpring platform, which generated greater losses in 2016 compared to 2015.

 

Net cash used in investing activities was $877,795 and $187,711 during the six months ended June 30, 2016, and 2015, respectively. For the six months ending June 30, 2016, cash used in investing activities includes $476,514 cash paid to several former GraphicMail third-party resells to acquire customer relationship assets. The Company also placed $250,000 of cash into a restricted account to collateralize the Company’s credit card program in the U.S. Additionally, the company used $151,281 to purchase property and equipment, consisting mostly of computers, servers, furniture and other equipment. For the six months ended June 30, 2015, all of the cash used in investing activities related to acquisitions of property and equipment.

 

Net cash used in financing activities was $1,206,804 during the six months ended June 30, 2016 compared to $54,704 provided by financing activities during the six months ended June 30, 2015. During the six months ending June 30, 2016, the Company paid $1 million to the former SharpSpring shareholders and $207,929 to the former GraphicMail shareholders related to earn out payments from those 2014 acquisitions. During the six months ended June 30, 2015, we raised $2 million (net of expenses) in an offering of common stock and paid $2 million to former SharpSpring shareholders related to an early settlement of part of the cash-based earn out for that acquisition. We also received $81,139 related to proceeds from stock option exercises during the six months ended June 30, 2015.

 

 

We had net working capital of approximately $11.7 million and negative ($1.8 million) as of June 30, 2016 and December 31, 2015, respectively. The positive working capital swing in 2016 relates to the sale proceeds from the SMTP asset sale and the settlement of the SharpSpring earn out liability (in cash and shares), both of which occurred during the quarter ended June 30, 2016. The negative net working capital at December 31, 2015 was primarily attributable to our short term earn out liability of $5.2 million. The majority of this earn out liability related to SharpSpring, for which 80% of the liability was settled in stock. Our cash balance increased to $15.3 million at June 30, 2016 compared to $4.2 million at December 31, 2015.

 

Contractual Obligations

 

We rent our facilities with leases ranging from month-to-month to several years in duration. Most of our service contracts are also on a month-to-month basis. However, from time to time, we enter into non-cancelable service contracts including longer-term contracts and payments for the acquisition of customer relationships from resellers. Future minimum lease payments and payments due under non-cancelable service contracts are as follows as of June 30, 2016:

 

Remainder of 2016		$	360,828
2017			312,408
2018			299,578
2019			308,599
2020			317,909
Thereafter			243,790
Total		$	1,843,112

 

Significant Accounting Policies

 

Our significant accounting policies, including the assumptions and judgments underlying them, are disclosed in the Notes to the Consolidated Financial Statements. We have consistently applied these policies in all material respects. We do not believe that our operations to date have involved uncertainty of accounting treatment, subjective judgment, or estimates, to any significant degree.

 

Off-balance sheet arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2016. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of June 30, 2016 the Company’s disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls Over Financial Reporting. We disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015 that management had concluded that our internal control over financial reporting was not effective as of December 31, 2015 due to gaps in segregation of duties. We are working to improve such documentation in order to render our internal controls effective; however, no change in our Company’s internal control over financial reporting occurred during our second fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

Not applicable.

 

Item 1A. Risk Factors.

 

Except as set forth below, there has been no material changes in our risk factors from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2015 filed on March 30, 2016.

 

We have a history of losses and may not achieve profitability in the future. The sale of the SMTP email relay business negatively impacts our profitability and ability to become profitable in the future.

 

We have a history of recent operating losses and the sale of the SMTP email relay product makes us less profitable. Excluding any income derived from the SMTP email relay product, we generated a net loss from continuing operations of $9.6 million in 2015. In addition, we plan to increase spending on the development of our technology platform and on our sales and marketing efforts as we continue to expand our offering and target new customers. In order to become profitable with this planned increase in spending, our revenues will need to increase dramatically. Our efforts to grow our business may be more costly than we expect, and we may not be able to increase our revenue enough to offset our higher operating expenses. We may incur significant losses in the future for a number of reasons, including the other risks described herein and in our Annual Report on Form 10-K filed on March 30, 2016. Also, we may experience unforeseen expenses, difficulties, complications and delays that may impact our profitability. If we are unable to achieve and sustain profitability, the market price of our common stock may significantly decrease.

 

As a consequence of being a smaller reporting company, the significant decrease in our revenue resulting from the sale of our SMTP email relay business will make the cost of being a public company a greater strain on our systems and resources.

 

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934 (Exchange Act) the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), and the rules and regulations of The NASDAQ Stock Market. The requirements of these rules and regulations increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and may also place undue strain on our personnel, systems and resources. The cost and effort to maintain this public-company profile are now leveraged against a smaller revenue base, making it an even larger cost impact as a percent of revenue than it was previously.

 

As a result of the sale of our SMTP email relay business, our parent company no longer generates revenue from third parties and will now rely on payments, advances and transfers of funds from our subsidiaries to meet its financial obligations.

 

As a result of the sale of our SMTP email relay business, our parent company no longer generates revenue from third parties and has no significant assets other than ownership of 100% of the capital stock of our subsidiaries. Because we conduct our operations through our subsidiaries, we depend on those entities for payments to generate the funds necessary to meet our financial obligations. The financial condition and operating requirements of our subsidiaries, may limit our ability to obtain cash from our subsidiaries, and in the future, legal and contractual restrictions which may govern future indebtedness of our subsidiaries may also limit our ability to obtain cash from our subsidiaries. The earnings from, or other available assets of, our subsidiaries might not be sufficient to make distributions or loans to enable us to pay our obligations. Any of the foregoing could materially and adversely affect our business, financial condition, results of operations and cash flows.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Date		Security/Value
June 2016		Common stock – 1,039,636 shares of common stock issued to satisfy earn out liability valued at $4,000,000 or $3.85 per share.

 

No underwriters were utilized and no commissions or fees were paid with respect to any of the above transactions. We relied on Section 4(2) of the Securities Act of 1933, as amended, since the transactions did not involve any public offering.

 

Item 3. Defaults Upon Senior Securities.

 

Not Applicable.

 

Item 4. Mine Safety Disclosures.

 

Not Applicable.

 

Item 5. Other Information.

 

Not Applicable.

 

 

Item 6. Exhibits.

 

INDEX TO EXHIBITS

 

SEC Reference Number		Title of Document		Location
10.1		2010 Employee Stock Plan		Incorporated by reference to the Company’s Form S-1 filed on 12/02/10
10.2		Amendment to 2010 Employee Stock Plan		Incorporated by reference to Appendix A to the Company’s Definitive Schedule 14A filed on 04/15/16
10.3		Asset Purchase Agreement dated June 27, 2016, by and between SharpSpring, Inc. and The Electric Mail Company		Incorporated by reference to the Company’s Form 8-K filed 06/28/16
10.4		Loan and Security Modification Agreement dated June 24, 2016, by and among SharpSpring, Inc., Quattro Hosting LLC, SharpSpring Technologies, Inc. and Western Alliance Bank		Incorporated by reference to the Company’s Form 8-K filed 06/28/16
10.5		Loan Agreement dated March 21, 2016, by and among SharpSpring, Inc., Quattro Hosting LLC, SharpSpring Technologies, Inc. and Western Alliance Bank		Incorporated by reference to the Company’s Form 8-K filed 03/22/16
10.6		Travis Whitton Employee Agreement dated August 15, 2014		Incorporated by reference to the Company’s Form 8-K filed 07/08/16
10.7		Travis Whitton Employee Agreement Amendment dated June 19, 2015		Incorporated by reference to the Company’s Form 8-K filed 07/8/16
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		Filed herewith
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		Filed herewith
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		Filed herewith
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		Filed herewith
101		XBRL		Filed herewith

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	SharpSpring, Inc.
	By:	/s/ Richard A. Carlson
		Richard A. Carlson
		Chief Executive Officer and President
		(Principal Executive Officer)
		Date: August 15, 2016

 

	SharpSpring, Inc.
	By:	/s/ Edward Lawton
		Edward Lawton
		Chief Financial Officer
		(Principal Financial Officer)
		Date: August 15, 2016