Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
☑ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the
quarterly period ended: June 30, 2018
Or
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File
Number: 001-36280
SharpSpring, Inc.
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(Exact
name of registrant as specified in its charter)
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Delaware
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05-0502529
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(State
or other jurisdiction of incorporationor organization)
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(I.R.S.
Employer Identification No.)
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550 Southwest 2nd Avenue
Gainesville, FL
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32601
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(Address
of principal executive offices)
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(Zip
Code)
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888-428-9605
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(Registrant’s
telephone number, including area code)
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(Former
name, former address and former fiscal year, if changed since last
report)
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Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. Yes ☑ No ☐
Indicate by check
mark whether the registrant has submitted electronically 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 ☑ No ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act:
Large
accelerated filer ☐
|
Accelerated
filer ☐
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Non-accelerated
filer ☐
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Smaller
reporting company ☑
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(Do not check if a smaller reporting company)
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Emerging
growth company ☐
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If an
emerging growth company, indicate by checkmark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) Yes ☐ No ☑
Indicate the number
of shares outstanding of each of the issuer’s classes of
common stock, as of the latest practicable date: 8,513,007 shares
of common stock as of August 9, 2018.
SharpSpring, Inc.
Table of Contents
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2
PART I – FINANCIAL
INFORMATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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, but are not limited
to:
●
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;
●
developments and
changes in laws and regulations, including increased regulation of
our industry through legislative action and revised rules and
standards;
●
security breaches,
cybersecurity attacks and other significant disruptions in our
information technology systems; and
●
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, 2017, as
amended pursuant to Form 10-K/A 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.
3
Item 1.
Financial
Statements.
SharpSpring, Inc.
CONSOLIDATED BALANCE SHEETS
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June 30,
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December 31,
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2018
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2017
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(unaudited)
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(audited)
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Assets
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Cash
and cash equivalents
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$12,536,507
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$5,399,747
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Accounts
receivable, net of allowance for doubtful accounts of $149,283 and
$526,127 at June 30, 2018 and December 31, 2017,
respectively
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689,271
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639,959
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Income
taxes receivable
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207,678
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2,132,616
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Other
current assets
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991,814
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899,127
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Total
current assets
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14,425,270
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9,071,449
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Property
and equipment, net
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825,547
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799,145
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Goodwill
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8,864,710
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8,872,898
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Intangibles,
net
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2,096,000
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2,326,000
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Deferred
income taxes
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2,148
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-
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Other
long-term assets
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607,777
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612,631
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Total
assets
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$26,821,452
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$21,682,123
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Liabilities and Shareholders' Equity
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Accounts
payable
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$1,094,284
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$504,901
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Accrued
expenses and other current liabilities
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595,197
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625,680
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Deferred
revenue
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318,586
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279,818
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Income
taxes payable
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81,045
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171,384
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Total
current liabilities
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2,089,112
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1,581,783
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Deferred
income taxes
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62,016
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168,132
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Convertible
notes, including accrued interest
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8,155,146
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-
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Convertible
notes embedded derivative
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267,579
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-
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Total
liabilities
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10,573,853
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1,749,915
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Commitments
and contingencies (Note 12)
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Shareholders'
equity:
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Preferred
stock, $0.001 par value, 5,000,000 shares authorized, no shares
issued or outstanding at June 30, 2018 and December 31,
2017
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-
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-
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Common
stock, $0.001 par value, Authorized shares-50,000,000; issued
shares-8,527,823 at June 30, 2018 and 8,456,061 at December 31,
2017; outstanding shares-8,507,823 at June 30, 2018 and 8,436,061
at December 31, 2017
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8,528
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8,456
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Additional
paid in capital
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29,080,351
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28,362,397
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Accumulated
other comprehensive loss
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(365,220)
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(480,762)
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Accumulated
deficit
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(12,392,060)
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(7,873,883)
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Treasury
stock
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(84,000)
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(84,000)
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Total
shareholders' equity
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16,247,599
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19,932,208
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Total
liabilities and shareholders' equity
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$26,821,452
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$21,682,123
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See
accompanying notes to the consolidated financial
statements.
4
SharpSpring, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS
(Unaudited)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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||
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2018
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2017
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2018
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2017
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Revenue
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$4,442,289
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$3,246,420
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$8,626,952
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$6,269,853
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Cost
of services
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1,507,362
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1,294,944
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2,907,659
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2,566,265
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Gross
profit
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2,934,927
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1,951,476
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5,719,293
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3,703,588
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Operating
expenses:
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Sales
and marketing
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2,356,400
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1,536,289
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4,727,431
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3,085,811
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Research
and development
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1,008,019
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731,187
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1,958,694
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1,390,918
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General
and administrative
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1,424,404
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1,231,708
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2,850,638
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2,587,906
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Intangible
asset amortization
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115,000
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131,869
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230,000
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263,392
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Total
operating expenses
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4,903,823
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3,631,053
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9,766,763
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7,328,027
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Operating
loss
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(1,968,896)
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(1,679,577)
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(4,047,470)
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(3,624,439)
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Other
income (expense), net
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(338,431)
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11,761
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(269,803)
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78,605
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Change
in fair value of embedded derivative features
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(453,449)
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-
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(453,449)
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-
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Loss
before income taxes
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(2,760,776)
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(1,667,816)
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(4,770,722)
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(3,545,834)
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Benefit
from income taxes
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(294,543)
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(395,094)
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(252,546)
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(893,840)
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Net
loss
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$(2,466,233)
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$(1,272,722)
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$(4,518,176)
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$(2,651,994)
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Basic
net loss per share
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$(0.29)
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$(0.15)
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$(0.53)
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$(0.32)
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Diluted
net loss per share
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$(0.29)
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$(0.15)
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$(0.53)
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$(0.32)
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Shares
used in computing basic net (loss) income per share
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8,474,616
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8,381,748
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8,459,036
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8,375,499
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Shares
used in computing diluted net (loss) income per share
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8,474,616
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8,381,748
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8,459,036
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8,375,499
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Other
comprehensive income (loss):
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Foreign
currency translation adjustment
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(30,526)
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(9,393)
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115,542
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(154,735)
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Comprehensive
loss
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$(2,496,759)
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$(1,282,115)
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$(4,402,634)
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$(2,806,729)
|
See
accompanying notes to the consolidated financial
statements.
5
SharpSpring, Inc.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
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Six Months Ended
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June 30,
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2018
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2017
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Cash
flows from operating activities:
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Net
loss
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$(4,518,176)
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$(2,651,994)
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Adjustments
to reconcile loss from operations:
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Depreciation
and amortization
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391,716
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398,582
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Non-cash
stock compensation
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476,221
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359,752
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Deferred
income taxes
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(108,265)
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(1,185)
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Non-cash
interest
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104,301
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-
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Change
in fair value of embedded derivative features
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453,449
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-
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Amortization
of debt issuance costs
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6,632
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-
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Unearned
foreign currency gain/loss
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167,912
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(19,745)
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Changes
in assets and liabilities:
|
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Accounts
receivable
|
(52,793)
|
505,384
|
Other
assets
|
(89,343)
|
33,430
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Income
taxes, net
|
1,838,379
|
(497,814)
|
Accounts
payable
|
564,696
|
77,185
|
Accrued
expenses and other current liabilities
|
(31,587)
|
(453,488)
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Deferred
revenue
|
40,910
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(37,987)
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Net
cash used in operating activities
|
(755,948)
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(2,287,880)
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Cash
flows from investing activities
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Purchases
of property and equipment
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(188,118)
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(133,331)
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Acquisitions
of customer assets from resellers
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-
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(64,268)
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Proceeds
from the sale of discontinued operations
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-
|
1,000,000
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Net
cash provided by (used in) investing activities
|
(188,118)
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802,401
|
|
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|
Cash
flows used in financing activities:
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Proceeds
from issance of convertible note
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8,000,000
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-
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Debt
issuance costs
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(141,657)
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-
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Proceeds
from exercise of stock options
|
241,805
|
1,359
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Net
cash provided by financing activities
|
8,100,148
|
1,359
|
|
|
|
Effect
of exchange rate on cash
|
(19,322)
|
35,641
|
|
|
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Change
in cash and cash equivalents
|
7,136,760
|
(1,448,479)
|
|
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Cash
and cash equivalents, beginning of period
|
5,399,747
|
8,651,374
|
|
|
|
Cash
and cash equivalents, end of period
|
$12,536,507
|
$7,202,895
|
|
|
|
Supplemental
information on consolidated statements of cash flows:
|
|
|
Cash
paid (received) for income taxes
|
$(1,982,957)
|
$54,582
|
See
accompanying notes to the consolidated financial
statements.
6
SharpSpring, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note 1: Organization
We were
incorporated in Massachusetts in October 1998 as EMUmail, Inc.
During 2010, we changed our name to SMTP.com, then later
reincorporated in the State of Delaware and changed our name to
SMTP, Inc. In December 2015, we changed our name to SharpSpring,
Inc. and changed the name of our primary U.S. operating subsidiary
from SharpSpring, Inc. to SharpSpring Technologies,
Inc.
Our
Company focuses on providing the SharpSpring cloud-based marketing
automation solution. SharpSpring is designed to increase the rates
at which businesses generate leads and convert leads to sales
opportunities by improving the way businesses communicate with
customers and prospects. Our products are marketed directly by us
and through a small group of reseller partners to customers around
the world.
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 (“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,
2018.
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.
Operating Segments
The Company operates as one operating segment. Operating segments
are defined as components of an enterprise for which separate
financial information is regularly evaluated by the chief operating
decision maker (“CODM”), which is the Company’s
chief executive officer, in deciding how to allocate resources and
assess performance. The Company’s CODM evaluates the
Company’s financial information and resources and assess the
performance of these resources on a consolidated basis. The Company
does not present geographical information about revenues because it
is impractical to do so.
Foreign Currencies
The Company’s subsidiaries utilize the U.S. Dollar, Swiss
Franc and South African Rand 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 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.
7
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, accounts receivable, deposits, embedded derivatives
(associated with our convertible notes) 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. The fair value of the embedded
derivatives is calculated using Level 3 unobservable inputs,
utilizing a probability-weighted expected value model to determine
the liability. The fair value of the embedded derivatives at June
30, 2018 was a liability balance of $267,579.
Accounts Receivable
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, thus creating a contract asset. A
portion of our accounts receivable balance is therefore unbilled at
each balance sheet date. 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.
The following table presents the balances of accounts receivable as
of June 30, 2018 and December 31, 2017:
Accounts Receivable and Unbilled Receivables
|
June 30,
|
December 31,
|
|
2018
|
2017
|
Accounts
receivable
|
$192,102
|
$611,293
|
Unbilled
receivables
|
646,452
|
554,793
|
Gross
receivables
|
$838,554
|
$1,166,086
|
Allowance
for doubtful accounts
|
(149,283)
|
(526,127)
|
Accounts
receivable and unbilled receivables, net
|
$689,271
|
$639,959
|
During the second quarter of 2018, the Company wrote off
approximately $351,000 of accounts receivable against the allowance
for doubtful accounts, with zero net loss recognized in the period
as the accounts were already fully reserved.
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 original 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.
8
Goodwill and Impairment
As of June 30, 2018, and December 31, 2017, we had recorded
goodwill of $8,864,710 and $8,872,898, 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. Under Financial
Accounting Standards Board (FASB) Accounting Standards Codification
(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.
Debt Issuance Costs
We incurred certain third-party costs in connection with the
issuance of the 5% Convertible Notes maturing March 27, 2023 (the
“Notes”), as more fully described in Note 5:
Convertible Notes, principally related to legal and financial
advisory fees. These costs are included as a direct reduction to
the carrying value of the debt as part of the Notes on our
consolidated balance sheets and are being amortized to interest
expense ratably over the five-year term of the Notes.
Estimated amortization expense of debt issuance costs for the
remainder of 2018 and subsequent years is as follows:
Remainder
of 2018
|
$12,718
|
2019
|
26,455
|
2020
|
27,855
|
2021
|
29,322
|
2022
|
30,862
|
2023
|
7,813
|
Total
|
$135,025
|
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.
9
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. As of June 30, 2018, the Company is not being
examined by domestic or foreign tax authorities.
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 $85,733
and $70,107 for the three
months ended June 30, 2018 and 2017, respectively. Depreciation
expense related to property and equipment was $161,716 and
$135,190 for the six months
ended June 30, 2018 and 2017, respectively. Repairs and maintenance
costs are expensed as incurred.
Property
and equipment as of June 30, 2018 and December 31, 2017 is as
follows:
|
June 30,
|
December 31,
|
|
2018
|
2017
|
Property
and equipment, net:
|
|
|
Leasehold
improvements
|
$128,122
|
$128,122
|
Furniture
and fixtures
|
397,409
|
355,033
|
Computer
equipment and software
|
895,674
|
776,201
|
Total
|
1,421,205
|
1,259,356
|
Less:
Accumulated depreciation and amortization
|
(595,658)
|
(460,211)
|
|
$825,547
|
$799,145
|
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. All significant sources of revenue are the
result of a contract with a customer, and as such meet all of the
requirements of recognizing revenue in accordance with FASB ASC
606. For the three months ended June 30, 2018 and June 30, 2017
revenue from contracts with customers was $4.4 million and $3.2
million respectively. For the six months ended June 30, 2018 and
June 30, 2017 revenue from contracts with customers was $8.6
million and $6.3 million respectively.
10
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 in arrears 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 in advance, for which revenues are
deferred and recorded ratably over the subscription period. The
Company also charges transactional-based fees if monthly volume
limitations are reached or other chargeable activity occurs.
Additionally, customers are typically 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 typically 60 days.
For the SharpSpring Mail+ product, the services are typically
offered on a month-to-month basis. Customers are either charged in
arrears based on the number of contacts in the system during the
billing period or in advance if the customer selects a plan based
on e-mail volume. The Company also charges transactional-based fees
if monthly volume limitations are reached or other chargeable
activity occurs.
Our products are billed in arrears or upfront, depending on the
product, which creates contract assets (accrued revenue) and
contract liabilities (deferred revenue). Contract assets occur due
to unbilled charges that the Company has satisfied performance
obligations for. Contract liabilities occur due to billing up front
for charges that the Company has not yet fully satisfied
performance obligations on. Both contract assets and liabilities
are recognized and deferred ratably over their service
periods.
The company makes judgements when determining revenue recognition.
Because many of our contracts are billed in arrears, estimates are
made for the transaction price and amounts allocated to each
accounting period related to the performance obligations of each
contract. There have been no changes to the methodology used in
these judgements and estimates for determining revenues. Some of
the estimates used when determining revenue recognition relate to
variable customer consideration that changes from month to month.
The Company uses the most likely amount method to determine the
estimated variable consideration, relying on historical
consideration received, customer status and projected usage to
determine the most likely consideration amount. The amount of
variable consideration recognized is constrained and is only
included in the transaction price to the extent that it is probable
that a significant reversal of cumulative revenue recognized will
not occur.
The performance obligations are measured using the output method to
recognize revenue based on direct measurements of the value to the
customer of the services transferred to date. Most of the
Company’s contracts are satisfied over time, and as each
contract has a predefined service period. This allows for a
reliable way to measure performance obligations remaining and
completed. The Company does have some contracts that are satisfied
at a point in time upon delivery of services. The criteria for the
completion of these contracts is defined in each contract with a
customer so that there is no judgment required in evaluating when
the service is delivered to the customer. Any discount given is
allocated to the performance obligation and is treated as reduction
to the transaction price. Due to the month to month nature of the
Company’s contracts with customers, no financing or time
value of money component exists related to the contracts with
customers. Due to the month to month nature of the Company’s
contracts with customers, we have elected to utilize the optional
practical expedient from ASC 606-10-50-14 through 50-14A for
disclosing the remaining performance obligations. The remaining
performance obligations as of the balance sheet date consist of
trainings and availability and use of the SharpSpring platform over
the remainder of the contract, which is typically less than 30
days.
From time to time, the Company offers refunds to customers and
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.
11
Deferred Revenue
Deferred revenue consists of payments received in advance of the
Company’s providing the services. Deferred revenue is earned
over the service period identified in each contract. The majority
of our deferred revenue balances (contract liabilities) arise from
upfront implementation and training fees for its SharpSpring
marketing automation solution that are paid in advance. These
services are typically performed over a 60-day period, and the
revenue is recognized over that period. Additionally, some of
the Company’s customers pay for services in advance on a
periodic basis (such as monthly, quarterly, annually or
bi-annually). In situations where a customer pays in advance for a
one-year service period, the deferred revenue is recognized over
that service period. The deferred revenue balances were $279,818
and $280,159 as of December 31, 2017 and 2016, respectively.
Deferred revenue during the three months ended June 30, 2018 and
2017 increased by $378,190 and $268,247, respectively. These
increases were offset by revenue recognized of $358,127 and
$305,623 during the same periods.
Deferred revenue during the six months ended June 30, 2018 and 2017
increased by $719,609 and $476,607, respectively. These increases
were offset by revenue recognized of $679,012 and $506,913 during
the same periods. The Company had deferred revenue contract
liability balances of $318,586 and $279,818 as of June 30, 2018 and
December 31, 2017, respectively. The company expects to recognize
100% of the revenue on of these remaining performance obligations
within 12 months. Deferred revenue is subject to foreign currency
fluctuations which is reflected in the foreign currency
translation.
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, thus creating a contract asset. A
portion of our accounts receivable balance is therefore unbilled at
each balance sheet date. The accrued revenue contract asset
balances were $554,603 and $439,559 as of December 31, 2017 and
2016, respectively. Revenue
billed that was included in accrued revenue at the beginning of the
period for the three months ending June 30, 2018 and 2017 was
$628,497 and $466,610, respectively. Revenue billed that was
included in accrued revenue at the beginning of the period for the
six months ending June 30, 2018 and 2017 was $554,603 and $439,559,
respectively. Accrued revenue not billed in the three and six
months ending June 30, 2018 and 2017 was $646,452 and $554,603,
respectively. The Company had accrued revenue contract asset
balances of $646,452 and $554,603 as of June 30, 2018 and December
31, 2017, respectively. Accrued revenue is subject to foreign
currency fluctuations which is reflected in the foreign currency
translation.
Concentration of Credit Risk and Significant Customers
Financial
instruments that potentially expose the Company to concentrations
of credit risk consist primarily of cash and cash equivalents. At
June 30, 2018 and December 31, 2017, 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.
There
were no customers that accounted for more than 10% of total revenue
or 10% of total accounts receivable for any financial period
presented.
Cost of Services
Cost of
services consists primarily of direct labor costs associated with
support and customer onboarding and technology hosting and license
costs associated with the cloud-based platform.
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. Advertising and
marketing expenses were $1,294,274 and $797,173 for the three months ended June
30, 2018 and 2017, respectively. Advertising and marketing expenses
were $2,743,701 and
$1,342,948 for the six months
ended June 30, 2018 and 2017, respectively.
12
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, 2018 and 2017, we
capitalized $39,210 and $17,392, respectively, in software
development costs. For the six months ended June 30, 2018 and 2017,
we capitalized $66,446 and $33,938, respectively, in software
development costs. We amortize capitalized software costs over the
estimated useful life of the software, which is typically estimated
to be 3 years, once the related project has been completed and
deployed for customer use. At June 30, 2018 and December 31, 2017,
the net carrying value of capitalized software was $121,446 and $86,857, respectively.
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.
Capitalized Cost of Obtaining a Contract
The
Company capitalizes sales commission costs which are incremental to
obtaining a contract. We expense costs that are related to
obtaining a contract, but are not incremental such as other sales
and marketing costs and other costs that would be incurred
regardless of if the contract was obtained. Capitalized costs are
amortized using the straight-line amortization over the estimated
weighted average life of the customer, which we have estimated to
be 3 years. At June 30, 2018 the net carrying value of the
capitalized cost of obtaining a contract was $1,248,584, of which
$665,807 is included in other current assets and $582,777 is included in other long-term
assets. At December 31, 2017, the net carrying value of the
capitalized cost of obtaining a contract was $1,218,833, of which
$631,203 is included in other current assets and $587,630 is
included in other long-term assets. The Company amortized expenses
for the costs of obtaining contracts of $185,701 and $130,226 for the three months ended June
30, 2018 and 2017, respectively. Such capitalized cost adjustments
have been retroactively applied to prior periods. The Company
amortized expenses for the costs of obtaining contracts of
$363,239 and $242,151 for the six months ended June 30,
2018 and 2017, respectively. Such capitalized cost adjustments have
been retroactively applied to prior periods.
Stock Compensation
We
account for stock-based compensation in accordance with FASB ASC
718 “Compensation — Stock Compensation” 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 Loss Per Share
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding for the
period. Diluted net loss per share is computed by giving effect to
all potential dilutive common stock equivalents for the period. For
purposes of this calculation, options to purchase common stock,
warrants and the conversion option of the convertible Notes (Note
5) are considered to be potential common shares outstanding. Since
the Company incurred net losses for each of the periods presented,
diluted net loss per share is the same as basic net loss per share.
The Company’s potential common shares outstanding were not
included in the calculation of diluted net loss per share as the
effect would be anti-dilutive.
Comprehensive Income (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
Recent
accounting standards not included below are not expected to have a
material impact on our consolidated financial position and results
of operations.
13
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
January 2017, the FASB issued guidance simplifying the accounting
for goodwill impairment by removing Step 2 of the goodwill
impairment test. Under current guidance, Step 2 of the goodwill
impairment test requires entities to calculate the implied fair
value of goodwill in the same manner as the amount of goodwill
recognized in a business combination by assigning the fair value of
a reporting unit to all of the assets and liabilities of the
reporting unit. The carrying value in excess of the implied fair
value is recognized as goodwill impairment. Under the new standard,
goodwill impairment is recognized based on Step 1 of the current
guidance, which calculates the carrying value in excess of the
reporting unit’s fair value. The new standard is effective
beginning in January 2020, with early adoption permitted. We do not
believe the adoption of this guidance will have a material impact
on our consolidated financial statements.
In May
2014, the FASB issued updated guidance and disclosure requirements
for recognizing revenue from contracts with customers. This new
revenue recognition standard became effective for the Company on
January 1, 2018. In addition to providing guidance on when and how
revenue is recognized, the new standard also provides guidance on
accounting for costs of obtaining contracts primarily related to
aligning the expense with the period in which the value is
recognized. As a result of this new standard, the Company was
required to capitalize certain costs related to obtaining contracts
associated with commissions expense paid to salespeople. The
Company is using the retrospective transition method to adjust each
prior reporting period presented for this new method of accounting
for costs associated with obtaining contracts. The application of
the retrospective transition was applied to all contracts at the
date of initial application. The following tables present our
results under our historical method and as adjusted to reflect
these accounting changes.
|
Historical Accounting Method
|
Effect of Adoption of New ASU
|
As Adjusted
|
Three Months Ended June 30, 2018
|
|
|
|
Sales
and Marketing Expense
|
2,396,227
|
(39,827)
|
2,356,400
|
Total
operating expense
|
4,943,650
|
(39,827)
|
4,903,823
|
Operating
loss
|
(2,008,723)
|
39,827
|
(1,968,896)
|
Loss
before income taxes
|
(2,800,603)
|
39,827
|
(2,760,776)
|
Benefit
for income tax
|
(294,543)
|
-
|
(294,543)
|
Net
loss
|
(2,506,060)
|
39,827
|
(2,466,233)
|
Basic
net loss per share
|
(0.29)
|
-
|
(0.29)
|
Diluted
net loss per share
|
(0.29)
|
-
|
(0.29)
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
Sales
and Marketing Expense
|
4,757,181
|
(29,750)
|
4,727,431
|
Total
operating expense
|
9,796,513
|
(29,750)
|
9,766,763
|
Operating
loss
|
(4,077,220)
|
29,750
|
(4,047,470)
|
Loss
before income taxes
|
(4,800,472)
|
29,750
|
(4,770,722)
|
Benefit
for income tax
|
(252,546)
|
-
|
(252,546)
|
Net
loss
|
(4,547,926)
|
29,750
|
(4,518,176)
|
Basic
net loss per share
|
(0.53)
|
-
|
(0.53)
|
Diluted
net loss per share
|
(0.53)
|
-
|
(0.53)
|
|
|
|
|
Balance as of June 30, 2018
|
|
|
|
Other
current assets
|
326,007
|
665,807
|
991,814
|
Other
long-term assets
|
25,000
|
582,777
|
607,777
|
Total
assets
|
25,572,868
|
1,248,584
|
26,821,452
|
Accumulated
deficit
|
(13,640,644)
|
1,248,584
|
(12,392,060)
|
14
|
Historical Accounting Method
|
Effect of Adoption of New ASU
|
As Adjusted
|
Three Months Ended June 30, 2017
|
|
|
|
Sales
and Marketing Expense
|
1,577,968
|
(41,679)
|
1,536,289
|
Total
operating expense
|
3,672,732
|
(41,679)
|
3,631,053
|
Operating
loss
|
(1,721,256)
|
41,679
|
(1,679,577)
|
Loss
before income taxes
|
(1,709,495)
|
41,679
|
(1,667,816)
|
Benefit
for income tax
|
(394,147)
|
(947)
|
(395,094)
|
Net
loss
|
(1,315,348)
|
42,626
|
(1,272,722)
|
Basic
net loss per share
|
(0.18)
|
0.03
|
(0.15)
|
Diluted
net loss per share
|
(0.18)
|
0.03
|
(0.15)
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
|
|
Sales
and Marketing Expense
|
3,223,838
|
(138,027)
|
3,085,811
|
Total
operating expense
|
7,466,054
|
(138,027)
|
7,328,027
|
Operating
loss
|
(3,762,466)
|
138,027
|
(3,624,439)
|
Loss
before income taxes
|
(3,683,861)
|
138,027
|
(3,545,834)
|
Benefit
for income tax
|
(893,840)
|
-
|
(893,840)
|
Net
loss
|
(2,790,021)
|
138,027
|
(2,651,994)
|
Basic
net loss per share
|
(0.34)
|
0.02
|
(0.32)
|
Diluted
net loss per share
|
(0.34)
|
0.02
|
(0.32)
|
|
|
|
|
Balance as of December 31, 2017
|
|
|
|
Other
current assets
|
267,924
|
631,203
|
899,127
|
Other
long-term assets
|
25,000
|
587,631
|
612,631
|
Total
assets
|
20,463,289
|
1,218,834
|
21,682,123
|
Accumulated
deficit
|
(9,092,717)
|
1,218,834
|
(7,873,883)
|
Note 3: Goodwill and Other Intangible Assets
Intangible assets are as follows:
|
As of June 30, 2018
|
||
|
Gross
|
|
Net
|
|
Carrying
|
Accumulated
|
Carrying
|
|
Amount
|
Amortization
|
Value
|
Amortized
intangible assets:
|
|
|
|
Trade
names
|
$120,000
|
$(101,496)
|
$18,504
|
Technology
|
2,130,000
|
(827,000)
|
1,303,000
|
Customer
relationships
|
4,095,758
|
(3,321,262)
|
774,496
|
Unamortized
intangible assets:
|
6,345,758
|
(4,249,758)
|
2,096,000
|
Goodwill
|
|
|
8,864,710
|
Total
intangible assets
|
|
|
$10,960,710
|
15
Estimated amortization expense for the remainder of 2018 and
subsequent years is as follows:
Remainder
of 2018
|
$229,998
|
2019
|
381,000
|
2020
|
332,000
|
2021
|
280,000
|
2022
|
228,000
|
2023
|
180,000
|
Thereafter
|
465,002
|
Total
|
$2,096,000
|
Amortization expense for the three months ended June 30, 2018 and
2017 was $115,000 and $131,869, respectively. Amortization expense
for the six months ended June 30, 2018 and 2017 was $230,000 and
$263,392, respectively.
Note 4: Credit Facility
In
March 2016, the Company entered into a $2.5 million revolving loan
agreement (the “Credit Facility”) with Western Alliance
Bank. The facility originally matured on March 21, 2018 and was
amended to mature on March 31, 2020. There are no mandatory
amortization provisions and the Credit Facility is payable in full
at maturity. Loan proceeds accrue interest at the higher of Western
Alliance Bank’s Prime interest rate (5.00% as of June 30,
2018) or 5.00%, plus 1.75%. The Credit Facility 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 Credit Facility subjects the Company to a number of restrictive
covenants, including financial and non-financial covenants
customarily found in loan agreements for similar transactions. The
Credit Facility also restricts our ability to pay cash dividends on
our common stock. There are no amounts outstanding under the Credit
Facility and no events of default occurred.
Note 5: Convertible Notes
On
March 28, 2018, we issued $8.0 million in aggregate principal
amount of convertible notes (the “Notes”). Interest
accrues at a rate of 5.0% per year and is “payable in
kind” annually in the form of the issuance of additional
notes (“PIK Notes”). The principal amount of the Note
and the PIK Notes are due and payable in full on the fifth
anniversary of the date of the Notes. The Company shall have the
right to extend the maturity date for up to six months on up to
three separate occasions, with interest accruing at a rate of 10%
during any such extension periods. The Notes are convertible into
shares of the Company’s common stock at any time by the
holder at a fixed conversion price of $7.50 per share, subject to
customary adjustments for specified corporate events. Additionally,
if the Notes and PIK Notes are not converted into common stock by
the holder, at the maturity date, the Company may elect to convert
all outstanding Notes and PIK Notes into shares of the
Company’s common stock at a conversion price equal to 80% of
the volume weighted average closing price of the Company’s
common stock for the 30 trading days prior to an including the
maturity date. We received net proceeds from the offering of
approximately $7.9 million after adjusting for debt issue costs,
including financial advisory and legal fees.
16
The
Notes are unsecured obligations and are subordinate in right of
payment to the Credit Facility (Note 4). So long as any Notes are
outstanding, except as the investor may otherwise agree in writing,
the Company shall at no time (i) have outstanding senior
indebtedness in an aggregate amount exceeding 18.6% of the
Company’s trailing twelve-month revenue, (ii) incur any
indebtedness that is both junior in right of payment to the
obligations of the Company to its senior secured lender and senior
to the Company’s obligations under the Notes or (iii) enter
into any agreement with any lender or other third party that would
(A) prohibit the Company from issuing PIK Notes at any time or
under any circumstances or (B) prohibit the conversion of the Notes
in accordance with their terms at any time or under any
circumstances. Prior to this offering, the Company had no
outstanding indebtedness for borrowed money. The holder of the
Notes must notify the Company at least 120 days prior to the
maturity of the Notes of its election to convert the
Notes.
The
convertible note agreement contains customary events of default
with respect to the Notes and provides that upon certain events of
default occurring and continuing, the investor, by written notice
to the Company may declare the entire outstanding principal amount
of this Note and all accrued but unpaid interest to be immediately
due and payable. During the continuance of an event of default, the
investor shall have recourse to any and all remedies available to
under applicable law. The Notes were recorded upon issuance at
amortized cost in accordance with applicable accounting guidance.
As there is no difference in the amount recorded at inception and
the face value of the Notes, interest expense will be accreted at
the stated interest rate under the terms of the Notes. Total
interest expense related to the Notes will be impacted by the
amortization of the debt issuance cost using the effective interest
method.
The
Company would be required to accelerate and issue the PIK Notes
through the maturity of the Notes if the Company elects to convert
the Notes prior to maturity (which it can do upon certain
conditions) or if there is a change in control. Pursuant to
accounting guidance, for each of these situations, the Company
determined that the economic characteristics of these “make
whole” features were not considered clearly and closely
related to the Company’s stock. Accordingly, these features
were determined to be “embedded derivatives” and were
bifurcated from the Notes and separately accounted for on a
combined basis at fair value as a single derivative. The fair value
of the derivatives as of June 30, 2018 was a liability of $267,579
which is included within the non-current liabilities on the balance
sheet. The derivative is being accounted for at fair value, with
subsequent changes in the fair value to be reported as part of
Other income (expense), net in the Consolidated Statement of
Operations.
Additionally,
the investor’s conversion option was analyzed for embedded
derivative treatment, but the conversion option qualifies for a
scope exception as it is considered to be clearly and closely
related to the Company’s stock.
The net
carrying amount of the Notes at June 30, 2018 was as
follows:
|
Six Months Ended
|
|
|
June 30,
|
|
|
2018
|
2017
|
Principal
amount
|
$8,000,000
|
-
|
Accrued
interest paid-in-kind
|
104,301
|
-
|
Unamortized
debt issuance costs
|
(135,025)
|
-
|
Original
embedded derivative conversion feature
|
185,870
|
|
Net
carrying value
|
$8,155,146
|
$-
|
We
incurred certain third-party costs in connection with our issuance
of the Notes, principally related to financial advisory and legal
fees, which are being amortized to interest expense ratably over
the five-year term of the Notes.
The
following table sets forth total interest expense related to the
Notes for the period ended June 30, 2018:
|
Three Months Ended
|
Six Months Ended
|
||
|
June 30,
|
June 30,
|
||
|
2018
|
2017
|
2018
|
2017
|
Contractual
interest paid-in-kind expense (non-cash)
|
100,000
|
-
|
104,301
|
-
|
Amortization
of debt issuance costs (non-cash)
|
6,359
|
-
|
6,632
|
-
|
Total
interest expense
|
106,359
|
-
|
110,933
|
-
|
Effective
interest rate
|
5.3%
|
0.0%
|
5.3%
|
0.0%
|
17
Note 6: Changes
in Accumulated Other Comprehensive Income
(Loss)
|
Foreign Currency
|
|
Translation
|
|
Adjustment
|
Balance
as of December 31, 2017
|
$(480,762)
|
Other
comprehensive income (loss) prior to reclassifications
|
-
|
Amounts
reclassified from accumulated other comprehensive
income
|
-
|
Tax
effect
|
-
|
Net
current period other comprehensive loss
|
115,542
|
Balance
as of June 30, 2018
|
$(365,220)
|
Note 7: Net
Loss Per Share
Basic
net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding for the period. Diluted
net loss per share is computed by giving effect to all potential
dilutive common stock equivalents for the period. For purposes of
this calculation, options to purchase common stock, warrants and
the conversion option of the convertible Notes (Note 5) are
considered to be potential common shares outstanding.
|
Three Months Ended
|
Six Months Ended
|
||
|
June 30,
|
June 30,
|
||
|
2018
|
2017
|
2018
|
2017
|
Net
loss
|
$(2,466,233)
|
$(1,272,722)
|
$(4,518,176)
|
$(2,651,994)
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
8,474,616
|
8,381,748
|
8,459,036
|
8,375,499
|
Add
incremental shares for:
|
|
|
|
|
Warrants
|
-
|
-
|
-
|
-
|
Stock
options
|
-
|
-
|
-
|
-
|
Convertible
notes
|
-
|
-
|
-
|
-
|
Diluted
weighted average common shares outstanding
|
8,474,616
|
8,381,748
|
8,459,036
|
8,375,499
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
Basic
|
$(0.29)
|
$(0.15)
|
$(0.53)
|
$(0.32)
|
Diluted
|
$(0.29)
|
$(0.15)
|
$(0.53)
|
$(0.32)
|
Additionally, since
the Company incurred net losses for each of the periods presented,
diluted net loss per share is the same as basic net loss per share.
The Company’s outstanding warrants, stock options, and
convertible notes were not included in the calculation of diluted
net loss per share as the effect would be anti-dilutive. The
following table contains all potentially dilutive common stock
equivalents:
|
Three and Six Months Ended
|
|
|
June 30,
|
|
|
2018
|
2017
|
Warrants
|
44,000
|
170,973
|
Stock
options
|
1,483,566
|
1,323,726
|
Convertible
notes
|
1,080,573
|
-
|
18
Note 8: 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.
During
the three months ended June 30, 2018 and 2017, the Company recorded
income tax benefits of $294,543 and $395,094, respectively, from
continuing operations. During the six months ended June 30, 2018
and 2017, the Company recorded income tax benefit of $252,546 and
income tax benefit of $893,840, respectively, from continuing
operations. The blended effective tax rate for the six months
ending June 30, 2018 and 2017 was 5.3% and 25.2%, respectively. The
blended effective tax rate varies from our statutory U.S. tax rate
due to income generated in certain other jurisdictions at various
tax rates.
The
income tax benefits for the three and six months ended June 30,
2018 related to return to provision adjustments for the 2017 year
and a benefit recorded for net operation losses that can be used to
offset future deferred tax liabilities associated with goodwill.
These benefits were partially offset by state income taxes for our
consolidated U.S. entities as well as taxes related to income
derived in foreign jurisdictions at the applicable statutory tax
rates. During 2018, we have recorded a full valuation allowance
against the majority of our U.S. net operating loss deferred tax
assets, so there is no tax benefit recorded on the income statement
for those losses. For the three and six months ended June 30, 2017,
our income tax benefit related to losses incurred by our
consolidated U.S. entities offset by a small amount of tax expense
related to income derived in foreign jurisdictions at the
applicable statutory tax rates.
In
December 2017, the Company reasonably estimated that it will not
have a transition tax related to the repatriation of foreign
earnings for the impact of the U.S. Tax Cuts and Jobs Act
(“Tax Act”). The Company has not yet finalized these
calculations and no adjustments to the provisional amount have been
made in the current period. We will finalize the provisional
amounts within one year from the date of enactment.
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.
In
making our assessment of 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 deferred tax
assets. However, based on the weighting of all the evidence,
including the near- term effect on our 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 deferred tax assets related to temporary
differences and net operating losses 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 taxable income.
At June
30, 2018 and December 31, 2017, we have established a valuation
allowance of $3.1 million and $1.9 million, respectively, against
certain deferred tax assets given the uncertainty of recoverability
of these amounts.
On June
21, 2018, the U.S. Supreme Court issued its decision in South
Dakota v. Wayfair, which overturned previous case law that
precluded states from requiring retailers to collect and remit
sales and use tax collection on sales made to in-state customers
unless the retailer had physical presence in the state. Although
this case is limited to sales tax collection obligations, we
continue to monitor the potential impact of this decision on our
state income tax footprint.
19
Note 9: Defined Contribution Retirement Plan
Starting
in 2016, we offered our U.S. employees the ability to participate
in a 401(k) plan. Eligible U.S. employees may contribute up to 100%
of their eligible compensation, subject to limitations established
by the Internal Revenue Code. The Company contributes a matching
contribution equal to 100% of each such participant’s
contribution up to the first 3% of their annual eligible
compensation. We charged $61,586 and $54,579 to expense in the three months
ended June 30, 2018 and 2017, respectively, associated with our
matching contribution in those periods. We charged $121,924 and $91,074 to expense in the six months ended
June 30, 2018 and 2017, respectively, associated with our matching
contribution in those periods.
Note 10: Stock-Based Compensation
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, February 2016, March 2017, and June 2018. The
plan was restated in its entirety in August 2018. As amended, up to
2,600,000 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 and 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,
|
||
|
2018
|
|
2017
|
|
|
|
|
Volatility
|
48 – 49%
|
|
48-49%
|
Risk-free interest rate
|
2.34% - 2.84%
|
|
1.90% - 2.26%
|
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,
2018 and 2017 was $2.34
and $2.40,
respectively.
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, 2018 and 2017, the
Company recognized expense of $189,344 and $175,405, respectively, associated with
stock option awards. During the six months ended June 30, 2018 and 2017, the Company
recognized expense of $382,879 and
$359,752, respectively, associated with stock option awards.
At June 30, 2018, future stock
compensation expense associated with stock options (net of
estimated forfeitures) not yet recognized was $1,556,548 and will
be recognized over a weighted average remaining vesting period of
2.9 years. The following summarizes stock option activity for the
six months ended June 30, 2018:
20
|
|
Weighted
|
Weighted
|
Aggregate
|
|
Number of
|
Average
|
Average Remaining
|
Intrinsic
|
|
Options
|
Exercise Price
|
Contractual Life
|
Value
|
Outstanding
at December 31, 2017
|
1,069,330
|
$5.11
|
7.0
|
$36,693
|
|
|
|
|
|
Granted
|
492,350
|
4.67
|
|
|
Exercised
|
(50,609)
|
4.93
|
|
|
Expired
|
(17,980)
|
7.49
|
|
|
Forfeited
|
(9,525)
|
4.72
|
|
|
Outstanding
at June 30, 2018
|
1,483,566
|
$4.95
|
8.2
|
$4,900,794
|
|
|
|
|
|
Exercisable
at June 30, 2018
|
565,113
|
$5.30
|
7.0
|
$1,945,382
|
The
total intrinsic value of stock options exercised during the three
months ended June 30, 2018 was $157,036. There were no stock options
exercised during the three months ended June 30, 2017. The total
intrinsic value of stock options exercised during the six months
ended June 30, 2018 was $157,601. There were no stock options
exercised during the six months ended June 30, 2017.
Stock Awards
During
the three months ended June 30, 2018
and 2017, the Company issued 6,915 and 12,786 shares, respectively, to
non-employee directors as compensation for their service on the
board. Such stock awards are immediately vested. During the six
months ended June 30, 2018 and
2017, the Company issued 15,870 and 23,670 shares, respectively, to
non-employee directors as compensation for their service on the
board. 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, 2018 and
2017 was $49,462 and $56,271, respectively. The total fair value
of stock awards granted, vested and expensed during the six months
ended June 30, 2018 and 2017
was $93,341 and $112,650,
respectively. As of June 30,
2018, there was no unrecognized compensation cost related to
stock awards. As of June 30,
2018, there was no unrecognized compensation cost related to
stock awards.
Note 11: Warrants
During
2014, the Company issued warrants to certain service providers. The
following table summarizes information about the Company’s
warrants at June 30,
2018:
|
|
Weighted
|
Weighted
|
|
|
Number of
|
Average
|
Average Remaining
|
Intrinsic
|
|
Units
|
Exercise Price
|
Contractual Term
|
Value
|
Outstanding
at December 31, 2017
|
80,000
|
$7.81
|
2.1
|
$33,660
|
|
|
|
|
|
Granted
|
-
|
-
|
|
|
Exercised
|
(36,000)
|
7.81
|
|
|
Cancelled
|
-
|
-
|
|
|
Outstanding
at June 30, 2018
|
44,000
|
$7.81
|
1.8
|
$-
|
|
|
|
|
|
Exercisable
at June 30, 2018
|
44,000
|
$7.81
|
1.8
|
$-
|
21
Note 12: 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 currently a party to any
litigation of a material nature.
Operating Leases and Service Contracts
The Company currently rents its primary office facility under a
five-year lease which started in September 2016 (the “2016
Lease”). On April 18, 2018, the Company entered into a lease
for the Company’s new principal office (the “2018
Lease”) to lease approximately 25,000 square feet of office
space. The term of the 2018 Lease is ten years, beginning on the
date on which the Company takes possession of and occupies all or
any part of the premises for normal business activities, which is
expected to be in the fourth quarter of 2018. The term may be
extended for an additional 5 years in incremental one-year periods,
subject to certain conditions described in the 2018 Lease. Base
rent for the first year of the 2018 Lease is approximately
$619,000, with increases in base rent occurring every two years. In
conjunction with the signing of the 2018 Lease, the Company has
agreed to assign the 2016 Lease to the landlord from the 2018 Lease
(the “Assignment”). If the landlord shall fail to pay
the 2016 Lease obligations under the Assignment, the Company will
be obligated to pay the obligations, but has a contractual right to
reduce its payments to the landlord related to the 2018 Lease by
equal amounts. In the below table of future contractual payments,
the Company has reflected the 2016 Lease through October 31, 2018
and the 2018 Lease thereafter reflecting the estimated commencement
date 2018 Lease and Assignment of the 2016 Lease.
Most of the Company’s 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, 2018:
Remainder
of 2018
|
$326,177
|
2019
|
618,557
|
2020
|
623,009
|
2021
|
645,265
|
2022
|
649,717
|
2023
|
671,973
|
Thereafter
|
3,408,119
|
Total
|
$6,942,817
|
Employment Agreements
The Company has employment agreements with several members of its
leadership team and executive officers.
Note 13: Disaggregation of Revenue
The company operates as one reporting segment. Operating segments
are defined as components of an enterprise for which separate
financial information in regularly evaluated by the chief operating
decision makers (“CODM”), which is the Company’s
chief executive office, in deciding how to allocate resources and
assess performance. The Company does not present geographical
information about revenues because it is impractical to do so.
Disaggregated revenue for the three and six months ended June 30,
2018 and 2017 are as follows:
|
Three Months Ended
|
Six Months Ended
|
||
|
June 30,
|
June 30,
|
||
|
2018
|
2017
|
2018
|
2017
|
Revenue by Product:
|
|
|
|
|
Mail
+ Product Revenue
|
$123,131
|
$152,951
|
$244,295
|
$331,211
|
Marketing
Automation Revenue
|
4,319,158
|
3,093,469
|
8,382,657
|
5,938,642
|
Total
Revenue
|
$4,442,289
|
$3,246,420
|
$8,626,952
|
$6,269,853
|
|
|
|
|
|
Revenue by Type:
|
|
|
|
|
Upfront
Fees
|
$370,288
|
$266,080
|
$701,120
|
$494,128
|
Recurring
Revenue
|
4,072,001
|
2,980,340
|
7,925,832
|
5,775,725
|
Total
Revenue
|
$4,442,289
|
$3,246,420
|
$8,626,952
|
$6,269,853
|
22
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, 2017,
filed with the Securities and Exchange Commission on March 15,
2018, as amended pursuant to Form 10-K/A filed with the Securities
and Exchange Commission on April 30, 2018.
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 primarily offer our premium
SharpSpring marketing automation solution, but also have customers
on the SharpSpring Mail+ product, which is a subset of the full
suite solution.
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.
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.
Results of Operations
Three Months Ended June 30,
2018 Compared to the Three Months Ended June 30, 2017
|
|
|
|
Percent
|
|
Three Months Ended
|
Change
|
Change
|
|
|
June 30,
|
from
|
from
|
|
|
2018
|
2017
|
Prior Year
|
Prior Year
|
Revenues and Cost of Sales:
|
|
|
|
|
Revenues
|
$4,442,289
|
$3,246,420
|
$1,195,869
|
37%
|
Cost
of Sales
|
1,507,362
|
1,294,944
|
212,418
|
16%
|
Gross
Profit
|
$2,934,927
|
$1,951,476
|
$983,451
|
50%
|
Revenues increased for the three months ended June
30, 2018 as compared to the three months ended June 30, 2017,
primarily due to growth in our SharpSpring marketing automation
customer base. Revenues also increased due to pricing changes
implemented over the past year. Revenues for our flagship marketing automation
platform increased to $4.3 million in the three months ended June
30, 2018 from $3.1 million in the three months ended June 30, 2017.
This growth in revenues was slightly offset by reduced revenue from
our SharpSpring Mail+ product which declined from $153,000 in the
three months ended June 30, 2017 to $123,000 in the three months
ended June 30, 2018.
23
Cost of
services increased for the three
months ended June 30, 2018 as compared to the three months ended June 30, 2017 primarily
due to increased employee related costs associated with providing
our technology platform to more customers and increased consulting
costs associated with Europe’s GDPR regulations compared to
the prior period. As a percentage of revenues, cost of services was
34% and 40% of revenues for the three months ended
June 30, 2018 and 2017, respectively. This represents a
year-over-year improvement in gross margin due to increased revenue
scale and operating leverage.
|
|
|
|
Percent
|
|
Three Months Ended
|
Change
|
Change
|
|
|
June 30,
|
from
|
from
|
|
|
2018
|
2017
|
Prior Year
|
Prior Year
|
Operating expenses:
|
|
|
|
|
Sales
and marketing
|
$2,356,400
|
$1,536,289
|
$820,111
|
53%
|
Research
and development
|
1,008,019
|
731,187
|
276,832
|
38%
|
General
and administrative
|
1,424,404
|
1,231,708
|
192,696
|
16%
|
Intangible
asset amortization
|
115,000
|
131,869
|
(16,869)
|
-13%
|
|
$4,903,823
|
$3,631,053
|
$1,272,770
|
35%
|
Sales
and marketing expenses increased for the three months ended June
30, 2018 as compared to the three months ended June 30, 2017. The
increase was primarily due to an increase in marketing program
spending for various lead generation activities, which increased by
approximately $575,000 compared
to last year, and increased headcount costs.
Research and
development expenses increased for the three months ended June 30,
2018 as compared to the three months ended June 30, 2017 primarily
due to additional hiring of development and quality assurance staff
since last year. Employee-related costs for this group increased by
approximately $333,000 in the
three months ended June 30, 2018 compared to the same period in
2017. Non-employee-related costs for this group were reduced by
approximately $56,000 in the three months ended June 30, 2018
compared to the same period in 2017.
General
and administrative expenses increased for the three months ended
June 30, 2018 as compared to the three months ended June 30, 2017,
primarily due to higher employee related costs associated with
business growth and higher professional fees associated with the
accounting of the convertible notes.
Amortization of
intangible assets decreased for the three months ended June 30,
2018 as compared to the three months ended June 30, 2017 due
primarily to the reduction of amortization related to the
GraphicMail customer relationship intangibles that were fully
depreciated at the end of 2017.
|
|
|
|
Percent
|
|
Three Months Ended
|
Change
|
Change
|
|
|
June 30,
|
from
|
from
|
|
|
2018
|
2017
|
Prior Year
|
Prior Year
|
Other
|
|
|
|
|
Other
income (expense), net
|
$(338,431)
|
$11,761
|
$(350,192)
|
-2978%
|
Change
in fair value of embedded derivative features
|
$(453,449)
|
$-
|
$(453,449)
|
n/a
|
Benefit
from income taxes
|
$(294,543)
|
$(395,094)
|
$100,551
|
-25%
|
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, as
well interest expense related to our convertible
notes.
24
We
recorded a change in the valuation of convertible notes embedded
derivatives of $453,449 for the three months ended June 30,
2018.
On
December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax
Act”) was enacted into the law. The Tax Act contains broad
and complex provisions including, but not limited to: (i) the
reduction of corporate income tax rate from 35% to 21%, (ii)
requiring companies to pay a one-time transition tax on certain
unrepatriated earnings of foreign subsidiaries, (iii) generally
eliminating U.S. federal income taxes on dividends from foreign
subsidiaries, (iv) modifying limitation on excessive employee
remuneration, (v) requiring current inclusion in U.S. federal
taxable income of certain earnings of controlled foreign
corporations, (vi) repeal of corporate alternative minimum tax
(“AMT”) and changing how AMT credits can be realized,
(vii) creating a new minimum tax, (viii) creating a new limitation
on deductible interest expense, (ix) changing rules related to uses
and limitations of net operating loss carrybacks, carryforwards and
foreign tax credits created in tax years beginning after December
31, 2017, and (x) eliminating the deduction for income attributable
to domestic production activities.
During
the three months ended June 30, 2018 our income tax benefit related
to return to provision adjustments for the 2017 year and a benefit
recorded for net operation losses that can be used to offset future
deferred tax liabilities associated with goodwill. These benefits
were partially offset by state income taxes for our consolidated
U.S. entities as well as taxes related to income derived in foreign
jurisdictions at the applicable statutory tax rates. During 2018,
we have recorded a full valuation allowance against the majority of
our U.S. net operating loss deferred tax assets, so there is no tax
benefit recorded on the income statement for those losses. For the
three months ended June 30, 2017, our income tax benefit related to
losses incurred by our consolidated U.S. entities offset by a small
amount of tax expense related to income derived in foreign
jurisdictions at the applicable statutory tax rates.
Six Months Ended June 30, 2018
Compared to the Six Months Ended June
30, 2017
|
|
|
|
Percent
|
|
Six Months Ended
|
Change
|
Change
|
|
|
June 30,
|
from
|
from
|
|
|
2018
|
2017
|
Prior Year
|
Prior Year
|
Revenues and Cost of Sales:
|
|
|
|
|
Revenues
|
$8,626,952
|
$6,269,853
|
$2,357,099
|
38%
|
Cost
of Sales
|
2,907,659
|
2,566,265
|
341,394
|
13%
|
Gross
Profit
|
$5,719,293
|
$3,703,588
|
$2,015,705
|
54%
|
Revenues increased for the three months ended June
30, 2018 as compared to the six months ended June 30, 2017,
primarily due to growth in our SharpSpring marketing automation
customer base. Revenues also increased due to pricing changes
implemented over the past year. Revenues for our flagship marketing automation
platform increased to $8.4 million in the six months ended June 30,
2018 from $5.9 million in the six months ended June 30, 2017. This
growth in revenues was slightly offset by reduced revenue from our
SharpSpring Mail+ product which declined from approximately
$334,000 in the six months ended June 30, 2017 to approximately
$244,000 in the six months ended June 30, 2018.
Cost of
services increased for the six months
ended June 30, 2018 as compared to the six months ended June 30, 2017 primarily
due to increased employee related costs associated with providing
our technology platform to more customers compared to the prior
period, and increased consulting costs associated with
Europe’s GDPR regulations. As a percentage of revenues, cost
of services was 34% and 41% of
revenues for the six months ended June 30, 2018 and 2017,
respectively. This represents a year-over-year improvement in gross
margin due to increased revenue scale and operating
leverage.
|
|
|
|
Percent
|
|
Six Months Ended
|
Change
|
Change
|
|
|
June 30,
|
from
|
from
|
|
|
2018
|
2017
|
Prior Year
|
Prior Year
|
Operating expenses:
|
|
|
|
|
Sales
and marketing
|
$4,727,431
|
$3,085,811
|
$1,641,620
|
53%
|
Research
and development
|
1,958,694
|
1,390,918
|
567,776
|
41%
|
General
and administrative
|
2,850,638
|
2,587,906
|
262,732
|
10%
|
Intangible
asset amortization
|
230,000
|
263,392
|
(33,392)
|
-13%
|
|
$9,766,763
|
$7,328,027
|
$2,438,736
|
33%
|
25
Sales
and marketing expenses increased for the six months ended June 30,
2018 as compared to the six months ended June 30, 2017. The
increase was primarily due to an increase in marketing program
spending for various lead generation activities, which increased by
approximately $1.4 million compared to last year, and increased
headcount costs.
Research and
development expenses increased for the six months ended June 30,
2018 as compared to the six months ended June 30, 2017 primarily
due to additional hiring of development and quality assurance staff
since last year. Employee-related costs for this group increased by
approximately $590,000 in the six months ended June 30, 2018
compared to the same period in 2017.
General
and administrative expenses increased for the six months ended June
30, 2018 as compared to the three months ended June 30, 2017,
primarily due to higher employee related costs associated with
business growth and higher professional fees. This increase was
somewhat offset by a lower bad debt expense.
Amortization of
intangible assets decreased for the six months ended June 30, 2018
as compared to the six months ended June 30, 2017 due primarily to
the reduction of amortization related to the GraphicMail customer
relationship intangibles that were fully depreciated at the end of
2017.
|
|
|
|
Percent
|
|
Six Months Ended
|
Change
|
Change
|
|
|
June 30,
|
from
|
from
|
|
|
2018
|
2017
|
Prior Year
|
Prior Year
|
Other
|
|
|
|
|
Other
income (expense), net
|
$(269,803)
|
$78,605
|
$(348,408)
|
-443%
|
Change
in fair value of embedded derivative features
|
$(453,449)
|
$-
|
$(453,449)
|
n/a
|
Benefit
from income taxes
|
$(252,546)
|
$(893,840)
|
$641,294
|
-72%
|
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, as
well interest expense related to our convertible
notes.
We
recorded a change in the valuation of convertible notes embedded
derivatives of $453,449 for the three months ended June 30,
2018.
On
December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax
Act”) was enacted into the law. The Tax Act contains broad
and complex provisions including, but not limited to: (i) the
reduction of corporate income tax rate from 35% to 21%, (ii)
requiring companies to pay a one-time transition tax on certain
unrepatriated earnings of foreign subsidiaries, (iii) generally
eliminating U.S. federal income taxes on dividends from foreign
subsidiaries, (iv) modifying limitation on excessive employee
remuneration, (v) requiring current inclusion in U.S. federal
taxable income of certain earnings of controlled foreign
corporations, (vi) repeal of corporate alternative minimum tax
(“AMT”) and changing how AMT credits can be realized,
(vii) creating a new minimum tax, (viii) creating a new limitation
on deductible interest expense, (ix) changing rules related to uses
and limitations of net operating loss carrybacks, carryforwards and
foreign tax credits created in tax years beginning after December
31, 2017, and (x) eliminating the deduction for income attributable
to domestic production activities.
During
the six months ended June 30, 2018 our income tax benefit related
to return to provision adjustments for the 2017 year and a benefit
recorded for net operation losses that can be used to offset future
deferred tax liabilities associated with goodwill. These benefits
were partially offset by state income taxes for our consolidated
U.S. entities as well as taxes related to income derived in foreign
jurisdictions at the applicable statutory tax rates. During the six
months ended June 30, 2018, we have recorded a full valuation
allowance against the majority of our U.S. net operating loss
deferred tax assets, so there is no tax benefit recorded on the
income statement for those losses. For the six months ended June
30, 2017, our income tax benefit related to losses incurred by our
consolidated U.S. entities offset by a small amount of tax expense
related to income derived in foreign jurisdictions at the
applicable statutory tax rates.
26
Liquidity and Capital Resources
Sources and Uses of Cash
Our
primary source of operating cash inflows are payments from
customers for use of our marketing automation technology platform.
Such payments are primarily received monthly from customers but can
sometimes be received annually in advance of providing the
services, yielding a deferred revenue liability on our consolidated
balance sheet. In addition, in March 2018, the Company issued $8.0
million of convertible notes and received $7.9 million in cash net
of debt issuance costs. The Company also received $2.0 million in
cash tax refunds in 2018 associated with U.S. net operating loss
carrybacks. To provide additional financing flexibility, the
Company also has a credit facility in place. No amounts have been
borrowed under the facility to date and based on the borrowing base
calculations, approximately $2.1 million was available under the
facility as of June 30, 2018.
Our
primary sources of cash outflows from operations include payroll
and payments to vendors and third-party service
providers.
Analysis of Cash Flows
Net
cash used in operating activities decreased by $1,531,932 to
$755,948 used in operations for the six months ended June 30, 2018,
compared to $2,287,880 used in operations for the six months ended
June 30, 2017. The decrease in cash used in operating activities
was attributable primarily to the $2.0 million tax refund received
in June 2018.
Net cash used in investing activities was $188,118
and net cash provided by investing activities was $802,401 during
the six months ended June 30, 2018, and June 30, 2017, respectively. The
change in cash used for investing activities is primarily related
to the receipt of the final payout from the sale of the SMTP
product.
Net
cash provided by financing activities was $8.1 million during the
six months ended June 30, 2018, compared to $1,359 net cash
received in financing activities of during the six months ended
June 30, 2017. The majority of the net cash provided by financing
activities is related the Company’s issuance $8 million of
convertible notes during the first quarter of 2018. In addition to
the $8 million dollars received, the Company also incurred
approximately $142,000 in debt issuance costs.
We had
net working capital of approximately $12.3 million and $7.5 million
as of June 30, 2018 and December 31, 2017, respectively. Our cash
balance was $12.5 million at June 30, 2018 compared to $5.4 million
at December 31, 2017, reflecting the net $7.9 million received from
the issuance of convertible notes in March 2018, offset by cash
used from operations.
Contractual Obligations
The
Company currently rents its primary office facility under a five
year lease which started in September 2016 (the “2016
Lease”). On April 18, 2018, the Company entered into a lease
for the Company’s new principal office (the “2018
Lease”) to lease approximately 25,000 square feet of office
space. The term of the 2018 Lease is ten years, beginning on the
date on which the Company takes possession of and occupies all or
any part of the premises for normal business activities, which is
expected to be in the fourth quarter of 2018. The term may be
extended for an additional 5 years in incremental one-year periods,
subject to certain conditions described in the 2018 Lease. Base
rent for the first year of the 2018 Lease is approximately
$619,000, with increases in base rent occurring every two years. In
conjunction with the signing of the 2018 Lease, the Company has
agreed to assign the 2016 Lease to the landlord from the 2018 Lease
(the “Assignment”). If the landlord shall fail to pay
the 2016 Lease obligations under the Assignment, the Company will
be obligated to pay the obligations, but has a contractual right to
reduce its payments to the landlord related to the 2018 Lease by
equal amounts. In the below table of future contractual payments,
the Company has reflected the 2016 Lease through October 31, 2018
and the 2018 Lease thereafter reflecting the estimated commencement
date 2018 Lease and Assignment of the 2016 Lease.
27
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, 2018:
Remainder
of 2018
|
$326,177
|
2019
|
618,557
|
2020
|
623,009
|
2021
|
645,265
|
2022
|
649,717
|
2023
|
671,973
|
Thereafter
|
3,408,119
|
Total
|
$6,942,817
|
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.
28
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, 2018.
Based on this evaluation, the Company’s principal executive
officer and principal financial officer concluded that, as of
June 30, 2018 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 Company Internal Controls
There
were no changes in our internal control over financial reporting
during the quarter ended June 30, 2018 that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
29
PART II – OTHER
INFORMATION
Item 1. Legal
Proceedings.
Not
applicable.
Item 1A. Risk Factors.
The
following risk factors supplement
the Risk Factors described in
the Company’s annual report on Form 10-K for the year ended December 31, 2017 and
should be read in conjunction therewith.
Risks Related to our Convertible Notes
As
described in Note 5 –
Convertible Notes to the Consolidated Financial Statements
and Part I. Item 1. of this report on
Form 10-Q, on March 28, 2018, the Company issued $8.0 million
aggregate principal amount of convertible notes (the
“Notes”). Interest
accrues at a rate of 5.0% per year and is “payable in
kind” annually in the form of the issuance of
additional notes (“PIK Notes”). The aggregate principal amount of
the Note and the PIK
Notes will be due and payable in full
on the fifth anniversary of the date of the
Notes.
If the Notes are converted, the Company will issue a
significant number of shares of common stock, and the ownership interests of existing
stockholders will be significantly diluted.
The holder of the Notes may convert the Notes into shares of the Company’s common
stock at any time prior to maturity at
a fixed conversion price of $7.50 per share. If the Notes
are converted by the holder, a minimum
of 1,080,573 new shares of the Company’s common stock
will be issued (as of June 30, 2018)
and the ownership interest of existing stockholders will be
significantly diluted. The number of shares to be issued upon
conversion of the Notes will
increase over time with the issuance of additional PIK
Notes, which will increase the
potential dilution of the ownership interests of existing
stockholders.
Under certain circumstances, the
Company will be required to register with the SEC the resale
of shares of common stock held
by the holder of the Notes or
issued upon conversion of the Notes, which may not be aligned with Company priorities
or the interests of other stockholders.
If the Notes are converted into shares of the
Company’s common stock, if the
Company elects to repay the Notes with shares of common stock, or under other specified circumstances, the
holder of the Notes (or the
underlying shares) will be entitled to demand and piggyback
registration rights with respect to resales of the shares. These
rights may adversely affect the market for and the market
price of the Company’s common stock, the Company’s ability to raise capital in
the future to fund working
capital, capital expenditures, acquisitions, general corporate or
other purposes, or the timing or terms of any such capital
raise.
If the Notes are not converted by the holder prior to maturity,
we will be required to repay the aggregate principal amount
of the outstanding
Notes, including the accrued
PIK Notes, and it is likely that
shareholders will experience significant dilution if that
occurs.
If the Notes are not converted prior to maturity by the holder,
the Company will have the option to:
●
Repay the aggregate
principal amount of the
outstanding Notes, including
accrued PIK Notes, in
cash;
●
Repay the aggregate
principal amount of the
outstanding Notes, including
accrued PIK Notes, by
issuing shares of the Company’s common stock
at value equal to 80% of the volume
weighted average share price over the preceding 30-trading day
period; or
●
Extend the maturity of the Notes
for up to eighteen months at an
increased interest rate of 10.0%.
Assuming
all of the Notes, including accrued PIK Notes, remain outstanding at maturity, the
aggregate principal amount would equal
approximately $10.2 million. Based on the current cash balance and
projected net uses of cash in the future, it is highly unlikely
that the Company would be able to repay the aggregate
principal amount at maturity in cash
without securing additional capital or other financing. Such
additional financing may not be available on favorable terms, or at
all. Any additional equity financing, or the repayment of
the Notes by issuing
shares of common stock, may be
dilutive to the ownership interests of existing stockholders and
may adversely affect the market for and the market price of
the Company’s common stock, and
other forms of financing could increase the Company’s debt
balance and result in significant expense to the
Company.
30
Our level of indebtedness may limit our financial
flexibility.
The
Company’s indebtedness may affect its operations in several
ways, including:
●
The Company may be
at a competitive disadvantage compared to similar companies that
have less debt;
●
The Notes limit the
Company’s ability to incur senior secured debt in excess of
18.6% of the Company’s trailing 12-month revenues;
and
●
Additional
financing in the future for working capital, capital expenditures,
acquisitions, general corporate or other purposes may have higher
costs and contain restrictive covenants or may not be available to
us.
These factors and other factors that could affect the
Company’s ability to obtain additional financing, some of
which may be beyond the Company’s control, could adversely
affect the Company’s ability to take advantage of strategic
opportunities that might otherwise benefit the Company, and
could make the Company less attractive to potential
acquirers.
The Notes contain a “make whole” provision that
provides for the PIK Notes to
accelerate and be paid through maturity upon a change in control of
the Company, which would increase the cost of acquiring the Company
and which could, in turn, make the Company less attractive
to potential acquirers.
The Notes provide for an acceleration of interest through
maturity upon a change in control, which will have the effect of
increasing the cost to a third party of acquiring the Company. This
could make the Company less attractive to potential
acquirers or decrease the amount that
a potential acquirer would be willing to pay for shares of
the Company’s common stock,
potentially preventing, or decreasing the consideration payable to
the Company’s stockholders in, a change of control
transaction.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds.
Date
|
|
Security/Value
|
June
2018
|
|
Common
Stock – 5,283 shares of common stock issued pursuant to
cashless warrant exercises with an exercise price of
$7.81.
|
No underwriters were utilized and no commissions
or fees were paid with respect to any of the above
transactions.
We relied on Section
4(a)(2) and/or Regulation D 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.
31
Item 6. Exhibits.
INDEX TO EXHIBITS
SEC ReferenceNumber
|
|
Title of Document
|
|
Location
|
|
Office
Lease Agreement with Celebration Pointe Office Partners II, LLC
dated April 18, 2018
|
|
Incorporated by reference to our Form 8-K filed April 19,
2018
|
|
|
Assignment
of Tenant’s Interest and Assumption of Lease with Celebration
Pointe Office Partners II, LLC dated April 18, 2018
|
|
Incorporated by reference to our Form 8-K filed April 19,
2018
|
|
|
Amendment
to Office Lease Agreement with Celebration Pointe Office Partners
II, LLC dated June 28, 2018
|
|
Filed
herewith
|
|
|
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 on March 22, 2016
|
|
|
Intellectual
Property Security 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 on March 22, 2016
|
|
|
Loan
and Security Modification Agreement dated October 25, 2017, 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 on October 30, 2017
|
|
|
Loan
and Security Modification Agreement dated April 30, 2018, 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 on May 1, 2018
|
|
|
SharpSpring, Inc. 2010 Restated Employee Stock Plan
|
|
Filed
herewith
|
|
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Filed
herewith
|
|
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Filed
herewith
|
|
|
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
|
|
|
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
|
|
|
32
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 13,
2018
|
SharpSpring,
Inc.
|
|
|
|
By:
|
/s/ Edward
Lawton
|
|
Edward
Lawton
Chief
Financial Officer
|
|
(Principal
Financial Officer)
Date: August 13,
2018
|
33